UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
20162018OR
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| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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| SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
For the transition period from to
Commission file number 1-33867
TEEKAY TANKERS LTD.
(Exact name of Registrant as specified in its charter)
Republic of Thethe Marshall Islands
(Jurisdiction of incorporation or organization)
4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
Telephone: (441) 298-2530
(Address and telephone number of principal executive offices)
Edith Robinson
4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
Telephone: (441) 298-2530
Fax: (441) 292-3931
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered, or to be registered, pursuant to Section 12(b) of the Act.
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| Title of each class | | Name of each exchange on which registered |
| Class A common stock, par value of $0.01 per share | | New York Stock Exchange |
Securities registered, or to be registered, pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
136,071,379231,550,575 shares of Class A common stock, par value of $0.01 per share.
23,232,75737,007,981 shares of Class B common stock, par value of $0.01 per share.
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No ý
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No ý
Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No ¨
Indicate by check mark if the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ Accelerated Filer ý Non-Accelerated Filer ¨ Emerging growth company ¨
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ¨
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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U.S. GAAP ý | | International Financial Reporting Standards as issued by the International Accounting Standards Board ¨ | | Other ¨ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
TEEKAY TANKERS LTD.
INDEX TO REPORT ON FORM 20-F
INDEX
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PART I
This Annual Report should be read in conjunction with the consolidated financial statements and accompanying notes included in this report.
Unless otherwise indicated, references in this Annual Report to “Teekay Tankers Ltd.", the "Company", "we”, "us" and "our" and similar terms refer to Teekay Tankers Ltd. and/or one or more of its subsidiaries, except that those terms, when used in this Annual Report in connection with the common stock described herein, shall mean specifically Teekay Tankers Ltd. References in this Annual Report to "Teekay" or “Teekay Corporation” refer to Teekay Corporation and/or any one or more of its subsidiaries.
In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements relate to future events and our operations, objectives, expectations, performance, financial condition and intentions. When used in this Annual Report, the words “expect,” “intend,” “plan,” “believe,” “anticipate,” “estimate” and variations of such words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, in particular, statements regarding:
our future financial condition, results of operations and future revenues, expenses and capital expenditures, and our expected financial flexibility and ability to fund capital expenditures and pursue acquisitions and other expansion opportunities;opportunities, including vessel acquisitions;
our dividend policy and ability to pay dividends on shares of our common stock;
the crude oil and refined product tanker market fundamentals, including the balance of supply and demand in the tanker market, changes in the world tanker fleet, changes in global oil and refined products demand and crude oil tanker demand, the rate of global oil production (including the effect of OPEC supply cuts), and changes in long-haul crude tanker movements, trading patterns, tanker fleet utilization and spot tanker rates;
changes in the production of or demand for oil or refined products;
changes in trading patterns significantly affecting overall vessel tonnage requirements; greater or less than anticipated levels of tanker newbuilding orders and deliveries and greater or less than anticipated rates of tanker scrapping or use of tankers for floating storage;
our compliance with, and the effect on our business and operating results of, covenants under our term loans, credit facilities and credit facilities;obligations related to capital leases;
our expectation regarding the ability of Teekay Corporation to comply with its covenants under our loan arrangements which Teekay Corporation is a guarantor, including our expectation that Teekay Corporation will refinance its senior notes due in 2020;
future oil prices, production and refinery capacity;
the effect of lower global oil prices, including the potential impact on oil stockpiling, refinery throughput, bunker fuel prices, and oil futures markets;
our expectations about the availability of vessels to purchase, the expected costs and time it may take to acquire vessels or construct and deliver newbuildings, or the useful lives of our vessels;
planned capital expenditures and the ability to fund capital expenditures;newbuildings;
the ability to leverage Teekay Corporation’s relationships and reputation in the shipping industry;
the expected benefits of participation in vessel pooling arrangements;revenue sharing arrangements (or RSAs) and purchasing alliances;
the effectiveness of our chartering strategy in capturing upside opportunities and reducing downside risks, including our ability to take advantage of theany tanker market recovery;
the expected benefits of our acquisition in 2015 of the ship-to-ship transfer business, including, among others, the ability of the acquired business to provide stable cash flow to help us partially manage the cyclicality of the tanker market, and our ability to leverage this acquisition to grow our presence in, and take advantage of the expected increased volumes moving in and out of, the U.S. Gulf, and to increase our market share in the ship-to-ship global supportssupport business;
the expected benefits of our expectation regarding the U.S. Gulf lightering trade and the impact on this trade from the lifted ban on U.S. crude oil exports;acquisitions of vessels or businesses;
our expectation that our U.S. Gulf lightering business will complement our spot trading strategy in the Caribbean to the U.S. Gulf market, allowing Teekayus to better optimize the deployment of the fleet that we trade in this region through better scheduling flexibility and utilization;
our ability to execute our ship-to-ship support services strategy by accessing opportunities created by oil market arbitrages and oil traders optimizing their USD ton/mile on cargoes;
our ability to execute our lightering strategy by leveraging our existing fleet and acumen to provide a full service lightering business model to customers;
the impact of alternative methods of delivering crude oil on our lightering business;
the ability to maximize the use of vessels, including the redeployment of vessels no longer under time charters;
our expectation regarding our vessels’ ability to perform to specifications and maintain their hire rates;
operating expenses, availability of crew, number of off-hire days, dry-docking requirements and insurance costs;
the impact and expected cost of, and our ability to comply with, new and existing governmental regulations and maritime self-regulatory organization standards applicable to our business;business, including the expected cost to install ballast water treatment systems on our tankers in compliance with International Maritime Organization (or IMO) proposals and the effect of IMO 2020;
our ability to obtain all permits, licenses and certificates material to the conduct of our operations;
the anticipated impact on us and the shipping industry and timing of regulatory changes or environmental liabilities;liabilities, including climate change;
expenses under service agreements with other affiliates of Teekay Corporation;
the anticipated taxation of our company and of distributionsdividends to our shareholders;
our expectations as to the useful vessel lives and any impairment of our vessels;vessels or of goodwill;
construction and delivery delays in the tanker industry generally;
our customers’ increasing emphasis on environmental and safety concerns;
meeting our going concern requirements and our liquidity needs, including anticipated funds and sources of financing for liquidity and capital expenditure needs and the sufficiency of cash flows, and our estimation that we will have sufficient liquidity for at least a one-year period;
our ability to refinance existing debt obligations, to raise additional debt and capital to fund capital expenditures and negotiate extensions or redeployments of existing assets;
the future valuation or impairmentuncertainty of goodwill;the completion of the February 2019 sale-leaseback financing transaction for two of our Suezmax tankers, the timing of the completion and the expected impact on our liquidity position;
our use of interest rate swaps to reduce interest rate exposure;
the expected effect of off-balance sheet arrangements;
ourexpectations and hedging activities relating to foreign exchange, interest rate and spot market risks;
the ability of counterparties to our derivative and other contracts to fulfill their contractual obligations;
the delivery timing of new charter-in vessels;
our expectations regarding payments made on behalf of our co-obligors in connection with the loan arrangements in which certain other subsidiaries of Teekay Corporation are also borrowers;
our position that we are not a passive foreign investment company; and
our business strategy and other plans and objectives for future operations;
our ability to enforce our arbitration award against STX Offshore & Shipbuilding Co. Ltd.; and
continued material variations in the period-to-period fair value of our derivative instruments.operations.
Forward-looking statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, those factors discussed below in Item 3 – Key Information: Risk Factors and other factors detailed from time to time in other reports we file with or furnish to the U.S. Securities and Exchange Commission (or the SEC).
We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may subsequently arise. You should carefully review and consider the various disclosures included in this Annual Report and in our other filings made with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
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| Item 1. | Identity of Directors, Senior Management and Advisors |
Not applicable.
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| Item 2. | Offer Statistics and Expected Timetable |
Not applicable.
Selected Financial Data
Set forth below is selected consolidated financial and other data of Teekay Tankers Ltd. and its subsidiaries for fiscal years 20122014 through 2016,2018, which have been derived from our consolidated financial statements. The following table should be read together with, and is qualified in its entirety by reference to, Item 5 – Operating and Financial Review and Prospects included herein, and the historical financial statements and accompanying notes and the Report of Independent Registered Public Accounting Firm thereon (which is included herein), with respect to the fiscal years 2016, 20152018, 2017 and 2014.2016.
From time to time we have purchased vesselsIn May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Teekay CorporationContracts with Customers (or TeekayASU 2014-09). ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 became effective for Teekay on January 1, 2018. We adopted ASU 2014-09 as a cumulative-effect adjustment as of the date of adoption. As such, periods prior to January 1, 2018 were not retroactively adjusted. The impact to our historical consolidated results of operation for the year ended December 31, 2018 was as follows:
We previously presented the net allocation for its vessels participating in RSAs as net pool revenues. We have determined that we are the principal in voyages our vessels perform that are included in the RSAs. As such, the revenue from those voyages is presented in voyage charter revenues and the difference between this amount and our net allocation from the RSA is presented as voyage expenses. This had the effect of increasing voyage charter revenues and voyage expenses for the year ended December 31, 2018 by $292.6 million. There was no cumulative impact to opening equity as at January 1, 2018.
We previously presented all accrued revenue as a component of accounts receivable. We have determined that if the right to such consideration is conditioned upon something other than the passage of time, such accrued revenue should be presented apart from accounts receivable. This had the effect of increasing other current assets and decreasing accounts receivable by $17.9 million at December 31, 2018.
In December 2015, we purchased two vessels from Teekay Offshore Partners L.P. (or TOO), an entity which was controlled by Teekay. DuringTeekay at the fiscal years 2012 through 2016, we acquired from Teekay and TOO a total of 15 conventional oil and product tankers of varying sizes. These acquisitions weretime. This acquisition was deemed to be a business acquisitionsacquisition between entities under common control. Accordingly, we have accounted for these transactionsthis transaction in a manner similar to the pooling of interest method whereby our consolidated financial statements prior to the date these vessels were acquired by us are retroactively adjusted to include the results of these acquired vessels.
The periods retroactively adjusted include all periods that we and the acquired vessels were both under the common control of Teekay and had begun operations.
In May 2017, we acquired from Teekay Holdings Ltd., a wholly-owned subsidiary of Teekay, the remaining 50% interest in Teekay Tanker Operations Ltd. (or TTOL), a company which owns conventional tanker commercial management and technical management operations. This was deemed to be a business acquisition between entities under common control. As a result, our consolidated financial statements prior to the date we acquired the controlling interest in TTOL have been retroactively adjusted to eliminate the equity method of accounting previously used for the original 50% interest owned and to include 100% of the assets and liabilities and results of TTOL on a consolidated basis during the periods we and TTOL were under common control of Teekay and had begun operations. All intercorporate transactions between us and TTOL that occurred prior to the acquisition have been eliminated upon consolidation.
As a result, our consolidated statements of (loss) income (loss) for the years ended December 31, 2017, 2016, 2015, 2014, 2013, and 20122014 reflect the results of operations of theseTTOL and the vessels acquired from TOO, referred to herein as the "Entities under Common Control," as if we had acquired them when TTOL and each respective vessel began operations under the ownership of Teekay. Please refer to Item 5 – Operating and Financial Review and Prospects: Items You Should Consider When Evaluating Our Results of Operations and Item 18 – Financial Statements: Note 34 – Acquisition of Entities under Common Control.
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (or GAAP).
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| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in thousands, except share, per share, and fleet data) |
| Income Statement Data: | | | | | | | | | |
Revenues (1) |
| $755,763 |
| |
| $431,178 |
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| $550,543 |
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| $534,681 |
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| $276,193 |
|
Voyage expenses (2) | (360,576 | ) | | (77,368 | ) | | (53,604 | ) | | (18,727 | ) | | (9,968 | ) |
Vessel operating expenses (3) | (209,131 | ) | | (175,389 | ) | | (182,598 | ) | | (137,164 | ) | | (98,403 | ) |
Time-charter hire expense (4) | (19,538 | ) | | (30,661 | ) | | (59,647 | ) | | (74,898 | ) | | (32,706 | ) |
| Depreciation and amortization | (118,514 | ) | | (100,481 | ) | | (104,149 | ) | | (73,760 | ) | | (53,292 | ) |
| General and administrative expenses | (39,775 | ) | | (32,879 | ) | | (33,199 | ) | | (30,403 | ) | | (25,130 | ) |
| Gain (loss) on sale of vessels | 170 |
| | (12,984 | ) | | (20,594 | ) | | 771 |
| | 9,955 |
|
| Restructuring charges | (1,195 | ) | | — |
| | — |
| | (6,795 | ) | | (812 | ) |
| Income from operations | 7,204 |
| | 1,416 |
| | 96,752 |
| | 193,705 |
| | 65,837 |
|
| Interest expense | (58,653 | ) | | (31,294 | ) | | (29,784 | ) | | (17,389 | ) | | (8,874 | ) |
| Interest income | 879 |
| | 907 |
| | 117 |
| | 122 |
| | 445 |
|
| Realized and unrealized gain (loss) on derivative instruments | 3,032 |
| | 1,319 |
| | (964 | ) | | (1,597 | ) | | 5,229 |
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| Equity income (loss) | 1,220 |
| | (25,370 | ) | | 7,680 |
| | 11,528 |
| | 4,951 |
|
| Freight tax and other expenses | (9,412 | ) | | (5,330 | ) | | (7,511 | ) | | (3,406 | ) | | (1,977 | ) |
| Other income | 3,182 |
| | 329 |
| | 1,533 |
| | 663 |
| | 3,295 |
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| Net (loss) income |
| ($52,548 | ) | |
| ($58,023 | ) | |
| $67,823 |
| |
| $183,626 |
| |
| $68,906 |
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(Loss) earnings per share (5) | | | | | | | | | |
| - Basic |
| ($0.20 | ) | |
| ($0.31 | ) | |
| $0.40 |
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| $1.26 |
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| $0.66 |
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| - Diluted |
| ($0.20 | ) | |
| ($0.31 | ) | |
| $0.40 |
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| $1.25 |
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| $0.65 |
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| Cash dividends declared |
| $0.03 |
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| $0.12 |
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| $0.18 |
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| $0.24 |
| |
| $0.12 |
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| Balance Sheet Data (at end of year): | | | | | | | | |
| Cash and cash equivalents | 54,917 |
| | 71,439 |
| | 94,157 |
| | 156,520 |
| | 187,757 |
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| Restricted cash - current and non-current | 5,590 |
| | 4,271 |
| | 750 |
| | 870 |
| | 145 |
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Vessels and equipment (6) | 1,401,551 |
| | 1,737,792 |
| | 1,605,372 |
| | 1,767,925 |
| | 897,237 |
|
Vessels related to capital leases (6) | 482,010 |
| | 227,722 |
| | — |
| | — |
| | — |
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| Total assets | 2,161,086 |
| | 2,197,348 |
| | 1,964,370 |
| | 2,214,803 |
| | 1,288,844 |
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Total debt (7) | 1,129,265 |
| | 1,120,927 |
| | 969,315 |
| | 1,204,485 |
| | 732,764 |
|
| Common stock and additional paid in capital | 1,295,929 |
| | 1,294,998 |
| | 1,103,304 |
| | 1,094,874 |
| | 802,650 |
|
| Total equity | 946,933 |
| | 1,006,601 |
| | 932,740 |
| | 899,479 |
| | 496,684 |
|
| Cash Flow Data: | | | | | | | | | |
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| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (in thousands, except share, per share, and fleet data) |
| Income Statement Data: | | | | | | | | | |
| Revenues |
| $526,896 |
| |
| $514,193 |
| |
| $250,002 |
| |
| $180,015 |
| |
| $207,384 |
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Voyage expenses (1) | (55,241 | ) |
| (19,816 | ) |
| (11,223 | ) |
| (8,337 | ) |
| (4,618 | ) |
Vessel operating expenses (2) | (182,598 | ) | | (137,164 | ) | | (98,403 | ) | | (91,667 | ) | | (96,166 | ) |
Time-charter hire expense (3) | (59,647 | ) | | (74,898 | ) | | (22,160 | ) | | (6,174 | ) | | (3,950 | ) |
| Depreciation and amortization | (104,149 | ) | | (73,760 | ) | | (53,292 | ) | | (50,973 | ) | | (75,492 | ) |
General and administrative expenses (2) | (18,211 | ) | | (17,354 | ) | | (12,821 | ) | | (13,522 | ) | | (8,857 | ) |
| (Loss) gain on sale of vessels | (20,594 | ) | | 771 |
| | 9,955 |
| | (71 | ) | | — |
|
| Asset impairments | — |
| | — |
| | — |
| | — |
| | (352,546 | ) |
| Restructuring charges | — |
| | (4,772 | ) | | — |
| | — |
| | — |
|
| Income (loss) from operations | 86,456 |
|
| 187,200 |
|
| 62,058 |
|
| 9,271 |
|
| (334,245 | ) |
| Interest expense | (29,784 | ) | | (17,389 | ) | | (9,128 | ) | | (10,454 | ) | | (20,677 | ) |
| Interest income | 117 |
| | 107 |
| | 287 |
| | 158 |
| | 50 |
|
| Realized and unrealized loss on derivative instruments | (964 | ) | | (1,597 | ) | | (1,712 | ) | | (1,524 | ) | | (7,963 | ) |
| Equity income (loss) | 13,101 |
| | 14,411 |
| | 5,228 |
| | 854 |
| | (1 | ) |
| Other (expense) income | (6,071 | ) | | (3,097 | ) | | 3,805 |
| | (1,014 | ) | | (2,064 | ) |
| Net income (loss) |
| $62,855 |
|
|
| $179,635 |
|
|
| $60,538 |
|
|
| ($2,709 | ) |
|
| ($364,900 | ) |
Earnings (loss) per share (4) | | | | | | | | | |
| - Basic |
| $0.40 |
| |
| $1.36 |
| |
| $0.67 |
| |
| ($0.10 | ) | |
| ($4.54 | ) |
| - Diluted |
| $0.40 |
| |
| $1.35 |
| |
| $0.66 |
| |
| ($0.10 | ) | |
| ($4.54 | ) |
| Balance Sheet Data (at end of year): | | | | | | | | |
| Cash and cash equivalents | 68,108 |
| | 96,417 |
| | 162,797 |
| | 25,646 |
| | 26,341 |
|
| Investment in term loans and interest receivable on term loans | — |
| | — |
| | — |
| | 136,061 |
| | 119,385 |
|
Vessels and equipment (5) | 1,605,372 |
| | 1,767,925 |
| | 897,237 |
| | 931,374 |
| | 961,198 |
|
| Total assets | 1,932,425 |
| | 2,169,476 |
| | 1,241,172 |
| | 1,168,023 |
| | 1,178,293 |
|
Total debt (6) | 953,928 |
| | 1,191,235 |
| | 718,960 |
| | 810,217 |
| | 799,300 |
|
| Common stock and additional paid in capital | 1,103,304 |
| | 1,094,874 |
| | 802,650 |
| | 673,217 |
| | 672,560 |
|
| Total equity | 920,624 |
| | 877,461 |
| | 478,278 |
| | 300,831 |
| | 314,730 |
|
| Cash Flow Data: | | | | | | | | | |
| Cash and cash equivalents provided by (used in): | | | | | | | | | |
| Operating cash flows | 209,976 |
| | 166,789 |
| | 20,940 |
| | 14,753 |
| | 35,165 |
|
| Financing cash flows | (275,109 | ) | | 648,800 |
| | 6,405 |
| | (9,648 | ) | | (21,528 | ) |
| Investing cash flows | 36,824 |
| | (881,969 | ) | | 109,806 |
| | (5,800 | ) | | (5,862 | ) |
| Number of outstanding shares of common stock at the end of the year | 159,304,136 |
| | 156,030,618 |
| | 112,064,036 |
| | 83,591,030 |
| | 83,591,030 |
|
| Other Financial Data: | | | | | | | | | |
Net revenues (7) | 471,655 |
| | 494,377 |
| | 238,779 |
| | 171,678 |
| | 202,766 |
|
EBITDA (8) | 196,671 |
| | 270,677 |
| | 122,671 |
| | 58,560 |
| | (268,781 | ) |
Adjusted EBITDA (8) | 229,319 |
| | 279,076 |
| | 113,819 |
| | 62,039 |
| | 91,728 |
|
| Capital expenditures | | | | | | | | |
| Expenditures for vessels and equipment | (9,226 | ) | | (848,229 | ) | | (2,084 | ) | | (1,904 | ) | | (2,518 | ) |
| Expenditures for dry docking | (9,340 | ) | | (39,617 | ) | | (17,072 | ) | | (19,245 | ) | | (7,003 | ) |
| Fleet Data: | | | | | | | | | |
Average number of tankers (9) | | | | | | | | | |
| Suezmax | 22.0 |
| | 13.4 |
| | 10.0 |
| | 10.0 |
| | 10.0 |
|
| Aframax | 21.8 |
| | 22.0 |
| | 15.4 |
| | 14.6 |
| | 15.0 |
|
| Product | 9.2 |
| | 12.2 |
| | 7.6 |
| | 6.0 |
| | 6.0 |
|
| VLCC | 0.5 |
| | 0.5 |
| | 0.8 |
| | 0.5 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| Cash, cash equivalents and restricted cash provided by (used for): | | | | | | | | | |
| Operating cash flows | (7,263 | ) | | 80,489 |
| | 206,546 |
| | 201,821 |
| | 15,881 |
|
| Financing cash flows | (3,448 | ) | | (178,466 | ) | | (290,853 | ) | | 647,678 |
| | 6,150 |
|
| Investing cash flows | (4,492 | ) | | 78,780 |
| | 21,824 |
| | 880,011 |
| | 116,300 |
|
| Number of outstanding shares of common stock at the end of the year | 268,558,556 |
| | 268,201,638 |
| | 159,304,136 |
| | 156,030,618 |
| | 112,064,036 |
|
| Other Financial Data: | | | | | | | | | |
Net revenues (8) | 395,187 |
| | 353,810 |
| | 496,939 |
| | 515,954 |
| | 266,225 |
|
EBITDA (9) | 133,152 |
| | 78,175 |
| | 209,150 |
| | 278,059 |
| | 132,604 |
|
Adjusted EBITDA (9) | 129,559 |
| | 125,664 |
| | 240,198 |
| | 286,504 |
| | 121,836 |
|
| Capital expenditures | | | | | | | | |
Expenditures for vessels and equipment (10) | (5,827 | ) | | (4,732 | ) | | (9,226 | ) | | (848,229 | ) | | (2,084 | ) |
| Expenditures for dry docking | (27,896 | ) | | (16,239 | ) | | (9,340 | ) | | (39,617 | ) | | (17,072 | ) |
| Fleet Data: | | | | | | | | | |
Average number of tankers (11) | | | | | | | | | |
| Suezmax | 30.0 |
| | 21.1 |
| | 22.0 |
| | 13.4 |
| | 10.0 |
|
| Aframax | 19.2 |
| | 17.3 |
| | 21.8 |
| | 22.0 |
| | 15.4 |
|
| Product | 9.0 |
| | 7.5 |
| | 9.2 |
| | 12.2 |
| | 7.6 |
|
| VLCC | 0.5 |
| | 0.5 |
| | 0.5 |
| | 0.5 |
| | 0.8 |
|
| |
| (1) | The comparative periods do not include the impact of the January 1, 2018 adoption of ASU 2014-09, Revenue from Contracts with Customers (or ASU 2014-09). Refer to Item 18: Financial Statements: Note 2 Recent Accounting Pronouncements. |
| |
| (2) | Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses also include certain costs associated with full service lightering activities, which include: short-term in-charter expenses, bunker fuel expenses and other port expenses. The comparative periods do not include the impact of the January 1, 2018 adoption of ASU 2014-09. Refer to Item 18: Financial Statements: Note 2 - Recent Accounting Pronouncements. |
| |
(2)(3) | Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils, and communication expenses among others. In order to more closely align our presentation to that of many of our peers, the cost of ship management activities of $13.9 million, $8.4 million, $6.0 million, and $5.6 million, for the years ended December 31, 2016, 2015, 2014 and 2013, respectively, has been presented in vessel operating expenses. Prior to 2013, we included these amounts in general and administrative expenses. All such costs incurred in comparative periods have been reclassified from general and administrative expenses to vessel operating expenses. The amounts reclassified for the year ended December 31, 2012 was $7.0 million. |
| |
(3)(4) | Time-charter hire expense includes vessel operating lease expense incurred to charter-in vessels. |
| |
(4)(5) | Earnings (loss)(Loss) earnings per share is determined by dividing (a) net (loss) income (loss) after (deducting) adding (deducting) the amount of net income (loss) attributable to the Entities under Common Control that were purchased solely with cash by (b) the weighted-average number of shares outstanding during the applicable period.period and the equivalent shares outstanding that are attributable to the Entities under Common Control. The calculation of weighted-average number of shares includes the total Class A and total Class B shares outstanding during the applicable period. The computation of diluted earnings per share assumes the exercise of all dilutive stock options and restricted stock units using the treasury stock method. The computation of diluted loss per share does not assume such exercises. |
| |
(5)(6) | Vessels and equipment and vessels related to capital leases consists of (a) vessels, at cost less accumulated depreciation, and (b) advances on any newbuildings.depreciation. |
| |
(6)(7) | Total debt includes the current and long-term portion of debt, current and long-term portion of obligations related to capital leases and long-term amounts due to affiliates. |
| |
(7)(8) | Net revenues is a non-GAAP financial measure. Consistent with general practice in the shipping industry, we use “net revenues” (defined as revenues less voyage expenses) as a measure of equating revenues generated from voyage charters to revenues generated from time charters, which assists us in making operating decisions about the deployment of our vessels and their performance. Under time charters, the charterer pays the voyage expenses, whereas under voyage charters, the ship-owner pays these expenses. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the ship owner, pay the voyage expenses, we typically pass the approximate amount of these expenses on to our customers by charging higher rates under the contract to them. As a result, although revenues from different types of contracts may vary, the net revenues are comparable across the different types of contracts. We principally use net revenues because it provides more meaningful information to us than revenues, the most directly comparable GAAP financial measure. Net revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between companies and to industry averages. The following table reconciles net revenues with revenues: |
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2016 |
| 2015 |
| 2014 |
| 2013 |
| 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Revenues | $ | 526,896 |
| | $ | 514,193 |
| | $ | 240,884 |
| | $ | 172,338 |
| | $ | 195,885 |
| $ | 755,763 |
| | $ | 431,178 |
| | $ | 550,543 |
| | $ | 534,681 |
| | $ | 267,075 |
|
| Interest income from investment in term loans | — |
| | — |
| | 9,118 |
| | 7,677 |
| | 11,499 |
| — |
| | — |
| | — |
| | — |
| | 9,118 |
|
| Voyage expenses | (55,241 | ) |
| (19,816 | ) |
| (11,223 | ) | | (8,337 | ) |
| (4,618 | ) | (360,576 | ) | | (77,368 | ) | | (53,604 | ) | | (18,727 | ) | | (9,968 | ) |
| Net revenues | $ | 471,655 |
| | $ | 494,377 |
| | $ | 238,779 |
| | $ | 171,678 |
| | $ | 202,766 |
| $ | 395,187 |
| | $ | 353,810 |
| | $ | 496,939 |
| | $ | 515,954 |
| | $ | 266,225 |
|
| |
(8)(9) | EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA before foreign exchange gain (loss), (loss) gain on sale of vessels, asset impairments, realized (gains) losses on interest rate swaps, unrealized gains on derivative instruments, dilution gain on share issuance by the equity accountedequity-accounted for investment, fair value adjustment of the equity-accounted for investment and share of the above items in non-consolidated equity accountedequity-accounted for investments. Both measuresEBITDA and Adjusted EBITDA are used as supplemental financial performance measures by management and by external users of our financial statements, such as investors. EBITDA and Adjusted EBITDA assist our management and investors as discussed below:by increasing the comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our industry that provide EBITDA or Adjusted EBITDA-based information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest expense, taxes, depreciation or amortization (or other items in determining Adjusted EBITDA), which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including EBITDA and Adjusted EBITDA benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength and health in order to assess whether to continue to hold our equity. |
Financial and operating performance. EBITDA and Adjusted EBITDA assist our management and investors by increasing the comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our industry that provide EBITDA or Adjusted EBITDA-based information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest expense, taxes, depreciation or amortization (or other items in determining Adjusted EBITDA), which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including EBITDA and Adjusted EBITDA as financial and operating measures benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength and health in assessing whether to continue to hold shares of our Class A common stock.
Liquidity. EBITDA and Adjusted EBITDA allow us to assess the ability of assets to generate cash sufficient to service debt, pay dividends and undertake capital expenditures. By eliminating the cash flow effect resulting from our existing capitalization and other items such as dry-docking expenditures, working capital changes and foreign currency exchange gains and losses, EBITDA and Adjusted EBITDA provide consistent measures of our ability to generate cash over the long term. Management uses this information as a significant factor in determining (a) our proper capitalization (including assessing how much debt to incur and whether changes to the capitalization should be made) and (b) whether to undertake material capital expenditures and how to finance them, all in light of our dividend policy. Use of EBITDA and Adjusted EBITDA as liquidity measures also permits investors to assess the fundamental ability of our business to generate cash sufficient to meet cash needs, including dividends on shares of our Class A common stock.
Neither EBITDA nor Adjusted EBITDA should be considered an alternative to net (loss) income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect net income and operating income, and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as presented in this Annual Reportbelow may not be comparable to similarly titled measures of other companies.
The following table reconciles our historical consolidated EBITDA and Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, and our historical consolidated Adjusted EBITDA to net operating cash flow, the most directly comparable GAAP financial measure. income.
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 |
| 2015 |
| 2014 |
| 2013 |
| 2012 |
| Reconciliation of “Adjusted EBITDA” to “Net income (loss)” |
|
|
|
|
|
|
|
|
|
| Net income (loss) | $ | 62,855 |
| | $ | 179,635 |
| | $ | 60,538 |
| | $ | (2,709 | ) | | $ | (364,900 | ) |
| Depreciation and amortization | 104,149 |
| | 73,760 |
| | 53,292 |
| | 50,973 |
| | 75,492 |
|
| Interest expense, net of interest income | 29,667 |
| | 17,282 |
| | 8,841 |
| | 10,296 |
| | 20,627 |
|
| EBITDA | $ | 196,671 |
| | $ | 270,677 |
| | $ | 122,671 |
| | $ | 58,560 |
| | $ | (268,781 | ) |
| Loss (gain) on sale of vessels | 20,594 |
| | (771 | ) | | (9,955 | ) | | 71 |
| | — |
|
| Asset impairments | — |
| | — |
| | — |
| | — |
| | 352,546 |
|
| Realized loss on interest rate swaps | 12,797 |
| | 9,790 |
| | 9,993 |
| | 9,887 |
| | 9,543 |
|
| Unrealized gain on derivative instruments | (9,679 | ) | | (8,193 | ) | | (8,281 | ) | | (8,363 | ) | | (1,580 | ) |
| Fair value on initial recognition of stock purchase warrant | — |
| | — |
| | (3,420 | ) | | — |
| | — |
|
| Dilution gain on equity accounted investment | — |
| | — |
| | (2,054 | ) | | — |
| | — |
|
Adjustments related to equity accounted investments (i) | 8,936 |
| | 7,573 |
| | 4,865 |
| | 1,884 |
| | — |
|
| Adjusted EBITDA | $ | 229,319 |
| | $ | 279,076 |
| | $ | 113,819 |
| | $ | 62,039 |
| | $ | 91,728 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
| 2012 |
| Reconciliation of “Adjusted EBITDA” to “Net operating cash flow” |
|
|
|
|
|
|
|
|
|
| Net operating cash flow | $ | 209,976 |
| | $ | 166,789 |
| | $ | 20,940 |
| | $ | 14,753 |
| | $ | 35,165 |
|
| Interest expense, net of interest income | 29,667 |
| | 17,282 |
| | 8,841 |
| | 10,296 |
| | 20,627 |
|
| Expenditures for dry docking | 8,608 |
| | 39,617 |
| | 17,072 |
| | 19,245 |
| | 7,003 |
|
| Realized loss on interest rate swaps | 12,797 |
| | 9,790 |
| | 9,993 |
| | 9,887 |
| | 9,543 |
|
| Change in working capital | (44,496 | ) | | 25,880 |
| | 50,904 |
| | 6,633 |
| | 20,609 |
|
| Other cash flows, net | 3,831 |
| | 12,145 |
| | 6,678 |
| | (659 | ) | | (1,219 | ) |
| Fair value on initial recognition of stock purchase warrant | — |
| | — |
| | (3,420 | ) | | — |
| | — |
|
| Dilution gain on equity accounted investment | — |
| | — |
| | (2,054 | ) | | — |
| | — |
|
Adjustments related to equity accounted investments (i) | 8,936 |
| | 7,573 |
| | 4,865 |
| | 1,884 |
| | — |
|
| Adjusted EBITDA | $ | 229,319 |
| | $ | 279,076 |
| | $ | 113,819 |
| | $ | 62,039 |
| | $ | 91,728 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Reconciliation of "EBITDA" and "Adjusted EBITDA” to “Net (loss) income” | | | | | | | | | |
| Net (loss) income | $ | (52,548 | ) | | $ | (58,023 | ) | | $ | 67,823 |
| | $ | 183,626 |
| | $ | 68,906 |
|
| Depreciation and amortization | 118,514 |
| | 100,481 |
| | 104,149 |
| | 73,760 |
| | 53,292 |
|
| Interest expense, net of interest income | 57,774 |
| | 30,387 |
| | 29,667 |
| | 17,267 |
| | 8,429 |
|
| Freight tax and other tax expenses | 9,412 |
| | 5,330 |
| | 7,511 |
| | 3,406 |
| | 1,977 |
|
| EBITDA | $ | 133,152 |
| | $ | 78,175 |
| | $ | 209,150 |
| | $ | 278,059 |
| | $ | 132,604 |
|
Foreign exchange (gain) loss (i) | (3,133 | ) | | (79 | ) | | (1,413 | ) | — |
| (613 | ) | | 292 |
|
| (Gain) loss on sale of vessels | (170 | ) | | 12,984 |
| | 20,594 |
| | (771 | ) | | (9,955 | ) |
| Realized (gain) loss on interest rate swaps | (2,316 | ) | | 994 |
| | 12,797 |
| | 9,790 |
| | 9,993 |
|
| Unrealized gain on derivative instruments | (579 | ) | | (937 | ) | | (9,679 | ) | | (8,193 | ) | | (11,676 | ) |
| Fair value on initial recognition of stock purchase warrant | — |
| | — |
| | — |
| | — |
| | (3,420 | ) |
| Dilution gain on equity-accounted for investment | — |
| | — |
| | — |
| | — |
| | (2,054 | ) |
| Fair value adjustment of TIL | — |
| | 26,733 |
| | — |
| | — |
| | — |
|
Adjustments related to equity-accounted for investments (ii) | 2,605 |
| | 7,794 |
| | 8,749 |
| | 8,232 |
| | 6,052 |
|
| Adjusted EBITDA | $ | 129,559 |
| | $ | 125,664 |
| | $ | 240,198 |
| | $ | 286,504 |
| | $ | 121,836 |
|
| |
| (i) | Foreign exchange (gain) loss includes an unrealized gain of $3.2 million in 2018 (2017 - loss of $0.2 million, 2016 - loss of $46.0 thousand, 2015 - gain of $1.0 thousand, and 2014 - loss of $0.2 million). |
| |
| (ii) | The following table reflects certain non-GAAP adjustments to the results of our equity accountedequity-accounted for investments. The adjusted results should not be considered as an alternative to any measure of financial performance or liquidity presented in accordance with GAAP. Adjustments to equity investments include some, but not all, items that affect equity income and these measures and adjustments may vary among other companies and may not be comparable to adjustments to similarly titled measures of other companies. When using Adjusted EBITDA as a measure of liquidity itIt should be noted that this measure includes the Adjusted EBITDA from our equity accountedequity-accounted for investments. We do not have control over the operations, nor do we have any legal claim to the revenue and expenses of our equity accountedequity-accounted for investments. Consequently, the cash flow generated by our equity accounted for investments may not be available for use by us in the period generated. |
Adjustments relating to equity income from our equity accountedequity-accounted for investments are as follows:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | 5,926 |
| | 4,535 |
| | 2,947 |
| | 1,136 |
| | — |
| 1,745 |
| | 5,250 |
| | 5,866 |
| | 4,517 |
| | 2,979 |
|
| Interest expense, net of interest income | 2,870 |
| | 2,769 |
| | 1,427 |
| | 444 |
| | — |
| 876 |
| | 2,562 |
| | 2,868 |
| | 2,763 |
| | 1,446 |
|
| Realized and unrealized loss on derivative instruments | 115 |
| | 344 |
| | 416 |
| | 341 |
| | — |
| |
| Foreign exchange loss (gain) | 25 |
| | (75 | ) | | 226 |
| | — |
| | — |
| |
| Income tax (recovery) expense | | — |
| | (1 | ) | | (107 | ) | | 602 |
| | 1,359 |
|
| Realized and unrealized (gain) loss on derivative instruments | | (16 | ) | | (14 | ) | | 115 |
| | 344 |
| | 416 |
|
| Foreign exchange (gain) loss | | — |
| | (3 | ) | | 7 |
| | 6 |
| | 3 |
|
| Other | — |
| | — |
| | (151 | ) | | (37 | ) | | — |
| — |
| | — |
| | — |
| | — |
| | (151 | ) |
| Adjustments related to equity accounted investments | $ | 8,936 |
| | $ | 7,573 |
| | $ | 4,865 |
| | $ | 1,884 |
| | $ | — |
| |
| Adjustments related to equity-accounted for investments | | $ | 2,605 |
| | $ | 7,794 |
| | $ | 8,749 |
| | $ | 8,232 |
| | $ | 6,052 |
|
| |
(9)(10) | Excludes vessels purchased in connection with our acquisition of Tanker Investments Ltd. (or TIL). Please read Item 18. Financial Statements: Note 23 - Acquisition of Tanker Investments Ltd. |
| |
| (11) | Average number of tankers consists of the average number of vessels that were in our possession during a period, including time-chartered in vessels, the vessel owned by theour High-Q Investment Ltd. (or High-Q) joint venture with Wah Kwong Maritime Transport Holdings Ltd. and vessels of the Entities under Common Control. |
Risk Factors
Some of the following risks relate principally to the industries in which we operate and to our business in general. Other risks relate principally to the securities market and to ownership of our common stock. The occurrence of any of the events described in this section could materially and adversely affect our business, financial condition, operating results and ability to pay dividends on, and the trading price of our common stock.
Our ability to repay or refinance debt obligations and to fund our capital expenditures will depend on certain financial, business and other factors, many of which are beyond our control. To the extent we are able to finance these obligations and expenditures with cash from operations or by issuing debt or common shares, our ability to makepay cash dividends may be diminished or our financial leverage may increase, or our shareholders may be diluted. Our business may be adversely affected if we need to access other sources of funding.
To fund our existing and future debt obligations and capital expenditures, we may be required to use our existing liquidity or cash from operations, incur borrowings, raise capital through the sale of assets or ownership interests in certain assets or joint venture entities,entity, debt or additional equity securities and/or seek to access other financing sources. Our access to potential funding sources and our future financial and operating performance will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control.
If we are unable to access additional financing arrangements and generate sufficient cash flow to meet our debt, capital expenditure and other business requirements, we may be forced to take actions such as:
restructuring our debt;
seeking additional debt or equity capital;
selling additional assets or equity interestsinterest in certain assets or joint ventures;venture;
further reducing cash distributions;dividends;
reducing, delaying or cancelling business activities, acquisitions, investments or capital expenditures; or
seeking bankruptcy protection.
Such measures might not be successful, and additional debt or equity capital may not be available on acceptable terms or enable us to meet our debt, capital expenditure and other obligations. Some of such measures may adversely affect our business and reputation. In addition, credit agreements may restrict our ability to implement some of these measures.
Use of cash from operations for capital purposes will reduce cash available for dividends to shareholders. TheOur ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions in general. Even if we are successful in obtaining necessary funds, the terms of such financings could limit our ability to pay cash dividends to shareholders or operate our business as currently conducted. In addition, incurring additional debt may significantly increase interest expense and financial leverage, and issuing additional equity securities may result in significant shareholder dilution and would increase the aggregate amount of cash required to maintain quarterly dividends. The sale of certain assets would reduce cash from operations and the cash available for shareholders.
Our primary liquidity needs in the next few years are to refinance loans as they mature and to make scheduled repayments of debt, in addition to paying debt service costs, quarterly dividends on equity, scheduled repayments of obligations related to our capital leases, operating expenses and dry dockingdry-docking expenditures and funding general working capital requirements. We anticipate that our primary sources of funds in the next few years will be existing liquidity, cash flows from operations, equity issuances and bank debt or other sources of financing and equity issuances.financing.
The cyclical nature of the tanker industry may lead to volatile changes in charter rates, and significant fluctuations in the utilization of our vessels, which may adversely affect our earnings.
Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in the supply of and demand for tanker capacity and changes in the supply of and demand for oil and oil products. The cyclical nature of the tanker industry may cause significant increases or decreases in the revenues we earn from our vessels and may also cause significant increases or decreases in the value of our vessels. If the tanker market is depressed, our earnings may decrease. Our exposure to industry business cycles is more acute because of our exposure to the spot tanker market, which is more volatile than the tanker industry generally. Our ability to operate profitably in the spot market and to recharter our other vessels upon the expiration or termination of their charters will depend upon, among other factors, economic conditions in the tanker market.
The factors affecting the supply of and demand for tankers are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable.
Key factors that influence the supply of tanker capacity include:
environmental concerns and regulations;
the number of newbuilding deliveries;
the scrapping rate of older vessels;
conversion of tankers to other uses; and
the number of vessels that are out of service.
Key factors that influence demand for tanker capacity include:
supply of oil and oil products;
demand for oil and oil products;
regional availability of refining capacity;
global and regional economic and political conditions;
the distance oil and oil products are to be moved by sea; and
changes in seaborne and other transportation patterns.
Historically, the tanker markets have been volatile as a result of the many conditions and factors that can affect the price and the supply of, and demand for, tanker capacity. Changes in demand for transportation of oil over longer distances and in the supply of tankers to carry that oil may materially affect our revenues, profitability and cash flows.
A continuation of the recent significant declinesdecline in oil prices may adversely affect our growth prospects and results of operations.
GlobalAlthough global crude oil and gas prices have significantly declinedmoderately recovered since mid-2014.falling from the highs of mid-2014, prices have not returned to those same highs and remain volatile due to global and regional geopolitical, economic and strategic risks and changes. A continuation of lower oil prices or a further decline in oil prices may adversely affect our business, results of operations and financial condition and our ability to pay dividends, as a result of, among other things:
a reduction in exploration for or development of new oil fields or energy projects, or the delay or cancellation of existing projects as energy companies lower their capital expenditures budgets, which may reduce our growth opportunities;
potential lower demand for tankers, which may reduce available charter rates and revenue to us upon chartering or rechartering of our vessels;
customers failing to extend or renew contracts upon expiration;
the inability or refusal of customers to make charter payments to us due to financial constraints or otherwise; or
declines in vessel values, which may result in losses to us upon vessel sales or impairment charges against our earnings.
A significant increase in crude oil prices could negatively impact tanker freight rates.
Crude oil prices have declined significantly since mid-2014, which has generally benefited the tanker market as it has led to higher oil demand, stronger refining margins, additional import demand for stockpiling purposes and lower bunker costs. A significant increase in crude oil prices compared to current levels could reverse many of these positive drivers and negatively impact tanker freight rates.
Changes in the oil markets could result in decreased demand for our vessels and services.
Demand for our vessels and services in transporting oil depends upon world and regional oil markets. Any decrease in shipments of crude oil in those markets could have a material adverse effect on our business, financial condition and results of operations. Historically, those markets have been volatile as a result of the many conditions and events that affect the price, production and transport of oil, including competition from alternative energy sources. Past slowdowns of the U.S. and world economies have resulted in reduced consumption of oil products and decreased demand for our vessels and services, which reduced vessel earnings. Additional slowdowns could have similar effects on our operating results and may limit our ability to expand our fleet.
Changes in the spot tanker market may result in significant fluctuations in the utilization of our vessels and our profitability.
During 20162018 and 2015,2017, we derived approximately 78.2%70.8% and 84.6%51.0%, respectively, of our net revenues from vessels operating in the spot tanker market, either directly or by means of participation in pooling agreementsrevenue sharing arrangements (or RSAs) (which includes vessels operating under full service lightering contracts and charters with an initial term of less than one year). Due to our involvement in the spot-charter market, declining spot rates in a given period generally will result in corresponding declines in our operating results for that period.
The spot-charter market is highly volatile and fluctuates based upon tanker and oil supply and demand. The successful operation of our vessels in the spot-charter market depends upon, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick upload cargo. Future spot rates may not be sufficient to enable our vessels trading in the spot tanker market to operate profitably or to provide sufficient cash flow to service our debt obligations.
The operation of a significant number of our tankers in the pooling arrangementsRSAs could limit our earnings.
As of December 31, 2016, 14 of our Suezmax tankers, three2018, 29 of our owned and fourleased Suezmax tankers, ten of our time-chartered inowned and leased Aframax tankers, and fiveeight of our owned and leased Long Range 2 (or LR2) product tankers operated in and generated revenues to us through participation in athe Suezmax tanker, pooling arrangement (the Teekay Suezmax Pool), two Aframax tanker revenue sharing arrangements (the Teekay Aframax Pools), and an LR2 product tanker pooling arrangement (the Taurus Tankers LR2 Pool), respectively. The Teekay Suezmax Pool, Teekay Aframax Pools and Taurus Tankers LR2 PoolRSAs, which are eachowned and/or managed by Teekay Tanker Operations Ltd. (or TTOL), in which Teekay Corporation and we each have a 50% interest. Pooling arrangements areone of our subsidiaries. Each RSA is designed to spread the costs and risks associated with commercial management of vessels and to share the net revenues earned by all of the vessels in the pool.RSA. Although the net revenues are apportioned based on the actual earning days each vessel is available and the relative performance capabilities of each vessel, a poolan RSA may include vessels that do not perform as well in actual operation as our vessels. As a result, our share of the net pool revenues may be less than what we could earn operating our vessels independently. Certain vessels of Tanker Investments Ltd. (TIL), in which we have an ownership interest, also participate in some of these pooling arrangements.
The removal of any vessels from the pooling arrangements in which we participate may adversely affect our operating results.
Participants in the Teekay Suezmax Pool, including third parties, have each agreed to include in the pool certain qualifying Suezmax-class crude tankers of the pool participants and their respective affiliates, including us, that operate in the spot market or pursuant to time charters
of less than one year. We and Teekay Corporation have each committed to include in the Teekay Aframax Pools all of our and its respective Aframax-class crude tankers that are employed in the spot market or operate pursuant to time charters of less than 90 days. Participants in the Taurus Tankers LR2 Pool, including third parties, have each agreed to include in the pool certain qualifying LR2 product tankers of the pool participants and their respective affiliates, including us, that operate in the spot market or pursuant to time charters of less than one year. If we or any participant remove vessels from any pooling arrangement in which we participate to operate under longer-term time charters, the benefits to us of the pooling arrangements could diminish.
Our failure to renew or replace fixed-rate charters could cause us to trade the related vessels in the spot market, which could adversely affect our operating results and make them more volatile.
As of December 31, 2016, a total of 13 of our tankers, one time-chartered in vessel and one jointly-owned vessel operated under fixed-rate time-charter contracts, seven of which are scheduled to expire in 2017, seven in 2018, and one in 2019, respectively. If upon their scheduled expiration or any early termination we are unable to renew or replace fixed-rate charters on favorable terms, if at all, or if we choose not to renew or replace these fixed-rate charters, we may employ the vessels in the volatile spot market. Increasing our exposure to the spot market, particularly during periods of unfavorable market conditions, could harm our results of operations and make them more volatile.
Our vessels operate in the highly competitive international tanker market.
The operation of oil tankers and transportation of crude oil and refined petroleum products are extremely competitive businesses. Competition arises primarily from other tanker owners, including major oil companies and independent tanker companies, some of which have substantially greater financial strength and capital than do we or Teekay Corporation. Competition for the transportation of oil and oil products can be intense and depends on price and the location, size, age, condition of the tanker and the acceptability of the tanker and its operators to the charterers. Our competitive position may erode over time.
Our operating results are subject to seasonal fluctuations.
Our tankers operate in markets that have historically exhibited seasonal variations in tanker demand and, therefore, in spot-charter rates. This seasonality may result in quarter-to-quarter volatility in our results of operations. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere but weaker in the summer months as a result of lower oil consumption in the northern hemisphere and refinery maintenance. In addition, unpredictable weather patterns during the winter months tend to disrupt vessel scheduling, which historically has increased oil price volatility and oil trading activities in the winter months. As a result, revenues generated by the tankers in our fleet have historically been weaker during our fiscal quarters ended June 30 and September 30, and stronger in our fiscal quarters ended December 31 and March 31.
Future economicEconomic downturns, including disruptions in the global credit markets, could adversely affect our ability to grow.
Economic downturns and financial crises in the global markets could produce illiquidity in the capital markets, market volatility, heightened exposure to interest rate and credit risks, and reduced access to capital markets. If global financial markets and economic conditions significantly deteriorate in the future, we may face restricted access to the capital markets or bank lending, which may make it more difficult and costly to fund future growth. Decreased access to such resources could have a material adverse effect on our business, financial condition and results of operations.
Economic downturns may affect our customers’ ability to charter our vessels and pay for our services and may adversely affect our business and results of operations.
Economic downturns in the global financial markets may lead to a decline in our customers’ operations or ability to pay for our services, which could result in decreased demand for our vessels and services. Our customers’ inability to pay could also result in their default on our current contracts and charters. A decline in the amount of services requested by our customers or their default on our contracts with them could have a material adverse effect on our business, financial condition and results of operations.
Exposure to currency exchange and interest rate fluctuations could result in fluctuations in our operating results.
Our primary economic environment is the international shipping market, which utilizes the U.S. Dollar as its functional currency. Consequently, virtually all of our revenues and the majority of our expenses are in U.S. Dollars. However, we incur certain voyage expenses, vessel operating expenses, and general and administrative expenses in foreign currencies, the most significant of which are the Euro, Singapore Dollar, British Pound, Euro and Canadian Dollar and British Pound.Dollar. This partial mismatch in revenues and expenses could lead to fluctuations in our net income due to changes in the value of the U.S. Dollar relative to other currencies.
We are exposed to the impact of interest rate changes primarily through our borrowings that require us to make interest payments based on LIBOR. Significant increases in interest rates could adversely affect our operating margins, results of operations and our ability to service our debt. In addition, there is uncertainty as to the continued use of LIBOR in the future. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to be eliminated or to perform differently than in the past. The consequences of these developments cannot be entirely predicted but could include an increase in the cost of our variable rate indebtedness and obligations. From time to time, we use interest rate swaps to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our floating-rate debt.
In addition, we are exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. For further information about our financial instruments at December 31, 2018, that are sensitive to changes in interest rates, please read "Item 11 - Quantitative and Qualitative Disclosures About Market Risk."
We may not be able to grow or to manage our growth effectively.
One of our principal strategies is to continue to grow by expanding our operations and adding vessels to our fleet. Our future growth will depend upon a number of factors, some of which are beyond our control. These factors include our ability to:
identify suitable tankers or shipping companies for acquisitions or joint ventures;
integrate successfully any acquired tankers or businesses with our existing operations; and
obtain required financing for our existing and any new operations.
In addition, competition from other companies, many of which have significantly greater financial resources than do we or Teekay Corporation, may reduce our acquisition opportunities or cause us to pay higher prices. Our failure to effectively identify, purchase, develop and integrate any tankers or businesses could adversely affect our business, financial condition and results of operations.
We may not realize expected benefits from acquisitions and implementing our growth strategy through acquisitions may harm our financial condition and performance.
Any acquisition of a vessel or business, such as our acquisition of the ship-to-ship transfer business in July 2015 and Tanker Investments Ltd. (or TIL) in November 2017, may not be profitable at or after the time of acquisition and may not generate cash flows sufficient to justify the investment. In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition and operating results, including risks that we may:
fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;
be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;
decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions;
significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;
incur or assume unanticipated liabilities, losses or costs associated with any vessels or businesses acquired; or
incur other significant charges, such as impairment of intangible assets, asset devaluation or restructuring charges.
To the extent we acquire existing vessels, they typically do not carry warranties as to their condition, unlike newbuilding vessels. While we generally inspect existing vessels prior to purchase, such an inspection would normally not provide us with as much knowledge of a vessel’s condition as we would possess if it had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for vessels we have operated since they were built. These costs could decrease our cash flows and liquidity, and harm our financial condition and performance.
Our entry into the business of providing ship-to-ship lightering services and LNG terminal management and consultancy services may be unsuccessful.
In July 2015, we acquired ship-to-ship transfer business from a company jointly owned by Teekay Corporation and a Norway-based marine transportation company, I.M. Skaugen SE. The acquired business provides ship-to-ship transfer services in the oil, gas and dry bulk industries, as well as LNG terminal management and consultancy services. We have no or limited prior experience in these businesses and competitors may have greater experience and resources than do we or Teekay Corporation. The markets for ship-to-ship transfer business and these consultancy services may have different competitive dynamics than our existing business, and customers may not engage us to provide these new services. As a result, our entry into these new markets may not be successful.
Over time, the value of our vessels may decline, which could adversely affect our ability to obtain financing or our operating results.
Vessel values for oil tankers can fluctuate substantially over time due to a number of different factors. Vessel values may decline from existing levels. If the operation of a tanker is not profitable, or if we cannot re-deploy a chartered tanker at attractive rates upon charter termination, rather than continue to incur costs to maintain and finance the vessel, we may seek to dispose of it. Our inability to dispose of the vessel at a fair market value or the disposition of the vessel at a fair market value that is lower than its book value could result in a loss on its sale and adversely affect our results of operations and financial condition. As of December 31, 2016,2018, two of our credit facilities and 14 of our obligations related to capital leases contain loan-to-value financial covenants tied to the value of the vessels that collateralize these credit facilities.facilities and the vessels related to the capital leases. A significant decline in the market value of these tankers may require us to pledge additional collateral to avoid a default under these credit facilities.facilities and obligations related to capital leases. We are required to maintain vessel value to outstanding loan principal balance ratios ranging from 105%75%-125%. At December 31, 2016,2018, we were in compliance with these requirements. A significant decline in the market value of our tankers may prevent us from refinancing tankers with a similar amount of debt thereby requiring us to either reduce debt levels in facilities collateralized by the tankers or seek alternative financing structures.
In addition, if we determine at any time that a vessel’s future useful life and earnings require us to impair its value on our consolidated financial statements, we may need to recognize a significant charge against our earnings. Vessel values had declined significantly in prior years, which contributed to significant vessel and goodwill impairment charges against our earnings in 2012.
We will be required to make substantial capital expenditures should we decide to expand the size of our fleet. We generally will be required to make significant installment payments for any acquisitions of newbuilding vessels prior to their delivery and generation of revenue. Depending on whether we finance our expenditures through cash from operations or by issuing debt or equity securities, our financial leverage could increase or our shareholders’ ownership interest in us could be diluted.
We will be required to make substantial capital expenditures should we decide to increase the size of our fleet. We intend to expand our fleet, byincluding acquiring tankers primarily from third parties. Our acquisitions may also include newbuildings. We generally will be required to make installment payments on any newbuildings prior to their delivery. We typically pay 10% to 20% of the purchase price of a tanker upon signing the purchase contract, even though delivery of the completed vessel does not occur until much later (approximately two to three years from the order). To fund
expansion capital expenditures, we may be required to use cash balances or cash from operations, incur borrowings or raise capital through the incurrence of debt or issuance of additional equity securities. Our ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial condition at the time of any such financing or offering, as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain funds for capital expenditures could have a material adverse effect on our business, results of operations and financial condition. Even if we are successful in obtaining the necessary funds, incurring additional debt may significantly increase our interest expense and financial leverage, which could limit our financial flexibility and ability to pursue other business opportunities. In addition, issuing additional equity securities may result in significant shareholder ownership dilution and would increase the aggregate amount of cash required to pay quarterly dividends.
An increase in operating costs could adversely affect our cash flows and financial condition.
We have entered into a long-term management agreement (or the Management Agreement) with Teekay Tankers Management Services Ltd. (our Manager), a subsidiaryThe levels of Teekay Corporation. Under the Management Agreement, we must reimburse our Manager for vessel operating expenses (including crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses). These expenses depend upon a variety of factors, many of which are beyond our or our Manager’s control. Some of these costs primarily relating to insurance, commodities, crew compensation and enhanced security measures, have been increasing and may increase in the future. Increases in any of these costsfuture, such increases would decrease our earnings and adversely affect our cash flows and financial condition.
Financing agreements containing operating and financial restrictions may restrict our business and financing activities.
The operating and financial restrictions and covenants in our revolving credit facilities, term loans, lease obligations and in any of our future financing agreements could adversely affect our ability to finance future operations or capital needs or to pursue and expand our business activities. For example, these financing arrangements may restrict our ability to:
incur oradditional indebtedness and guarantee indebtedness;
change ownershippay dividends or structure, including mergers, consolidations, liquidations and dissolutions;make other distributions or repurchase or redeem our capital stock;
pay dividends;prepay certain debt;
grant liens on our assets;
sell, transfer, assignissue certain preferred shares or convey assets;similar equity securities;
make certainloans and investments; and
enter into a new line of business.business;
incur or permit certain liens to exist;
enter into transactions with affiliates;
create unrestricted subsidiaries;
transfer, sell, convey or otherwise dispose of assets;
make certain acquisitions and investments;
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
consolidate, merge or sell all or substantially all of our assets.
In addition, certain of our debt agreements require, us to comply with certain financial covenants. Our ability to comply with covenants and restrictions contained in debt instruments and lease obligations may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, we may fail to comply with these covenants. In addition, two of our term loans are guaranteed by Teekay and contain certain financial covenants. Teekay's ability to comply with the covenants of these term loans will affect our compliance with the covenants. If we breach any of the restrictions, covenants, ratios or tests in theour financing agreements or indentures, our obligations may become immediately due and payable, and the lenders’ commitment under our credit facilities, if any, to make further loans may terminate. This could lead to cross-defaults under our other financing agreements and result in obligations becoming due and commitments being terminated under such agreements. A default under one financing agreementagreements could also result in foreclosure on any of our vessels and other assets securing related loans,loans.
Because we are organized under the laws of the Marshall Islands, it may be difficult to serve us with legal process or triggerenforce judgments against us, our directors or our management.
We are organized under the laws of the Marshall Islands, and all of our assets are located outside of the United States. In addition, a defaultmajority of our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible to bring an action against us or against these individuals in the United States. Even if successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict the enforcement of a judgment against our assets or our directors and officers.
As a Marshall Islands corporation with our headquarters in Bermuda, and with a majority of our subsidiaries being Marshall Islands entities and also having subsidiaries in other offshore jurisdictions, our operations may be subject to economic substance requirements of the European Union, which could harm our business.
Finance ministers of the EU rate jurisdictions for tax transparency, governance, real economic activity and corporate tax rate. Countries that do not adequately cooperate with the finance ministers are put on a “grey list” or a “blacklist”. Various countries, including the Republic of the Marshall Islands and Bermuda, are currently on the blacklist.
EU member states have agreed upon a set of measures, which they can choose to apply against the listed countries, including increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The European Commission has stated it will continue to support member states' efforts to develop a more coordinated approach to sanctions for the listed countries in 2019. EU legislation prohibits EU funds from being channelled or transited through entities in countries on the blacklist.
We are a Marshall Islands corporation with our headquarters in Bermuda. A majority of our subsidiaries are Marshall Islands entities and many of our subsidiaries are either organized or registered in Bermuda. It is difficult to determine how the EU blacklisting of these jurisdictions will affect our business. These jurisdictions have enacted or may enact economic substance laws and regulations with which we may be obligated to comply. We understand that recently-adopted Bermudian legislation requires each Bermudian registered entity to maintain a substantial economic presence in Bermuda and provides that a registered entity that carries on a relevant activity may comply with the economic substance requirements if (i) it is directed and managed in Bermuda, (ii) its core income-generating activities are undertaken in Bermuda with respect to the relevant activity, (iii) it maintains adequate physical presence in Bermuda, (iv) it has adequate full-time employees in Bermuda with suitable qualifications, and (v) it incurs adequate operating expenditures in Bermuda in relation to the relevant activity. We do not know what actions the Marshall Islands may take, if any, to remove itself from the list; whether the EU will remove the Marshall Islands or Bermuda from the list; how quickly the EU would react to any changes in legislation of the Marshall Islands, Bermuda or other applicable jurisdictions; or how EU banks or other counterparties will react while we or any of our subsidiaries remain as entities organized and existing or registered under other financing agreements.the laws of blacklisted countries. The effect of the EU blacklist, and any noncompliance by us with any legislation adopted by applicable countries to achieve removal from the list, could have a material adverse effect on our business, financial condition and operating results.
Our substantial debt levels and obligations related to capital leases may limit our flexibility in obtaining additional financing, pursuing other business opportunities and paying dividends.
As of December 31, 2016,2018, our long-term debt was approximately $933.0$742.0 million and an additional $34.3$11.8 million was available to us under our revolving credit facilities.facilities, and our obligations related to capital leases was approximately $375.3 million. In addition, in late 2018, one of our subsidiaries entered into a working capital loan facility, which provides up to $40 million of available aggregate borrowings with the option to increase the facility up to an additional $15.0 million. As at December 31, 2018, no amounts had been drawn under this facility. We will continue to have the ability to incur additional debt, subject to limitations in our revolving credit facilities.facilities and working capital loan facility. Our level of debt could have important consequences to us, including the following:
our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired, or such financing may not be available on favorable terms;
we will need a substantial portion of our cash flow to make principal and interest payments on our debt and lease payments on our obligations related to capital leases, reducing the funds that would otherwise be available for operations, business opportunities and dividends to our shareholders;
our debt level will make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our industry or the economy generally; and
our debt level may limit our flexibility in responding to changing business and economic conditions.
Our ability to service our debt and obligations related to capital leases depends upon, among other things, our financial and operating performance, which is affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness and obligations related to capital leases, we will be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.
Our insurance may be insufficient to cover losses that may occur to our vessels or result from our operations.
The operation of oil tankers and lightering support vessels isand the transfer of oil and gas are inherently risky. Although we carry hull and machinery (marine and war risks) and protection and indemnity insurance, all risks may not be adequately insured against, and any particular claim may not be paid. In addition, we do not carry insurance on our vessels covering the loss of revenues resulting from vessel off-hire time, based on its cost compared to our off-hire experience.time. Any significant unpaid claims or off-hire time of our vessels could harm our business, operating results and financial condition. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent environmental regulations have led to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. A catastrophic oil spill, marine disasters or natural disasters could exceed the insurance coverage, which could harm our business, financial condition and operating results. Any uninsured or underinsured loss could harm our business and financial condition. In addition, the insurance may be voidable by the insurers as a result of certain actions, such as vessels failing to maintain certification with applicable maritime regulatory organizations.
Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult to obtain. In addition, the insurance that may be available may be significantly more expensive than existing coverage.
Terrorist attacks, piracy, increased hostilities, political change or war could lead to further economic instability, increased costs and disruption of business.
Terrorist attacks, piracy and the current or future conflicts in the Middle East, South East Asia, West Africa (Nigeria), Libya and elsewhere, and other current and future conflicts and political change, may adversely affect our business, operating results, financial condition, and ability to raise capital and fund future growth. Continuing hostilities in the Middle East especially among Qatar, Saudi Arabia, the United Arab Emirates, Yemen and elsewhere may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may contribute further to economic instability and disruption of oil production and distribution, which could result in reduced demand for our services and have an adverse impact on our operations and our ability to conduct business.
In addition, oil facilities, shipyards, vessels, pipelines, oil fields or other infrastructure could be targets of future terrorist attacks or warlike operations and our vessels could be targets of pirates, hijackers, terrorists or warlike operations. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport oil to or from certain locations. Terrorist attacks, war, piracy, hijacking or other events beyond our control that adversely affect the distribution, production or transportation of oil to be shipped by us could entitle customers to terminate charters which would harm our cash flow and business.
Acts of piracy on ocean-going vessels continue to be a risk, which could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, Gulf of Guinea and the Indian Ocean off the coast of Somalia. While there continues to be a significant risk of piracy in the Gulf of Aden and Indian Ocean, recently there have been increases in the frequency and severity of piracy incidents off the coast of West Africa and a resurgent piracy risk in the Straits of Malacca, Sulu & Celebes Sea and surrounding waters. If these piracy attacks result in regions in which our vessels are deployed being named on the Joint War Committee Listed Areas, war risk insurance premiums payable for such coverage canmay increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which may beare incurred to the extent we employ on-board security guards and escort vessels, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, hijacking as a result of an act of piracy against our vessels, or an increase in cost or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations.
Our substantial operations outside the United States expose us to political, governmental and economic instability, which could harm our operations.
Because our operations and the operations of our customers are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where we engage in business or where our vessels are registered. Any disruption caused by these factors could harm our business, including by reducing the levels of oil exploration, development and production activities in these areas. We derive some of our revenues from shipping oil from politically unstable regions. Conflicts in these regions have
included attacks on ships and other efforts to disrupt shipping. Hostilities or other political instability in regions where we operate or where we may operate could have a material adverse effect on the growth of our business, results of operations and financial condition and ability to make cash distributions.pay dividends. In addition, tariffs, trade embargoes and other economic sanctions by the United States or other countries to which we trade may limit trading activities with those countries, which could also harm our business and ability to make cash distributions.pay dividends. Finally, a government could requisition one or more of our vessels, which is most likely during war or national emergency. Any such requisition would cause a loss of the vessel and could harm our cash flows and financial results.
A cyber attack could materially disrupt our business.
We rely on information technology systems and networks in our operations and the administration of our business. Cyber-attacks have increased in number and sophistication in recent years. Our operations could be targeted by individuals or groups seeking to sabotage or disrupt our information technology systems and networks, or to steal data. A successful cyber-attack could materially disrupt our operations, including the safety of our operations, or lead to unauthorized release of information or alteration of information on our systems. Any such attack or other breach of our information technology systems could have a material adverse effect on our business and results of operations.
Our failure to comply with data privacy laws could damage our customer relationships and expose us to litigation risks and potential fines.
Data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services and continue to develop in ways which we cannot predict, including with respect to evolving technologies such as cloud computing. The European Union has adopted the General Data Privacy Regulation (or GDPR), a comprehensive legal framework to govern data collection, use and sharing and related consumer privacy rights which took effect in May 2018. The GDPR includes significant penalties for non-compliance. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our business, financial condition and results of operations.
Past port calls by our vessels, or third-party vessels from which we derived pooling revenues, to countries that are subject to sanctions imposed by the United States and the European Union may impact investors’ decisions to invest in our securities.
The United States has imposed sanctions on several countries or regions such as Cuba, North Korea, Syria and Sudan.the Crimea region of the Ukraine. The United States and the European Union (or EU)EU) also had imposed sanctions on Iran. The EU lifted these sanctions in January 2016. At that time, the U.S. lifted its secondary sanctions on Iran, which applied to foreign persons, but has retained its primary sanctions, which apply to U.S. entities and their foreign subsidiaries. In the past, conventional oil tankers owned or chartered-in by us, or third-party vessels participating in commercial pooling arrangementsRSAs from which we derive revenue, made limited port calls to those countries for the loading and discharging of oil products. Those port calls did not violate U.S. or EU sanctions at the time and we intend to maintain our compliance with all U.S. and EU sanctions. In addition, we have no future contracted loadings or discharges in any of those countries and intend not to enter into voyage charter contracts for the transport of oil or gas to or from Iran Syria or Sudan.Syria. We believe that our compliance with these sanctions and our lack of any future port calls to those countries does not and will not adversely impact our revenues, because port calls to these countries have never accounted for any material amount of our revenues. However, some investors might decide not to invest in us simply because we have previously called on, or through our participation in pooling arrangementsRSAs have previously received revenue from calls on, ports in these sanctioned countries. Any such investor reaction could adversely affect the market for our common shares.
Marine transportation is inherently risky, and an incident involving loss or damage to a vessel, significant loss of product or environmental contamination by any of our vessels could harm our reputation and business.
VesselsOur vessels, crew and their cargoes are at risk of being damaged, injured or lost because of events such as:
marine disasters;
bad weather or natural disasters;
mechanical or electrical failures;
grounding, capsizing, fire, explosions and collisions;
piracy;piracy (hijacking and kidnapping);
cyber attack;
human error; and
war and terrorism.
An accident involving any of our vessels could result in any of the following:
death or injury to persons, loss of property or damage to the environment and natural resources;
delays in the delivery of cargo;
loss of revenues from charters;
liabilities or costs to recover any spilled oil or other petroleum products and to restore the eco-system affected by the spill;
governmental fines, penalties or restrictions on conducting business;
higher insurance rates; and
damage to our reputation and customer relationships generally.
Any of these events could have a material adverse effect on our business, financial condition and operating results. In addition, any damage to, or environmental contamination involving, oil production facilities serviced by our vessels could result in the suspension or curtailment of operations by our customer, which would in turn result in loss of revenues.
The shipping industry is subject to substantial environmental and other regulations, which may significantly limit operations and increase expenses.
Our operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties and conventions in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. Many of these requirements are designed to reduce the risk of oil spills and other pollution. In addition, we believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on vessels. We expect to incur substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating procedures.
These requirements may affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in, certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or other hazardous substances from our vessels or otherwise in connection with our operations. We could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with our operations. In addition,
failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations, including, in certain instances, seizure or detention of our vessels. For further information about regulations affecting our business and related requirements on us, please read Item 4 – Information on the Company: B. Business Overview—Overview – Regulations.
Climate change and greenhouse gas restrictions may adversely impact our operations and markets.
Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. Compliance with changes in laws, regulations and obligations relating to climate change could increase our costs related to operating and maintaining our vessels and require us to install new emission controls, acquire allowances or pay taxes related to our greenhouse gas emissions, or administer and manage a greenhouse gas emissions program. RevenueOur revenue generation and strategic growth opportunities may also be adversely affected.
Adverse effects upon the oil industry relating to climate change may also adversely affect demand for our services. Although we do not expect that demand for oil will lessen dramatically over the short-term,short term, in the long-termlong term, climate change may reduce the demand for oil or increased regulation of greenhouse gases may create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil industry could have a significant financial and operational adverse impact on our business that we cannot predict with certainty at this time.
Maritime claimants could arrest, or port authorities could detain, our vessels, which could interrupt our cash flow from these vessels.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lienholder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of funds to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one vessel in our fleet or the pooling arrangementsRSAs in which we operate for claims relating to another of our ships. In addition, port authorities may seek to detain our vessels in port, which could adversely affect our operating results or relationships with customers.
We depend on Teekay Corporation to assist us in operating our business and competing in our markets, and our business will be harmed if Teekay Corporation fails to assist us.
Pursuant to the terms of the Management Agreement, our Manager provides various services to us commercial, technical, administrative and strategic services, including vessel maintenance, crewing, purchasing, shipyard supervision, insurance and financial services.us. Our operational success and ability to execute our growth strategy depend significantly upon the satisfactory performance of these services by our Manager. Our business willmay be
harmed if our Manager fails to perform these services satisfactorily, if it stops providing these services to us or if it terminates the Management Agreement, as it is entitled to do under certain circumstances. The circumstances under which we are able to terminate the Management Agreement are limited and do not include mere dissatisfaction with our Manager’s performance. In addition, upon any termination of the Management Agreement, we may lose our ability to benefit from economies of scale in purchasing supplies and other advantages that we believe our relationship with Teekay Corporation provides. Furthermore, the profitable operation of our tankers that participate in tanker pooling arrangements depends largely on the efforts of the pool managers, Teekay Corporation’s participation in the pooling arrangements and its reputation and relationships in the shipping industry. Under the pooling arrangements, the earnings and voyage expenses of all of the vessels in pools are aggregated, or pooled, and divided according to an agreed formula. If Teekay Corporation suffers material damage to its reputation or relationships, it may harm our ability to:
maximize revenues of our tankers included in the pooling arrangements;RSAs;
acquire new tankers or obtain new time charters;
renew existing time charters upon their expiration;
successfully interact with shipyards during periods of shipyard construction constraints;
obtain financing on commercially acceptable terms; or
maintain satisfactory relationships with suppliers and other third parties.
If our ability to do any of the things described above is impaired, it could have a material adverse effect on our business, results of operations and financial condition.
Teekay Corporation and its affiliates may engage in competition with us.
In our articles of incorporation and in a contribution, conveyance and assumption agreement we entered into with Teekay Corporation in connection with our initial public offering, we have renounced business opportunities that may be attractive to both Teekay Corporation and us in favor of Teekay Corporation, which may strengthen Teekay Corporation’s ability to compete with us.
The pooling arrangements we participate in are managed, in whole or in part, by Teekay Corporation subsidiaries. When operated in a pool, chartering decisions are made by the pool manager and vessel earnings are based on a formula designed to allocate the pool’s earnings to vessel owners based on actual on-hire performance of the vessels they contributed, and attributes of the vessels, rather than amounts actually earned by those vessels. If we, Teekay Corporation or its affiliates terminate the pooling arrangements in which we participate pursuant to the terms thereof or if vessels of Teekay Corporation or us cease operating in the pooling arrangements for any other reason, our tankers may compete with other vessels owned or operated by Teekay Corporation to provide crude oil transportation services. In addition, we may compete with Teekay Corporation in seeking to charter any vessels in our fleet under fixed-rate time charters, whether upon the expiration or early termination of existing time charters or otherwise.
Teekay Corporation may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business, and the cost of attracting and retaining such personnel may increase.
Our success depends in large part on Teekay Corporation’s ability to attract and retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work. Competition to attract and retain qualified crew members is intense. The shipping industry continues to forecast a shortfall in qualified personnel, and crew or other compensation may increase in the future. If crew costs increase and we are not able to increase our rates to compensate for any such increases, our financial condition and results of operations may be adversely affected. Any inability we experience in the future to hire, train and retain a sufficient number of qualified employees or crew could impair our ability to manage, maintain and grow our business.
The superior voting rights of our Class B common stock held by Teekay Corporation limit our Class A common shareholders’ ability to control or influence corporate matters.
Our Class B common stock has five votes per share, and our Class A common stock has one vote per share. However, the voting power of the Class B common stock is limited such that the aggregate voting power of all shares of outstanding Class B common stock can at no time exceed 49% of the voting power of our outstanding Class A common stock and Class B common stock, voting together as a single class. As of the date of this Annual Report, Teekay Corporation indirectly owns shares of Class A and Class B common stock representing a majority of the voting power of our outstanding capital stock. Through its ownership of all of our Class B common stock and of our Manager and other entities that provide services to us, Teekay Corporation has substantial control and influence over our management and affairs and over all matters requiring shareholder approval, including the election of directors and significant corporate transactions. In addition, because of this dual-class common stock structure, Teekay Corporation will continue to be able to control matters submitted to our shareholders for approval even though it owns significantly less than 50% of the outstanding shares of our common stock. This voting control limits our remaining Class A common shareholders’ ability to influence corporate matters and, as a result, we may take actions that our Class A common shareholders do not view as beneficial.
We must remain in compliance with the New York Stock Exchange’s requirements for the continued listing of our Class A common stock on the exchange.
Our Class A common stock is listed on the New York Stock Exchange (or NYSE) under the symbol “TNK”. If we fail to comply with the NYSE’s listing requirement that the average closing price of our Class A common stock over a consecutive 30-day trading period be not less than $1.00, this will result in our Class A common stock being delisted from the NYSE if we are not able to resume compliance with the NYSE’s listing requirements within the applicable cure period. Any such delisting would negatively impact the Company and holders of our Class A common stock, including due to the resulting potential decreased price, liquidity and trading of our Class A common stock, limited availability of price quotations and reduced news and analyst coverage. These developments may also require brokers trading in our Class A common stock to adhere to more stringent rules and may limit our ability to raise capital by issuing additional shares of Class A common stock in the future. We actively monitor the price of our Class A common stock and will consider available options, including, among others, a reverse stock split, to maintain compliance with the continued listing standards of the NYSE. If it is necessary for us to undertake a reverse stock split, the number of shares available on the public market following such reverse stock split will be reduced significantly, which may affect the volume and liquidity of our Class A common stock. Delisting may adversely impact the perception of our financial condition and harm our reputation with investors and other third parties. In addition, any perceived decrease in value of employee equity incentive awards may reduce their effectiveness in encouraging performance and retention.
Our Manager has rights to terminate the Management Agreement and, under certain circumstances, could receive substantial sums in connection with such termination; however, even if our Board of Directors or our shareholders are dissatisfied with our Manager, there are limited circumstances under which we can terminate the Management Agreement.
Our Management Agreement has an initial term through December 31, 2022 and will automatically renew for subsequent five-year terms provided that certain conditions are met. Our Manager has the right to terminate the Management Agreement with 12 months’ notice. Our Manager also has the right to terminate the Management Agreement after a dispute resolution process if we have materially breached the Management Agreement. The Management Agreement will terminate upon the sale of all or substantially all of our assets to a third party, our liquidation or after any change of control of our company occurs. If the Management Agreement is terminated as a result of an asset sale, our liquidation or change of control, then our Manager may be paid a termination fee. Any such payment could be substantial.
In addition, our rights to terminate the Management Agreement are limited. Even if we are not satisfied with the Manager’s efforts in managing our business, unless our Manager materially breaches the agreement or experiences certain bankruptcy or change of control events, we have only a limited right to terminate the agreement after 10 years and may not be able to terminate the agreement until December 31, 2022, the end of the initial 15-year term. If we elect to terminate the Management Agreement at eitherthe end of these pointsthe initial term or at the end of any subsequent renewal term, our Manager will receive a termination fee, which may be substantial.
Our Manager could receive a performance fee which is contingent on our results of operations and financial condition.
If Gross Cash Available for Distribution (as defined in the Management Agreement) for a given fiscal year exceeds $3.20 per share of our common stock (subject to adjustment for stock dividends, splits, combinations and similar events, and based on the weighted-average number of shares outstanding for the year) (or the Incentive Threshold), our Manager generally will be entitled to payment of a performance fee equal to 20% of all Gross Cash Available for Distribution for such year in excess of the Incentive Threshold. Although the performance fee is payable on an annual basis, we accrue any amounts expected to be payable in respect of the performance fee on a quarterly basis. Gross Cash Available for Distribution generally represents the distributable cash flows that we generate from operations.
Our Manager will be entitled to a fee upon any sale of any vessels we acquired as part of the TIL acquisition.
In January 2014, TIL entered into a long-term management agreement with our Manager, pursuant to which our Manager provides to TIL certain services. The management agreement, which was waived in part by the Manager but otherwise remains in effect following our acquisition of TIL in 2017, requires us to pay our Manager a fee equal to 1.0% of the aggregate consideration payable to us upon the sale of any vessels which were owned by TIL subsidiaries as of the date of the TIL merger.
Many seafaring employees are covered by collective bargaining agreements, and the failure to renew those agreements or any future labor agreements may disrupt operations and adversely affect our cash flows.
A significant portion of Teekay Corporation’s seafarers that crew our vessels are employed under collective bargaining agreements. Teekay Corporation may become subject to additional labor agreements in the future. Teekay Corporation may suffer labor disruptions if relationships
deteriorate with the seafarers or the unions that represent them. The collective bargaining agreements may not prevent labor disruptions, particularly when the agreements are being renegotiated. Salaries are typically renegotiated annually or biannually for seafarers. Although these negotiations have not caused labor disruptions in the past, any labor disruptions could harm our operations and could have a material adverse effect on our business, results of operations and financial condition.
Our executive officers and directors and the executivecertain officers and directors of our ManagerTeekay Corporation have conflicts of interest and limited fiduciary and contractual duties, which may permit them to favor interests of other Teekay Corporation and its other affiliates above our interests and those of our Class A common shareholders.
Conflicts of interest may arise between Teekay Corporation our Manager and theirits other affiliates, on the one hand, and us and our shareholders, on the other hand. As a result of these conflicts, Teekay Corporation or our Manager may favor theirits own interests and the interests of theirits other affiliates over our interests and those of our shareholders. These conflicts include, among others, the following situations:
our Chief Executive Officer and Chief Financial Officer and threefour of our current directors or expected nominees for election as directors at our 2019 annual meeting of shareholders also serve as executive officers or directors of Teekay Corporation, and/or our Manager, and we have limited their fiduciary duties regarding corporate opportunities that may be attractive to both Teekay Corporation and us;
our Manager, a subsidiary of Teekay Corporation, advises our Board of Directors about the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuances of additional common stock and cash reserves, each of which can affect our ability to pay dividends to our shareholders and the amount of the performance fee payable to our Manager under the Management Agreement;
our executive officers and those of our Manager do not spend all of their time on matters related to our business; and
our Manager will advise us of costs incurred by it and its affiliates that it believes are reimbursable by us.
The fiduciary duties of certain of our officers and directors may conflict with their duties as officers or directors of Teekay Corporation and its affiliates.
Our officers and directors have fiduciary duties to manage our business in a manner beneficial to us and our shareholders. However, our Chief Executive Officer and our Chief Financial Officer and threefour of our current directors or nominees for election as directors at our 2019 annual meeting of shareholders also serve as executive officers or directors of Teekay Corporation, and/or executive officers of our Manager, and as a result, have fiduciary duties to manage the business of Teekay Corporation and its affiliates in a manner beneficial to such entities and their shareholders or partners, as the case may be. Consequently, these officers and directordirectors may encounter situations in which their fiduciary obligations to Teekay Corporation or our Manager or theirits affiliates, on the one hand, and us, on the other hand, are in conflict. The resolution of these conflicts may not always be in our best interest or that of our shareholders.
Our U.S. Gulf lightering business competes with alternative methods of delivering crude oil to ports, which may limit our earnings in this market.
Our U.S. Gulf lightering business faces competition from alternative methods of delivering crude oil shipments to port, including offshore offloading facilities. While we believe that lightering offers advantages over alternative methods of delivering crude oil to U.S. Gulf ports, our lightering revenues may be limited due to the availability of alternative methods.
Our full service lightering operations are subject to specific risks that could lead to accidents, oil spills or property damage.
Lightering is subject to specific risks arising from the process of safely bringing two large moving tankers next to each other and mooring them for lightering operations, in which oil, refined petroleum products or other cargoes are transferred from one ship to the other. These operations require a high degree of expertise and present a higher risk of collision or spill compared to when docking a vessel or transferring cargo at port. Lightering operations, similar to marine transportation in general, are also subject to risks due to events such as mechanical failures, human error, and weather conditions.
Tax Risks
In addition to the following risk factors, you should read Item 4E -– Information on the Company – Taxation of the Company, Item 10 - Additional Information—Information – Material U.S. Federal Income Tax Considerations and Item 10 - Additional Information—Information – Non-United States Tax Considerations for a more complete discussion of the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of our Class A common stock.
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. shareholders.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (or PFIC)PFIC) for such purposes in any taxable year for which either (a) at least 75% of its gross income consists of “passive income,” or (b) at least 50% of the average value of the entity’s assets is attributable to assets that produce or are held for the production of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties (other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business). By contrast, income derived from the performance of services does not constitute “passive income.”
There are legal uncertainties involved in determining whether the income derived from our time-chartering activities constitutes rental income or income derived from the performance of services, including the decision in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), which held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign sales corporation provision of the Internal Revenue Code of 1986, as amended (or the Code)Code). However, the Internal Revenue Service (or IRS)IRS) stated in an Action on Decision (AOD 2010-01) that it disagrees with, and will not acquiesce to, the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would not follow the Tidewater decision in interpreting the PFIC provisions of the Code. Nevertheless, based on the current composition of our assets and operations (and those of our subsidiaries), we intend to take the position that we are not now and have never been a PFIC. No assurance can be given, however, that this position would be sustained by a court if contested by the IRS, or that we would not constitute a PFIC for any future taxable year if there were to be changes in our assets, income or operations.
If the IRS were to determine that we are or have been a PFIC for any taxable year during which a U.S. Holder (as defined below under “Item 10 – Additional Information – Material U.S. Federal Income Tax Considerations”) held our stock, such U.S. Holder would face adverse tax consequences. For a more comprehensive discussion regarding the tax consequences to U.S. Holders if we are treated as a PFIC, please read Item 10 - Additional Information-Material U.S. Federal Income Tax Considerations-United States Federal Income Taxation of U.S. Holders-Consequences of Possible PFIC Classification.
We may beare subject to taxes, which could affectreduce our operating results.
We or our subsidiaries are subject to tax in certain jurisdictions in which we or our subsidiaries are organized own assets or have operations, which reduces our operating results. In computing our tax obligations in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on us or our subsidiaries, further reducing our operating results. In addition, changes in our operations or ownership could result in additional tax being imposed on us or on our subsidiaries in jurisdictions in which operations are conducted. For example, if Teekay Tankers Ltd. was not able to satisfy the requirements of the exemption from U.S. taxation under Section 883 of the Code, our U.S. source incomewe would becomebe subject to taxation under Section 887U.S. federal income tax on shipping income attributable to our transportation of cargoes to or from the Code. The amount of such tax would depend uponUnited States, the amount of income we earn from voyages into or out of the United States, which is not within our complete control. Also, jurisdictions in which we or our subsidiaries are organized, own assets or have operations may change their tax laws, or we may enter into new business transactions relating to such jurisdictions, which could result in increased tax liability and reduce our operating results. Please read Item 4 - Information on the Company—Taxation of the Company.
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| Item 4. | Information on the Company |
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| A. | History and Development of the Company |
Teekay Tankers Ltd. (“we,” “us,” or “the Company”) is an international provider of marine transportation to global oil industries. We were formed as a Marshall Islands corporation in October 2007 by Teekay Corporation (NYSE: TK), a leading provider of marine services to the global oil and natural gas industries. We completed our initial public offering on December 18, 2007 with an initial fleet of nine Aframax oil tankers which were transferred to us by Teekay Corporation.
Our conventional fleet size has increased from nine owned Aframax tankers in 2007 to 4356 owned and leased conventional tankers, seventhree in-chartered vessels and one jointly-owned Very Large Crude Carrier (or VLCC) as of December 31, 2016.2018. The capacity of our conventional tanker fleet has risen from approximately 980,000 deadweight tonnes (or dwt) in 2007 to approximately 6,890,0007,918,000 dwt as of December 31, 2016.2018. Over the last five years, we have acquired a total of 1318 conventional tankers from Teekay Corporation,through the merger with Tanker Investments Ltd. (or TIL), 17 conventional tankers from external parties and two conventional tankers from TOO. In March 2014, we also assumed ownership of two VLCCs that previously served as collateral under term loans we made to a third party. We subsequently sold those two VLCCs in May 2014. Please read Item 18 – Financial Statements: Note 6 – InvestmentWe sold three Aframax tankers and two Suezmax tankers in Term Loans. We also sold2017, two Medium Range (or MR) tankers in 2016 and one MR tanker in 2015. Please read Item 18 – Financial Statements: Note 2120 - Vessel SalesSales. We also completed two sale-leaseback financing transactions in 2018, relating to eight Aframax tankers, one Suezmax tanker and Vessel Acquisitions.one LR2 product tanker, and a sale-leaseback financing transaction in 2017 relating to four of our Suezmax tankers. Please read Item 18 - Financial Statements: Note 11 - Leases.
In November 2017, we completed a merger with TIL by acquiring all of the remaining 27.0 million issued and outstanding common shares of TIL, by way of a share-for-share exchange resulting in TIL becoming a wholly-owned subsidiary. At the time of the merger, TIL owned a modern fleet of ten Suezmax tankers, six Aframax tankers and two LR2 product tankers. Please read Item 18 - Financial Statements: Note 23 - Acquisition of Tanker Investments Ltd.
In May 2017, we completed the acquisition from Teekay Holdings Ltd., a wholly-owned subsidiary of Teekay Corporation, of the remaining 50% interest in Teekay Tanker Operations Ltd. (or TTOL), which owns conventional tanker commercial management and technical management operations and directly administers four commercially managed tanker RSAs. Please read Item 18 - Financial Statements: Note 7 - Investments in and advances to Equity-Accounted for Investments.
In July 2015, we acquired the ship-to-ship transfer business (orTMSpreviously referred to as SPT) from a company jointly owned by Teekay Corporation and a Norway-based marine transportation company, I.M. Skaugen SE. TMS provides a full suite of ship-to-ship transfer services in the oil, gas and dry bulk industries. In addition to full service lightering and lightering support, TMS also provides consultancy and LNG terminal management services. This acquisition established us as a global company in the ship-to-ship transfer business. As of December 31, 2016,2018, TMS operated a fleet of sevensix ship-to-ship support vessels, including fourthree owned and three chartered-in vessels.
From time to time, we also charter-in vessels, typically from third parties as part of our chartering strategy. Please read “Business Strategies” below in this Item. Most of our acquisitions were financed by a combination of utilizing the net proceeds from public equity offerings or private placements, as well as raising new debt, the assumption of existing debt, drawing on our revolving credit facility, and using our available working capital.
We are incorporated on October 17, 2007 under the laws of the Republic of The Marshall Islands as Teekay Tankers Ltd. and maintain our principal executive offices at 4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda. Our telephone number at such address is (441) 298-2530.
The SEC maintains an Internet site at www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our website is www.teekay.com/business/tankers. The information contained on our website is not part of this annual report.
Our primary business is to own oil and product tankers and we employ a chartering strategy that seeks to capture upside opportunities in the tanker spot market while using fixed-rate time charters to reduce downside risks. During 2015, we expanded our service offerings to our customers through the purchase of aour ship-to-ship transfer business that provides full service lightering as well as lightering support services and consultancy and LNG terminal management services. This acquisition, which is adjacent to our core competencies, along with our existing conventional tanker commercial management and technical management operations, is expected to improve our ability to manage the cyclicality of the tanker market through the less volatile cash flows generated by these business areas. Historically, the tanker industry has experienced volatility in profitability due to changes in the supply of, and demand for, tanker capacity. Tanker supply and demand are each influenced by several factors beyond our control.
Teekay Corporation, which formed us in 2007, is a leading provider of marine services to the global oil and natural gas industries, and together with its subsidiaries, is one of the world’s largest operator of medium-sized oil tankers. We believe we benefit from Teekay Corporation’s expertise, relationships and reputation as we operate our fleet and pursue growth opportunities. We have acquired the majoritya portion of our current operating fleet from Teekay Corporation at various times since our inception, and we anticipate additional opportunities to expand our fleet through acquisitions of tankers from third parties, and additional tankers thatparties. In addition, Teekay Corporation’s day-to-day focus on cost control is applied to our operations. Teekay Corporation and its subsidiaries may offer to ustwo other shipping companies participate in a purchasing alliance, Teekay Bergesen Worldwide, which leverages
the purchasing power of the combined fleets, mainly in such commodity areas as lube oils, paints and other chemicals. Through our Manager, we benefit from time to time. These tankers may include crude oil and product tankers.this purchasing alliance.
CommencingEffective May 2018, we eliminated the payment of our minimum quarterly dividend of $0.03 per share in December 2015, we adopted aorder to preserve liquidity during the cyclical downturn of the tanker spot market. Under the revised dividend policy, under which quarterly dividends are expected to range from 30% to 50% of our quarterly adjusted net income, subject to reserves our Board of Directors may determine are necessary for the prudent operations of the company. Dividend payments are subject to the discretion of our Board of Directors, with a minimum quarterly dividend of $0.03 per share.and the policy remains subject to change. Adjusted net (loss) income is a non-GAAP measure which excludes specific items affecting net (loss) income that are typically excluded by securities analysts in their published estimates of our financial results. Prior to this change, our dividend policy was to distribute 30% to 50% of our quarterly adjusted net income to our shareholders, with a fixedminimum quarterly dividend of $0.03 per share ($0.12 per share annually). Our dividend policy is reviewed by our Board of Directors from time to time. Prior to the first quarter of 2013, we distributed to our shareholders on a quarterly basis, all of our Cash Available for Distribution, subject to any reserves our Board of Directors determined to be required for prudent conduct of our business. For additional information about our dividend policy, please read Item 8 – Financial Information: Dividend Policy.
Under the supervision of our executive officers and Board of Directors, our operations are managedconducted in part by Teekay Tankers Management Services Ltd. (our our subsidiaries who receive services from our Manager), a subsidiary of Teekay Corporation, that and its affiliates. In addition, our Manager provides various services to us commercial, technical, administrative and strategic services. We have entered into aunder our long-term management agreement with our Manager (the Management Agreement) pursuant. Commencing October 1, 2018, we elected to whichprovide our own commercial and technical services, and prior to this date, our Manager provided these services to us as required under the Management Agreement, which it did by subcontracting such services from our subsidiary TTOL and its affiliates provide to us technical, administrative and strategic services. Commercial services are provided to us by other wholly or partially owned subsidiaries of Teekay Corporation that manage the Teekay Suezmax Pool, the Teekay Aframax Pools and the Taurus Tankers LR2 Pool.affiliates. We pay our Manager a market-based feecertain fees and reimbursements for its services. In order to provide our Manager with an incentive to improve our operation and financial conditions, we have agreed to pay a performance fee to our Manager under certain circumstances, in addition to the basic feefees provided in the Management Agreement. Please read Item 7 – Major Shareholders and Related Party Transactions: Related Party Transactions—Management Agreement for additional information about the Management Agreement.
In October 2018, we established a new RSA structure under our wholly-owned subsidiary, Teekay Tankers Chartering Pte. Ltd. (or TTCL), and subsequently began transitioning our RSA activities from TTOL to TTCL.
We employ our chartering strategy based on theour outlook of our Manager for freight rates, oil tanker market conditions and global economic conditions. As of December 31, 2016, we owned 43 conventional tankers, in-chartered seven conventional and three ship-to-ship support vessels, owned four ship-to-ship support vessels and owned a 50% interest in a VLCC through a joint venture. Please refer to the “Our Fleet” table below. We employ our vessels on fixed rate time-charter out contracts and in various pooling arrangements, the majority ofRSAs which are managed by wholly or partially ownedTTCL and subsidiaries of Teekay CorporationTTOL (collectively, the Pool Managers), both of which employ vessels on the spot market. By employing some of our vessels in these pooling arrangements with Teekay Corporation,RSAs, we believe we benefit from Teekay Corporation’s expertise in commercial management of oil tankers and economies of scale of a larger fleet, including higher vessel utilization and daily revenues. We also believe that these pooling arrangements limit Teekay Corporation’s ability to compete with us in the spot market.
Our Fleet
The following table summarizes our fleet as at December 31, 2016:2018:
| | | | Owned Vessels | | Chartered-in Vessels | | Total | Owned and Leased Vessels | | Chartered-in Vessels | | Total |
| Fixed-rate: | | | | | | | | | | |
| Suezmax Tankers | 5 |
| | — |
| | 5 |
| |
| Aframax Tankers | 6 |
| | — |
| | 6 |
| |
| Long Range 2 Product Tankers | 2 |
| | 1 |
| | 3 |
| |
VLCC Tankers (1) | 1 |
| | — |
| | 1 |
| |
Total Fixed-Rate Fleet (2) | 14 |
| | 1 |
| | 15 |
| |
| Suezmax Tanker | | 1 |
| | — |
| | 1 |
|
| Aframax Tanker | | 1 |
| | — |
| | 1 |
|
Total Fixed-Rate Fleet (1) | | 2 |
| | — |
| | 2 |
|
| Spot-rate: | | | | | | | | | | |
| Suezmax Tankers | 17 |
| | — |
| | 17 |
| 29 |
| | — |
| | 29 |
|
| Aframax Tankers | 8 |
| | 6 |
| | 14 |
| 16 |
| | 3 |
| | 19 |
|
| Long Range 2 Product Tankers | 5 |
| | — |
| | 5 |
| 9 |
| | — |
| | 9 |
|
VLCC Tanker (2) | | 1 |
| | — |
| | 1 |
|
Total Spot Fleet (3) | 30 |
| | 6 |
| | 36 |
| 55 |
| | 3 |
| | 58 |
|
| Total Conventional Fleet | | 57 |
| | 3 |
| | 60 |
|
| Ship-to-Ship Support Vessels | 4 |
| | 3 |
| | 7 |
| 3 |
| | 3 |
| | 6 |
|
| Total Teekay Tankers Fleet | 48 |
|
| 10 |
|
| 58 |
| 60 |
|
| 6 |
|
| 66 |
|
| |
| (1) | ABoth time-charter out contracts are scheduled to expire in 2019. |
| |
| (2) | We own one VLCC that we own through a 50/50 joint venture with Wah Kwong Maritime Transport Holdings Limited (please refer to Item 18 - Financial Statements: Note 87 - Investments in and advances to Equity Accounted Investments, included in Item 18 – Financial Statements in this Annual Report)Equity-Accounted for Investments). |
| |
(2) | The number of time-charter out contracts scheduled to expire include seven in 2017, seven in 2018 (including one jointly owned VLCC time-charter out contract) and one in 2019. |
| |
| (3) | A total of 47 of our owned and leased vessels operated in the spot market in RSAs, which are managed by the Pool Managers. As at December 31, 2016,2018, the four pooling arrangementsRSAs in which we participate and including vessels owned by other pool members, were comprised of a total of 2933 Suezmax tankers, 32 modern35 Aframax tankers, 3 Aframax tankers over 15-year-old, and 11ten LR2 product tankers.tankers (of which eight LR2 tankers were cross-trading in the Aframax RSA), including vessels owned by other members of the RSAs. |
The following table provides additional information about our owned Suezmax-classand leased Suezmax oil tankers as of December 31, 2016,2018, all of which 20 are Bahamian flagged and two are Malta flagged.Bahamian-flagged.
| | | Vessel | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter |
| Ashkini Spirit | 165,200 |
| | 2003 | | Pool | | — | | — | 165,200 |
| | 2003 | | RSA | | — | | — |
| Aspen Spirit | | 156,800 |
| | 2009 | | RSA | | — | | — |
| Athens Spirit | 158,500 |
| | 2012 | | Pool | | — | | — | 158,500 |
| | 2012 | | RSA | | — | | — |
Atlanta Spirit (1) | 158,700 |
| | 2011 | | Spot | | — | | — | |
| Atlanta Spirit | | 158,700 |
| | 2011 | | RSA | | — | | — |
| Baker Spirit | | 156,900 |
| | 2009 | | RSA | | — | | — |
| Barcelona Spirit | 158,500 |
| | 2011 | | Pool | | — | | — | 158,500 |
| | 2011 | | RSA | | — | | — |
| Beijing Spirit | 156,500 |
| | 2010 | | Pool | | — | | — | 156,500 |
| | 2010 | | RSA | | — | | — |
Ganges Spirit (2) | 159,500 |
| | 2002 | | Spot | | — | | — | |
| Cascade Spirit | | 156,900 |
| | 2009 | | RSA | | — | | — |
| Copper Spirit | | 156,800 |
| | 2010 | | RSA | | — | | — |
| Dilong Spirit | | 159,000 |
| | 2009 | | RSA | | — | | — |
| Godavari Spirit | 159,100 |
| | 2004 | | Time charter | | $32,906 | | Aug-17 | 159,100 |
| | 2004 | | RSA | | — | | — |
| Iskmati Spirit | 165,300 |
| | 2003 | | Pool | | — | | — | 165,300 |
| | 2003 | | RSA | | — | | — |
| Jiaolong Spirit | | 159,000 |
| | 2009 | | RSA | | — | | — |
| Kaveri Spirit | 159,100 |
| | 2004 | | Pool | | — | | — | 159,100 |
| | 2004 | | RSA | | — | | — |
| London Spirit | 158,500 |
| | 2011 | | Pool | | — | | — | 158,500 |
| | 2011 | | RSA | | — | | — |
| Los Angeles Spirit | 159,200 |
| | 2007 | | Time charter | | $22,500 | | Dec-17 | 159,200 |
| | 2007 | | RSA | | — | | — |
Montreal Spirit (3) | 150,000 |
| | 2006 | | Pool | | — | | — | |
| Montreal Spirit | | 150,000 |
| | 2006 | | Time charter | | $17,500 | | Aug-19 |
| Moscow Spirit | 156,500 |
| | 2010 | | Pool | | — | | — | 156,500 |
| | 2010 | | RSA | | — | | — |
| Narmada Spirit | 159,200 |
| | 2003 | | Pool | | — | | — | 159,200 |
| | 2003 | | RSA | | — | | — |
| Pinnacle Spirit | 160,400 |
| | 2008 | | Pool | | — | | — | 160,400 |
| | 2008 | | RSA | | — | | — |
| Rio Spirit | 158,400 |
| | 2013 | | Pool | | — | | — | 158,400 |
| | 2013 | | RSA | | — | | — |
| Seoul Spirit | 160,000 |
| | 2005 | | Pool | | — | | — | 160,000 |
| | 2005 | | RSA | | — | | — |
| Shenlong Spirit | | 159,000 |
| | 2009 | | RSA | | — | | — |
| Summit Spirit | 160,500 |
| | 2008 | | Time Charter | | $26,200 | | Aug-18 | 160,500 |
| | 2008 | | RSA | | — | | — |
Sydney Spirit | 158,500 |
| | 2012 | | Pool | | — | | — | 158,500 |
| | 2012 | | RSA | | — | | — |
Tokyo Spirit (4) | 150,000 |
| | 2006 | | Time charter | | $18,066 | | Mar-17 | |
Yamuna Spirit (5) | 159,400 |
| | 2002 | | Spot | | — | | — | |
| Tahoe Spirit | | 156,900 |
| | 2010 | | RSA | | — | | — |
| Tianlong Spirit | | 159,000 |
| | 2009 | | RSA | | — | | — |
Tokyo Spirit | | 150,000 |
| | 2006 | | RSA | | — | | — |
| Vail Spirit | | 157,000 |
| | 2009 | | RSA | | — | | — |
| Zenith Spirit | 160,500 |
| | 2009 | | Time charter | | $32,906 | | Jul-17 | 160,500 |
| | 2009 | | RSA | | — | | — |
| Total Capacity | 3,491,500 |
| | 4,749,900 |
| |
The following table provides additional information about our owned and leased Aframax oil tankers as of December 31, 2018, all of which are Bahamian-flagged.
|
| | | | | | | | | | |
| Vessel | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter |
| Americas Spirit | 111,900 |
| | 2003 | | Spot | | — | | — |
Australian Spirit | 111,900 |
| | 2004 | | RSA | | — | | — |
| Axel Spirit | 115,400 |
| | 2004 | | RSA | | — | | — |
| Blackcomb Spirit | 109,000 |
| | 2010 | | Spot | | — | | — |
| Emerald Spirit | 109,100 |
| | 2009 | | Spot | | — | | — |
| Erik Spirit | 115,500 |
| | 2005 | | RSA | | — | | — |
Esther Spirit (1) | 115,400 |
| | 2004 | | RSA | | — | | — |
Everest Spirit (1) | 115,000 |
| | 2004 | | Time charter | | $25,000 | | Apr-19 |
| Explorer Spirit | 105,800 |
| | 2008 | | Spot | | — | | — |
| Garibaldi Spirit | 109,000 |
| | 2009 | | RSA | | — | | — |
| Helga Spirit | 115,500 |
| | 2005 | | RSA | | — | | — |
| Matterhorn Spirit | 114,800 |
| | 2005 | | RSA | | — | | — |
| Navigator Spirit | 105,800 |
| | 2008 | | Spot | | — | | — |
| Peak Spirit | 104,600 |
| | 2011 | | RSA | | — | | — |
| Tarbet Spirit | 107,500 |
| | 2009 | | Spot | | — | | — |
| Whistler Spirit | 109,100 |
| | 2010 | | RSA | | — | | — |
| Yamato Spirit | 107,600 |
| | 2008 | | RSA | | — | | — |
| Total Capacity | 1,882,900 |
| | | | | | | | |
| |
| (1) | The SuezmaxAframax tanker AtlantaEsther Spirit joinedreplaced the Teekay Suezmax Pool in February 2017. |
| |
(2) | The Suezmax tanker GangesEverest Spirit was sold and delivered to its new owner in January 2017.
|
| |
(3) | The Suezmax tanker Montreal Spirit entered a2019 for the remaining period of the time-charter out contract which commenced in February 2017.
|
| |
(4) | The Suezmax tanker Tokyo Spirit completed a time-charter out contract and joined the Teekay Suezmax Pool in February 2017.
|
| |
(5) | The Suezmax tanker Yamuna Spirit was sold and delivered to its new owner in March 2017.contract.
|
The following table provides additional information about our owned Aframax-class oiland leased LR2 product tankers as of December 31, 2016, all2018, seven of which are Bahamian flagged.
Bahamian-flagged and two of which are Marshall Islands-flagged.
|
| | | | | | | | | | |
| Vessel | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter |
| Americas Spirit | 111,900 |
| | 2003 | | Pool | | — | | — |
Australian Spirit | 111,900 |
| | 2004 | | Time charter | | $22,000 | | Jun-17 |
| Axel Spirit | 115,400 |
| | 2004 | | Time charter | | $18,000 | | Dec-17 |
| Erik Spirit | 115,500 |
| | 2005 | | Pool | | — | | — |
| Esther Spirit | 115,400 |
| | 2004 | | Time charter | | $25,000 | | Dec-18 |
Everest Spirit | 115,000 |
| | 2004 | | Time charter | | $25,000 | | Apr-19 |
| Explorer Spirit | 105,800 |
| | 2008 | | Spot | | — | | — |
| Helga Spirit | 115,500 |
| | 2005 | | Time charter | | $24,900 | | Sep-18 |
| Kanata Spirit | 113,000 |
| | 1999 | | Pool | | — | | — |
| Kareela Spirit | 113,100 |
| | 1999 | | Spot | | — | | — |
Kyeema Spirit (1) | 113,400 |
| | 1999 | | Spot | | — | | — |
| Matterhorn Spirit | 114,800 |
| | 2005 | | Spot | | — | | — |
| Navigator Spirit | 105,800 |
| | 2008 | | Spot | | — | | — |
| Yamato Spirit | 107,600 |
| | 2008 | | Time charter | | $23,000 | | Jun-18 |
| Total Capacity | 1,574,100 |
| | | | | | | | |
| |
(1) | In March 2017, the Company entered into an agreement to sell the Kyeema Spirit.
|
The following table provides additional information about our owned LR2 product-class oil tankers as of December 31, 2016, all of which are Bahamian flagged.
| | | Vessel | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter |
| Donegal Spirit | 105,600 |
| | 2006 | | Time charter | | $17,750 | | Oct-18 | 105,600 |
| | 2006 | | RSA | | — | | — |
| Galway Spirit | 105,600 |
| | 2007 | | Time charter | | $17,000 | | Mar-18 | 105,600 |
| | 2007 | | RSA | | — | | — |
| Hovden Spirit | | 105,300 |
| | 2012 | | RSA | | — | | — |
| Leyte Spirit | 109,700 |
| | 2011 | | Pool | | — | | — | 109,700 |
| | 2011 | | RSA | | — | | — |
| Limerick Spirit | 105,600 |
| | 2007 | | Pool | | — | | — | 105,600 |
| | 2007 | | RSA | | — | | — |
| Luzon Spirit | 109,600 |
| | 2011 | | Pool | | — | | — | 109,600 |
| | 2011 | | RSA | | — | | — |
| Sebarok Spirit | 109,600 |
| | 2011 | | Pool | | — | | — | 109,600 |
| | 2011 | | RSA | | — | | — |
| Seletar Spirit | 109,000 |
| | 2010 | | Pool | | — | | — | 109,000 |
| | 2010 | | Spot | | — | | — |
| Trysil Spirit | | 105,300 |
| | 2012 | | RSA | | — | | — |
| Total Capacity | 754,700 |
| | 965,300 |
| |
The following table provides additional information about our VLCC-classVLCC oil tanker as of December 31, 2016,2018, which is Hong Kong flagged.Kong-flagged.
| | | Vessel | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter | Capacity (dwt) | | Built | | Employment | | Daily Rate | | Expiration of Charter |
Hong Kong Spirit (1) | 319,000 |
| | 2013 | | Time charter | | $37,500 | | Jul-18 | 319,000 |
| | 2013 | | Pool | | — | | — |
| |
| (1) | The VLCC vessel, Hong Kong Spirit, is owned through a 50/50 joint venture. The charter rate on this vesselventure and is subject toemployed in a profit sharing amount that is being calculated every six months.spot market pool managed by a third party. |
Please read Note 10 - Long-Term Debt and Note 11 - Leases included in Item 18 – Financial Statements included in this Annual Report for information with respect to major encumbrances against our vessels.
Business Strategies
Our primary business strategies include the following:
Expand our fleet through accretive acquisitions. Since our initial public offering, we have purchased 21 conventional tankers from Teekay Corporation, two18 conventional tankers resulting from TOO andthe merger with TIL, 17 conventional tankers from third parties.parties and two conventional tankers from TOO. In the future, we anticipate growing our fleet primarily through acquisitions of tankers from third parties, by securing additional in-chartered vessels and by ordering newbuildings.
Tactically manage our mix of spot, charter, lightering, and LNG terminal management and consultancy contracts. We employ a chartering strategy that seeks to capture upside opportunities in the spot market while using fixed-rate contracts to reduce downside risks. We believe that our Manager’s experience operating through cycles in the tanker spot market will assist us in employing this strategy and
seeking to maximize operating results. In addition, we expect that the July 2015 acquisition of TMS will provide stable cash flow, to partially offset volatility in the tanker market, through global ship-to-ship support services, full service lightering, and LNG terminal management and consultancy services.
Increase cash flow by participating in pooling arrangements.RSAs. Through the participation of a significant number of our vessels in the Teekay Suezmax Pool, the Teekay Aframax Pools and the Taurus Tankers LR2 Pool, we believe that we benefit from Teekay Corporation’s reputation and the scope of Teekay Corporation’s operations. We believe that the cash flow we derive over time from operating somea significant number of our vessels in these pooling arrangementsthe RSAs together with third party vessels exceeds the amount we would otherwise derive by operating these vessels outside of the pooling arrangementsRSAs due to higher vessel utilization and daily revenues. We also derive poolRSA and vessel management income as a result of our August 2014 purchase of a 50% interest in TTOL, which includes Teekay Corporation’s conventional tanker commercial and technical managementthrough the operations and is the owner of interests in four of the pooling arrangements.Pool Managers. We seek to increase this fee income by increasing the number of vessels participating in the applicable pooling arrangements and receiving management services from TTOL.RSAs.
Provide superior customer service by maintaining high reliability, safety, environmental and quality standards. We believe that energy companies and oil traders seek transportation partners that have a reputation for high reliability, safety, environmental and quality standards. We leverage our reputation forand operational expertise and customer base to further expand these relationships with consistent delivery of superior customer service through our Manager.
Revenue Sharing Arrangements
We and certain third party vessel owners have entered into Suezmax RSA, Aframax RSA and Taurus LR2 RSA agreements managed by our subsidiaries and pursuant to which we have agreed to include in the RSAs certain qualifying Suezmax or Aframax crude tankers or certain qualifying LR2 product tankers, that are employed and operate in the spot market or pursuant to time charters of less than one year. Teekay Offshore Partners L.P. is a party to some of the RSAs. As of December 31, 2018, the Suezmax RSAs consisted of 33 Suezmax tankers (including 29 of our owned and leased tankers), the Aframax RSAs consisted of 35 Aframax tankers (including ten of our owned and leased tankers and six of our owned and leased LR2 product tankers which are commercially managed by and cross trading from the Taurus LR2 RSA) and the Taurus LR2 RSA consisted of 10 LR2 product tankers (including eight of our owned and leased LR2 product tankers). Eight LR2 product tankers have been deployed into the Aframax RSA.
A participating tanker will no longer participate in the applicable RSAs if it becomes subject to a time charter with a term exceeding one year, unless otherwise agreed by all other participants for the applicable RSA, or if the tanker suffers an actual or constructive total loss or is sold or becomes controlled by a person who is not an affiliate of a party to the applicable RSA agreements.
Each RSA provides a revenue sharing mechanism whereby aggregate revenues and related expenses of the RSA are distributed to RSA participants based on an allocation formula. Revenues generated by vessels operating in the RSA less voyage expenses (such as fuel and port charges) incurred by these vessels and other applicable expenses are pooled and allocated according to a specified weighting system that recognizes each vessel’s earnings capability based on its characteristics, speed and bunker consumption, as well as actual on-hire performance. The allocation for each vessel participating in the RSA is established based on its characteristics and historical consumption data. Payments based on accrued earnings, with certain adjustments, subject to available cash flow applicable to each vessel are made on a monthly basis to RSA participants. Each vessel's earnings capability, that established its distribution weighting, is adjusted every six months based on current data.
Our subsidiaries provide commercial management services for vessels participating in the RSA and otherwise administer the RSAs in exchange for fees consisting of a per vessel per day fee and a percentage of the gross revenues fee attributable to the participant’s vessels.
An RSA participant may withdraw from the RSA upon at least 90 days’ notice and shall cease to participate in the RSA if, among other things, it materially breaches the RSA agreement and fails to resolve the breach within a specified cure period or experiences certain bankruptcy events.
Our Chartering Strategy and Participation in the Vessel PoolingRevenue Sharing Arrangements
Chartering Strategy. We operate our vessels in both the spot market and under time charters of varying lengths in an effort to maximize cash flow from our vessels based on our Manager’s outlook for freight rates, oil tanker market conditions and global economic conditions. As of December 31, 2016,2018, a total of 3054 of our owned and leased vessels and sixthree time-chartered in vessels operated in the spot market through participation in Teekay managed pooling arrangementsRSAs or on spot voyage charters. FourteenTwenty-nine of our owned and leased vessels operated in the Teekay Suezmax Pool, threeRSAs, ten of our owned and leased vessels and fourone time-chartered in vessel operated in the Teekay Aframax Pools while fiveRSAs, and eight of our owned and leased vessels operated in the Taurus Tankers LR2 Pool.RSAs. In addition, eightseven of our owned and leased vessels and two time-chartered in vessels operated in the spot market on voyage charters. As of December 31, 2016, 132018, two of our owned vessels one in-chartered vessel and one jointly-owned vessel operated under fixed-rate time-charter contracts. Our mix of vessels trading in the spot market, providing lightering services in the U.S. Gulf (or USG), or subject to fixed-rate time charters will change from time to time. Our ManagerWe also may seek to hedge our spot exposure through the use of freight forward agreements or other financial instruments.
Likewise, the managers of the pooling arrangementsRSAs in which we participate may, with our approval, enter into fixed-rate time charters for vessels we include in those pooling arrangements,RSAs, thereby decreasing spot-rate exposure without withdrawing the vessels from the pooling arrangements.RSAs.
Vessel PoolingRevenue Sharing Arrangements. As of December 31, 2016, and including our owned and time-chartered in vessels, the Teekay Suezmax Pool and Teekay Aframax Pools were comprised of 29 Suezmax and 35 Aframax crude tankers, respectively, and the Taurus Tankers LR2 Pool included 11 LR2 product tankers. Under the pooling arrangements,RSAs, the aggregate revenues generated by the entire applicable poolsRSAs are distributed to poolRSA members, including us, pursuant to a pre-arranged weighting system based on actual earnings days each vessel is available during the applicable period and on each vessel’s earnings capability based on its characteristics, speed and bunker consumption. The allocation for each vessel participating in the poolRSA is established based on observations and historical consumption and performance measures of the individual vessel. Payments based on net cash flow applicable to each tanker are made on a monthly basis to poolRSA participants and adjusted at standard intervals determined by each poolRSA based on the weighting system. We have agreed with the respective poolRSA managers and poolRSA participants to include certain of our vessels trading on voyage charters into the pooling arrangementsRSAs assuming the vessel meets the respective poolingRSA criteria. For example, our Suezmax tankers that are operating on voyage charters with terms of less than one year are included in the Teekay Suezmax Pool.RSAs. Likewise, certain Aframax tankers and LR2 tankers on voyage charters with terms of 90 daysone year or less participate in the Teekay Aframax PoolsRSAs and the Taurus Tankers LR2 Pool,RSAs, respectively. Please read Item 7 – Major Shareholders and Related Party Transactions: Related Party Transactions—Pooling Arrangements, for additional information about the Teekay Suezmax Pool, the Teekay Aframax Pools, and the Taurus Tankers LR2 Pool.
Voyage Charters. Tankers operating in the spot market typically are chartered for a single voyage, which may last up to several weeks. Spot market revenues may generate increased profit margins during times when tanker rates are increasing, while tankers operating under fixed-rate time charters generally provide more predictable cash flows without exposure to the variable expenses such as port charges and bunkers. Under a typical voyage charter in the spot market, the shipowner is paid on the basis of moving cargo from a loading port to a discharge port. The shipowner is responsible for paying both vessel operating costs and voyage expenses, and the charterer is responsible for any delay at the loading or discharging ports. Voyage expenses are all expenses attributable to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Vessel operating expenses are incurred regardless of particular voyage details and include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. When the vessel is “off hire,” or not available for service, the vessel is unavailable to complete new voyage charters until the off hire is finalized and the vessel becomes available again for service. In addition, if the vessel is “off hire” while trading in a commercial pooling arrangement,RSA, the vessel will have those off hire days deducted from its monthly calculation of available days for the purpose of poolRSA distributions. Under a voyage charter, the shipowner is generally required, among other things, to keep the vessel seaworthy, to crew and maintain the vessel and to comply with applicable regulations.
Time Charters. A time charter is a contract for the use of a vessel for a fixed period of time at a specified daily rate. A customer generally selects a time charter if it wants a dedicated vessel for a period of time, and the customer is commercially responsible for the use of the vessel. Under a typical time charter, the shipowner provides crewing and other services related to the vessel’s operation, the cost of which is included in the daily rate, while the customer is responsible for substantially all of the voyage expenses. When the vessel is off hire,"off hire", or not available for service, the customer generally is not required to pay the hire rate, and the ownershipowner is responsible for all costs.costs, including the cost of fuel bunkers, unless the customer is responsible for the circumstances giving rise to the lack of availability. A vessel generally will be deemed to be off hire if there is an occurrence preventing the full working of the vessel. “Hire rate” refers to the basic payment from the charterer
for the use of the vessel. Under our time charters, hire is payable monthly in advance in U.S. Dollars. Hire payments may be reduced, or under some time charters the shipowner must pay liquidated damages, if the vessel does not perform to certain of its specifications, such as if the amount of fuel consumed to power the vessel under normal circumstances exceeds a guaranteed amount. When the vessel is “off hire,” or not available for service, the charterer generally is not required to pay the hire rate, and the shipowner is responsible for all costs, including the cost of fuel bunkers, unless the charterer is responsible for the circumstances giving rise to the lack of availability. A vessel generally will be deemed to be off hire if there is an occurrence preventing the full working of the vessel.
Time-Charters-in. A time-charter in vessel is one that is contracted from another party for use by us for a fixed period of time at a specified daily rate. We may choose to place the time-chartered in vessel in a pooling arrangementRSA if it meets the standards to participate in a pooling arrangementRSA or to employ it on a fixed-rate time-charter out for the same period of time the vessel is chartered-in to us or for shorter depending on the market conditions and the Manager’s outlook for the market. Under a typical time-charter in, the shipowner provides crewing and other services related to the vessel’s operation, the cost of which is included in the daily hire rate. The customer is responsible for substantially all of the voyage-related expenses. When the vessel is off hire the customer generally is not required to pay the hire rate, and the shipowner is responsible for all costs, including the cost of fuel bunkers, unless the charterer is responsible for the circumstances giving rise to the lack of availability. A vessel generally will be deemed to be off hire if there is an occurrence preventing the full working of the vessel.
Our Full Service Lightering, Ship-to-ship Support Services, and LNG Terminal Management and Consultancy Strategy
Full Service Lightering. Full service lightering (or FSL) is the process of transferring cargo between vessels of different sizes. Our lightering capability leverages access to our Aframax fleet operating in the USG and our offshore lightering support acumen to provide a full service lightering business model to customers. Theselightering. Our customers include oil companies and trading companies that are importing or exporting crude oil in the USG to or from larger Suezmax and VLCC vessels which are port restricted due to their size. We believe that our full service lightering in the USG will provide additional base cargo volume complementary to our spot trading strategy in the Caribbean to the USG market and allow our Manager to better optimize the deployment of the fleet that we trade in this region through better scheduling flexibility and utilization.
Ship-to-Ship Support Services and LNG Terminal Management and Consultancy Services. Ship-to-ship (or STS) support service is the process of transferring cargo between seagoing ships positioned alongside each other, either stationary or underway. Demand for global ship-to-shipSTS support services is often driven by oil market arbitrages and oil traders optimizing their USD ton/mile on cargoes. WeFor conventional crude, dirty petroleum, clean petroleum and LPG product, we intend to access various opportunities related to the provision of global ship-to-ship services, including blending, breaking of bulk cargo shipments, and the optimization of markets in contango which may use floating storage as a more cost-effective solution to shore tankage. In addition, there is demand for global LNG ship-to-ship support services due to the limited number of ice capable LNG carriers, which increasingly is resulting in the shuttling of LNG cargo to conventional LNG carriers for long haul voyages.
LNG terminal management and consultancy services revolve around tailored service provisions focusing on areas, such as LNG terminal operations and maintenance, LNG terminal development, LNG bunkering solutions, and commissioning and compatibility services. We seek to obtain more sustainable revenue through long-term, fixed-rate contracts for these LNG services.
Industry and Competition
We compete in the Suezmax (120,000(125,000 to 199,999 dwt) and Aframax (80,000(85,000 to 119,999124,999 dwt) crude oil tanker markets. Our competition in the Aframax and Suezmax markets is also affected by the availability of other size vessels that compete in these markets. Suezmax size vessels and Panamax (55,000 to 79,99984,999 dwt) size vessels can compete for many of the same charters for which our Aframax tankers compete; Aframax size vessels and VLCCs (200,000 to 319,999 dwt) can compete for many of the same charters for which our Suezmax tankers may compete. Because of their large size, VLCCs and Ultra Large Crude Carriers (320,000+ dwt) (or ULCCs) (320,000+ dwt) rarely compete directly with Aframax tankers, and ULCCs rarely compete with Suezmax tankers for specific charters. However, because VLCCs and ULCCs comprise a substantial portion of the total capacity of the market, movements by such vessels into Suezmax trades and of Suezmax vessels into Aframax trades would heighten the already intense competition.
We also compete in the LR2 (80,000(85,000 to 119,999109,999 dwt) product tanker market. Our competition in the LR2 product tanker market is affected by the availability of other size vessels that compete in the market. Long Range 1 (LR1) (60,000-79,999(or LR1) (55,000-84,999 dwt) size vessels can compete for many of the same charters for which our LR2 tankers compete.
Seaborne transportation of crude oil and refined petroleum products are provided both by major energy companies (private as well as state-owned) and by independent ship owners. The desire of many major energy companies to outsource all or a portion of their shipping requirements has caused the number of conventional oil tankers owned by energy companies to decrease in the last 20 years. As a result of this trend, independent tanker companies now own or control a large majority of the international tanker fleet.
As of December 31, 2016, other large operators of Aframax tonnage (including newbuildings on order) included Sovcomflot (approximately 42 vessels), Malaysian International Shipping Corporation (or MISC) (approximately 36 Aframax vessels), the Sigma Pool (approximately 29 vessels) and the Navig8 Pool (approximately 20 vessels). Other large operators of Suezmax tonnage (including newbuildings on order) as of such date included Nordic American Tankers (approximately 30 vessels), the Stena Sonangol Pool (approximately 22 vessels), Euronav (approximately 21 vessels), Navig8 (approximately 20 vessels), the Blue Fin Pool (approximately 16 vessels), and Sovcomflot (approximately 15 vessels).
As of December 31, 2016,2018, we wereremain effectively one of three active full service lightering businesses in the USG,U.S. Gulf Coast. We remain one of two providers that consistently provide a complete full service STS offering, which includes the largest being AET Tankers (or AET) (a subsidiary companyavailability of MISC)Aframax tonnage to provide shipment between shore and the smallest being OSG Lightering (a subsidiary of International Seaways Inc.).offshore. USG lightering trade has a steady foundation of demand due to ongoingtraditional imports into the United States and has recently found support in reverse-lightering due to changes toserve U.S. policy which now permit U.S.-producedGulf Coast refinery demand. Although imports of crude oil into the U.S. have declined as a result of rising domestic crude oil production, OPEC supply cuts in 2017/18, and further OPEC supply cuts since the start of 2019, we believe that the demand for import lightering has stabilized to be exporteda base level that is consistent to global destinations. AET currently maintains the majority of lightering market share in the USG. However through our acquisition of SPT (now known as Teekay Marine Solutions or TMS),
wedependency which U.S. refiners still have targeted this region in an effort to grow our presence and take advantage of the expected increased volumes moving both in and out of the USG. The USG lightering trade shows stability in the current environment where U.S. refineries appear still to be dependent on imports borneforeign oil that is only economically transported on larger VLCC and Suezmax class vessels to feedinto the U.S. Gulf Coast refinery requirements. We also expect USGCoast. At the end of 2018, export lightering grew to approximately 45% of total volume lightered in the U.S. Gulf. As the United States continues to project growth in crude production, we believe that the percentage of export lightering as compared to import lightering will see incremental benefits resulting from the lifted ban on UScontinue to increase as shippers look to leverage U.S. crude oil exports should that oil be transported on larger size vessels, including VLCC and Suezmax vessels targeted for Asia. Although the ports of Houston and Corpus Christi, Texas are now able to accommodate a VLCC at berthside for direct loading, draft restrictions will still require offshore top off ship-to-ship loading for those vessels to lift full capacity at an economic dollar per tonne basis.
AsThe operation of December 31, 2016,tanker vessels, as well as the largestseaborne transportation of crude oil and refined petroleum products is a competitive market. There are several large operators of Aframax, Suezmax, and LR2 tonnage (including newbuildings on order) included Scorpio Tankers (approximately 25 vessels), the Navig8 LR2 pool (approximately 21 vessels), Torm Tankers (approximately 14 vessels), the Sigma Pool (approximately 13 vessels), and Ocean Tankers (approximately 12 vessels).
that provide these services globally. Competition in both the crude and product tanker marketmarkets is primarily based on price, location (for single-voyage or short-term charters), size, age, condition and acceptability of the vessel, oil tanker shipping experience and quality of ship operations, and the size of an operating fleet, with larger fleets allowing for greater vessel substitution, availability and customer service. Aframax and Suezmax tankers are particularly well-suited for short-haulshort and medium-haul crude oil routes, while LR2 tankers are well-suited for long and medium-haul refined product routes.
Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in oil tanker demand and oil tanker supply. The cyclical nature of the tanker industry causes significant increases or decreases in charter rates earned by operators of oil tankers. Because voyage charters occur in short intervals and are priced on a current, or “spot,” market rate, the spot market is more volatile than time charters and the tanker industry generally. In the past, there have been periods when spot rates declined below the operating cost of the vessels.
Our largest competitor in the ship-to-ship global supportssupport business and the LNG terminal management and consultancy business is Fendercare Marine. Fendercare Marine is well-established and was relatively unchallenged in what was a niche market until 2006, when SPTTMS developed from being primarily a U.S. basedU.S.-based supplier. Through the growth of SPTTMS we have gained market share, and now under TMS,TNK, we look to increasemaintain our presence further through our intended business development.
Oil Tanker Demand. Demand for oil tankers is a function of several factors, including world oil demand and supply (which affect the amount of crude oil and refined products transported in tankers), and the relative locations of oil production, refining and consumption (which affects the distance over which the oil or refined products are transported).
Oil has been one of the world’s primary energy sources for a number of decades. As of January 2017,December 2018, the International Energy Agency (or IEA) estimated that oil consumption will increase from 96.599.2 million barrels per day (or mb/d) in 2016,2018, to 97.8100.7 mb/d in 20172019, driven by increasing consumption in non-OECD countries. A majority of known oil reserves are located in regions far from major consuming regions, which contributes positively towardimpacts demand for oil tankers.
The distance over which crude oil or refined petroleum products isare transported is determined by seaborne trading and distribution patterns, which are principally influenced by the relative advantages of the various sources of production and locations of consumption. Seaborne trading patterns are also periodically influenced by geopolitical events, such as wars, hostilities and trade embargoes that divert tankers from
normal trading patterns, as well as by inter-regional oil trading activity created by oil supply and demand imbalances. Historically, the level of oil exports from the Middle East has had a strong effect on the crude tanker market due to the relatively long distance between this supply source and typical discharge points. Over the past few years, the growing economies of China and India have increased and diversified their oil imports, resulting in an overall increase in transportation distance for crude tankers. Major consumers in Asia have increased their crude import volumes from longer-haul producers, such as those in the Atlantic Basin.
The limited growth in refinery capacity in developed nations, the largest consumers of oil in recent years, and increasing refinery capacity in the Middle East and parts of Asia where capacity surplus supports exports, have also altered traditional trading patterns and contributed to the overall increase in transportation distance for both crude tankers and productsproduct tankers.
Oil Tanker Supply. New Aframax, Suezmax and LR2 tankers are generally expected to have a lifespan of approximately 25 to 30 years, based on estimated hull fatigue life. However, U.S. and international regulations require the earlier phase-out of existing vessels that are not double-hulled, regardless of their expected lifespan. As of December 31, 2016,2018, the world Aframax crude tanker fleet consisted of 627642 vessels, with an additional 8977 Aframax crude oil tanker newbuildings on order for delivery through 2017;2022; the world Suezmax crude tanker fleet consisted of 468567 vessels, with an additional 8064 Suezmax crude oil tanker newbuildings on order for delivery through 2018;2021; the world LR2 product tanker fleet consisted of 314352 vessels, and with an additional 4435 LR2 product tanker newbuildings on order through 2018.2021. Currently, delivery of a vessel typically occurs within two to three years after ordering.
The supply of oil tankers is primarily a function of new vessel deliveries, vessel scrapping and the conversion or loss of tonnage. The level of newbuilding orders is primarily a function of newbuilding prices in relation to current and prospective charter market conditions. Another factorOther factors that affectsaffect tanker supply isare the availableavailability of financing and shipyard capacity. The level of vessel scrapping activity is primarily a function of scrapping prices in relation to current and prospective charter market conditions and operating, repair and survey costs. Industry regulations also affect scrapping levels. Please read “—Regulations” below. Demand for drybulk vesselvessels and floating storage off-take units, to which tankers can be converted, strongly affects the number of tanker conversions.
For more than a decade, there has been a significant and ongoing shift toward quality in vessels and operations, as charterers and regulators increasingly focus on safety and protection of the environment. Since 1990, there has been an increasing emphasis on environmental protection through legislation and regulations such as OPA 90, International Maritime Organization (or IMO) regulations and protocols, and classification
society procedures that demand higher quality tanker construction, maintenance, repair and operations. We believe that operators with proven ability to integrate these required safety regulations into their operations have a competitive advantage.
Safety, Management of Ship Operations and Administration
Safety and environmental compliance are our top operational priorities. Our vessels are operated by our Manager in a manner intended to protect the safety and health of our employees, the general public and the environment. We actively seek to manage the risks inherent in our business and are committed to eliminating incidents that threaten the safety and integrity of our vessels, such as groundings, fires, collisions and petroleum spills. In 2007, we introduced a behavior-based safety program called “Safety in Action” to further enhance the safety culture in our fleet. We are also committed to reducing our emissions and waste generation. In 2008, weTeekay Corporation introduced the Quality Assurance and Training Officers (or QATO) Program to conduct rigorous internal audits of our processes and provide our seafarers with onboard training.
Teekay Corporation,We, through certain of itsour subsidiaries providesand affiliates, provide technical management services for allsome of our vessels. Teekay Corporation hasWe have obtained through Det Norske Veritas Germanischer Lloyd ((or or DNV-GL), the Norwegian classification society, approval of its safety management system as in compliance with the International Safety Management Code (or ISM Code), and this system has been implemented for all of our vessels. As part of Teekay Corporation’sour ISM Code compliance, all of the vessels’ safety management certificates are maintained through ongoing internal audits performed by Teekay Corporation’s certified internal auditors and intermediate audits performed by DNV-GL.
In addition to the mandatory internal audits conducted by the QATOs, an internal audit is conducted by the Teekay Tanker’sour Health Safety, Environment and Quality (or HSEQ) team every quarter to ensure that all ship management functions are strictly adhered to.
Teekay Tankers conductsWe conduct quarterly Safety Management courses for senior officers, Onboard Safety Officer courses for safety officers and Rating safety courses. These are delivered by senior managers from Teekay Tankers.Additionally, a Safety Orientation Seminar is conducted every month for the ratings in Manila to emphasize key messages around safety.
Depending on existing HSEQ trends, various campaigns are run to address the shortcomings that are identified.
Additionally, a number of other projects have been implemented, including the Navigation Safety Handbook, Significant Incident Potential (SIP)(SIP), Behavioral Safety (E-colors) as well as Risk Tools handbook.
Teekay Corporation provides,We provide, through certain of itsour subsidiaries and affiliates, expertise in various functions critical to our operations and access to human resources, financial and other administrative functions. Critical ship management functions that our Manager provides to us through its affiliates include:
vessel maintenance (including repairs and dry docking) and certification;
crewing by competent seafarers;
purchasing of stores, bunkers and spare parts;
shipyard supervision;
insurance; and
financial management services.
These functions are supported by onboard and onshore systems for maintenance, inventory, purchasing and budget management.
All vessels are operated by us under a comprehensive and integrated Safety Management System that complies with the ISM Code, the International Standards Organization’s (or ISO) 9001 for Quality Assurance, ISO 14001 for Environment Management Systems, and Occupational Health and Safety Assessment Series (or OHSAS) 18001 and the new Maritime Labour Convention 2006 that became enforceable on August 20, 2013. The management system is certified by DNV-GL. Although certification is valid for five years, compliance with the above mentionedabove-mentioned standards is confirmed on a yearly basis by a rigorous auditing procedure that includes both internal audits as well as external verification audits by DNV-GL and certain flag states.
In addition, Teekay Corporation’s day-to-day focus on cost control is applied to our operations. Teekay Corporation and two other shipping companies participate in a purchasing alliance, Teekay Bergesen Worldwide, which leverages the purchasing power of the combined fleets, mainly in such commodity areas as lube oils, paints and other chemicals. Through our Manager, we benefit from this purchasing alliance.
Risk of Loss, Insurance and Risk Management
The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters, death or injury of persons and property losses caused by adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, the transportation and transfer/lightering of crude oil and petroleum products is subject to the risk of spills and to business interruptions due to political circumstances in foreign countries, hostilities, labor strikes, sanctions and boycotts. The occurrence of any of these events may result in loss of revenues or increased costs.
We carry hull and machinery (marine and war risks) and protection and indemnity insurance coverage to protect against most of the accident-related risks involved in the conduct of our business. Hull and machinery insurance covers loss of or damage to a vessel due to marine perils
such as collision, grounding and weather. Protection and indemnity insurance indemnifies us against other liabilities incurred while operating vessels, including injury to the crew, third parties, cargo loss and pollution. The current maximum amount of our coverage for pollution is $1 billion per vessel per incident. We also carry insurance policies covering war risks (including piracy and terrorism). None of our vessels are insured against loss of revenues resulting from vessel off-hire time, based on the cost of this insurance compared to our off-hire experience. We believe that our current insurance coverage is adequate to protect against most of the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage. However, we cannot guarantee that all covered risks are adequately insured against, that any particular claim will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental regulations have resulted in increased costs for, and may result in the lack of availability of, insurance against the risks of environmental damage or pollution.
In our operations, we use Teekay Corporation’s thorough risk management program which includes, among other things, risk analysis tools, maintenance and assessment programs, a seafarers competence training program, seafarers workshops and membership in emergency response organizations. We believe we benefit from Teekay Corporation’s commitment to safety and environmental protection as certain of its subsidiaries assist us in managing our vessel operations.
Teekay Corporation has achieved certification under the standards reflected in ISO 9001 for quality assurance, ISO 14001 for environment management systems, OHSAS 18001, and the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention on a fully integrated basis.
Flag, Classification, Audits and Inspections
Our vessels are registered with reputable flag states, and the hull and machinery of all of our vessels have been “classed” by one of the major classification societies and members of the International Association of Classification Societies ltd (or IACS): DNV-GL, Lloyd’s Register of Shipping or the American Bureau of Shipping.
The applicable classification society certifies that the vessel’s design and build conforms to the applicable class rules and meets the requirements of the applicable rules and regulations of the country of registry of the vessel and the international conventions to which that country is a signatory. The classification society also verifies throughout the vessel’s life that it continues to be maintained in accordance with those rules. In order to validate this, the vessels are surveyed by the classification society in accordance to the classification society rules, which in the case of our vessels follows a comprehensive five-year special survey cycle, renewed every fifth year. During each five-year period the vessel undergoes annual and intermediate surveys, the scrutiny and intensity of which is primarily dictated by the age of the vessel. As our vessels are modern and we have enhanced the resiliency of the underwater coatings of each vessel hull and marked the hull to facilitate underwater inspections by divers, their underwater areas are inspected in a dry dock at two and a half to five-year intervals. In-water inspection is carried out during the second or third annual inspection (i.e.(e.g. during an intermediate survey).
In addition to class surveys, the vessel’s flag state also verifies the condition of the vessel during annual flag state inspections, either independently or by additional authorization to class. Also, port state authorities of a vessel’s port of call are authorized under international conventions to undertake regular and spot checks of vessels visiting their jurisdiction.
Processes followed onboard are audited by either the flag state or the classification society acting on behalf of the flag state to ensure that they meet the requirements of the ISM Code. DNV-GL typically carries out this task. We also follow an internal process of internal audits undertaken annually at each office and vessel.
We follow a comprehensive inspections scheme supported by our sea staff, shore-based operational and technical specialists and members of our QATO program. We carry out regular inspections, which help us to ensure that:
our vessels and operations adhere to our operating standards;
the structural integrity of the vessel is being maintained;
machinery and equipment is being maintained to give reliable service;
we are optimizing performance in terms of speed and fuel consumption; and
our vessels' appearance supports our brand and meets customer expectations.
Our customers also often carry out vetting inspections under the Ship Inspection Report Program, which is a significant safety initiative introduced by the Oil Companies International Marine Forum to specifically address concerns about sub-standard vessels. The inspection results permit charterers to screen a vessel to ensure that it meets their general and specific risk-based shipping requirements.
We believe that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will generally lead to greater scrutiny, inspection and safety requirements on all vessels in the oil tanker markets and will accelerate the scrapping or phasing out of older vessels throughout these markets.
Overall, we believe that our relatively new, well-maintained and high-quality vessels provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality of service.
Regulations
General
Our business and the operation of our vessels are significantly affected by international conventions and national, state and local laws and regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. Because these conventions, laws and regulations change frequently, we cannot predict the ultimate cost of compliance or their impact on the resale price or useful life of our vessels. Additional conventions, laws and regulations may be adopted that could limit our ability to do business or increase the cost of our doing business and that may materially affect our operations. We are required by various governmental and quasi-governmental agencies to obtain permits, licenses and certificates with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits, licenses and certificates required for the operations of the vessels we own will depend on a number of factors, we believe that we will be able to continue to obtain all permits, licenses and certificates material to the conduct of our operations.
International Maritime Organization (or IMO)(or IMO)
The IMO is the United Nations’ agency for maritime safety and prevention of pollution. IMO regulations relating to pollution prevention for oil tankers have been adopted by many of the jurisdictions in which our tanker fleet operates. Under IMO regulations, and subject to limited exceptions, a tanker must be of double-hull construction in accordance with the requirements set out in these regulations or be of another approved design ensuring the same level of protection against oil pollution. All of our tankers are double-hulled.
Many countries, but not the United States, have ratified and follow the liability regime adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (or CLC). Under this convention, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil (e.g. crude oil, fuel oil, heavy diesel oil or lubricating oil), subject to certain defenses. The right to limit liability to specified amounts that are periodically revised is forfeited under the CLC when the spill is caused by the owner’s actual fault or when the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative regimes or common law governs, and liability is imposed either on the basis of fault or in a manner similar to the CLC.
IMO regulations also include the International Convention for Safety of Life at Sea (or SOLAS), including amendments to SOLAS implementing the International Ship and Port Facility Security Code (or ISPS), the ISM Code, the International Convention on Load Lines of 1966. SOLAS provides rules for the construction of and the equipment required for commercial vessels and includes regulations for their safe operation. Flag states, which have ratified the convention and the treaty generally employ the classification societies, which have incorporated SOLAS requirements into their class rules, to undertake surveys to confirm compliance.
SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations. Non-compliance with IMO regulations, including SOLAS, the ISM Code, ISPS and other regulations, may subject us to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to or detention in some ports. For example, the United States Coast Guard (or USCG) and European Union authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading in U.S. and European Union ports. The ISM Code requires vessel operators to obtain a safety management certification for each vessel they manage, evidencing the shipowner’s development and maintenance of an extensive safety management system. Each of the existing vessels in our fleet is currently ISM Code-certified, and we expect to obtain safety management certificates for each newbuilding vessel upon delivery.
The IMO’s Maritime Safety Committee (or MSC) has adopted the International Code of Safety for Ships using Gases or other Low-flashpoint Fuels (theIGF Code), which is a mandatory code for ships fuelledfueled by gases or other low-flashpoint fuels. The IGF Code, which is applicable from January 1, 2017, setsfuels, setting out mandatory provisions for the arrangement, installation, control and monitoring of machinery, equipment and systems using low-flashpoint fuel, in order to minimize the risk to the ship, its crew and the environment taking into account the nature of these fuels.fuel.
Annex VI to the IMO's International Convention for the Prevention of Pollution from Ships (MARPOL) (or Annex VI) sets limits on sulfur oxide and nitrogen oxide (or NOx) emissions from ship exhausts and prohibits emissions of ozone depleting substances, emissions of volatile compounds from cargo tanks and the incineration of specific substances. Annex VI also includes a world-wide cap on the sulfur content of fuel oil and allows for special “emission control areas” (or ECAs) to be established with more stringent controls on sulfur emissions.
Annex VI also provides for a three-tier reduction in nitrogen oxide (or NOx) emissions from marine diesel engines, with the final tier (‘‘(or Tier III’’) to apply to engines installed on vessels constructed on or after January 1, 2016 and which operate in the North American ECA or the U.S. Caribbean Sea ECA. The Tier III requirements will also apply toECA as well as ECAs designated in the future by the IMO. In October 2016 the IMO’s Marine Environment Protection Committee (or MEPC) approved the designation of the North Sea (including the English Channel) and the Baltic Sea as ECAs for NOx emissions. These two new NOxemissions; these ECAs and the related amendments to Annex VI of MARPOL are expected to be formally adopted by IMO’s MEPC in 2017 and the two new ECAs are expected to enter(with some exceptions) entered into effect on January 1, 2021.2019. This requirement will be applicable for new ships constructed on or after January 1, 2021 if they visit the Baltic or North Sea (including the English Channel) and requires the future trading area of a ship to be assessed at the contract stage. There are exemption provisions to allow ships with only Tier II engines, to navigate in a NOx Tier III ECA if the ship is departing from a shipyard where the ship is newly built or visiting a shipyard for conversion/repair/maintenance without loading/unloading cargoes.
Effective January 1, 2020, Annex VI imposes a global limit for sulphur in fuel oil used on board ships of 0.50% m/m (mass by mass), regardless of whether a ship is operating outside a designated ECA. To comply with this new standard, ships may utilize different fuels containing low or zero sulphur (e.g., LNG or biofuels), or utilize exhaust gas cleaning systems, known as “scrubbers”. Amendments to the information to be included in bunker delivery notes relating to the supply of marine fuel oil to ships fitted with alternative mechanisms to address sulphur emission requirements (e.g., scrubbers) became effective January 1, 2019. We have taken and continue to take steps to comply with the 2020 sulphur limit. At present, we have not installed any scrubbers on our fleet and we intend to switch over to burning low sulphur fuel from January 1, 2020.
As of March 1, 2018, amendments to Annex VI impose new requirements on ships of 5,000 gross tonnage and above to collect fuel oil consumption data for ships, as well as certain other data including proxies for transport work; the amendments also set forth criteria for determining whether cargo residues are harmful to the marine environment and a new Garbage Record Book format.
The IMO has issued guidance regarding protecting against acts of piracy off the coast of Somalia. We comply with these guidelines.
The IMO's Ballast Water Management Convention has been adopted by 54 countries, the combined merchant fleets of which represent 53.30% of the gross tonnage of the world’s merchant shipping, and will enterentered into force on September 8, 2017. As of December 31, 2018, there were 79 contracting states to the convention. The convention stipulates two standards for discharged ballast water. The D-1 standard covers ballast water exchange while the D-2 standard covers ballast water treatment. Once effective, theThe convention will requirerequires the implementation of either the D-1 or D-2 standard. There will be a transitional period from the entry into force to the International Oil Pollution Prevention (or IOPP) renewal survey in which ballast water exchange (reg. D-1) can be employed. AfterThe IMO’s Marine Environment Protection Committee (or MEPC) agreed to a compromise on the implementation dates for the D-2 discharge standard: ships constructed on or after September 8, 2017 must comply with the D-2 standard upon delivery. Existing ships should be D-2 compliant on the first IOPP renewal following entry into force if the survey vesselsis completed on or after September 8, 2019, or a renewal IOPP survey is completed on or after September 8, 2014 but prior to September 8, 2017. Ships should be D-2 compliant on the second IOPP renewal survey after September 8, 2017 if the first renewal survey after that date is completed prior to September 8, 2019 and if the previous two conditions are not met. Vessels will be required to meet the discharge standard D-2 by installing an approved Ballast Water Management System (or BWMS). Ships constructed after entry into force will be required to have a treatment system installed at delivery. Besides the IMO convention, ships sailing in U.S. waters are required to employ a type-approved BWMS which is compliant with USCG regulations. To date, theThe USCG have issued Type Approval (or TA)has approved a number of BWMS - Alfa Laval (Sweden), Ocean Saver (Norway), Sunrui (China), Optimarin (Norway), Ecochlor (USA), Erma First (Greece), Hyundai Heavy Industries Co. Ltd. (Korea), Qingdao Headway Technology Co. Ltd. (China), and JFE Engineering Corporation (Japan), out of which first two makers are under Teekay’s approved list for the following ballast water treatment systems (or BWTS):
•Alfa Laval;
•Ocean Saver; and
•Optimarin.
We expect the USCG will issue more TAs for BWTS in the future. Plans have been set for the decoupling of IOPP surveys with Harmonized System of Survey and Certification for vessels planning to drydock in 2018 with approval from the Flag and Classification Society.retrofit. We estimate that the installation of approved BWTSBWMS may cost between $2 million and $3 million per vessel.
Amendments to MARPOL Annex VI that makes the data collection system for fuel oil consumption of ships mandatory were adopted at the 70th session of the MEPC held in October 2016 and entered into force on March 1, 2018. The amendments require operators to update the vessels Ship Energy Efficiency Management Plan (SEEMP) to include a part II describing the ship specific methodology that will be used for collecting and measuring data for fuel oil consumption, distance travelled, hours underway, ensuring data quality is maintained and the processes that will be used to report the data to the Administration. This must be verified as compliant on or before December 31, 2018, with the first data collection period being for the 2019 calendar year. A Confirmation of Compliance will be issued by the administration/registered organization, which must be kept on board the ship.
The IMO has also developed and adopted an International Code for Ships Operating in Polar Waters (or Polar Code) which deals with matters regarding design, construction, equipment, operation, search and rescue and environmental protection in relation to ships operating in waters surrounding the two poles. The Polar Code includes both safety and environmental provisions and will be mandatory, with the safety provisions becoming part of SOLAS and the environmental provisions becoming part of MARPOL. In November 2014, the IMO’s MSC adopted theprovisions. The Polar Code and the related amendments to SOLASentered into force in relation to safety, while in May 2015, the IMO’s Marine Environment Protection Committee (or MEPC) adopted the environmental provisions of the Polar Code and associated amendments to MARPOL.January 2017. The Polar Code has becomeis mandatory for new vessels built after January 1, 2017. For existing ships, this code will be applicable from the first intermediate or renewal survey, whichever occurs first, beginning on or after January 1, 2018.
In addition to the requirements of major IMO shipping conventions, the exploration for and production of oil and gas within the Newfoundland & Labrador (or NL) offshore area is conducted pursuant to the Canada Newfoundland and Labrador Atlantic Accord Implementation Act (or the Accord Act) in accordance with the conditions of a license and authorization issued by the Canada-Newfoundland and Labrador Offshore Petroleum Board (or CNLOPB). Various regulations dealing with environmental, occupational health and safety, and other aspects of offshore oil and gas activities have been enacted under the Accord Act. The CNLOPB has also issued interpretive guidelines concerning compliance with the regulations, and compliance with CNLOPB guidelines may be a condition of the issuance or renewal of the license and authorizations. These regulations and guidelines require that the shuttle tankers in the NL offshore area meet stringent standards for equipment, reporting and redundancy systems, and for the training and equipping of seagoing staff. Further, licensees are required by the Accord Act to provide a benefits plan satisfactory to CNLOPB. Such plans generally require the licensee to: establish an office in NL; give NL residents first consideration for training and employment; make expenditures for research and development and education and training to be carried out in NL; and give first consideration to services provided from within NL and to goods manufactured in NL. These regulatory requirements may change as regulations and CNLOPB guidelines are amended or replaced from time to time.
MARPOL Annex I also states that oil residue may be discharged directly from the sludge tank to the shore reception facility through standard discharge connections. They may also be discharged to the incinerator or to an auxiliary boiler suitable for burning the oil by means of a dedicated discharge pump. Oil residue tanks shall have noAmendments to Annex I expand on the requirements for discharge connectionconnections and piping to the engine room bilge system, bilge tank or OWS except in the following cases:
the residue tank may be fitted with manually operated self-closing valves and arrangements for subsequent visual monitoring of the settled water that lead to an oily water holding tank or bilge well;
the sludge tank discharge piping and bilge water piping may be connected to a common line leading to the standard discharge connection; however, the interconnection of line shall not allow for the transfer of sludge to the bilge system; and
a screw down non-return valve in lines connecting to the standard discharge connection, provides an acceptable means for not allowing for the transfer of sludge to the bilge system. Ship operators and managers, should before the first IOPP renewal survey, ensure that such systemsresidues are compliant. In the event that modifications are required, system drawings will be subject to approval.
properly disposed of. Annex I is applicable for existing vessels with a first renewal survey beginning on or after January 1, 2017. It
Amendments to MARPOL Annex V were adopted at the 70th session of the MEPC held in October 2016 and entered into force on March 1, 2018. The changes include criteria for determining whether cargo residues are harmful to the marine environment and a new Garbage Record Book (or GRB) format with a new garbage category for e-waste. Solid bulk cargo as per regulation VI/1-1.2 of SOLAS, other than grain, shall now be classified as per the criteria in the new Appendix I of MARPOL Annex V, and the shipper shall then declare whether or not the cargo is anticipated that most vessels constructed after December 31, 1991 already comply withharmful to the marine environment. A new form of the GRB has been included in Appendix II to MAROL Annex V. The GRB is now divided into two parts: Part I as MARPOL has since provided a unified interpretation prohibiting interconnections between sludge and bilge systems.- for all garbage other than cargo residues, applicable to all ships; PART II - for cargo residues only applicable to ships carrying solid bulk cargo. These changes are reflected in the vessels' latest revised GRB.
MSC 91 adopted amendments to SOLAS Regulation II-2/10 to add a new paragraph 10.4 to clarify that a minimum of two-way portable radiotelephone apparatus for each fire party for firefighters' communication shall be carried on board. These radio devices shall be of explosion proof type or intrinsically safe type. All existing ships built before July 1, 2014 should comply with this requirement by the first safety equipment survey after July 1, 2018. All new vessels constructed (keel laid) on or after July 1, 2014 must comply with this requirement at the time of delivery.
Amendments to SOLAS Regulation II-1/2/-12 on protection against noise, Regulation II-2/1 and II 2/10 on firefighting and new Regulation XI-12-1 on harmonization of survey periods of cargo ships not subject to the ESP code become effective January 1, 2020.
As per MSC. 338(91), requirements have been highlighted for audio and visual indicators for breathing apparatus which will alert the user before the volume of the air in the cylinder has been reduced to no less than 200 liters. This applies to ships constructed on or after July 1, 2014. Ships constructed before July 1, 2014 must comply no later than July 1, 2019.
Cyber-related risks are operational risks that are appropriately assessed and managed in accordance with the safety management requirements of the ISM Code. Cyber risks are required to be appropriately addressed in our safety management system no later than the first annual verification of the company's Document of Compliance after January 1, 2021.
The IMO continues to review and introduce new regulations; as such, it is impossible to predict what additional requirements, if any, may be adopted by the IMO and what effect, if any, such regulations might have on our operations.
European Union (or EU)
Like the IMO, theThe EU has adopted regulations phasing out single-hull tankers. All of our tankers are double-hulled. On May 17, 2011, the European commission carried out a number of unannounced inspections, at the offices of some of the world’s largest container line operators starting an antitrust investigation. We are not directly affected by this investigation and believe that we are compliant with antitrust rules. Nevertheless, it is possible that the investigation could be widened and new companies and practices could come under scrutiny within the EU.
The EU has also adopted legislation (Directive 2009/16/EC on Port State Control as subsequently amended) that: bans from European waters manifestly sub-standard vessels (defined as vessels that have been detained twice by EU port authorities, in the preceding two years); creates obligations on the part of EU member port states to inspect minimum percentages of vessels using these ports annually; provides for increased surveillance of vessels posing a high risk to maritime safety or the marine environment; and provides the EU with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of negligent societies (Directive 2009/15/EC as amended by Directive 2014/111/EU of December 17, 2014).
societies.
Two new regulations were introduced by the European Commission in September 2010, asthat are part of the implementation of the Port State Control Directive. TheseDirective, came into force on January 1, 2011 and introduced a ranking system (published on a public website and updated daily) displaying shipping companies operating in the EU with the worst safety records. The ranking is judged upon the results of the technical inspections carried out on the vessels owned by a particular shipping company. Those shipping companies that have the most positive safety records are rewarded by subjecting them to fewer inspections, while those with the most safety shortcomings or technical failings recorded upon inspection will in turn be subject to a greater frequency of official inspections to their vessels.
The EU has, by way of Directive 2005/35/EC, which has been amended by Directive 2009/123/EC created a legal framework for imposing criminal penalties in the event of discharges of oil and other noxious substances from ships sailing in its waters, irrespective of their flag. This relates to discharges of oil or other noxious substances from vessels. Minor discharges shall not automatically be considered as offenses, except where repetition leads to deterioration in the quality of the water. The persons responsible may be subject to criminal penalties if they have acted with intent, recklessly or with serious negligence and the act of inciting, aiding and abetting a person to discharge a polluting substance may also lead to criminal penalties.
The EU has adopted a Directive requiring the use of low sulfur fuel. Since January 1, 2015, vessels have been required to burn fuel with sulfur content not exceeding 0.1% while within EU member states’ territorial seas, exclusive economic zones and pollution control zones that are included in SOX Emission Control Areas. Other jurisdictions have also adopted regulations requiring the use of low sulfur fuel.similar regulations. Since January 1, 2014, the California Air Resources Board (or CARB) has required vessels to burn fuel with 0.1% sulfur content or less within 24 nautical miles of California. China also established emission control areas in the Pearl River Delta, the Yangtze River Delta and the Bohai Bay rim area with restrictions, commencing on January 1, 2016, oncontinues to establish such areas, restricting the maximum sulfur content of the fuel to be used by vessels within those areas, which limits become progressively stricter over time. Commencing January 1, 2017, all the key ports within the three China ECAs (i.e. Tianjin, Qinhuangdao, Tangshan, Huanghua, Shenzhen, Guangzhou, Zhuhai, Shanghai, Ningbo-Zhoushan, Suzhou and Nantong) have implemented the low sulfur bunker requirements.
IMO regulations requirerequired that as of January 1, 2015, all vessels operating within ECAs worldwide recognized under MARPOL Annex VI must comply with 0.1% sulfur requirements. Currently, the only grade of fuel meeting 0.1% sulfur content requirement is low sulfur marine gas oil (or LSMGO). Since January 1, 2015, the applicable sulfur content limits in the North Sea, the Baltic Sea and the English Channel ECAs have been 0.1%. Other established ECAs under Annex VI to MARPOL are the North American ECA and the United States Caribbean Sea ECA. Certain modifications were necessary in order to optimize operation on low sulphur marine gas oil (LSMGO) of equipment originally designed to operate on Heavy Fuel Oil (or HFO). In addition, LSMGO is more expensive than HFO and this willcould impact the costs of operations. However, for vessels employed on fixed term business, all fuel costs, including any increases, are borne by the charterer. Our exposure to increased cost is in our spot trading vessels, although our competitors bear a similar cost increase as this is a regulatory item applicable to all vessels. All required vessels in our fleet trading to and within regulated low sulfur
areas are able to comply with fuel requirements. The global cap on the sulfur content of fuel oil is currently 3.5%, to be reduced to 0.5% by January 1, 2020. The reduced global cap of 0.5% as of January 1, 2020 was subject to a feasibility review, which was completed in 2016 and on the basis of which the IMO’s Marine Environment Protection Committee (or the MEPC) decided in October 2016 to implement the 0.5% global sulfur cap as of January 1, 2020.
The EU Ship Recycling Regulation (1257/2013) entered into force on December 30, 2013. It aims to prevent, reduce and minimize accidents, injuries and other negative effects on human health and the environment when ships are recycled and the hazardous waste they contain is removed. The legislation applies to all ships flying the flag of an EU country and to vessels with non-EU flags that call at an EU port or anchorage. It sets out responsibilities for ship owners and for recycling facilities both in the EU and in other countries. Each new ship has to have on board an inventory of the hazardous materials (such as asbestos, lead or mercury) it contains in either its structure or equipment. The use of certain hazardous materials is forbidden. Before a ship is recycled, its owner must provide the company carrying out the work with specific information about the vessel and prepare a ship recycling plan. Recycling may only take place at facilities listed on the EU ‘List of facilities’. In 2014, the Council Decision 2014/241/EU was adopted, authorizingauthorized EU countries having ships flying their flag or registered under their flag to ratify or to accede to the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships. The Regulation isCompliance timelines are as follows: EU-flagged new-buildings were required to apply not later thanhave on board a verified Inventory of Hazardous Materials (IHM) with a Statement of Compliance at the latest by December 31, 2018, although certainexisting EU-flagged and non-EU-flagged vessels are required to have on board a verified IHM with a Statement of its provisions are to applyCompliance at different stages, with some of them being applicable fromthe latest by December 31, 2020. Pursuant to this Regulation, theThe EU Commission has recently published the first version ofadopted a
European List of approved ship recycling facilities, meeting the requirements of the regulation, as well as four further implementing decisions dealing with certification and other administrative requirements set out in the Regulation.Regulation.
United States
The United States has enacted an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills, including discharges of oil cargoes, bunker fuels or lubricants, primarily through the Oil Pollution Act of 1990 (or OPA 90) and the Comprehensive Environmental Response, Compensation and Liability Act (or CERCLA). OPA 90 affects all owners, operators, and bareboat charterers, whose vessels trade to the United States or its territories or possessions or whose vessels operate in United States waters, which include the U.S. territorial sea and 200-mile exclusive economic zone around the United States. CERCLA applies to the discharge of “hazardous substances” rather than “oil” and imposes strict joint and several liabilities upon the owners, operators or bareboat charterers of vessels for cleanup costs and damages arising from discharges of hazardous substances. We believe that petroleum products should not be considered hazardous substances under CERCLA, but additives to oil or lubricants used on vessels might fall within its scope.
Under OPA 90, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the oil spill results solely from the act or omission of a third party, an act of God or an act of war and the responsible party reports the incident and reasonably cooperates with the appropriate authorities) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. These other damages are defined broadly to include:
natural resources damages and the related assessment costs;
real and personal property damages;
net loss of taxes, royalties, rents, fees and other lost revenues;
lost profits or impairment of earning capacity due to property or natural resources damage;
net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards; and
loss of subsistence use of natural resources.
OPA 90 limits the liability of responsible parties in an amount it periodically updates. The liability limits do not apply if the incident was proximately caused by violation of applicable U.S. federal safety, construction or operating regulations, including IMO conventions to which the United States is a signatory, or by the responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the oil removal activities. Liability under CERCLA is also subject to limits unless the incident is caused by gross negligence, willful misconduct, or a violation of certain regulations. We currently maintain for each of our vessel’s pollution liability coverage in the maximum coverage amount of $1 billion per incident. A catastrophic spill could exceed the coverage available, which could harm our business, financial condition and results of operations.
Under OPA 90, with limited exceptions, all newly built or converted tankers delivered after January 1, 1994 and operating in U.S. waters must be double-hulled. All of our tankers are double-hulled.
OPA 90 also requires owners and operators of vessels to establish and maintain with the United States Coast Guard (or the Coast Guard)USCG evidence of financial responsibility in an amount at least equal to the relevant limitation amount for such vessels under the statute. The Coast GuardUSCG has implemented regulations requiring that an owner or operator of a fleet of vessels must demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having the greatest maximum limited liability under OPA 90 and CERCLA. Evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance, guaranty or an alternative method subject to approval by the Coast Guard.USCG. Under the self-insurance provisions, the ship owners or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the Coast GuardUSCG regulations by obtaining financial guaranties from one of its subsidiaries covering our vessels. If other vessels in our fleet trade into the United States in the future, we expect to obtain guaranties from third-party insurers.
OPA 90 and CERCLA permit individual U.S. states to impose their own liability regimes with regard to oil or hazardous substance pollution incidents occurring within their boundaries and some states have enacted legislation providing for unlimited strict liability for spills. Several coastal states require state-specific evidence of financial responsibility and vessel response plans. We intend to comply with all applicable state regulations in the ports where our vessels call.
Owners or operators of vessels, including tankers, operating in U.S. waters are required to file vessel response plans with the Coast Guard,USCG, and their tankers are required to operate in compliance with their Coast GuardUSCG approved plans. Such response plans must, among other things:
address a “worst case” scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a “worst case discharge”;
describe crew training and drills; and
identify a qualified individual with full authority to implement removal actions.
WeAll our vessels have filedUSCG approved vessel response plans with the Coast Guard and have received its approval of such plans. In addition, we conduct regular oil spill response drills in accordance with the guidelines set out in OPA 90. The Coast GuardUSCG has announced it intends to propose similar regulations requiring certain vessels to prepare response plans for the release of hazardous substances.
OPA 90 and CERCLA do not preclude claimants from seeking damages resulting from the discharge of oil and hazardous substances under other applicable law, including maritime tort law. The application of this doctrine varies by jurisdiction.
The U.S. Clean Water Act (or the Clean Water Act) also prohibits the discharge of oil or hazardous substances in U.S. navigable waters and imposes strict liability in the form of penalties for unauthorized discharges. The Clean Water Act imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90 and CERCLA discussed above.
Our vessels that discharge certain effluents, including ballast water, in U.S. waters must obtain a Clean Water Act permit from the Environmental Protection Agency (or EPA) titled the “Vessel General Permit” and comply with a range of effluent limitations, best management practices, reporting, inspections and other requirements. The current Vessel General Permit incorporates Coast GuardUSCG requirements for ballast water exchange and includes specific technology-based requirements for vessels, and includes an implementation schedule to require vessels to meet the ballast water effluent limitations by the first dry docking after January 1, 2016, depending on the vessel size. The Vessel Incidental Discharge Act (or VIDA) became effective on December 4, 2018 and establishes a new framework for the regulation of vessel incidental discharges under the CWA. VIDA requires the EPA to develop performance standards for incidental discharges, and requires the USCG to develop regulations within two years of the EPA’s promulgation of standards. Under VIDA, all provisions of the Vessel General Permit remain in force and effect as currently written until the USCG regulations are finalized. Vessels that are constructed after December 1, 2013 are subject to the ballast water numeric effluent limitations. Several U.S. states have added specific requirements to the Vessel General Permit and, in some cases, may require vessels to install ballast water treatment technology to meet biological performance standards.
Greenhouse Gas Regulation
In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (or the Kyoto Protocol)Protocol) entered into force. Pursuant to the Kyoto Protocol, adopting countries are required to implement national programs to reduce emissions of greenhouse gases. In December 2009, more than 27 nations, including the United States, entered into the Copenhagen Accord. The Copenhagen Accord is non-binding but is intended to pave the way for a comprehensive, international treaty on climate change. In December 2015 the Paris Agreement (or the Paris Agreement) was adopted by a large number of countries at the 21st Session of the Conference of Parties (commonly known as COP 21, a conference of the countries which are parties to the United Nations Framework Convention on Climate Change; the COP is the highest decision-making authority of this organization). The Paris Agreement, which entered into force on November 4, 2016, deals with greenhouse gas emission reduction measures and targets from 2020 in order to limit the global temperature increases to well below 2˚ Celsius above pre-industrial levels. Although shipping was ultimately not included in the Paris Agreement, it is expected that the adoption of the Paris Agreement may lead to regulatory changes in relation to curbing greenhouse gas emissions from shipping.
In July 2011, the IMO adopted regulations imposing technical and operational measures for the reduction of greenhouse gas emissions. These new regulations formed a new chapter in Annex VI and became effective on January 1, 2013. The new technical and operational measures include the “Energy Efficiency Design Index” (or theEEDI), which is mandatory for newbuilding vessels, and the “Ship Energy Efficiency Management Plan,” which is mandatory for all vessels. In October 2016, the IMO’s MEPC adopted updated guidelines for the calculation of the EEDI. In addition, the IMO is evaluating various mandatory measures to reduce greenhouse gas emissions from international shipping, which may include market-based instruments or a carbon tax. In October 2014, the IMO’s MEPC agreed in principle to develop a system of data collection regarding fuel consumption of ships. In October 2016, the IMO adopted a mandatory data collection system under which vessels of 5,000 gross tonnages and above are to collect fuel consumption and other data and to report the aggregated data so collected to their flag state at the end of each calendar year. The new requirements are expected to enterentered into force on March 1, 2018. All vessels are required to submit fuel consumption data to their respective administration/registered organizations for onward submission to the IMO for analysis and to help with decision making on future measures. The amendments require operators to update the vessel's SEEMP to include a part II describing the ship specific methodology that will be used for collecting and measuring data for fuel oil consumption, distance travelled, hours underway and processes that will be used to report the data to the Administration, in order to ensure data quality is maintained. The vessels were required to be verified as compliant on or before December 31, 2018, with the first data collection period being for the 2019 calendar year. A Confirmation of Compliance will be issued by the administration/registered organization, which must be kept on board the ship. The IMO also approved a roadmap for the development of a comprehensive IMO strategy on reduction of greenhouse gas emissions from ships with an initial strategy to be adopted inon April 13, 2018 and a revised strategy to be adopted in 2023.2023.
The EU also has indicated that it intends to propose an expansion of an existing EU emissions trading regime to include emissions of greenhouse gases from vessels, and individual countries in the EU may impose additional requirements. The EU has adopted Regulation (EU) 2015/757 on the monitoring, reporting and verification (MRV)(MRV) of CO2 emissions from vessels (or the MRV Regulation)Regulation), which entered into force on July 1, 2015. The MRV Regulation aims to quantify and reduce CO2 emissions from shipping. It lists the requirements on MRV of carbon dioxide emissions and requires ship owners and operators to annually monitor, report and verify CO2 emissions for vessels larger than 5,000 gross tonnage calling at any EU and EFTA (Norway and Iceland) port (with a few exceptions, such as fish-catching or fish-processing vessels). Data collection takes place on a per voyage basis and startsstarted January 1, 2018. The reported CO2 emissions, together with additional data, such as cargo and energy efficiency parameters, are to be verified by independent verifiers and sent to a central inspection database managedhosted by the European Maritime Safety Agency. To comply withAgency (EMSA) to collate all the data applicable to the EU MRV regulation, we have prepared anregion. Companies responsible for the operation of large ships using EU MRV monitoring plan andports are required to report their CO2 emissions. While the EU MRV monitoring template in line with legislative requirement. The approved EU-MRV monitoring plan is expected to be placed on all our vessels by August 31, 2017. The EU is currentlywas considering a proposal for the inclusion of shipping in the EU Emissions Trading System as from 2021 in(in the absence of a comparable system operating under the IMO.IMO) it appears that the decision to include shipping may be deferred until 2023.
In the United States, the EPA issued an “endangerment finding” regarding greenhouse gases under the Clean Air Act. While this finding in itself does not impose any requirements on our industry, it authorizes the EPA to regulate directly greenhouse gas emissions through a rule-making process. In addition, climate change initiatives are being considered in the United States Congress and by individual states. Any passage of new climate control legislation or other regulatory initiatives by the IMO, EU, the United States or other countries or states where we operate that restrict emissions of greenhouse gases could have a significant financial and operational impact on our business that we cannot predict with certainty at this time.
Vessel Security Regulation
The ISPS was adopted by the IMO in December 2002 in the wake of heightened concern over worldwide terrorism and became effective on July 1, 2004. The objective of ISPS is to enhance maritime security by detecting security threats to ships and ports and by requiring the development of security plans and other measures designed to prevent such threats. Each of the existing vessels in our fleet currently complies with the requirements of ISPS and Maritime Transportation Security Act of 2002 (U.S. specific requirements). Procedures are in place to inform the Maritime Security Council Horn of Africa (orMSCHOA) whenever our vessels are calling in the Indian Ocean Region or West Coast of Africa (or WAC)WAC) high risk area. In order to mitigate the security risk, security arrangements are required for vessels which travel through the Gulf of Aden and WAC region.
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| C. | Organizational Structure |
As of December 31, 2016,2018, Teekay Corporation (NYSE: TK), through its 100%-owned subsidiary Teekay Holdings Ltd., had a 25.4%28.8% economic interest in us through its ownership of 17.240.3 million of our shares of Class A common stock and 23.237.0 million shares of our Class B common stock.
Our shares of Class A common stock entitle the holders thereof to one vote per share and our shares of Class B common stock entitle the holders thereof to five votes per share, subject to a 49% aggregate Class B common stock voting power maximum. AsTeekay Corporation currently holds a majority of the voting power of our common stocks, and as such, we are controlled by Teekay Corporation. Teekay Corporation also controls its public subsidiariessubsidiary Teekay LNG Partners L.P. (NYSE: TGP) and Teekay Offshore Partners L.P. (NYSE: TOO).
Please read Exhibit 8.1 to this Annual Report for a list of our subsidiaries as of December 31, 2016.2018.
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| D. | Property, Plant and Equipment |
Other than our vessels and related equipment, we do not have any material property.
Please see “Item 4. Information on the Company: Note B–Company - B. Business Overview - Our Fleet” for a description of our vessels and “Item 18. Financial Statements: Note 10—10 – Long-Term Debt”Debt and Note 11 – Leases” for information about major encumbrances against our vessels.
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| E. | Taxation of the Company |
The following is a discussion of the expected material U.S. federal income tax considerations applicable to us. This discussion is based upon the provisions of the Internal Revenue Code, of 1986, as amended (or the Code), legislative history, applicable U.S. Treasury Regulations (or Treasury Regulations), judicial authority and administrative interpretations, all as in effect on the date of this Annual Report, and which are subject to change, possibly with retroactive effect, or are subject to different interpretations. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below.
Taxation as a Corporation. We are taxed as a corporation for U.S. federal income tax purposes. As such, we are subject to U.S. federal income tax on our income to the extent it is from U.S. sources or otherwise is effectively connected with the conduct of a trade or business in the United States as discussed below.
Taxation of Operating Income. A significant portion of our gross income will be attributable to the transportation of crude oil and related products. For this purpose, gross income attributable to transportation (or Transportation Income) includes income derived from, or in connection with, the use (or hiring or leasing for use) of a vessel to transport cargo, or the performance of services directly related to the use of any vessel to transport cargo, and thus includes both time-charterincome from time-charters and bareboat-charter income.bareboat-charters.
Fifty percent (50%) of Transportation Income attributable to transportation that either begins or ends, but that does not both begin and end, in the United States (or U.S. Source International Transportation Income) is considered to be derived from sources within the United States. Transportation Income attributable to transportation that both begins and ends in the United States (or U.S. Source Domestic Transportation Income) is considered to be 100% derived from sources within the United States. Transportation Income attributable to transportation exclusively between non-U.S. destinations is considered to be 100% derived from sources outside the United States. Transportation Income derived from sources outside the United States generally willis not be subject to U.S. federal income tax.
Based on our current operations, a substantial portion of our Transportation Income is from sources outside the United States and not subject to U.S. federal income tax. In addition, we believe that we have not earned any U.S. Source Domestic Transportation Income, and we expect that we will not earn a material amount of such income in future years. However, certain of our subsidiaries which have made special U.S. tax elections to be treated as partnerships or disregarded as entities separate from us for U.S. federal income tax purposes are potentially engaged in activities which could give rise to U.S. Source International Transportation Income. Unless the exemption from U.S. taxation under Section 883 of the Code (or the Section 883 Exemption) applies, our U.S. Source International Transportation Income generally will beis subject to U.S. federal income taxation under either the net basis and branch profits taxes or the 4% gross basis tax, each of which is discussed below.
The Section 883 Exemption. In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations thereunder (or the Section 883 Regulations), it will not be subject to the net basis and branch profits taxes or the 4% gross basis tax described below on its U.S. Source International Transportation Income. As discussed below, we believe that under our current ownership structure, the Section 883 Exemption will apply and we will not be taxed on our U.S. Source International Transportation Income. The Section 883 Exemption does not apply to U.S. Source Domestic Transportation Income.
A non-U.S. corporation will qualify for the Section 883 Exemption if, among other things, it (i) is organized in a jurisdiction outside the United States that grants an exemption from tax to U.S. corporations on international Transportation Income (or an Equivalent Exemption), (ii) meets one of three ownership tests (or Ownership Tests) described in the Section 883 Regulations, and (iii) meets certain substantiation, reporting and other requirements (or the Substantiation Requirements).
We are organized under the laws of the Republic of Thethe Marshall Islands. The U.S. Treasury Department has recognized the Republic of Thethe Marshall Islands as a jurisdiction that grants an Equivalent Exemption. We also believe that we will be able to satisfy the Substantiation Requirements necessary to qualify for the Section 883 Exemption. Consequently, our U.S. Source International Transportation Income (including for this purpose, our share of any such income earned by our subsidiaries that have properly elected to be treated as partnerships or disregarded as entities separate from us for U.S. federal income tax purposes) will be exempt from U.S. federal income taxation provided we satisfy one of the Ownership Tests. We believe that we should satisfy one of the Ownership Tests because our stock is primarily and regularly traded on an established securities market in the United States within the meaning of Section 883 of the Code and the Section 883 Regulations. We can give no assurance, however, that changes in the ownership of our stock subsequent to the date of this report will permit us to continue to qualify for the Section 883 exemption.
The Net Basis Tax and Branch Profits Taxes.Tax. If the Section 883 Exemption does not apply, our U.S. Source International Transportation Income may be treated as effectively connected with the conduct of a trade or business in the United States (or Effectively Connected Income) if we have a fixed place of business in the United States and substantially all of our U.S. Source International Transportation Income is attributable to regularly scheduled transportation or, in the case of income derived from bareboat charters, is attributable to a fixed place of business in the United States. Based on our current operations, none of our potential U.S. Source International Transportation Income is attributable to regularly scheduled transportation or is derived from bareboat charters attributable to a fixed place of business in the United States. As a result, we do not anticipate that any of our U.S. Source International Transportation Income will be treated as Effectively Connected Income. However, there is no assurance that we will not earn income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of business in the United States in the future, which would result in such income being treated as Effectively Connected Income.
U.S. Source Domestic Transportation Income generally will be treated as Effectively Connected Income. However, we do not anticipate that a material amount of our income has been or will be U.S. Source Domestic Transportation Income.
Any income we earn that is treated as Effectively Connected Income would be subject to U.S. federal corporate income tax (the highest statutory rate currentlyfor 2018 onwards is 35%21%), and a 30% branch profits tax imposed under Section 884 of the Code. In addition, a branch interest tax could be imposed on certain interest paid or deemed paid by us.
On the sale of a vessel that has produced Effectively Connected Income, we generally would be subject to the net basis and branch profits taxes with respect to our gain recognized up to the amount of certain prior deductions for depreciation that reduced Effectively Connected Income. Otherwise, we would not be subject to U.S. federal income tax with respect to gain realized on the sale of a vessel, provided the sale is considered to occur outside of the United States under U.S. federal income tax principles.
The 4% Gross Basis Tax. If the Section 883 Exemption does not apply and we are not subject to the net basis and branch profits taxes described above, we wouldwill be subject to a 4% U.S. federal income tax on our gross U.S. Source International Transportation Income, without benefit of deductions. For 2017,2018, we estimate that if the Section 883 Exemption and the net basis tax did not apply, the U.S. federal income tax on such U.S. Source International Transportation Income would behave been approximately $3.5 million if the Section 883 Exemption does not apply, based on the amount of U.S. Source International Transportation Income we earned for 2016.$5.9 million. The amount of such tax for which we may beare liable in any year wouldwill depend upon the amount of income we earn from voyages into or out of the United States in such year, however, which is not within our complete control.
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| 2. | Marshall Islands Taxation |
Because we and our controlled affiliates do not, and we do not expect that we and our controlled affiliatesor they will, conduct business, operations, or operationstransactions in the Republic of the Marshall Islands, neither we nor our controlled affiliates are subject to income, capital gains, profits or other taxation under current Marshall IslandIslands law, other than taxes, fines, or fees due to (i) the incorporation, dissolution, continued existence, merger, domestication (or similar concepts) of legal entities registered in the Republic of the Marshall Islands, (ii) the incorporation or dissolution of legal entities registered in the Republic of the Marshall Islands, (iii) filing certificates (such as certificates of incumbency, merger, or redomiciliation)re-domiciliation) with the Marshall Islands registrar, (iv)(iii) obtaining certificates of good standing from, or certified copies of documents filed with, the Marshall Islands registrar, or (v)(iv) compliance with Marshall Islands law concerning vessel ownership, such as tonnage tax.tax, or (v) non-compliance with requests made by the Marshall Islands registrar of corporations relating to our books and records and the books and records of our subsidiaries. As a result, distributions by our controlled affiliates to us are not subject to Marshall Islands taxation.
We and our subsidiaries are subject to taxation in certain non-U.S. jurisdictions because we or our subsidiaries are either organized, or conduct business or operations, in such jurisdictions, but, we do not expect any such tax to be material. However, we cannot assure this result as tax
laws in these or other jurisdictions may change, or we may enter into new business transactions relating to such jurisdictions, which could affect our tax liability.
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| Item 4A. | Unresolved Staff Comments |
None.
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| Item 5. | Operating and Financial Review and Prospects |
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
We were formed in October 2007 by Teekay Corporation (NYSE: TK), a leading provider of marine services to the global oil and gas industries, and we completed our initial public offering in December 2007. Our business is to own oil and product tankers and we employ a chartering strategy that seeks to capture upside opportunities in the tanker spot market while using fixed-rate time charters to reduce downside risks. During 2015, weOur mix of vessels trading in the spot market or subject to fixed-rate time charters will change from time to time. We further developed our service offerings to our customers through the 2015 purchase of a ship-to-ship (or STS) transfer business that provides full service lightering as well as lightering support services and consultancy and LNG terminal management services. This acquisition, which is adjacent to our core competencies, along with our existing conventional tanker commercial management and technical management operations, is expected to improveimproved our ability to manage the cyclicality of the tanker market through the less volatile cash flows generated by these business areas. Historically, the tanker industry has experienced volatility in profitability due to changes in the supply of, and demand for, tanker capacity. Tanker supply and demand are each influenced by several factors beyond our control. We were formed in October 2007 by Teekay Corporation (NYSE: TK) (or Teekay), a leading provider of marine services to the global oil and gas industries and the world’s largest operator of medium-sized oil tankers, and we completed our initial public offering in December 2007.
Through the participation of some of our vessels in pooling arrangements, we expect to benefit from Teekay’s reputation and the scope of its operations in increasing our cash flows. Our mix of vessels trading in the spot market or subject to fixed-rate time charters will change from time to time. Teekay Corporation currently holds a majority of the voting power of our common stock, which includes Class A common stock and Class B common stock.
Commencing in December 2015, we adopted a newUnder our current dividend policy, under which quarterly dividends are expected to range from 30% to 50% of our quarterly adjusted net income, subject to reserves our Board of Directors may determine are necessary for the prudent operations of the company. Dividend payments are subject to the discretion of our Board of Directors, with a minimum quarterly dividend of $0.03 per share.and the policy remains subject to change. Adjusted net (loss) income is a non-GAAP measure which excludes specific items affecting net (loss) income that are typically excluded by securities analysts in their published estimates of our financial results. Prior
Significant Developments in 2018 and Early 2019
Board of Directors
In March 2019, we announced several changes to our Board of Directors. Director William Lawes retired from our Board effective March 31, 2019. Directors Bjorn Moller and Richard J.F. Bronks will retire from our Board, effective at the 2019 annual meeting of shareholders. The Board has also nominated David Schellenberg, a current director of Teekay Corporation, to stand for election as a director at the 2019 annual meeting. With these changes, we expect the size of our Board of Directors to be reduced subsequent to William Lawes' retirement from six members to five members.
Working Capital Borrowing Base Facility Agreement
In November 2018, one of our subsidiaries entered into a working capital loan facility agreement which provides for available aggregate borrowings of up to $40.0 million by the subsidiary, subject to certain limits based on the amount of accounts receivable and accrued revenues, with the option to increase the facility up to an additional $15.0 million, subject to approval of the lender. As of December 31, 2018, we had not drawn any amounts under this change,facility.
Sale-leaseback Financing Transactions
In February 2019, we signed a term sheet for a $63.7 million sale-leaseback financing transaction relating to two of our dividend policySuezmax tankers. If completed, we expect to increase our liquidity position by approximately $25 million after the repayment of outstanding debt related to these vessels. The transaction, which remains subject to customary conditions precedent and execution of definitive documentation, is expected to be completed in the second quarter of 2019.
In November 2018, we completed a $84.7 million sale-leaseback financing transaction relating to four of our vessels including two Aframax tankers, one Suezmax tanker and one LR2 product tanker. Each vessel is leased on a bareboat charter with terms ranging from 10 to 12 years, with fixed daily rates on the charters ranging between $5,000 and $7,800, and with purchase options for all four vessels throughout the remaining lease term beginning in November 2021 and upon maturity of the bareboat charters. Proceeds from the sale-leaseback transaction were used to refinance one of our corporate revolvers which matured in November 2018, and to prepay a portion of another loan facility.
In September 2018, we completed a $156.6 million sale-leaseback financing transaction relating to six of our Aframax tankers. Each vessel is leased on a bareboat charter, with terms ranging from nine to 10 years, with fixed daily rates on the charters ranging between $9,400 and $11,200, and with purchase options for all six vessels throughout the remaining lease term beginning in September 2020. We are obligated to purchase each vessel upon maturity of the bareboat charters. Proceeds from the sale-leaseback transaction were used to prepay a portion of one of our loan facilities.
Changes to Authorized Common Stock
In July 2018, we amended our amended and restated articles of incorporation, increasing the authorized number of Class A common shares from 285,000,000 to 485,000,000 and the total authorized number of shares of capital stock from 485,000,000 to 685,000,000.
In March 2018, we increased the authorized number of Class A common shares issuable under our 2007 Long-Term Incentive Plan by 6.0 million shares. As of December 31, 2018, approximately 4.3 million shares of our Class A common stock remained as reserves pursuant to the 2007 Long-Term Incentive Plan for issuance of options or restricted stock units to be granted.
STX Offshore & Shipbuilding Co., Ltd (or STX) Arbitration
In 2014 we brought action against STX for its repudiation of four firm shipbuilding contracts and an option agreement for additional vessels. In November 2017, each of our four subsidiaries to the repudiated contracts became entitled to receive, as part of a rehabilitation plan relating to STX's bankruptcy proceedings, an $8.9 million award, 7% of which was to distributebe paid in cash annually through 2026, and 93% of which was to be paid in STX equity. In June 2018, our shareholderssubsidiaries received a fixedtotal of 315,856 shares of STX, representing a minor percentage interest.
As of December 31, 2018, the STX shares were de-listed and no amounts have been recorded due to the uncertainty of their value. In addition, we have not recognized a receivable with respect to the non-interest-bearing cash award due to uncertainty of collection.
Please refer to Item 18 - Financial Statements: Note 22 - Shipbuilding Contracts.
Dividend Policy
Effective May 2018, we eliminated the payment of our minimum quarterly dividend of $0.03 per share ($0.12 per share annually). Ourin order to preserve liquidity during the cyclical downturn of the tanker spot market. Under the revised dividend policy, is reviewed byquarterly dividends are expected to range from 30% to 50% of our quarterly adjusted net income, subject to reserves our Board of Directors from time to time.
Significant Developments in 2016 and Early 2017
LNG Terminal Service
In November 2016, our ship-to-ship transfer business (or TMS) signed an operational and maintenance subcontract with Teekay LNG Bahrain Operations L.L.C., an entity wholly owned by Teekay LNG Partners L.P. (or TGP),may determine are necessary for the Bahrain LNG Import Terminal. As the subcontractor, TMS will provide pre-mobilization services for an expected period of 21 months, mobilization services and other general operational and maintenance servicesprudent operations of the facility. We have agreedcompany. Dividend payments are subject to guarantee the performancediscretion of this contract by TMS.
New Lightering Business Contracts
Inour Board of Directors, and the latter part of 2016, we secured two significant Aframax lightering contracts with major oil companies for firm periods of 12 and 24 months, which commenced in October 2016 and November 2016, respectively.policy remains subject to change.
Time Charter-OutChartered-in Vessels
During the year ended December 31, 2016,fourth quarter of 2018, we entered into time charter-outcharter-in contracts for 2.5 Aframax vessel equivalents for periods ranging one to two Suezmax tankers,years with anextension options. The new time charter-in contracts have a weighted average daily rate of $24,400, two LR2 product tankers, with an average daily rate of $17,400 and one Aframax tanker, with a daily rate of $23,000. We also extended$17,600.
In March 2018, we entered into time charter-outcharter-in contracts for two Aframax vessels, with an average daily rate of $20,000. These contracts haveapproximately $11,900 and firm periods ranging from 12of 45 days to 24six months.
Time Chartered-in Vessels
During the year ended December 31, 2016, we entered into in-charter contracts for two Aframax tankers, with an average daily rate of $17,800 and which were delivered to us in the fourth quarter of 2016. In December 2015, we entered into an in-charter The charter contract for one of the Aframax tankers included a 50/50 profit sharing component with the option to extend the contract for six months at an escalated rate. The charter contract for the other Aframax tanker whichhad a maximum period of approximately four months and the vessel was deliveredused to us in February 2016, has a daily rate of $22,750 and is scheduled to expire in March 2021.
During the year ended December 31, 2016, we alsosupport full service lightering operations. Both Aframax tankers were redelivered back to their respective owners in June and September 2018. We also redelivered one in-chartered Aframax tanker back to its owner in March 2018.
Time Chartered-out Vessels
In July 2018, we entered into a time charter-out contract for one Suezmax tanker, with a daily rate of $17,500 and a firm period of 12 months, with an option to extend the contract at an escalated rate. In January 2018, we entered into a time charter-out contract for one Suezmax tanker, with a daily rate of $17,250 and a period of six to nine months, with an option to extend the contract to a year at an escalated rate.
During 2018, six time chartered-out Suezmax tankers, seven in-charteredtime chartered-out Aframax tankers and two in-charteredtime chartered-out LR2 product tankers.
Vessel Sales
During the year ended December 31, 2016, we completed the saletankers were redelivered to us. All of two Medium Range (or MR) tankers, the Teesta Spirit and the Hugli Spirit, for net proceeds of $27.2 million. The vessels were written down to their agreed sales price in the second and third quarters of 2016, respectively, resulting in an aggregate loss on sale of the vessels of $14.7 million.
In October 2016, we agreed to sell two Suezmax tankers, the Yamuna Spirit and Ganges Spirit. The vessels were written down to their agreed sales prices and the resulting write down of $6.2 million was recognized in 2016. The Ganges Spirit was delivered to its buyer in January 2017 and the Yamuna Spirit was delivered to its buyer in March 2017.
New Time-Charter Swap
Effective June 1, 2016, we entered into a time-charter swap agreement for 55% of two Aframax equivalent vessels. Under such agreement, we will receive $27,776 per day, less a 1.25% brokerage commission, and pay 55% of the net revenue distribution of two Aframax equivalent vessels employed in our Aframax revenue sharing pooling arrangement less $500 per day, for a period of 11 months plus an additional two months at the counterparty's option.
Continuous Offering Program and Private Placement
In December 2016, we re-opened our continuous offering program (or COP) under which we may issue shares of our Class A common stock at market prices up to a maximum aggregate amount of $80.0 million. As of December 31, 2016, we sold approximately 3.0 million shares under this COP for net proceeds of $7.6 million, net of issuance costs. In January 2017, we sold approximately 3.8 million shares under this COP for net proceeds of $8.6 million, net of issuance costs. In addition, we issued 2.2 million new shares to Teekay in a private placement for gross proceeds of $5.0 million, and the price per share was set to equal the weighted average price of the Company's Class A common stock for the ten trading days ending on the date of issuance.
New Loan Facilities
In January 2016, we entered into a $894.4 million long-term debt facility, consisting of both a term loan and a revolving credit component, which are scheduled to mature in January 2021. The funds were used to repay our two bridge loan facilities, which matured in late January 2016, and a portion of our main corporate revolving credit facility, which was scheduled to mature in 2017.
New Interest Rate Swaps
In February 2016, in connection with our new long-term debt facility, we entered into a total of nine new interest rate swaps. Four of the interest rate swaps commenced and are scheduled to terminate in October 2016 and December 2020, respectively, and have notional amounts of $50.0 million each with fixed rates of 1.462%. The remaining five interest rate swaps commenced in the first quarter of 2016 and are scheduled to terminate in January 2021, of which one swap has a notional amount of $75.0 million, one swap has a notional amount of $50.0 million, and three swaps have notional amounts of $25.0 million each with fixed rates of 1.549%, 1.155% and 1.549%, respectively.
Acquisition of Entities under Common Control
In December 2015, we acquired from Teekay Offshore Partners L.P. (or TOO), which is an entity controlled by Teekay, two conventional oil tankers and related time-charter contracts and debt facilities for an aggregate price of $39.0 million, including working capital of approximately $8.6 million and net of outstanding debt of approximately $49.6 million (or the 2015 Acquired Business). Of this net amount, $30.4 million was paid on closing of the transaction in December 2015 and the remaining $8.6 million was settled in early 2016.
The acquisition of the 2015 Acquired Business was accounted for as a transfer of a business between entities under common control. As a result, our consolidated financial statements prior to the date the interests in these vessels were actually acquired by us have been retroactively adjusted to include the results of these vessels during the periods they were under common control of Teekay and had begun operations. The effect of adjusting such information to account for the 2015 Acquired Business in periods prior to our acquisition thereof is referred to as the "Entities under Common Control." Please read Item 1 - Financial Statements: Note 3 - Acquisition of Entities under Common Control.
Legal Action for Damages
In April 2013, we entered into agreements with STX Offshore & Shipbuilding Co., Ltd (or STX) of South Korea to construct four, fuel-efficient 113,000 dead-weight tonne LR2 product tanker newbuildings plus options to order up to an additional 12 vessels. The payment of our first shipyard installment was contingent on us receiving acceptable refund guarantees for the shipyard installment payments. In May 2013, STX commenced a voluntary financial restructuring with its lenders, and as a result, STX’s refund guarantee applications were temporarily suspended. In October and November 2013, we exercised our options to order eight additional newbuildings, in aggregate, under an option agreement relating to the original STX LR2 shipbuilding agreements signed in April 2013 (or the Option Agreement). STX did not produce shipbuilding contracts within the specified timeframe of the option declarations and, informed us that there was no prospect of the refund guarantees being provided under any of the firm or Option Agreement. Therefore, STX is in breach of the Option Agreement. In December
2013, we terminated the newbuilding agreements and in February 2014, we terminated the option agreement. In February 2014, we commenced a legal action against STX for damages. In November 2014, we placed $0.6 million into an escrow account as cash security pending the resolution of this matter.
In February 2016, our subsidiaries obtained an English Court Order requiring STX to pay a total of $32.4 million in respect of four firm shipbuilding contracts. As a result, our subsidiaries have exercised their rights under English law to seek the assistance of the English courttrading in the enforcement of the arbitration awards. We and our subsidiaries are pursuing other routes to enforce the awards against STX. Additionally, the cash deposit of $0.6 million which was held in escrow was refunded to us in March 2016.
STX has filed for bankruptcy protection andspot market as of December 31, 2016, all Korean enforcement actions are stayed. STX has had that protection recognized in England and Wales. We will not be in a position to take any further action on enforcement and recognition in the UK or Korea while the bankruptcy protection remains in place. No amounts have been recorded as receivable in respect of these awards due to uncertainty of their collection.2018.
The option agreement case has gone through trial and despite finding that we had valid option agreements, the judgment was ruled against us due to uncertainty of delivery dates. We are considering whether to appeal this ruling.
Our Charters
We generate revenues by charging customers for the transportation of their crude oil using our vessels. Historically, these services generally have been provided under the following basic types of contractual relationships:
Voyage charters participating in pooling arrangements are charters for shorter intervals that are priced on a current or “spot” market rate then adjusted for pool participation based on predetermined criteria; and
Time charters, whereby vessels are chartered to customers for a fixed period of time at rates that are generally fixed, but may contain a variable component based on inflation, interest rates or current market rates.
The table below illustrates the primary distinctions among these types of charters and contracts:
|
| | |
| Voyage Charter | Time Charter |
Typical contract length | Single voyage | One year or more |
Hire rate basis (1)
| Varies | Daily |
Voyage expenses (2)
| We pay | Customer pays |
Vessel operating expenses (3)
| We pay | We pay |
Off hire (4)
| Customer does not pay | Customer does not pay |
| |
(1) | “Hire” rate refers to the basic payment from the charterer for the use of the vessel. |
| |
(2) | Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. |
| |
(3) | Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. |
| |
(4) | “Off-hire” refers to the time a vessel is not available for service. |
Important Financial and Operational Terms and Concepts
We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:
Revenues. Revenues primarily include revenues from time charters, voyage charters, poolrevenue sharing arrangements and full service lightering and lightering support services and interest income from investment in term loans.services. Revenues are affected by hire rates and the number of days a vessel operates. Revenues are also affected by the mix of our business between time charters, voyage charters and vessels operating in poolrevenue sharing arrangements. Hire rates for voyage charters are more volatile, as they are typically tied to prevailing market rates at the time of a voyage. Our charters are explained further below.
Voyage Expenses. Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the ship ownershipowner under voyage charters and the customer under time charters.charters, except when the vessel is off-hire during the term of a time charter, in which case the owner pays voyage expenses.
Net Revenues. Net revenues represent revenues less voyage expenses. Because the amount of voyage expenses we incur for a particular charter depends upon the type of the charter, we use net revenues to improve the comparability between periods of reported revenues that are generated by the different types of charters and contracts. We principally use net revenues, a non-GAAP financial measure, because we believe it provides more meaningful information to us about the deployment of our vessels and their performance than does revenues, the most directly comparable financial measure under United States generally accepted accounting principles (or GAAP.GAAP).
Vessel Operating Expenses. We are responsible for vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. The two largest components of our vessel operating expenses are crew costs and repairs and maintenance. We expect these expenses to increase as our fleet matures and to the extent that it expands.
Income from Vessel Operations. To assist us in evaluating our operations, we analyze the income we receive after deducting operating expenses, but prior to interest expense and interest income, realized and unrealized gains and losses on derivative instruments, equity income and other expenses.
Dry docking. We must periodically dry dock each of our vessels for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. Generally, we dry dock each of our vessels every two and a half to five years, depending upon the age of the vessel. We capitalize a substantial portion of the costs incurred during dry docking and amortize those costs on a straight-line basis from the completion of a dry docking over the estimated useful life of the dry dock. We expense, as incurred, costs for routine repairs and maintenance performed during dry dockings that do not improve or extend the useful lives of the assets. The number of dry dockings undertaken in a given period and the nature of the work performed determine the level of dry-docking expenditures.
Depreciation and Amortization. Our depreciation and amortization expense typically consists of charges related to the depreciation of the historical cost of our fleet (less an estimated residual value) over the estimated useful lives of our vessels, charges related to the amortization of dry-docking expenditures over the estimated number of years to the next scheduled dry docking, and charges related to the amortization of our intangible assets over the estimated useful life of 10 years.
Time-Charter Equivalent (TCE) Rates. Bulk shipping industry freight rates are commonly measured in the shipping industry at the net revenues level in terms of “time-charter equivalent” ((oror TCE) rates, which represent net revenues divided by revenue days. We calculate TCE rates as net revenue per revenue day before related-party pool management fees and pool commissions, and off-hire bunker expenses.
Revenue Days. Revenue days are the total number of calendar days our vessels were in our possession during a period, less the total number of off-hire days during the period associated with major repairs, dry dockings or special or intermediate surveys. Consequently, revenue days represents the total number of days available for the vessel to earn revenue. Idle days, which are days when the vessel is available for the vessel to earn revenue yet is not employed, are included in revenue days. We use revenue days to explain changes in our net revenues between periods.
Average Number of Ships. Historical average number of ships consists of the average number of vessels that were in our possession during a period. We use average number of ships primarily to highlight changes in vessel operating expenses and depreciation and amortization.
Our Charters
We generate revenues by charging customers for the transportation of their crude oil using our vessels. Historically, these services generally have been provided under the following basic types of contractual relationships:
Voyage charters are charters for shorter intervals that are priced on a current or “spot” market rate then adjusted for pool participation based on predetermined criteria, if applicable; and
Time charters, whereby vessels are chartered to customers for a fixed period of time at rates that are generally fixed, but may contain a variable component based on inflation, interest rates or current market rates.
The table below illustrates the primary distinctions among these types of charters and contracts:
|
| | |
| Voyage Charter | Time Charter |
| Typical contract length | Single voyage | One year or more |
Hire rate basis (1) | Varies | Daily |
Voyage expenses (2) | We pay | Customer pays |
Vessel operating expenses (3) | We pay | We pay |
Off hire (4) | Customer does not pay | Customer does not pay |
| |
| (1) | “Hire” rate refers to the basic payment from the charterer for the use of the vessel. |
| |
| (2) | Voyage expenses are all expenses unique to a particular voyage, including any fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. |
| |
| (3) | Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. |
| |
| (4) | “Off-hire” refers to the time a vessel is not available for service. |
Items You Should Consider When Evaluating Our Results
You should consider the following factors when evaluating our historical financial performance and assessing our future prospects:
Adoption of Accounting Standards Update 2014-09. In May 2014, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (or ASU 2014-09) (please read "Item 18 – Financial Statements: Note 2 – Recent Accounting Pronouncements"). We have adopted ASU 2014-09 as a cumulative-effect adjustment as of January 1, 2018, and as a result, comparative 2017 and 2016 periods do not reflect the effect of this new standard. The following differences had a material effect on revenues reported in the year ended December 31, 2018:
| |
| ◦ | We previously presented the net allocation for its vessels participating in RSAs as net pool revenues. We have determined that we are the principal in voyages our vessels perform that are included in the RSAs. As such, the revenue from those voyages is presented in voyage charter revenues and the difference between this amount and our net allocation from the RSA is presented as voyage expenses. This had the effect of increasing voyage charter revenues and voyage expenses for the year ended December 31, 2018 by $292.6 million. There was no cumulative impact to opening equity as at January 1, 2018. |
| |
| ◦ | We previously presented all accrued revenue as a component of accounts receivable. We have determined that if the right to such consideration is conditioned upon something other than the passage of time, such accrued revenue should be presented apart from accounts receivable. This had the effect of increasing other current assets and decreasing accounts receivable by $17.9 million at December 31, 2018. |
Our financial results reflect the results of the interests in vessels acquired from TeekayTTOL for all periods the vessels wereTTOL was under common control. The 2015 Acquired BusinessOur May 2017 acquisition from Teekay of the remaining 50% interest in TTOL was deemed to be a business acquisition between entities under common control. Accordingly, we have accounted for this transaction in a manner similar to the pooling of interests method. Under this method of accounting our consolidated financial statements, for periods prior to the respective date the interestscontrolling interest in these vessels wereTTOL was actually acquired by us, areis retroactively adjusted to include the results of these acquired vessels.TTOL. The periodsperiod retroactively adjusted includeincludes all periods that we and the acquired vesselsTTOL, as applicable, were both under the common control of Teekay and had begun operations. All financial or operational information contained herein for the periods prior to the respective date the controlling interests in these vessels wereTTOL was actually acquired by us, and during which we and the applicable vesselsTTOL were under common control of Teekay, are retroactively adjusted to include the results of these acquired vesselsTTOL and are collectivelyalso referred to as the “Entities under Common Control”.
Our voyage revenues are affected by cyclicality in the tanker markets. The cyclical nature of the tanker industry causes significant increases or decreases in the revenue we earn from our vessels, particularly those we trade in the spot market.
Tanker rates also fluctuate based on seasonal variations in demand. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere but weaker in the summer months as a result of lower oil consumption in the northern hemisphere and increased refinery maintenance. In addition, unpredictable weather patterns during the winter months tend to disrupt vessel scheduling, which historically has increased oil price volatility and oil trading activities in the winter months. As a result, revenues generated by our vessels have historically been weaker during the quarters ended June 30 and September 30, and stronger in the quarters ended December 31 and March 31.
Our U.S. Gulf lightering business competes with alternative methods of delivering crude oil to ports, which may limit our earnings in this area of our operations. Our U.S. Gulf lightering business faces competition from alternative methods of delivering
crude oil shipments to port, including offshore offloading facilities. While we believe that lightering offers advantages over alternative methods of delivering crude oil to U.S. Gulf ports, our lightering revenues may be limited due to the availability of alternative methods.
Vessel operating and other costs are facing industry-wide cost pressures. The shipping industry continues to forecast a shortfall in qualified personnel, which could lead to increases in crew manning costs, howeveralthough weak shippingtanker markets and slowing growth may ease officer shortages. We will continue to focus on our manning and training strategies to meet future needs, but going forward crew compensation may increase.needs. In addition, factors such as client demands for enhanced training and physical equipment, pressure on commodity and raw material prices, as well as changes in regulatory requirements could also contribute to operating expenditure increases. We continue to take action aimed at improving operational
efficiencies, and to temper the effect of inflationary and other price escalations; however, increases to operational costs are still likely tomay well occur in the future.
The amount and timing of dry dockings of our vessels can significantly affect our revenues between periods. Our vessels are normally off-hireoff hire when they are being dry docked. We had twoeight vessels drydock in 2016,2018, compared to 18seven vessels which dry docked in 20152017 and ninetwo vessels which dry docked in 2014.2016. The total number of off-hire days relating to dry dockings during the years ended December 31, 2018, 2017 and 2016 2015were 295, 221, and 2014 were 82, 603, and 292, respectively. For our current fleet, there are nine17 owned and leased vessels scheduled to dry dock in 2017.2019.
Results of Operations
In accordance with GAAP, we report gross revenues in our consolidated statements of (loss) income and include voyage expenses among our operating expenses. However, ship-owners base economic decisions regarding the deployment of their vessels upon anticipated TCE rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time-charter contracts, the customer usually pays the voyage expenses, while under voyage charters, the ship-owner usually pays the voyage expenses, which typically are added to the hire rate at an approximate cost.cost (as is also described in "Our Charters" above). Accordingly, the discussion of revenue below focuses on net revenues and TCE rates (both of which are non-GAAP financial measures) where applicable.
For the years ended December 31, 2016 and 2015,The operating results of our conventional tanker segment and ship-to-ship (or STS) segment are presented separately. Our STS transfer business (or TMS) was acquired in July 2015, therefore no revenues or expenditures were incurred in 2014. Our conventional tanker segment includes the operations of all our tankers, including those employed on full service lightering contracts. Our STS transfer segment includes the operating results from lightering support services provided to our conventional tanker segment as part of full service lightering operations and other services provided to our customers associated with our lightering support operations.
Summary
Our consolidated income from vessel operations increased to $7.2 million for the year ended December 31, 2018, compared to $1.4 million in the prior year. The primary reasons for this increase are as follows:
an increase in income from operations of $16.9 million primarily due to lower operating losses in 2018 as a result of the sales of the Ganges Spirit, Yamuna Spirit, Kyeema Spirit, Kareela Spirit and Kanata Spirit in 2017;
an increase in income from operations of $3.9 million primarily due to our full service lightering (or FSL) operations as a result of higher realized FSL spot rates and changes in the utilization of dedicated FSL vessels;
an increase in income from operations of $3.3 million resulting from lower operating expenses primarily due to the scope and timing of repairs and planned maintenance activities in 2018 as compared to 2017; and
an increase in income from operations of $2.0 million due to the redeliveries to their owners of various in-chartered tankers whose earnings were lower than their time-charter hire expenses;
partially offset by
a net decrease in income from operations of $20.9 million primarily due to the expiry of time-charter out contracts for various vessels which subsequently traded on spot voyages at lower average realized rates.
We manage our business and analyze and report our results of operations on the basis of two reportable segments: the conventional tanker segment and the STS transfer segment. Please refer to Item 18 - Financial Statements: Note 6 - Segment Reporting. Details of the changes to our results of operations for each of our segments for the years ended December 31, 2018, 2017 and 2016 are provided below.
Year Ended December 31, 2018 versus Year Ended December 31, 2017
Conventional Tanker Segment
Our conventional tanker segment consists of conventional crude oil and product tankers that (i) are subject to long-term, fixed-rate time-charter contracts (which have an original term of one year or more), (ii) operate in the spot tanker market, or (iii) are subject to time-charters that are priced on a spot market basis or are short-term, fixed-rate contracts (which have an original term of less than one year). Our conventional tanker commercial management and technical management operations results are also included in our conventional tanker segment.
The following table presents our operating results for the years ended December 31, 2018 and 2017 and compares net revenues, a non-GAAP financial measure, for those periods to revenues, the most directly comparable GAAP financial measure.
|
| | | | | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars, except percentages) | 2018 | | 2017 (1) | | % Change |
Revenues | 720,076 |
| | 391,267 |
| | 84 | % |
Less: voyage expenses (2) | (373,064 | ) | | (87,879 | ) | | 325 | % |
| Net revenues | 347,012 |
| | 303,388 |
| | 14 | % |
| Vessel operating expenses | (174,278 | ) | | (135,740 | ) | | 28 | % |
| Time-charter hire expense | (13,537 | ) | | (25,666 | ) | | (47 | )% |
| Depreciation and amortization | (114,062 | ) | | (95,433 | ) | | 20 | % |
| General and administrative expenses | (36,481 | ) | | (29,539 | ) | | 24 | % |
| Loss on sale of vessels | — |
| | (13,034 | ) | | (100 | )% |
| Restructuring charges | (152 | ) | | — |
| | 100 | % |
| Income from vessel operations | 8,502 |
| | 3,976 |
| | 114 | % |
| Equity income (loss) | 1,220 |
| | (25,370 | ) | | (105 | )% |
| |
| (1) | The comparative period does not include the impact of the January 1, 2018 adoption of ASU 2014-09. Please refer to Item 18 - Financial Statements: Note 2 - Recent Accounting Pronouncements. |
| |
| (2) | Includes $12.5 million and $10.5 million of voyage expenses for the years ended December 31, 2018 and 2017, respectively, relating to lightering support services which the STS transfer segment provided to the conventional tanker segment for FSL operations. |
Tanker Market
Crude tanker spot rates were at multi-year lows during the first half of 2018 as OPEC supply cuts took their toll on tanker demand. However, the market appeared to reach an inflection point in the middle of the year, as an increase in oil supply from both OPEC and non-OPEC sources, and a period of lower fleet growth, allowed rates to recover.
Crude tanker spot rates improved significantly during the fourth quarter of 2018, spurred by both winter market seasonality and positive underlying supply / demand fundamentals. In the fourth quarter of 2018, OPEC crude oil production rose to 33.0 million barrels per day (mb/d), the highest level since July 2017 and up from 32.0 mb/d earlier in the year. Russian oil production reached a record high 11.5 mb/d by the end of the year, which was positive for mid-size tanker demand in the Mediterranean / Black Sea and Baltic Sea regions. Rising U.S. exports was also supportive of crude tanker demand, with US crude oil production reaching a record high 11.7 mb/d during the fourth quarter and crude oil exports reaching 2.5 mb/d. This was positive for both crude tanker demand, as well as lightering demand in the US Gulf.
Crude tanker spot rates have softened through the first quarter of 2019, which is typical for this time of year as refineries enter into seasonal maintenance programs. OPEC supply cuts are also weighing on crude tanker demand, with OPEC (plus select non-OPEC partners) pledging to cut production by 1.2 mb/d starting in January 2019. Early data suggests that OPEC is achieving high compliance with these cuts, which is negative for crude tanker demand in the near-term. We expect OPEC cuts to have a negative impact on crude tanker demand through the first half of the year, though the oil market is reasonably well balanced, and we believe that OPEC will have to return oil to the market during the second half of the year when oil demand is expected to increase substantially versus first half levels.
The global tanker fleet grew by just 5.7 million deadweight tonnes (mdwt), or 1.0%, in 2018, which was the lowest level of tanker fleet growth since 2001. High tanker scrapping was the main driver of low fleet growth in 2018, with a total of 22.4 mdwt removed (the fifth highest scrapping year on record). Looking ahead, we expect an increase in tanker fleet growth during 2019 as a firmer freight rate environment should lead to relatively fewer vessels sold for scrap. We expect total tanker fleet growth of approximately 3.5% during 2019, with much of this growth weighted towards the first half of the year. This will further add to pressure on the crude tanker market during the early part of the year, although it paves the way for much lower fleet growth in the second half of 2019 and into 2020, when we forecast that the global tanker fleet will grow by less than 2%.
Global oil demand remains firm, with the IEA forecasting growth of 1.4 mb/d growth in 2019. Furthermore, we expect that tanker demand will be boosted in 2019 by an increase in global refining capacity. According to the IEA, a total of 2.6 mb/d of new refining capacity will come online in 2019, which is the largest annual increase on record. This should be positive for both crude and product tanker demand. We also expect that the new IMO 2020 regulations will be positive for tanker demand, as it should lead to an increase in refinery throughput. The new
regulations could also open up a number of new trade patterns and arbitrage opportunities for both crude and product, which would be beneficial for overall tonne-mile demand. Finally, new pipeline capacity to the U.S. Gulf Coast is expected to lift U.S. crude exports during the second half of 2019 from approximately 2.5 mb/d at present to approximately 4 mb/d, which is expected to be beneficial for both crude tanker demand and U.S. Gulf lightering demand.
In summary, we believe that OPEC supply cuts, higher fleet growth, and the impact of seasonal refinery maintenance could weigh on tanker demand through the first half of the year. However, we believe that this will give way to a much stronger second half of 2019 and 2020 due to strong underlying oil demand, an increase in US crude oil exports, the return of OPEC crude oil supply, lower tanker fleet growth, and the positive impact of IMO 2020.
Fleet and TCE Rates
As at December 31, 2018, we owned 56 double-hulled conventional oil tankers, had time-chartered in three Aframax tankers and owned a 50% interest in one VLCC, the results of which are included in equity income (loss). The number of vessels we own, as well as our financial and operational results, include the Entities under Common Control in all relevant periods presented. Please read Item 18 - Financial Statements: Note 4 - Acquisition of Entities under Common Control included in the notes to our consolidated financial statements included in this Annual Report.
As defined and discussed above, we calculate TCE rates as net revenue per revenue day before related-party pool management fees and pool commissions, and off-hire bunker expenses. The following tables outline the average TCE rates earned by vessels for 2018 and 2017:
|
| | | | | | | | | | | | | | | | | |
| | Conventional Tanker Segment |
| | Year Ended December 31, 2018 |
| | Revenues (1)(2) | Voyage Expenses (1)(3) | Adjustments (4) | TCE Revenues | Revenue Days | Average TCE per Revenue Day (4) |
| | (in thousands) | (in thousands) | (in thousands) | (in thousands) | | |
| | | | | | | |
| Voyage-charter contracts - Suezmax |
| $359,711 |
|
| ($202,639 | ) |
| $1,144 |
|
| $158,216 |
| 9,795 |
|
| $16,154 |
|
Voyage-charter contracts - Aframax (5) |
| $236,137 |
|
| ($148,629 | ) |
| $915 |
|
| $88,423 |
| 5,515 |
|
| $16,034 |
|
| Voyage-charter contracts - LR2 |
| $71,175 |
|
| ($36,172 | ) |
| $154 |
|
| $35,157 |
| 2,488 |
|
| $14,131 |
|
| Time-charter out contracts - Suezmax |
| $16,899 |
|
| ($606 | ) |
| $204 |
|
| $16,497 |
| 819 |
|
| $20,144 |
|
| Time-charter out contracts - Aframax |
| $35,602 |
|
| ($566 | ) |
| $470 |
|
| $35,506 |
| 1,674 |
|
| $21,216 |
|
| Time-charter out contracts - LR2 |
| $7,357 |
|
| ($94 | ) |
| $4 |
|
| $7,267 |
| 420 |
|
| $17,287 |
|
| Total |
| $726,881 |
|
| ($388,706 | ) |
| $2,891 |
|
| $341,066 |
| 20,711 |
|
| $16,469 |
|
| |
| (1) | The impact of our January 1, 2018 adoption of ASU 2014-09 increased revenues and voyage expenses by $292.5 million for 2018. Please refer to Item 1 – Financial Statements: Note 2 – Recent Accounting Pronouncements for further details. |
| |
| (2) | Excludes $5.9 million of commissions and management fees earned from TTOL from the management of external vessels trading in RSAs and $2.9 million of bunker commissions earned. |
| |
| (3) | Includes $12.5 million of inter-segment voyage expenses relating to lightering support services provided by the STS transfer segment and $15.6 million of voyage expenses incurred by the vessels that were internally chartered from the RSA to perform full service lightering. |
| |
| (4) | Average TCE per Revenue Day excludes off-hire bunker and other expenses (income) included as part of the adjustments. |
| |
| (5) | Includes $104.9 million of revenues and $80.6 million of voyage expenses related to the full service lightering business, which includes $12.5 million of inter-segment voyage expenses referenced in note 3 relating to the full service lightering business by the STS transfer segment. |
|
| | | | | | | | | | | | | | | | | |
| | Conventional Tanker Segment |
| | Year Ended December 31, 2017 |
| | Revenues (1) | Voyage Expenses (2) | Adjustments (3) | TCE Revenues | Revenue Days | Average TCE per Revenue Day (3) |
| | (in thousands) | (in thousands) | (in thousands) | (in thousands) | | |
| | | | | | | |
| Voyage-charter contracts - Suezmax |
| $98,550 |
|
| ($5,618 | ) |
| $525 |
|
| $93,457 |
| 5,621 |
|
| $16,627 |
|
Voyage-charter contracts - Aframax (4) |
| $141,763 |
|
| ($80,220 | ) |
| $727 |
|
| $62,270 |
| 3,956 |
|
| $15,739 |
|
| Voyage-charter contracts - LR2 |
| $25,353 |
|
| ($141 | ) |
| $306 |
|
| $25,518 |
| 1,771 |
|
| $14,407 |
|
| Voyage-charter contracts - MR |
| $11 |
| — |
|
| ($10 | ) |
| $1 |
| — |
| — |
|
| Time-charter out contracts - Suezmax |
| $45,745 |
|
| ($932 | ) |
| $18 |
|
| $44,831 |
| 1,853 |
|
| $24,198 |
|
| Time-charter out contracts - Aframax |
| $50,964 |
|
| ($686 | ) |
| $151 |
|
| $50,429 |
| 2,283 |
|
| $22,085 |
|
| Time-charter out contracts - LR2 |
| $15,391 |
|
| ($265 | ) |
| ($13 | ) |
| $15,113 |
| 837 |
|
| $18,063 |
|
| Total |
| $377,777 |
|
| ($87,862 | ) |
| $1,704 |
|
| $291,619 |
| 16,321 |
|
| $17,867 |
|
| |
| (1) | Excludes $10.4 million of commissions and management fees earned by TTOL from the management of external vessels trading in the RSAs, $2.6 million of bunker commissions earned and $0.6 million of revenue earned from a profit-sharing agreement. |
| |
| (2) | Includes $10.5 million of inter-segment voyage expenses relating to lightering support services provided by the STS transfer segment. |
| |
| (3) | Average TCE per Revenue Day excludes off-hire bunker and other expenses (income) included as part of the adjustments. |
| |
| (4) | Includes $92.8 million of revenues and $72.4 million of voyage expenses related to the full service lightering business, which include $10.5 million of inter-segment voyage expenses referenced in note 2 relating to the full service lightering business by the STS transfer segment. |
Net Revenues. Net revenues increased to $347.0 million for 2018 from $303.4 million for 2017, primarily due to:
a net increase of $67.4 million primarily due to the addition of 18 vessels that we acquired as part of our merger with Tanker Investments Ltd. (or TIL), which was completed in the fourth quarter of 2017, and the addition of five Aframax in-chartered tankers that were delivered to us during 2018, partially offset by the redeliveries of various in-chartered tankers to their owners at various times during 2017 and the sales of one Suezmax tanker and three Aframax tankers in 2017;
an increase of $3.9 million due to an increase in the number of voyages related to our full service lightering operations in 2018 compared to 2017; and
a net increase of $0.9 million due to a higher average realized spot tanker rates earned by our Aframax tankers, partially offset by lower average realized spot tanker rates earned by our Suezmax and LR2 tankers in 2018 compared to 2017;
partially offset by
a net decrease of $19.9 million due to the expiry of time-charter out contracts for various vessels which subsequently traded on spot voyages at lower average realized rates in 2018 compared to 2017;
a decrease of $4.5 million due to lower commissions and management fees earned from TTOL from the management of fewer external vessels trading in the RSAs in 2018 compared to 2017; and
a net decrease of $4.0 million due to more off-hire days, higher off-hire bunker and other expenses in 2018 compared to 2017.
Vessel Operating Expenses. Vessel operating expenses increased to $174.3 million for 2018 from $135.7 million for 2017, primarily due to:
an increase of $50.7 million primarily due to the addition of 18 vessels that we acquired in the merger with TIL in November 2017;
partially offset by
a decrease of $7.6 million primarily resulting from the sales of three Aframax tankers and two Suezmax tankers during 2017;
a decrease of $3.1 million due to the scope of repairs and planned maintenance activities in 2018 as compared to 2017; and
a decrease of $1.6 million primarily due to lower port expenses and insurance premiums paid in 2018 as compared to 2017.
Time-charter Hire Expense. Time-charter hire expense decreased to $13.5 million for 2018 from $25.7 million for 2017, primarily due to seven Aframax tankers and one LR2 product tanker redelivering back to their respective owners in 2017, partially offset by the addition of five Aframax
tankers we in-chartered during 2018 and the fourth quarter of 2017, and a higher number of revenue days related to drydocking of one Aframax tanker.
Depreciation and Amortization. Depreciation and amortization increased to $114.1 million for 2018 from $95.4 million for 2017. The increase primarily relates to the addition of 18 vessels in November 2017 due to the merger with TIL and the depreciation related to capitalized dry-docking expenditures which increased in 2018 compared to 2017, partially offset by the sales of three Aframax tankers in 2017.
General and Administrative Expenses. General and administrative expenses increased to $36.5 million for 2018 from $29.5 million for 2017, primarily due to:
an increase of $4.0 million due to higher administrative, strategic management, and other fees incurred relating to changes in levels of corporate support due to the increase in fleet size resulting from the merger with TIL in November 2017;
a net increase of $1.9 million due to higher corporate expenses incurred during 2018 primarily as a result of professional fees related to management initiatives and higher director liability insurance costs incurred in 2018 as compared to 2017, partially offset by lower legal fees incurred related to the STX arbitration in 2018 as compared to 2017; and
an increase of $0.5 million primarily due to an increase in fees paid to our Board of Directors.
Loss on Sale of Vessels. The loss on sale of vessels of $13.0 million for the year ended December 31, 2017 primarily relates to the sales of three Aframax tankers which were delivered to their new owners in the second, third and fourth quarters of 2017, respectively, and two Suezmax tankers which completed their respective sales in the first quarter of 2017. Please refer to Item 18 – Financial Statements: Note 20 – Sale of Vessels.
Equity Income (Loss).
The following table reflects our equity income (loss) for 2018 and 2017,
|
| | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2018 | | 2017 |
| High-Q Joint Venture | 1,220 |
| | 3,071 |
|
| Tanker Investments Ltd. | — |
| | (28,443 | ) |
| Gemini Tankers L.L.C. | — |
| | 2 |
|
| Total equity income (loss) | 1,220 |
| | (25,370 | ) |
Equity income increased to $1.2 million in 2018 from equity losses of $25.4 million for 2017, primarily due to:
a decrease in equity losses of $28.4 million primarily due to a $26.7 million net write-down of our investment in TIL to its fair market value in 2017 and lower equity losses in 2018, both resulting from the TIL merger;
partially offset by
a decrease in equity income of $1.9 million primarily resulting from lower earnings recognized in 2018 due to the dry dock of the joint venture's VLCC, which was completed in June 2018, and the expiry of the time-charter out contract for the VLCC in May 2018, which subsequently traded on spot voyages at lower average realized rates.
Please refer to Item 18 – Financial Statements: Note 7 – Investments in and advances to Equity-Accounted for Investments.
Ship-to-ship Transfer Segment
Our STS transfer segment consists of our lightering support services, including those services provided to our conventional tanker segment, which includes full service lightering operations, and other lightering support services.
The following table presents our operating results for the years ended December 31, 2018 and 2017 and compares net revenues, a non-GAAP financial measure, for those periods to revenues, the most directly comparable GAAP financial measure.
|
| | | | | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars, except percentages) | 2018 | | 2017 | | % Change |
Revenues (1) | 48,175 |
| | 50,422 |
| | (4 | )% |
| Less: voyage expenses | — |
| | — |
| | — | % |
| Net revenues | 48,175 |
| | 50,422 |
| | (4 | )% |
| Vessel operating expenses | (34,853 | ) | | (39,649 | ) | | (12 | )% |
| Time-charter hire expense | (6,001 | ) | | (4,995 | ) | | 20 | % |
| Depreciation and amortization | (4,452 | ) | | (5,048 | ) | | (12 | )% |
| General and administrative expenses | (3,294 | ) | | (3,340 | ) | | (1 | )% |
| Gain on sale of vessels | 170 |
| | 50 |
| | 240 | % |
| Restructuring charges | (1,043 | ) | | — |
| | 100 | % |
| Loss from vessel operations | (1,298 | ) | | (2,560 | ) | | (49 | )% |
| |
| (1) | Includes $12.5 million of revenues for the year ended December 31, 2018 (2017 - $10.5 million) relating to lightering support services which the STS transfer segment provided to the conventional tanker segment for FSL operations. |
Net Revenues. Net revenues decreased to $48.2 million for the year ended December 31, 2018 compared to $50.4 million for the prior year. The decrease was primarily due to a reduction in the number of jobs related to our lightering support service operations as a result of our efforts to reduce low margin business.
Vessel Operating Expenses. Vessel operating expenses decreased to $34.9 million for the year ended December 31, 2018 compared to $39.6 million for the same period in the prior year. The changes in vessel operating expenses were primarily due to decreases in the number of lightering support service operations.
Time-charter Hire Expense. Time-charter hire expense increased to $6.0 million for the year ended December 31, 2018 compared to $5.0 million for the same period in the prior year. The increase was primarily due to more in-charter days for vessels supporting our lightering support service operations.
Depreciation and Amortization. Depreciation and amortization decreased to $4.5 million for the year ended December 31, 2018 compared to $5.0 million for the same period in the prior year. The decrease was primarily due to the 2018 sale of one lightering support vessel.
Restructuring Charges. Restructuring charges were $1.0 million for the year ended December 31, 2018 and primarily relate to the termination of certain employees as a result of management restructuring of our lightering support services operations.
Other Operating Results
The following table compares our other operating results for the years ended December 31, 2018 and 2017:
|
| | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2018 | | 2017 |
| Interest expense | (58,653 | ) | | (31,294 | ) |
| Interest income | 879 |
| | 907 |
|
| Realized and unrealized gain on derivative instruments | 3,032 |
| | 1,319 |
|
| Freight tax and other expenses | (9,412 | ) | | (5,330 | ) |
| Other income | 3,182 |
| | 329 |
|
Interest Expense. Interest expense increased to $58.7 million for 2018 from $31.3 million for 2017, primarily due to the debt facilities assumed and refinanced as a result of the merger with TIL in November 2017, the additional interest expense incurred relating to the sale- leaseback transactions of eight Aframax tankers, one Suezmax tankers and one LR2 product tanker during 2018 and four Suezmax tankers in July 2017, and an increase in average variable interest rates related to our debt facilities. These were partially offset by a lower average balance on one of our corporate revolvers due to the scheduled repayments and prepayments made on the revolver in connection with the sales of three Aframax tankers and two Suezmax tankers in 2017.
Realized and Unrealized Gain on Derivative Instruments. Realized and unrealized gain on derivative instruments increased to $3.0 million for 2018 compared to a realized and unrealized gain of $1.3 million for 2017.
As at December 31, 2018, we had interest rate swap agreements with aggregate outstanding notional amounts of $292.6 million (December 31, 2017 - $338.8 million) with a weighted-average fixed rate of 1.45% (December 31, 2017 - 1.46%).
The changes in the fair value of the interest rate swaps resulted in unrealized gains of $0.6 million and $2.1 million for the years ended December 31, 2018 and 2017, respectively. The decrease in unrealized gains was primarily due to decreases in our long-term benchmark interest rates.
Effective June 1, 2016, we entered into a time-charter swap for 55% of two Aframax equivalent vessels. Under such agreement, we received $27,776 per day, less a 1.25% brokerage commission, and paid 55% of the net revenue distribution of two Aframax equivalent vessels employed in our Aframax RSA, less $500 per day, for a period of 11 months plus an additional two months at the counterparty's option. As at December 31, 2017, the counter party option was not exercised resulting in the expiration of the time-charter swap. We recognized an unrealized loss of $0.9 million and a realized gain of $1.1 million in the year ended December 31, 2017.
In addition, we had a stock purchase warrant which had entitled us to purchase up to 750,000 shares of common stock of TIL. The stock purchase warrant was not exercised and was canceled upon completion of the TIL merger in November 2017. For the year ended December 31, 2017, we recognized an unrealized loss in respect of the stock purchase warrant of $0.3 million. Please refer to Item 18 - Financial Statements: Note 12 - Derivative Instruments.
Please see "Item 5 - Operating and Financial Review and Prospects - Critical Accounting Estimates - Valuation of Derivative Instruments", which explains how our derivative instruments are valued, including the significant factors and uncertainties in determining the estimated fair value and why changes in these factors result in material changes in realized and unrealized loss or gain on derivative instruments from period to period.
Freight Tax and Other Expenses. Freight tax and other expenses were $9.4 million in 2018, compared to $5.3 million in 2017. The increase is primarily due to an increase in our estimate of freight tax expense as a result of the increase in the average size of and trading patterns of our fleet, partially offset by historical balances which have now become statute-barred.
Other Income. Other income was $3.2 million in 2018, compared to $0.3 million in 2017. The increase is primarily due to changes in foreign exchange rates related to our freight tax accrual balances.
Net Loss. As a result of the foregoing factors, we recorded a net loss of $52.5 million for 2018, compared to a net loss of $58.0 million for 2017.
Year Ended December 31, 20162017 versus Year Ended December 31, 20152016
Conventional Tanker Segment
Our conventional tanker segment consists of conventional crude oil and product tankers that (i) are subject to long-term, fixed-rate time-charter contracts (which have an original term of one year or more), (ii) operate in the spot tanker market, or (iii) are subject to time-charters that are priced on a spot market basis or are short-term, fixed-rate contracts (which have an original term of less than one year).
The following table presents our operating results for the years ended December 31, 20162017 and 20152016 and compares net revenues, a non-GAAP financial measure, for those periods to revenues, the most directly comparable GAAP financial measure.
| | | | Year Ended December 31, | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2016 | | 2015 | | % Change | |
| (in thousands of U.S. dollars, except percentages) | | 2017 (1) | | 2016 (1) | | % Change |
Revenues | 488,961 |
| | 496,455 |
| | (2 | )% | 391,267 |
| | 512,608 |
| | (24 | )% |
Less: voyage expenses (1)(2) | (58,442 | ) | | (19,468 | ) | | 200 | % | (87,879 | ) | | (56,805 | ) | | 55 | % |
| Net revenues | 430,519 |
| | 476,987 |
| | (10 | )% | 303,388 |
| | 455,803 |
| | (33 | )% |
Vessel operating expenses (2) | (150,100 | ) | | (123,572 | ) | | 21 | % | (135,740 | ) | | (150,100 | ) | | (10 | )% |
| Time-charter hire expense | (57,368 | ) | | (74,860 | ) | | (23 | )% | (25,666 | ) | | (57,368 | ) | | (55 | )% |
| Depreciation and amortization | (99,024 | ) | | (72,118 | ) | | 37 | % | (95,433 | ) | | (99,024 | ) | | (4 | )% |
| General and administrative expenses | (14,444 | ) | | (15,369 | ) | | (6 | )% | (29,539 | ) | | (29,432 | ) | | — | % |
| (Loss) gain on sale of vessels | (20,926 | ) | | 771 |
| | (2,814 | )% | |
| Restructuring charges | — |
| | (4,445 | ) | | (100 | )% | |
| Loss on sale of vessels | | (13,034 | ) | | (20,926 | ) | | (38 | )% |
| Income from vessel operations | 88,657 |
| | 187,394 |
| | (53 | )% | 3,976 |
| | 98,953 |
| | (96 | )% |
| Equity income | 13,101 |
| | 14,411 |
| | (9 | )% | |
| Equity (loss) income | | (25,370 | ) | | 7,680 |
| | (430 | )% |
| |
| (1) | The comparative periods do not include the impact of the January 1, 2018 adoption of ASU 2014-09. Refer to Item 18 - Financial Statements: Note 2 - Recent Accounting Pronouncements. |
| |
| (2) | Includes $10.5 million and $3.2 million of voyage expenses for the year ended December 31, 2017 and 2016, respectively, relating to lightering support services which the ship-to-shipSTS transfer segment provided to the conventional tanker segment for full service lighteringFSL operations. |
| |
(2) | Includes $0.8 million of vessel operating expenses for the year ended December 31, 2015 relating to lightering support services which the ship-to-ship transfer segment provided to the conventional tanker segment for full service lightering operations.
|
Tanker Market
Tanker rates in 2016 softened from the highs seen in 2015, yet remained in-line with the ten-year average as a result of ongoing positive demand fundamentals. Global oil demand remained strong in 2016 with growth of 1.5 million barrels per day (mb/d), which was 0.4 mb/d higher than the ten-year average. Global oil supply was also strong, with record high OPEC production for 2016 of 32.6 mb/d. However, unexpected supply outages in Nigeria put pressure on mid-sized tanker demand in mid-2016. Oil prices remained in the mid-$40 per barrel range for most of 2016 before increasing in December 2016 as OPEC commenced firmed plans for production cuts as a means to rebalance oil markets. While ongoing low prices throughout the year provided some support for tonne-mile demand through strategic and commercial stockpiling programs, record high onshore stock levels towards the second half of 2016 resulted in lower import requirements as refiners
struggled with elevated stockpile levels. Tanker fleet growth also created some downside pressure to tanker rates towards the second half of 2016 as crude tanker fleet growth reached 6% and scrapping dipped to the lowest level since 1995.
Looking ahead, we anticipate 2017 to present some headwinds to the crude tanker spot tanker market. Total tanker fleet growth is forecast to be approximately 4.5%, which is slightly lower than 2016 but in-line with the ten-year average. However, most fleet growth in 2017 will come from the mid-sized segments, with mid-size fleet growth expected to be approximately 5%. The outlook for 2018 is more positive given a lack of ordering and the expectation for increased scrapping due to an aging fleet and changes to the regulatory landscape.
Global oil demand is forecast to grow by 1.4 mb/d in 2017 (average of IEA, EIA, and OPEC forecasts), which is similar to 2016 and above the ten-year average growth rate of 1.1 mb/d. On the supply side, OPEC production cuts of approximately 1.2 mb/d, with the majority of cuts (approximately 0.8 mb/d) coming from Middle East OPEC producers, will be negative for overall crude volumes available for transport. While OPEC production cuts may continue through the year, non-OPEC production increases of approximately 0.3 mb/d are expected as firming oil prices encourage more drilling, particularly in the U.S. The result could benefit the mid-sized tanker segments from increased tonne-mile demand as oil supply in the Atlantic basin continues to grow. In addition, the Brent - Dubai oil price spread has narrowed considerably as a result of OPEC cuts, and many crude buyers are sourcing Brent-benchmarked crudes as they become more economically attractive. These price/supply factors could offset some of the headwinds that the crude tanker market faces in 2017 as they have the potential to introduce volatility into regional tanker demand, which is positive for spot tanker rates.
In summary, we anticipate that 2017 will present some headwinds to crude tanker rates due to cuts to OPEC production, rising oil prices, and fleet growth. However, we believe that this dip in the current market cycle will be relatively short and shallow. In addition, lower fleet growth, strong oil demand growth, particularly in Asia, and a potential increase in long-haul movements from the Atlantic basin to the Pacific basin is expected to provide support towards the next market upturn.
Fleet and TCE Rates
As at December 31, 2016,2017, we owned 4356 double-hulled conventional oil tankers, time-chartered in sixone Aframax tankers and one LR2 product tanker from third parties and owned a 50% interest in one VLCC, the results of which are included in equity (loss) income. The number of vessels we own, as well as our financial and operational results, include the Entities under Common Control in all relevant periods presented. Please read Item 18 –- Financial Statements: Note 3 –4 - Acquisition of Entities under Common Control.Control included in the notes to our consolidated financial statements included in this Annual Report.
As defined and discussed above, we calculate TCE rates as net revenue per revenue day before related-party pool management fees and pool commissions, and off-hire bunker expenses. The following table outlines the average TCE rates earned by vessels for 20162017 and 2015:2016:
| | | | Conventional Tanker Segment | Conventional Tanker Segment |
| | Year Ended December 31, 2016 | Year Ended December 31, 2017 |
| | Revenues (1) | Voyage Expenses (2) | Adjustments (3) | Net Revenues | Revenue Days | Average TCE per Revenue Day (3) | Revenues (1) | Voyage Expenses (2) | Adjustments (3) | TCE Revenues | Revenue Days | Average TCE per Revenue Day (3) |
| | (in thousands) | | | (in thousands) | | |
| | | | | | | |
| Voyage-charter contracts - Suezmax |
| $179,438 |
|
| ($5,214 | ) |
| $5,614 |
|
| $179,838 |
| 6,705 |
|
| $26,820 |
|
| $98,550 |
|
| ($5,618 | ) |
| $525 |
|
| $93,457 |
| 5,621 |
|
| $16,627 |
|
Voyage-charter contracts - Aframax (4) |
| $155,499 |
|
| ($50,693 | ) |
| $3,673 |
|
| $108,479 |
| 5,145 |
|
| $21,086 |
|
| $141,763 |
|
| ($80,220 | ) |
| $727 |
|
| $62,270 |
| 3,956 |
|
| $15,739 |
|
| Voyage-charter contracts - LR2 |
| $47,086 |
|
| $53 |
|
| $1,477 |
|
| $48,616 |
| 2,572 |
|
| $18,903 |
|
| $25,353 |
|
| ($141 | ) |
| $306 |
|
| $25,518 |
| 1,771 |
|
| $14,407 |
|
| Voyage-charter contracts - MR |
| $8,305 |
|
| ($30 | ) |
| $302 |
|
| $8,577 |
| 535 |
|
| $16,035 |
|
| $11 |
| — |
|
| ($10 | ) |
| $1 |
| — |
| — |
|
| Time-charter out contracts - Suezmax |
| $30,597 |
|
| ($1,108 | ) |
| $476 |
|
| $29,965 |
| 1,029 |
|
| $29,124 |
|
| $45,745 |
|
| ($932 | ) |
| $18 |
|
| $44,831 |
| 1,853 |
|
| $24,198 |
|
| Time-charter out contracts - Aframax |
| $54,594 |
|
| ($1,017 | ) |
| $718 |
|
| $54,295 |
| 2,327 |
|
| $23,332 |
|
| $50,964 |
|
| ($686 | ) |
| $151 |
|
| $50,429 |
| 2,283 |
|
| $22,085 |
|
| Time-charter out contracts - LR2 |
| $12,201 |
|
| ($433 | ) |
| $130 |
|
| $11,898 |
| 526 |
|
| $22,629 |
|
| $15,391 |
|
| ($265 | ) |
| ($13 | ) |
| $15,113 |
| 837 |
|
| $18,063 |
|
Total (1) |
| $487,720 |
|
| ($58,442 | ) |
| $12,390 |
|
| $441,668 |
| 18,839 |
|
| $23,445 |
|
| $377,777 |
|
| ($87,862 | ) |
| $1,704 |
|
| $291,619 |
| 16,321 |
|
| $17,867 |
|
| |
| (1) | Excludes $10.4 million of commissions and management fees earned from TTOL from the management of external vessels trading in the RSAs, $2.6 million of bunker commissions earned and $0.6 million of in-process revenue contract revenue. |
| |
| (2) | Includes $10.5 million of inter-segment voyage expenses relating to lightering support services provided by the STS transfer segment to the FSL business. |
| |
| (3) | Average TCE per Revenue Day excludes off-hire bunker and other expenses included as part of the adjustments. |
| |
| (4) | Includes $92.8 million of revenues and $72.4 million of voyage expenses related to the FSL business, which includes $10.5 million of inter-segment voyage expenses referenced in note 2 above. |
|
| | | | | | | | | | | | | | | | | |
| | Conventional Tanker Segment |
| | Year Ended December 31, 2016 |
| | Revenues (1) | Voyage Expenses (2) | Adjustments (3) | TCE Revenues | Revenue Days | Average TCE per Revenue Day (2) |
| | (in thousands) | (in thousands) | (in thousands) | (in thousands) | | |
| | | | | | | |
| Voyage-charter contracts - Suezmax |
| $184,965 |
|
| ($5,068 | ) |
| ($59 | ) |
| $179,838 |
| 6,705 |
|
| $26,820 |
|
Voyage-charter contracts - Aframax (4) |
| $158,272 |
|
| ($50,185 | ) |
| $392 |
|
| $108,479 |
| 5,145 |
|
| $21,086 |
|
| Voyage-charter contracts - LR2 |
| $48,599 |
|
| $53 |
|
| ($36 | ) |
| $48,616 |
| 2,572 |
|
| $18,903 |
|
| Voyage-charter contracts - MR |
| $8,305 |
|
| ($30 | ) |
| $302 |
|
| $8,577 |
| 535 |
|
| $16,035 |
|
| Time-charter out contracts - Suezmax |
| $30,597 |
|
| ($731 | ) |
| $99 |
|
| $29,965 |
| 1,029 |
|
| $29,124 |
|
| Time-charter out contracts - Aframax |
| $54,593 |
|
| ($338 | ) |
| $40 |
|
| $54,295 |
| 2,327 |
|
| $23,332 |
|
| Time-charter out contracts - LR2 |
| $12,201 |
|
| ($273 | ) |
| ($30 | ) |
| $11,898 |
| 526 |
|
| $22,629 |
|
| Total |
| $497,532 |
|
| ($56,572 | ) |
| $708 |
|
| $441,668 |
| 18,839 |
|
| $23,445 |
|
| |
| (1) | Excludes $11.2 million of commissions and management fees earned by TTOL from the management of external vessels trading in the RSAs, $2.6 million of bunker commissions earned and $1.2 million of in-process revenue contract revenue. |
| |
| (2) | Includes $3.2 million of inter-segment voyage expenses relating to lightering support services provided by the ship-to-shipSTS transfer segment.segment to the FSL business and excludes $0.3 million of voyage expenses incurred by TTOL. |
| |
| (3) | Average TCE per Revenue Day excludes a total of $12.0$0.7 million in pool management fees and commissions payable for commercial management for our vessels, and $0.4 million in off-hire bunker and other expenses, all of which are included as part of the adjustments. |
| |
| (4) | Includes $48.2 million of revenues and $34.8 million of voyage expenses related to the full service lighteringFSL business, which includes $3.2 million of inter-segment voyage expenses referenced in note 2, relating to lightering support services provided to the full service lightering business by the ship-to-ship transfer segment. |
|
| | | | | | | | | | | | | | | | | |
| | Conventional Tanker Segment |
| | Year Ended December 31, 2015 |
| | Revenues (1) | Voyage Expenses | Adjustments (2) | Net Revenues | Revenue Days | Average TCE per Revenue Day (2) |
| | (in thousands) | (in thousands) | (in thousands) | (in thousands) | | |
| | | | | | | |
| Voyage-charter contracts - Suezmax |
| $154,579 |
|
| ($2,568 | ) |
| $5,702 |
|
| $157,713 |
| 4,021 |
|
| $39,217 |
|
Voyage-charter contracts - Aframax (3) |
| $158,783 |
|
| ($13,683 | ) |
| $4,214 |
|
| $149,314 |
| 4,800 |
|
| $31,109 |
|
| Voyage-charter contracts - LR2 |
| $79,158 |
|
| ($342 | ) |
| $3,042 |
|
| $81,858 |
| 2,845 |
|
| $28,777 |
|
| Voyage-charter contracts - MR |
| $19,346 |
|
| ($61 | ) |
| $1,088 |
|
| $20,373 |
| 960 |
|
| $21,205 |
|
| Time-charter out contracts - Suezmax |
| $14,235 |
|
| ($278 | ) |
| $317 |
|
| $14,274 |
| 483 |
|
| $29,577 |
|
Time-charter out contracts - Aframax (4) |
| $54,550 |
|
| ($2,337 | ) |
| $1,796 |
|
| $54,009 |
| 2,864 |
|
| $18,835 |
|
| Time-charter out contracts - LR2 |
| $4,607 |
|
| ($132 | ) |
| $5 |
|
| $4,480 |
| 175 |
|
| $25,623 |
|
| Time-charter out contracts - MR |
| $6,427 |
|
| ($66 | ) |
| ($4,391 | ) |
| $1,970 |
| 50 |
|
| $39,036 |
|
Total (1) |
| $491,685 |
|
| ($19,467 | ) |
| $11,773 |
|
| $483,991 |
| 16,198 |
|
| $29,875 |
|
| |
(1) | Excludes $4.8 million of in-process revenue contract revenue. |
| |
(2) | Average TCE per Revenue Day excludes a total of $12.6 million in pool management fees and commissions payable for commercial management for our vessels, $4.4 million of crew redundancy costs recovery from one of our customers and $3.7 million in off-hire bunker and other expenses, all of which are included as part of the adjustments. |
| |
(3) | Includes $15.0 million of revenues and $5.8 million of voyage expenses related to the full service lightering business. |
| |
(4) | Net revenues and average TCE per revenue day in 2015 include $1.4 million related to the Entities under Common Control.above. |
Net Revenues.Revenues. Net revenues decreased to $430.5$303.4 million for 20162017 from $477.0$455.8 million for 20152016, primarily due to:
a decrease of $99.8$66.5 million due to lower average realized spot tanker rates earned by our Suezmax, Aframax and LR2 tankers in 2017 compared to 2016;
net decreases of $59.3 million primarily due to the redeliveries of various in-charters to their owners at various times during 2016 and 2017 and the sale of two Suezmax product tankers, three Aframax tankers and two MR product tankers in 2016 comparedand 2017, partially offset by the addition of 18 vessels that we acquired as part of the TIL merger on November 27, 2017 and three Aframax in-charters that were delivered to 2015;us during 2016 and 2017;
a net decrease of $16.2$29.3 million due to the expiry of time-charter out contracts for various vessels changingwhich subsequently traded on spot voyages at lower average realized rates and more vessels that transitioned from voyage charter to full service lightering employment between fixed-rate charters and spot voyage charters;in 2017 compared to 2016;
a decrease of $4.4$1.2 million due to redundancy cost for the Australian seafarersin-process revenue contract amortization that we recovered from the customer upon expiration of a time-charter out contract of a MR product tankerrecognized in revenue in the first quarter of 2015;2016;
a net decrease of $1.4 million due to more off-hire days, higher off-hire bunker and other expenses in 2017 compared to 2016;
a decrease of $0.9 million for 2017 due to one additional calendar day in 2016 as it was a leap year; and
a decrease of $3.5$0.9 million due to lower commissions and management fees earned from TTOL from the management of in-process revenue contract amortization we recognizedexternal vessels trading in revenuethe RSAs and bunker commissions received in 20162017 compared to 2015;2016;
partially offset by
a netan increase of $43.9 million, primarily due to the addition of 12 Suezmax tankers, two LR2 product tankers and one Aframax tanker that we acquired during 2015 and the change in the average size of the in-charter fleet, partially offset by the sale of two MR product tankers in 2015 and 2016;
a net increase of $13.9$7.0 million due to fewer off-hire days in 2016 compared to 2015;
an increase in the number of $10.5 million duevoyages related to higher average rates earned on our out-chartered Aframax tankers in 2016 compared to 2015;
an increase of $4.2 million due to the acquisition of the full service lightering business that was part of the SPT acquisition during the third quarter of 2015;
a net increase of $4.0 million due to lower pool management fees, commissions, off-hire bunker and other expensesoperations in 20162017 compared to 2015 due primarily to lower average TCE rates; and2016.
an increase of $1.1 million for 2016 due to one additional calendar day as 2016 was a leap year.
Vessel Operating Expenses.Expenses. Vessel operating expenses increaseddecreased to $135.7 million for 2017 from $150.1 million for 2016, from $123.6 million for 2015 primarily due to:
an increasea net decrease of $27.0$13.5 million primarily resulting from the addition of 12 modern Suezmax tankers, one Aframax tanker and four LR2 product tankers, acquired in 2015, including two LR2 product tankers that were previously in-chartered. This was partially offset by the sales of two MR tankers in the second half of 2016, and one MR tanker soldof two Suezmax tankers in the fourthfirst quarter of 2015;2017, of one Aframax tanker in second quarter of 2017 and of two Aframax tankers in the second half of 2017;
an increasea decrease of $1.7$3.0 million due to the scope of repairs and planned maintenance activities in 2017 as compared to 2016;
a decrease of $2.9 million due to higher ship management fees resulting fromtransition costs incurred in 2016 compared to 2017 directly relating to 12 Suezmax tankers, which were acquired in the 17 vessels acquired inlatter part of 2015; and
an increasea decrease of $0.6$0.8 million primarily due to inflationary increases and higher crew and manning expensescosts related to performance-based compensationthe change from external to in-house ship management and lower insurance premiums paid to seafarers which were recognized in 2016;during the year;
partially offset by
an increase of $5.4 million primarily resulting from the acquisition of 10 Suezmax tankers, six Aframax tankers and two LR2 product tankers which were acquired as a decreaseresult of $0.9the merger with TIL in November 2017; and
an increase of $0.3 million due to lowerhigher fleet overhead costs, primarily resulting from the timing of seafarer training, crew agency fees and other initiatives; and
a decrease of $0.9 million due to lower insurance premiums paid and insurance credits received during the year.initiatives.
Time-charter Hire Expense.Expense. Time-charter hire expense decreased to $25.7 million for 2017 from $57.4 million for 2016, from $74.9 million for 2015primarily due to the changes in the average size of the in-charter fleet, decreases in the average in-charter rate in 2016 compared to 2015, the acquisition of two LR2 product tankers in February 2015 which were previously in-chartered, two in-chartered Aframax tankers which were offhire during the year and lower time-charter rates due to profit sharing components of one Aframax tanker and one LR2 product tanker.fleet.
Depreciation and Amortization. Depreciation and amortization increaseddecreased to $95.4 million for 2017 from $99.0 million for 2016 from $72.1 million for 2015.2016. The increasedecrease primarily relates to the addition of 12 Suezmax tankers, one Aframax tanker and four LR2 product tankers acquired in 2015, the amortization of customer relationships in relation to the acquisition of the ship-to-ship transfer business in July 2015 and higher amortization of dry-docking expenditures in 2016 as compared to the prior year. This was partially offset by the salesales of two MR tankers in the second half of 2016, andof two Suezmax tankers in the salefirst quarter of 2017, of one MRAframax tanker in the fourthsecond quarter of 2015.2017 and of two Aframax tankers in the second half of 2017, partially offset by the addition of 18 vessels in November 2017 due to the merger with TIL.
General and Administrative Expenses.Expenses. General and administrative expenses decreased to $14.4remained consistent at $29.5 million for 2017 and $29.4 million for 2016, compared to $15.4 million for 2015, primarily due to:
an increase of $2.3 million due to $0.5higher administrative, strategic management, and other fees incurred due primarily to differences in annual bonuses and financial system changes;
partially offset by
a decrease of $1.3 million ofdue to higher corporate expenses incurred during 20152016 primarily as a result of legal expenses related to theour vessel construction and option agreements with STX arbitration (please read Item 18 – Financial Statements: Note 22 – Shipbuilding Contracts)of South Korea; and legal expenses incurred related
a decrease of $0.6 million primarily due to the acquisitionsdecreased stock-based compensation granted to our Board of vesselsDirectors, one of our officers and the ship-to-ship business in 2015.certain employees of Teekay subsidiaries that provided services to us.
(Loss) GainLoss on Sale of Vessels. Loss on sale of vessels ofdecreased to $13.0 million for 2017 compared to $20.9 million for 2016. The loss on sale of vessels for the year ended December 31, 2017 primarily relates to the sales of three Aframax tankers which were delivered to their new owners in the second, third and fourth quarters of 2017, respectively, and two Suezmax tankers which completed their respective sales in the first quarter of 2017.
The loss on sale of vessels for the year ended December 31, 2016 primarily relates to the sale of the two MR tankers and the two held for sale Suezmax tankers which were written down to their respective agreed sales prices. Gain on saleprices in the fourth quarter of vessels2016 and which sales were completed in the first quarter of $0.8 million for the year ended December 31, 2015 related to the sale of one MR tanker.2017. Please refer to Item 18 - Financial Statements: Note 2120 - Vessel Sales and Vessel Acquisitions.Sale of Vessels.
Restructuring Charges.Equity (Loss) Income Restructuring charges for 2015 relate to crew redundancy costs incurred due to the change in nationality of crew on one of our vessels, which we recovered from one of our customers..
Equity Income.
The following table reflects our equity (loss) income for 20162017 and 2015,2016,
| | | | Year Ended December 31, | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2016 | | 2015 | 2017 | | 2016 |
| High-Q Joint Venture | 4,359 |
| | 3,218 |
| 3,071 |
| | 4,359 |
|
| Tanker Investments Ltd. | 3,515 |
| | 7,280 |
| (28,443 | ) | | 3,515 |
|
| Teekay Tanker Operations Ltd. | 5,227 |
| | 3,913 |
| |
| Total equity income | 13,101 |
| | 14,411 |
| |
| Gemini Tankers L.L.C. | | 2 |
| | (194 | ) |
| Total equity (loss) income | | (25,370 | ) | | 7,680 |
|
Equity (loss) income decreased to $13.1$(25.4) million in 20162017 from $14.4$7.7 million for 20152016, primarily due to:
a decrease of $3.8$31.9 million primarily due to a $26.7 million net write-down of our investment in TIL to its fair market value in June 2017 and prior to the TIL merger completion and lower equity earnings from Tanker Investments Ltd. (or TIL) resulting from overall lower realized average spot rates earned in 20162017 compared to 2015, partially offset by an increase resulting from our increased ownership interest in TIL to 11.3% in 2016 as compared to 10.2% in 2015;
2016; andpartially offset by
an increasea decrease of $1.3 million due to higherlower equity earnings from our 50% interest in Teekay Tankers Operations Ltd.High-Q Investment Ltd (or TTOL), primarily relating to our share of cancellation fees paid to Anglo-Eastern during the first quarter of 2015 for acquiring its 49% share in Teekay Marine Ltd. and the timing of vessels which transitioned from the Gemini Suezmax pool to the Teekay Suezmax RSA in 2015. This was partially offset by overall lower realized average spot rates earned in 2016 compared to 2015; and
an increase of $1.1 million due to higher equity earnings from the High-QHigh-Q) joint venture primarily resulting from profit share recognized in the second quarter of 2016 as VLCC rates averaged above certain thresholds, triggering a profit sharing with the customer.
Please refer to Item 18 –- Financial Statements: Note 8 –7 - Investments in and Advancesadvances to Equity AccountedEquity-Accounted for Investments.
The High-Q joint venture has an interest rate swap agreement which exchanges a receipt of floating interest for a payment of fixed interest to reduce the joint venture’s exposure to interest rate variability on its outstanding floating rate debt. Our proportionate share of realized and unrealized gains or losses relating to this instrument has been included in the equity income from the High-Q joint venture. For the years ended December 31, 2016 and 2015, our proportionate share of realized losses was $0.2 million and $0.3 million, respectively, and unrealized gains were $0.1 million and $nil, respectively.
Ship-to-ship Transfer Segment
Our ship-to-shipSTS transfer segment consists of our lightering support services, including those services provided to our conventional tanker segment, which includes full service lightering operations, and other lightering support services. Our results for the year ended December 31, 2015, include five months of operations of this segment, from the date of our acquisition of SPT (now referred to as TMS) on July 31, 2015.
The following table presents our operating results for the years ended December 31, 20162017 and 20152016 and compares net revenues, a non-GAAP financial measure, for those periods to revenues, the most directly comparable GAAP financial measure.
| | | | Year Ended December 31, | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2016 | | 2015 | | % Change | |
| (in thousands of U.S. dollars, except percentages) | | 2017 | | 2016 | | % Change |
Revenues (1) | 41,136 |
| | 18,587 |
| | 121 | % | 50,422 |
| | 41,136 |
| | 23 | % |
| Less: voyage expenses | — |
| | (348 | ) | | (100 | )% | — |
| | — |
| | — | % |
| Net revenues | 41,136 |
| | 18,239 |
| | 126 | % | 50,422 |
| | 41,136 |
| | 23 | % |
| Vessel operating expenses | (32,498 | ) | | (14,441 | ) | | 125 | % | (39,649 | ) | | (32,498 | ) | | 22 | % |
| Time-charter hire expense | (2,279 | ) | | (38 | ) | | 5,897 | % | (4,995 | ) | | (2,279 | ) | | 119 | % |
| Depreciation and amortization | (5,125 | ) | | (1,642 | ) | | 212 | % | (5,048 | ) | | (5,125 | ) | | (2 | )% |
| General and administrative expenses | (3,767 | ) | | (1,985 | ) | | 90 | % | (3,340 | ) | | (3,767 | ) | | (11 | )% |
| Gain on sale of vessels | 332 |
| | — |
| | 100 | % | 50 |
| | 332 |
| | (85 | )% |
| Restructuring charge | — |
| | (327 | ) | | (100 | )% | |
| Loss from vessel operations | (2,201 | ) | | (194 | ) | | 1,035 | % | (2,560 | ) | | (2,201 | ) | | 16 | % |
| |
| (1) | Includes $3.2$10.5 million of revenues for the year ended December 31, 2016 (20152017 (2016 - $0.8$3.2 million) relating to lightering support services which the ship-to-shipSTS transfer segment provided to the conventional tanker segment for full service lighteringFSL operations. |
Loss from vessel operations.Net Revenues Loss from vessel operations. Net revenues increased to $50.4 million for 2016the year ended December 31, 2017 compared to 2015$41.1 million for the same period in the prior year. The increase was primarily due to a full operating yearhigher number of TMS, which was acquiredoperations related to our lightering support service operations in the latter half of 2015. The increaseAsia, Middle East and Africa, partially offset by decreases in the number of lightering support operations in 2016 resultedother regions.
Vessel Operating Expenses. Vessel operating expenses increased to $39.6 million for the year ended December 31, 2017 compared to $32.5 million for the same period in higher revenuesthe prior year. The changes in vessel operating expenses were primarily due to increases in equipment mobilization, port costs and expenses; however, a majoritypersonnel expenses in relation to the increase in operational volumes.
Time-charter Hire Expense. Time-charter hire expense increased to $5.0 million for the year ended December 31, 2017 compared to $2.3 million for the same period in the prior year. The increase was due to the addition of this additional volume was inSTS support of the conventional tanker segment’s full servicevessels which we in-chartered to support our lightering operations or other areas which generated lower margins.during the year.
Other Operating Results
The following table compares our other operating results for the years ended December 31, 20162017 and 2015:2016:
| | | | Year Ended December 31, | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2016 | | 2015 | 2017 | | 2016 |
| Interest expense | (29,784 | ) | | (17,389 | ) | (31,294 | ) | | (29,784 | ) |
| Interest income | 117 |
| | 107 |
| 907 |
| | 117 |
|
| Realized and unrealized loss on derivative instruments | (964 | ) | | (1,597 | ) | |
| Other expense | (6,071 | ) | | (3,097 | ) | |
| Realized and unrealized gain (loss) on derivative instruments | | 1,319 |
| | (964 | ) |
| Freight tax and other expenses | | (5,330 | ) | | (7,511 | ) |
| Other income | | 329 |
| | 1,533 |
|
Interest Expense.Expense. Interest expense increased to $31.3 million for 2017 from $29.8 million for 2016, from $17.4 million for 2015, primarily due to additional interest incurred related to finance the acquisitionsale and leaseback of four Suezmax tankers and the completion of the 12 modern Suezmax tankers which were acquiredTIL merger in November 2017, partially offset by higher interest expense incurred in 2016 due to the refinancing of our debt facilities in the latter partfirst quarter of 2015.2016.
Realized and Unrealized LossGain (Loss) on Derivative Instruments. Realized and unrealized lossgain on derivative instruments decreasedincreased to $1.3 million for 2017 compared to a realized and unrealized loss of $1.0 million for 2016 from $1.6 million for 2015.2016. In February 2016, we entered into a total of nine new interest rate swap agreements relating to our new credit facility. Four of the interest rate swaps have notional amounts of $50.0 million each, with fixed rates of 1.462%, and commenced in October 2016. The remaining five interest rate swaps commenced in the first quarter of 2016, of which one swap has a notional amount of $75.0 million, one swap has a notional amount of $50.0 million, and three swaps have notional amounts of $25.0 million each, with fixed-rates of 1.549%, 1.155% and 1.549%, respectively. Some of the interest rate swaps have notional amounts which reduce quarterly.
As at December 31, 2016,2017, we had interest rate swap agreements with aggregate outstanding notional amounts of $400.0$338.8 million with a weighted-average fixed rate of 1.46%. Realized losses on the interest rate swaps increased fromdecreased to $1.0 million in 2017 compared to $12.8 million in 2016 compared to $9.8
million in 2015 primarily due to the termination of an interest rate swap in the first quarter of 2016 and the expiration of the another interest rate swap in October 2016. This was partially offset by the nine new interest rate swap agreements which were entered into in February 2016.
The changes in the fair value of the interest rate swaps resulted in unrealized gains of $13.7$2.1 million and $7.7$13.7 million for the years ended December 31, 20162017 and 2015,2016, respectively, and were primarily due to an increasethe nine interest rate swaps we entered into in the first quarter of 2016, partially offset by increases in our long-term benchmark interest rates partially offset byand the termination of an existing interest rate swap in earlythe first quarter of 2016.
Effective June 1, 2016, we also entered into a time-charter swap for 55% of two Aframax equivalent vessels. Under such agreement, we will receivereceived $27,776 per day, less a 1.25% brokerage commission, and paypaid 55% of the net revenue distribution of two Aframax equivalent vessels employed in our Aframax revenue sharing pooling arrangement,RSA, less $500 per day, for a period of 11 months plus an additional two months at the counterparty's option. As at December 31, 2016,2017, the counter-party option was not exercised resulting in the expiration of the time-charter swap had a fair valueswap. We have recognized an unrealized loss of $0.9 million which resulted in an unrealized gain of $0.9 million. We also recognized realized gains of $2.2 million on the time-charter swap in the year ended December 31, 2016.2017, compared to an unrealized gain of $0.9 million for the same period in the prior year.
In addition, we havehad a stock purchase warrant entitlingwhich had entitled us to purchase up to 750,000 shares of common stock of TIL. The stock purchase warrant had a fair valuewas not exercised and was canceled upon completion of the TIL merger in November 2017. For the year ended December 31, 2017, we recognized an unrealized loss in respect of the stock purchase warrant of $0.3 million as at December 31, 2016 and we recognizedcompared to an unrealized lossesloss of $4.9 million in 2016 compared to an unrealized gain of $0.5 million in 2015.2016.
Please see Item"Item 5 - Operating and Financial Review and Prospects –- Commitments and Contingencies - Valuation of Derivative Instruments,Instruments", which explains how our derivative instruments are valued, including the significant factors and uncertainties in determining the estimated fair value and why changes in these factors result in material changes in realized and unrealized loss or gain on derivative instruments from period to period.
Freight Tax and Other Expense.Expenses Other expense. Freight tax and other expenses was $6.1$5.3 million in 2016,2017, compared to $3.1$7.5 million in 2015.2016. The increasedecrease is primarily due to an increasea decrease in our estimate of freight tax expense as a result of the trading patterns of our fleet, partially offset byfleet.
Other Income. Other income was $0.3 million in 2017, compared to $1.5 million in 2016. The decrease is primarily due to changes in foreign exchange rates.rates related to our freight tax accrual balances.
Net Income.(Loss) Income. As a result of the foregoing factors, we recorded a net loss of $58.0 million for 2017, compared to net income of $62.9$67.8 million for 2016, compared to $179.6 million for 2015.
Year Ended December 31, 2015 versus Year Ended December 31, 2014
The following table presents our operating results for 2015 and 2014 and compares net revenues, a non-GAAP financial measure, for those periods to revenues, the most directly comparable GAAP financial measure.
|
| | | | | | | | | | | | | | | | | |
| | Conventional Tankers | | Ship-to-ship Transfer | | Total |
| | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Revenues (1) | 496,455 |
| | 240,884 |
| | 17,738 |
| | — |
| | 514,193 |
| | 250,002 |
|
| Interest income from investment in term loans | — |
| | 9,118 |
| | — |
| | — |
| | — |
| | — |
|
| Less: voyage expenses | (19,468 | ) | | (11,223 | ) | | (348 | ) | | — |
| | (19,816 | ) | | (11,223 | ) |
| Net revenues | 476,987 |
| | 238,779 |
| | 17,390 |
| | — |
| | 494,377 |
| | 238,779 |
|
Vessel operating expenses (1) | (122,723 | ) | | (98,403 | ) | | (14,441 | ) | | — |
| | (137,164 | ) | | (98,403 | ) |
| Time-charter hire expense | (74,860 | ) | | (22,160 | ) | | (38 | ) | | — |
| | (74,898 | ) | | (22,160 | ) |
| Depreciation and amortization | (72,118 | ) | | (53,292 | ) | | (1,642 | ) | | — |
| | (73,760 | ) | | (53,292 | ) |
| General and administrative | (15,369 | ) | | (12,821 | ) | | (1,985 | ) | | — |
| | (17,354 | ) | | (12,821 | ) |
| Gain on sale of vessels | 771 |
| | 9,955 |
| | — |
| | — |
| | 771 |
| | 9,955 |
|
| Restructuring charge | (4,445 | ) | | — |
| | (327 | ) | | — |
| | (4,772 | ) | | — |
|
| Income (loss) from vessel operations | 188,243 |
| | 62,058 |
| | (1,043 | ) | | — |
| | 187,200 |
| | 62,058 |
|
| Equity income | 14,411 |
| | 5,228 |
| | — |
| | — |
| | 14,411 |
| | 5,228 |
|
| |
(1) | Excludes $0.8 million of revenues and vessel operating expenses for the year ended December 31, 2015 relating to lightering support services which the ship-to-ship transfer segment provided to the conventional tanker segment for full service lightering operations. |
Fleet and TCE Rates
As at December 31, 2015, we owned 45 double-hulled conventional oil tankers, time-chartered in ten Aframax tankers and three LR2 product tankers from third parties and owned a 50% interest in one VLCC. The number of vessels we own, as well as our financial and operational results, includes the Entities under Common Control in all relevant periods presented. Please read Item 18 – Financial Statements: Note 3 – Acquisition of Entities under Common Control included in the notes to our consolidated financial statements included in this Annual Report.
As defined and discussed above, we calculate TCE rates as net revenue per revenue day before related-party pool management fees and pool commissions, and off-hire bunker expenses. The following table outlines the average TCE rates earned by vessels for 2015 and 2014:
|
| | | | | | | | | | | | | | | | | |
| | Conventional Tanker Segment |
| | Year Ended December 31, 2015 |
| | Revenues (1) | Voyage Expenses | Adjustments (2) | Net Revenues | Revenue Days | Average TCE per Revenue Day (2) |
| | (in thousands) | (in thousands) | (in thousands) | (in thousands) | | |
| | | | | | | |
| Voyage-charter contracts - Suezmax |
| $154,579 |
|
| ($2,568 | ) |
| $5,702 |
|
| $157,713 |
| 4,021 |
|
| $39,217 |
|
Voyage-charter contracts - Aframax (3) |
| $158,783 |
|
| ($13,683 | ) |
| $4,214 |
|
| $149,314 |
| 4,800 |
|
| $31,109 |
|
| Voyage-charter contracts - LR2 |
| $79,158 |
|
| ($342 | ) |
| $3,042 |
|
| $81,858 |
| 2,845 |
|
| $28,777 |
|
| Voyage-charter contracts - MR |
| $19,346 |
|
| ($61 | ) |
| $1,088 |
|
| $20,373 |
| 960 |
|
| $21,205 |
|
| Time-charter out contracts - Suezmax |
| $14,235 |
|
| ($278 | ) |
| $317 |
|
| $14,274 |
| 483 |
|
| $29,577 |
|
Time-charter out contracts - Aframax (4) |
| $54,550 |
|
| ($2,337 | ) |
| $1,796 |
|
| $54,009 |
| 2,864 |
|
| $18,835 |
|
| Time-charter out contracts - LR2 |
| $4,607 |
|
| ($132 | ) |
| $5 |
|
| $4,480 |
| 175 |
|
| $25,623 |
|
| Time-charter out contracts - MR |
| $6,427 |
|
| ($66 | ) |
| ($4,391 | ) |
| $1,970 |
| 50 |
|
| $39,036 |
|
Total (1) |
| $491,685 |
|
| ($19,467 | ) |
| $11,773 |
|
| $483,991 |
| 16,198 |
|
| $29,875 |
|
| |
(1) | Excludes $4.8 million of in-process revenue contract revenue. |
| |
(2) | Average TCE per Revenue Day excludes a total of $12.6 million in pool management fees and commissions payable for commercial management for our vessels, $4.4 million of crew redundancy costs recovery from one of our customers and $3.7 million in off-hire bunker and other expenses, all of which are included as part of the adjustments. |
| |
(3) | Includes $15.0 million of revenues and $5.8 million of voyage expenses related to the full service lightering business. |
| |
(4) | Net revenues and average TCE per revenue day in 2015 include $1.4 million related to the Entities under Common Control. |
|
| | | | | | | | | | | | | | | | | |
| | Conventional Tanker Segment |
| | Year Ended December 31, 2014 |
| | Revenues | Voyage Expenses | Adjustments (1) | Net Revenues | Revenue Days | Average TCE per Revenue Day (1) |
| | (in thousands) | (in thousands) | (in thousands) | (in thousands) | | |
| | | | | | | |
| Voyage-charter contracts - Suezmax |
| $64,599 |
|
| ($459 | ) |
| $3,081 |
|
| $67,221 |
| 2,926 |
|
| $22,976 |
|
| Voyage-charter contracts - Aframax |
| $39,498 |
|
| ($3,784 | ) |
| $2,063 |
|
| $37,777 |
| 1,692 |
|
| $22,321 |
|
| Voyage-charter contracts - LR2 |
| $29,008 |
|
| $71 |
|
| $1,215 |
|
| $30,294 |
| 1,698 |
|
| $17,842 |
|
| Voyage-charter contracts - MR |
| $9,253 |
|
| ($22 | ) |
| $597 |
|
| $9,828 |
| 697 |
|
| $14,108 |
|
| Voyage-charter contracts - VLCC |
| $4,315 |
|
| ($3,025 | ) |
| $33 |
|
| $1,323 |
| 96 |
|
| $13,805 |
|
| Time-charter out contracts - Suezmax |
| $13,728 |
|
| ($75 | ) |
| $74 |
|
| $13,727 |
| 676 |
|
| $20,292 |
|
| Time-charter out contracts - Aframax |
| $66,974 |
|
| ($3,766 | ) |
| $1,978 |
|
| $65,186 |
| 3,658 |
|
| $17,819 |
|
| Time-charter out contracts - MR |
| $13,509 |
|
| ($163 | ) |
| ($176 | ) |
| $13,170 |
| 365 |
|
| $36,081 |
|
Total (2) |
| $240,884 |
|
| ($11,223 | ) |
| $8,865 |
|
| $238,526 |
| 11,808 |
|
| $20,200 |
|
| |
(1) | Average TCE per Revenue Day excludes a total of $7.1 million in pool management fees and commissions payable for commercial management for our vessels and $1.8 million in off-hire bunker and other expenses, all of which are included as part of the adjustments. |
| |
(2) | Excludes interest income from investment in term loans of $9.1 million. |
Net Revenues. Net revenues increased to $494.4 million for 2015 from $238.8 million for 2014 primarily due to:2016.
a net increase of $144.0 million resulting from the addition of 11 Suezmax tankers (excluding one which is currently in drydock), one Aframax tanker and four LR2 product tankers acquired in 2015, the addition of two in-chartered Aframax tankers and one LR2 product tanker in 2015, the addition of two Aframax tankers owned by Entities under Common Control, the addition of seven in-chartered Aframax tankers and four in-chartered LR2 product tankers in 2014, partially offset by the addition of two VLCCs in March 2014 that were subsequently sold to TIL in May 2014 and the sale of a MR product tanker in 2015;
an increase of $46.2 million resulting from higher average realized rates earned by our Suezmax tankers in 2015 compared to 2014;
an increase of $26.6 million resulting from the acquisition of SPT during 2015, of which $9.2 million is related to full service lightering operations that are included as part of our conventional tanker segment;
an increase of $18.5 million resulting from higher average realized rates earned by our LR2 product tankers in 2015 compared to 2014;
an increase of $13.6 million resulting from higher average realized rates earned by our Aframax tankers in 2015 compared to 2014;
a net increase of $13.4 million resulting from various vessels changing employment between fixed-rate charters and voyage charters;
an increase of $4.8 million resulting from in-process revenue contract amortization we recognized in revenue in 2015;
an increase of $4.7 million resulting from higher average realized rates earned by our MR product tankers in 2015 compared to 2014; and
an increase of $4.4 million resulting from redundancy costs for Australian seafarers that we recovered from our customer upon expiration of a time-charter out contract of a MR product tanker in 2015;
partially offset by
a decrease of $9.1 million due to the interest income we recognized on our investments in term loans in 2014;
a net decrease of $6.6 million due to higher management fees, commissions, off-hire bunker expense and other expenses in 2015 compared to 2014; and
a net decrease of $4.9 million due to more off-hire days in 2015 compared to 2014, primarily as a result of higher drydocking activity.
Vessel Operating Expenses. Vessel operating expenses increased to $137.2 million for 2015 from $98.4 million for 2014 primarily due to:
an increase of $24.3 million resulting from the addition of 11 modern Suezmax tankers (excluding one which is currently in drydock), one Aframax tanker and four LR2 product tankers acquired in 2015;
an increase of $13.7 million due to additional expenditures associated with the ship-to-ship business we acquired during the second half of 2015;
an increase of $5.4 million relating to the timing and extent of planned vessel maintenance and repairs;
an increase of $2.3 million due to higher ship management fees relating to the 16 vessels and the ship-to-ship transfer business acquired in 2015;
an increase of $1.0 million due to the additional expenditures assumed from the Entities under Common Control; and
an increase of $0.2 million due to higher port costs and fleet overhead costs related to the timing of seafarer training and other initiatives;
partially offset by
decreases of $5.7 million due to lower crewing costs resulting from a change in the nationality of crew on an MR product tanker as well as favorable current year foreign currency exchange rates impacting crew wage expenditures; and
a decrease of $2.3 million due to repairs on a Suezmax tanker which was incurred during 2014.
Time-charter Hire Expense. Time-charter hire expense increased to $74.9 million for 2015 from $22.2 million for 2014 due to the addition of two in-chartered Aframax tankers and one LR2 tankers to our fleet in the year ended December 31, 2015, additional time charters from external parties in connection with our ship-to-ship transfer business we acquired in July 2015, higher time-charter rates due to profit sharing components and options we exercised to extend certain in-chartered contracts at higher rates, and the timing of eight time-charter contracts which we entered into during the latter half of 2014. This was partially offset by a decrease as a result of two previously in-chartered LR2 product tankers which we acquired in February 2015 and a decrease resulting from the addition of the Entities under Common Control as we acquired one previously in-chartered vessel as part of the 2015 Acquired Business.
Depreciation and Amortization. Depreciation and amortization increased to $73.8 million for 2015 from $53.3 million for 2014. The increase primarily relates to the addition of 12 Suezmax tankers, one Aframax tankers and four LR2 product tankers acquired in 2015, the acquisition of the ship-to-ship transfer business in July 2015, and higher amortization of dry-docking expenditures in 2015 as compared to the prior year.
General and Administrative Expenses. General and administrative expenses increased to $17.4 million for 2015 compared to $12.8 million for 2014, primarily due to:
an increase of $2.8 million as a result of higher corporate expenses incurred during 2015 primarily as a result of legal expenses related to the STX arbitration (please read Item 18 – Financial Statements: Note 22 – Shipbuilding Contracts) and legal expenses incurred related to the acquisitions of vessels and the ship-to-ship business in 2015;
a net increase of $1.9 million due to additional general and administrative expenses related to the ship-to-ship business acquired in July 2015; and
an increase of $0.3 million due to increased stock-based compensation granted to our Board of Directors, one of our officers and certain employees of Teekay subsidiaries that provided services to us;
partially offset by
a net decrease of $0.3 million due to lower administrative, strategic management, and other fees incurred; and
a decrease of $0.2 million due to lower expenses in the Entities under Common Control in 2015 compared to 2014.
Gain on Sale of Vessels. Gain on sale of vessels of $0.8 million for the year ended December 31, 2015 related to the sale of the Mahanadi Spirit with a sale price of $11.2 million.
Gain on sale of vessels of $10.0 million for the year ended December 31, 2014 related to the sale of two wholly-owned subsidiaries, each of which owned one VLCC, to Tanker Investments Ltd. (or TIL) for aggregate proceeds of $154.0 million plus related working capital on closing.
Restructuring Charges. Restructuring charges for 2015 relate to severance payments made during the year in relation to the acquisition of the ship-to-ship transfer business as well as crew redundancy costs due to the change in nationality of crew on one of our vessels which we recovered from one of our customers.
Equity Income.
|
| | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2015 | | 2014 |
| High-Q Joint Venture | 3,218 |
| | 2,702 |
|
| Tanker Investments Ltd. | 7,280 |
| | (184 | ) |
| Dilution gain in respect of the Initial Public Offering of Tanker Investments Ltd. | — |
| | 2,054 |
|
| Teekay Tanker Operations Ltd. | 3,913 |
| | 656 |
|
| Total equity income | 14,411 |
| | 5,228 |
|
Equity income increased to $14.4 million in 2015 from $5.2 million for 2014 primarily due to:
an increase of $5.4 million due to higher equity earnings from TIL resulting from overall higher realized average spot rates earned in 2015 compared to 2014, its acquisition of six Suezmax vessels delivered during 2015 and one Aframax vessel delivered during 2014, partially offset by a decrease relating to a dilution gain recorded in 2014 resulting from our reduced ownership interest in TIL from TIL’s share issuance completed as part of its initial public offering (or IPO) in 2014;
an increase of $3.3 million due to a full year of earnings from our 50% interest in TTOL, which we acquired in 2014; and
an increase of $0.5 million due to higher equity earnings from the High-Q joint venture resulting from higher unrealized gain on derivatives recognized in 2015 compared to 2014.
Please refer to Item 18 – Financial Statements: Note 8 – Investments in and Advances to Equity Accounted Investments.
The High-Q joint venture has an interest rate swap agreement which exchanges a receipt of floating interest for a payment of fixed interest to reduce the joint venture’s exposure to interest rate variability on its outstanding floating rate debt. Our proportionate share of realized and unrealized gains or losses relating to this instrument has been included in the equity income from the High-Q joint venture. For the years ended December 31, 2015 and 2014, our proportionate share of realized losses was $0.3 million and $0.4 million, respectively, and unrealized losses were $nil.
Other Operating Results
The following table compares our other operating results for the years ended December 31, 2015 and 2014:
|
| | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2015 | | 2014 |
| Interest expense | (17,389 | ) | | (9,128 | ) |
| Interest income | 107 |
| | 287 |
|
| Realized and unrealized loss on derivative instruments | (1,597 | ) | | (1,712 | ) |
| Other (expenses) income | (3,097 | ) | | 3,805 |
|
Interest Expense. Interest expense increased to $17.4 million for 2015 from $9.1 million for 2014, primarily due to additional interest incurred from two new term loan facilities which were drawn in 2015 to finance the acquisition of the 12 modern Suezmax tankers, one Aframax tanker and four LR2 product tankers that we acquired during 2015.
Realized and Unrealized Loss on Derivative Instruments. Realized and unrealized loss on derivative instruments decreased to $1.6 million for 2015 from $1.7 million for 2014. Realized and unrealized loss on derivative instruments is comprised of realized and unrealized gains or losses on our interest rate swaps and unrealized gains or losses on a stock purchase warrant issued to us by TIL.
Realized and unrealized losses on interest rate swaps were $2.1 million for the year ended December 31, 2015, compared to $2.9 million for the year ended December 31, 2014. During 2015 and 2014, we had interest rate swap agreements with aggregate average outstanding notional amounts of approximately $300.0 million and with weighted average fixed rate of approximately 3.59%. Short-term variable benchmark interest rates during these periods were generally less than 1.0%. As a result, we incurred realized losses of $9.8 million and $10.0 million for the years ended December 31, 2015 and 2014, respectively, under the interest rate swap agreements.
The changes in the fair value of the interest rate swaps resulted in unrealized gains of $7.7 million and $7.1 million for the years ended December 31, 2015 and 2014, respectively, due to an increase in long-term benchmark interest rates in both years.
In addition to our interest rate swaps, we have a stock purchase warrant entitling us to purchase up to 750,000 shares of common stock of TIL. The stock purchase warrant had a fair value of $5.2 million and $4.7 million as of December 31, 2015 and 2014, respectively. We recognized an unrealized gain of $0.5 million and $1.2 million for the years ended December 31, 2015 and 2014, respectively.
Please see Item 5 - Operating and Financial Review and Prospects – Valuation of Derivative Instruments, which explains how our derivative instruments are valued, including the significant factors and uncertainties in determining the estimated fair value and why changes in these factors result in material changes in realized and unrealized loss or gain on derivative instruments from period to period.
Other (Expenses) Income. Other expenses was $3.1 million in 2015, compared to other income of $3.8 million in 2014. The decrease primarily relates to income of $3.4 million which we recognized upon receipt of the TIL stock purchase warrant in the first quarter of 2014 for our involvement in the formation of TIL and an increase of $3.3 million in our estimate of freight tax expenses for the year ended December 31, 2015 due to higher vessel activity as compared to the prior year.
Net Income. As a result of the foregoing factors, we recorded net income of $179.6 million for 2015, compared to $60.5 million for 2014.
Liquidity and Capital Resources
Liquidity and Cash Needs
Our primary sources of liquidity are cash and cash equivalents, cash flows provided by our operations, our undrawn credit facilities, proceeds from sales of vessels, and capital raised through financing transactions. As at December 31, 2016,2018, our total cash and cash equivalents were $68.1$54.9 million, compared to $96.4$71.4 million at December 31, 2015.2017. Our cash balance at December 31, 20162018 had decreased primarily as a result of repayments of our long-term debt, (described below) andrepayments of our obligations related to our capital leases, dividends paid on our shares of common stock, which werecapital expenditures due to dry-docking activities and increases in working capital balances, partially offset by cash flow from our operations byand proceeds received from the salesale-leaseback of two MR tankers and two lightering support10 vessels and distributions we received from our equity accounted investments.in 2018.
Our total consolidated liquidity, including cash, cash equivalents and undrawn credit facilities, was $102.4$66.7 million as at December 31, 2016,2018, compared to $111.0$160.0 million as at December 31, 2015.2017. In addition, as at December 31, 2018, one of our subsidiaries had up to $40 million of available aggregate borrowings available under a working capital loan we entered into in late-2018 for our RSA commercial management pool operations. A portion of the proceeds from this loan will be used to provide working capital in relation to certain vessels trading in the RSAs and to fund pooling operations. We anticipate that our primary sources of funds for our short-term liquidity needs will be cash flows from operations based on an expected tanker market recovery, existing cash and cash equivalents and undrawn long-term borrowings, or refinancing existing loans and proceeds of new financings, or equity issuances, which we believe will be sufficient to meet our existing liquidity needs for at least the next 12 months. Potential additional sources of liquidity include the sale-leasebacks of additional vessels, some of the net proceeds of which would be used to prepay a portion of another loan facility, and the proceeds of a loan to finance working capital, mentioned above. Please read "Item 1 - Financial Statements: Note 18 - Liquidity."
Two of our term loans, with an aggregate outstanding balance of $166.4 million as at December 31, 2018, are guaranteed by Teekay and contain certain covenants. Please read "Item 18 - Financial Statements: Note 10 - Long-term Debt" in the notes to our consolidated financial statements included in this Annual Report. As part of our assessment of our liquidity, we have considered Teekay’s ability to comply with the covenants of these term loans for the one-year period following the issuance of our consolidated financial statements. Teekay has informed us that it expects it will comply with all required covenants and have sufficient liquidity to continue as a going concern for at least the one-year period following the issuance of Teekay’s consolidated financial statements, taking into account Teekay's plans to refinance its senior
notes coming due in January 2020. Consequently, we do not expect any negative impact on our liquidity as a result of Teekay’s obligations under the two term loans.
Our short-term liquidity requirements include the payment of operating expenses, dry-docking expenditures, debt servicing costs, dividends on our shares of common stock, scheduled repayments of long-term debt, scheduled repayments of our obligations related to capital leases, as well as funding our other working capital requirements. Our short-term charters and spot market tanker operations contribute to the volatility of our net operating cash flow, and thus impact our ability to generate sufficient cash flows to meet our short-term liquidity needs. Historically, the tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, tanker spot markets historically have exhibited seasonal variations in charter rates. Tanker spot markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling.
FromEffective May 2018, we eliminated the first quarter of 2013 to the dividend paid in the fourth quarter of 2015, we distributed a portionpayment of our cash flow to shareholders through a fixedminimum quarterly dividend of $0.03 per share onin order to preserve liquidity during the cyclical downturn of the tanker spot market. Under our common shares. Commencing with therevised dividend paid in the first quarter of 2016, we have adopted a new dividend policy, under which quarterly dividends are expected to range from 30% to 50% of our quarterly adjusted net income, subject to reserves our Board of Directors may determine are necessary for the prudent operations of the company. Dividend payments are subject to the discretion of our Board of Directors, with a minimum quarterly dividend of $0.03 per share. and the policy remains subject to change. Adjusted net (loss) income is a non-GAAP measure which excludes specific items affecting net income (loss) that are typically excluded by securities analysts in their published estimates of our financial results. Specific items affecting net income (loss) include, among others, foreign exchange gain or losses, unrealized gains or losses on derivative instruments gainand gains or losses on sale of vessels and debt issuance costs which were written off in connection with the refinancing of our debt facilities in the first quarter of 2016.
vessels.
Our long-term capital needs are primarily for capital expenditures and debt repayment.repayment of our loan facilities and obligations related to capital leases. Generally, we expect that our long-term sources of funds will be cash balances, cash flows from operations, long-term bank borrowings and other debt or equity financings, which includes equity issuances from our COP.financings. We expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and expansion capital expenditures.expenditures, including opportunities we may pursue to purchase additional vessels.
In October 2016, we agreedNovember 2018, one of our wholly-owned subsidiaries entered into a working capital loan facility agreement, which provides available aggregate borrowings of up to sell two Suezmax tankers$40.0 million for the subsidiary, with the option to increase the facility up to an aggregate sales price of $33.8additional $15.0 million. The saleloan facility has an initial maturity date of one Suezmax tankersix months after the first utilization date but shall be continually extended for further periods of six months thereafter unless and until the lender gives notice in writing that no further extensions shall occur. As at December 31, 2018, no amounts had been drawn under this facility.
In November 2018, we completed an $84.7 million sale-leaseback financing transaction relating to four of our vessels. The transaction was completedstructured as 10 to 12-year bareboat charters with an average rate of approximately $6,400 per day, with purchase options for all four vessels throughout the lease term beginning in January 2017 and the sale of the other Suezmax tanker was completed in March 2017.November 2021. We used the proceeds from these salesthis transaction to refinance one of our corporate revolvers, which matured in November 2018, and to prepay a portion of one of our corporate revolving credit facilities.
In September 2018, we completed a $156.6 million sale-leaseback financing transaction relating to six of our vessels. The transaction was structured as nine to 10-year bareboat charters with an average rate of approximately $9,900 per day, with purchase options for all six vessels throughout the lease term beginning in September 2020 and an obligation to purchase the vessels on maturity of the bareboat charters. We used the proceeds from this transaction to repay a portion of one of our corporate revolving credit facility, which is scheduled to mature in 2017. As at December 31, 2016, the revolving credit facility had an outstanding balance of $55.1 million.
In January 2016, we entered into a new $894.4 million long-term debt facility, consisting of both a term loan and a revolving credit facility, which is scheduled to mature in January 2021, of which $845.8 million was used to repay our two bridge loan facilities, which matured in late January 2016, and a portion of our main corporate revolving credit facility, which was scheduled to mature in 2017.facilities.
Our obligations related to capital leases are described in Item 18 - Financial Statements: Note 11 - Leases, and our revolving credit facilities and term loans are described in Item 18 –- Financial Statements: Note 10 - Long-TermLong-term Debt in the notes to our consolidated financial statements included in this Annual Report. Our obligations related to capital leases require us to maintain minimum levels of cash and aggregate liquidity. Our revolving credit facilities and term loans contain covenants and other restrictions that we believe are typical of debt financing collateralized by vessels, including those that restrict the relevant subsidiaries fromfrom: incurring or guaranteeing additional indebtedness,indebtedness; making certain negative pledges or granting certain liens,liens; and selling, transferring, assigning or conveying assets. In addition, an event of default of our term loans will occur if any financial indebtedness of Teekay in excess of the covenant requirement is not paid when due. In the future, some of the covenants and restrictions in our financing agreements could restrict the use of cash generated by ship-owning subsidiaries in a manner that could adversely affect our ability to pay dividends on our common stock. However, we currently do not currently expect that these covenants will have such an effect. Our revolving credit facilities and term loans require us to maintain financial covenants.covenants, which are described in further detail in Item 18 - Financial Statements: Note 10 - Long-Term Debt included in this Annual Report. Should we not meet these financial covenants, the lender may declare our obligations under the agreements immediately due and payable and terminate any further loan commitments, which would significantly affect our short-term liquidity requirements. As at December 31, 2016,2018, we and Teekay were in compliance with all covenants relating to our revolving credit facilities, term loans and obligations related to capital leases. Teekay also advised us that, as at December 31, 2018, it was in compliance with all covenants relating to the credit facilities and term loans.loans to which we are party to.
We are exposed to market risk from changes in interest rates, foreign currency fluctuations and spot market rates. We use interest rate swaps to manage interest rate risk. We do not use this financial instrument for trading or speculative purposes.
Passage of any climate control legislation or other regulatory initiatives that restrict emissions of greenhouse gases could have a significant financial and operational impact on our business, which we cannot predict with certainty at this time. Such regulatory measures could increase our costs related to operating and maintaining our vessels and require us to install new emission controls, acquire allowances or pay taxes related to our greenhouse gas emissions, or administer and manage a greenhouse gas emissions program. In addition, increased regulation of greenhouse gases may, in the long-term, lead to reduced demand for oil and reduced demand for our services.
Cash Flows
The following table summarizes our sources and uses of cash for the periods presented:
|
| | | | | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2016 | | 2015 | | 2014 |
| Net cash flow from operating activities | 209,976 |
| | 166,789 |
| | 20,940 |
|
| Net cash flow (used for) provided by financing activities | (275,109 | ) | | 648,800 |
| | 6,405 |
|
| Net cash flow provided by (used for) investing activities | 36,824 |
| | (881,969 | ) | | 109,806 |
|
|
| | | | | | | | |
| | Year Ended December 31, |
| (in thousands of U.S. dollars) | 2018 | | 2017 | | 2016 |
| Net cash flow (used for) provided by operating activities | (7,263 | ) | | 80,489 |
| | 206,546 |
|
| Net cash flow used for financing activities | (3,448 | ) | | (178,466 | ) | | (290,853 | ) |
| Net cash flow (used for) provided by investing activities | (4,492 | ) | | 78,780 |
| | 21,824 |
|
Operating Cash Flows
Changes in net cash flow from operating activities primarily reflect fluctuationschanges in spot tankerrealized TCE rates, changechanges in interest rates, fluctuations in working capital balances, the timing and the amount of dry-docking expenditures, repairs and maintenance activities, and vessel additions and dispositions. Our exposure to the spot tanker market has contributed significantly to historical fluctuations in operating cash flows historically as a result of highly cyclical spot tanker rates.
Net cash flow provided by operating activities increased to $210.0decreased by $87.8 million in 2016,for the year ended December 31, 2018, compared to $166.8 millionthe same period in 2015,the prior year. This decrease was primarily as a result of the following:due to:
a net increasedecrease of $70.4$61.5 million in operating cash flows in 20162018 due to the timing of the settlement of operating assets and liabilities, primarily as a resultrelated to the timing of the decrease insettlements of our pool receivables and due to lower TCE rates in late 2016affiliates accounts compared to the prior year; and
an increasea decrease of $31.0$13.9 million in operating cash flows in 20162018 relating to lowerhigher expenditures onfor dry-docking activities. In 2016,2018, we dry docked twofive Suezmax tankers and three Aframax tankers, whereas in 20152017, we dry docked seventhree Suezmax tankers seven LR2 product tankers, twoand four Aframax tankers,tankers; and two MR tankers.
partially offset by
a net decrease of $58.2$12.3 million in operating earnings in 2018 primarily due to the expiry of time-charter out contracts for various vessels which subsequently traded on spot voyages at lower average realized rates, partially offset by lower operating losses in 2018 as a result of the vessel sales in 2017.
Net cash flow provided by operating activities decreased by $126.1 million for the year ended December 31, 2017, compared to the same period in the prior year. This decrease was primarily due to:
a net decrease of $97.2 million in operating earnings in 2017 primarily as a result of lower average realized TCE rates, partially offset by the increaseexpiry of time-charter out contracts for various vessels which subsequently traded on spot voyages at lower average realized rates and more vessels which transitioned from voyage charter to full service lightering employment in fleet size in 2016 as2017 compared to the prior year.
Net cash flow provided by operating activities increased to $166.8 million in 2015, compared to $20.9 million in 2014, primarily as a result of the following:
2016;
a net increasedecrease of $143.4 million in operating earnings primarily as a result of an increase in our fleet size (due to the acquisition of 12 modern Suezmax vessels, four LR2 product tankers, and one Aframax tanker, the addition of two Aframax tankers from the Entities under Common Control, and the chartering-in of an additional nine vessels), operating earnings associated with the ship-to-ship transfer business we acquired during the second half of 2015, and higher average realized TCE rates due to our increased exposure to the spot market; and
a net increase of $25.0$23.4 million in operating cash flows in 2017 due to the timing of the settlement of operating assets and liabilities;
liabilities, primarily resulting from lower settlements of our pool receivables due to changes in the average realized TCE rates in 2017 compared to the prior year and higher settlements of our due to affiliates accounts, partially offset by the timing of our 2016 first quarter dividends which were declared at the end of 2015; and
a decrease of $22.5$5.5 million in operating cash flows in 2017 relating to higher expenditures onfor dry-docking activities in 2015.activities. In 2015,2017, we dry docked seventhree Suezmax tankers seven LR2 product tankers, twoand four Aframax tankers, and two MR tankers, whereas in 2014,2016 we dry docked seven Aframax tankers, one MR and onetwo Suezmax tanker.tankers.
Financing Cash Flows
Net cash used for financing activities was $275.1decreased by $175.0 million in 2016,for the year ended December 31, 2018, compared to net cash provided by financing activities of $648.8 millionthe same period in 2015,the prior year. This decrease was primarily as a result of the following:due to:
an increasea net decrease of $692.9$186.6 million in cash outflows primarily due to an increasea net decrease in repayments and prepayments on our term loans and revolving credit facilities, compared to 2015;partially offset by the proceeds received from the two sale-leaseback financing transactions which completed in 2018; and
a net decrease of $202.8$12.6 million in cash outflows related to lower cash dividends paid during 2018, as a result of changes to our dividend policy;
partially offset by
a decrease of $13.5 million in cash inflows due to lowerfrom proceeds received from equity offerings, in 2016 compared with 2015, including the effect of the 2015 issuances of shares under private placements to partially fund the acquisition of the 12 Principal Maritime vessels and the ship-to-ship transfer business in 2015, substantially lower sales of Class A common stock during 2016 under our continuous offering program (or COP) and proceeds from the underwriters' exercisean issuance of their over-allotment option in January 2015 for an additional 3.02.2 million shares of Class A common stock;stock to Teekay; and
an increase of $31.7$10.9 million in cash outflows due to the scheduled payments on our capital lease obligations which we entered into in July 2017, September 2018 and November 2018.
Net cash used for financing activities decreased by $112.4 million for the year ended December 31, 2017, compared to the same period in the prior year. This decrease was primarily due to:
a net decrease of $68.8 million in cash outflows due to a decrease in repayments and prepayments on our term loans and revolving credit facilities, partially offset by the 2016 refinancing of our long-term debt facilities and the 2017 sale-leaseback financing transaction;
a decrease of $26.2 million in cash outflows related to additionallower cash dividends paid during 2016 due to the change in2017, resulting from lower earnings as our dividend policy andis based on adjusted net (loss) income, partially offset by the increase in the number of our shares of outstanding Class A and B common stock from issuances of our 2015 issuances;
partially offset byshares in 2016 and 2017;
a decrease of $3.5$15.0 million in cash used for financing activities fromoutflows, related to the return of capital in 2016 by the Entities under Common Control.Control to Teekay; and
Net cash provided by financing activities increased to $648.8an increase of $6.0 million in 2015, compared to $6.4 million in 2014, primarily as a result of the following:
a net increase of $545.6 million in proceeds from additional borrowings, including a new term loan facility of $397.2 million to finance the acquisition of 12 modern Suezmax tankers and a new term loan facility of $126.6 million to finance the acquisition of four LR2 product tankers and one Aframax tanker, net of repayments and prepayments on our term loans and revolving credit facilities; and
a net increase in financing cash inflows of $131.1 million infrom proceeds related toreceived from equity offerings, including our COP which we relaunched in November 2016 and proceeds from an additional 19.7issuance of 2.2 million shares of Class A common stock issued to Teekay Corporation and a group of institutional investors to partially fund the acquisition of 12 Principal Maritime vessels, an additional 13.4 million shares of Class A common stock issued under our COP, an additional 6.5 million shares of Class B common stock issued to Teekay Corporation in order to finance the acquisition of SPT, and an additional 3.0 Class A common stock issued in January 2015;
Teekay;
partially offset by
a net increase of $28.1 million in cash used for financing activities from the Entities under Common Control;
an increase of $5.0$4.1 million in cash outflows related to additional cash dividends paid during 2015 due to an increasethe scheduled payments on our capital lease obligations which we entered into in the number of shares of outstanding Class A and B common stock from our 2015 issuances; and
an increase of cash outflow of $1.3 million related to an equity contribution from Teekay to indemnify the costs required to repair the Kaveri Spirit in 2014.
July 2017.Investing Cash Flows
Net cash provided by investing activities decreased by $83.3 million for the year ended December 31, 2018, compared to the same period in the prior year. This decrease was primarily due to:
a decrease of $51.5 million in cash inflows related to the sales of one lightering support vessel during the year ended December 31, 2018, compared to the sales of two Suezmax tankers and three Aframax tankers for the prior year;
a decrease of $30.8 million in cash inflows related to cash acquired, net of transaction costs, in the TIL merger in 2017; and
an increase of $1.1 million in cash outflows due to higher capital expenditures for the fleet for the year ended December 31, 2018 as compared to the prior year.
Net cash provided by investing activities was $36.8increased by $57.0 million in 2016,for the year ended December 31, 2017, compared to net cash used for investing activities of $882.0 millionthe same period in the prior year,year. This increase was primarily as a result of the following:due to:
a decreasenet increase of $30.8 million in cash outflows of $612.0 million related to the cash consideration paid to acquire the 12 modern Suezmax vessels from Principal Maritime Tankers in 2015;
a decrease of cash outflows of $227.0 million related to the acquisition of four LR2 product tankers and one Aframax tanker in 2015 as well as other capital expenditures made during the year;
a decrease of cash outflows of $45.6 million,acquired, net of working capital adjustments, related totransaction costs, in the acquisition of TMS in 2015;TIL merger;
an increase of $24.6 million in cash inflows of $16.5 million related to gross proceeds received fromthe sales of two Suezmax tankers, three Aframax tankers and one lightering support vessel during the year ended December 31, 2017, compared to the sale of two MR tankers and two lightering support vessels which were soldfor the same period in the second halfprior year; and
a decrease of 2016;$4.5 million in cash outflows due to fewer capital expenditures for the fleet for the year ended December 31, 2017 as compared to the prior year;
an increase
partially offset by
a decrease of $3.0 million in cash inflows of $15.2 million primarily related to the return of capital received in 2016 from our investment in TTOL; and
an increase of cash inflows of $2.5 million related to the 2016 repayment of a loan repayments to us from our High-Q joint venture.
Net cash used for investing activities increased to $882.0 million in 2015, compared to net cash provided by investing activities of $109.8 million in the prior year, primarily as a result of the following:
an increase of cash outflows of $612.0 million related to the cash consideration paid to acquire the 12 modern Suezmax vessels from Principal Maritime Tankers in 2015;
an increase of cash outflows of $230.4 million related to the acquisition of four LR2 product tankers and one Aframax tanker in 2015 as well as other capital expenditures made during the year;
a decrease of cash inflows of $154.0 million related to gross proceeds from the sale of two wholly-owned subsidiaries, each of which owned one VLCC, to TIL in May of 2014;
an increase of cash outflows of $45.6 million, net of working capital adjustments, related to the acquisition of TMS in 2015;
a decrease of cash inflows of $1.2 million related to the term loan advance recoveries received in 2014; and
a decrease of cash inflows of $1.0 million related to the 2014 net loan repayment from the High-Q joint venture;
partially offset by
a net decrease of cash outflows of $41.3 million related to investments in and advances to equity accounted investments. In 2014 we invested $35.0 million in common shares of TIL (2015 - $nil) and paid $6.5 million in connection with the purchase of our investment in TTOL (2015 - $0.2 million); and
an increase in cash inflows of $11.1 million related to gross proceeds from the sale of one MR tanker in 2015.
Please read Item 18 – Financial Statements: Note 67 – Investment in Term Loans and Note 8 - Investments in and advances to equity accounted investmentsEquity-Accounted for Investments for specific details on our equity-accounted for investment in term loans and 50/50 joint venture activities included in the notes to our consolidated financial statements attachedincluded in this Annual Report.
Commitments and Contingencies
The following table summarizes our long-term contractual obligations as at December 31, 2016:2018:
| | | | Total | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Beyond 2023 |
| (in millions of U.S. dollars) | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Dollar-Denominated Obligations | | | | | | | | | | | | | | | | | | | | | | | | |
Scheduled repayments of revolving facilities, term loans and other debt (1) | 455.0 |
| | 122.3 |
| | 110.1 |
| | 110.0 |
| | 110.0 |
| | 2.6 |
| 266.7 |
| | 106.7 |
| | 118.6 |
| | 28.8 |
| | 12.6 |
| | — |
| | — |
|
Repayments at maturity of revolving facilities, term loans and other debt (1) | 486.7 |
| | 49.1 |
| | 65.5 |
| | — |
| | — |
| | 372.1 |
| 475.3 |
| | — |
| | — |
| | 401.3 |
| | 74.0 |
| | — |
| | — |
|
Chartered-in vessels (operating leases) (2) | 53.1 |
| | 26.8 |
| | 8.3 |
| | 8.3 |
| | 8.3 |
| | 1.4 |
| |
Scheduled repayments of obligations related to capital leases (2) | | 375.3 |
| | 20.9 |
| | 21.8 |
| | 23.4 |
| | 25.3 |
| | 27.2 |
| | 256.7 |
|
Chartered-in vessels (operating leases) (3) | | 62.5 |
| | 36.9 |
| | 23.5 |
| | 2.1 |
| | — |
| | — |
| | — |
|
| Total | 994.8 |
|
| 198.2 |
|
| 183.9 |
|
| 118.3 |
|
| 118.3 |
|
| 376.1 |
| 1,179.8 |
|
| 164.5 |
|
| 163.9 |
|
| 455.6 |
|
| 111.9 |
|
| 27.2 |
|
| 256.7 |
|
| |
| (1) | Excludes all expected interest payments of $22.6 million (2017), $18.7 million (2018), $15.2$31.4 million (2019), $12.2$26.3 million (2020), $14.1 million (2021) and $5.3$2.3 million (2021)(2022). Expected interest payments are based on the existing interest rates for fixed-rate loans of 5.4% and existing interest rates for variable-rate loans at LIBOR plus margins that range from 0.30% to 2.00%2.75% at December 31, 2018. The expected interest payments do not reflect the effect of related interest rate swaps that we have used to hedge certain of our floating-rate debt. |
December 31, 2016. The expected interest payments do not reflect the effect of related interest rate swaps that we have used to hedge certain of our floating-rate debt.
| |
| (2) | Excludes imputed interest payments of $27.1 million (2019), $25.5 million (2020), $23.8 million (2021), $22.0 million (2022), $20.0 million (2023) and $63.4 million (thereafter). |
| |
| (3) | Excludes payments required if we execute all options to extend the terms of in-chartered leases. If we exercise all options to extend the terms of in-chartered leases signed as of December 31, 2018. If we exercise all options to extend the terms of signed in-chartered leases, we would expect to be obligated to additional total payments of $43.1 million (2017), $17.7 million (2018), $8.3$39.4 million (2019), $8.3$28.9 million (2020), and $1.4$2.6 million (2021). |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates in the application of our accounting policies based on our best assumptions, judgments and opinions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For a further description of our material accounting policies, please read Item 18 – Financial Statements: Note 1 – Summary of Significant Accounting Policies to our consolidated financial statements included in this Annual Report.
Revenue Recognition
Description. We recognize voyage revenue using the proportionate performance method. Under this method, voyages may be calculated on either a load-to-loadload-to-discharge or discharge-to-discharge basis. This means that voyageVoyage revenues are recognized ratably either from the beginning of when product is loaded for one voyage to when it is loaded for the next voyage,discharged if using a load-to-discharge basis, or from when product is discharged (unloaded) at the end of onethe prior voyage to when it is discharged after the current voyage, if using a discharge-to-discharge basis. However, we do not begin recognizing revenue for any of our vessels until a charter has been agreed to by the customer and us, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. A portion of our revenues is also generated from the offshore ship-to-shipSTS transfer of commodities, primarily crude oil and refined oil products, but also liquid gases and various other products. We also generate revenues from other technical activities such as terminal management, consultancy, procurement and equipment rental. Short-term contracts for these services are recognized as services are completed based on a percentage of completion method. Long-term contracts are recognized over the duration of the contract period.
Judgments and Uncertainties. In applyingWhether to use the proportionate performance method,load-to-discharge basis or the discharge-to-discharge basis depends on whether the customer directs the use of the vessel throughout the period of use, pursuant to the terms of the voyage charter. This is a matter of judgement. However, we believe that in most cases the discharge-to-discharge basis of calculating voyages more accurately reflects voyage results than the load-to-load basis. At the time of cargo discharge, we generally have information about the next load port and expected discharge port, but at the time of loading we are typically less certain what the next load port will be. We use this method of revenue recognition for all spot voyages. However we do not begin recognizing revenue for any of our vessels until a charter has been agreed to byif the customer and us, even ifhas the right to direct the vessel has discharged its cargoto different load and discharge ports, among other things, a voyage charter contract contains a lease, and the lease term begins on the later of the vessel’s last discharge or inception of the voyage charter contract. As such, in this case revenue is sailing to the anticipated load portrecognized on its next voyage.a discharge-to-discharge basis. Otherwise, it is recognized on a load-to-discharge basis.
Effect if Actual Results Differ from Assumptions. If actual results areour assessment of whether the customer directs the use of the vessel through-out the period of use is not consistent with our estimates in applyingactual results, then the proportionate performance method,period over which voyage revenue is recognized would be different and as such our revenues could be overstated or understated for any given period by the amount of such difference.
Vessel Lives and Impairment
Description. Acquisitions of vessels from Teekay were deemed to be business acquisitions between entities under common control. Accordingly, the carrying value of each such vessel represents Teekay’s carrying value at the date we acquired the vessel, less subsequent depreciation and impairment charges. Vessels acquired from third parties are initially recorded at their acquisition value. We depreciate the original cost, less an estimated residual value, of these vessels on a straight-line basis over each vessel’s estimated useful life. The carrying values of our vessels may not represent their market value at any point in time because the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Both charter rates and newbuilding costs tend to be cyclical in nature.
We review vessels and equipment for impairment whenever events or circumstances indicate the carrying value of an asset, including the carrying value of the charter contract, if any, under which the vessel is employed, may not be recoverable. This occurs when the asset’s carrying value is greater than the future undiscounted cash flows the asset is expected to generate over its remaining useful life. If the estimated future undiscounted cash flows of an asset exceed the asset’s carrying value, no impairment is recognized even though the fair value of the asset may be lower than its carrying value. If the estimated future undiscounted cash flows of an asset are less than the asset’s carrying value and the fair value of the asset is less than its carrying value, the asset is written down to its fair value. Fair value is calculated as the net present value of estimated future cash flows, which, in certain circumstances, will approximate the estimated market value of the vessel. For a vessel under charter, the discounted cash flows from that vessel may exceed its market value, as market values may assume the vessel is not employed on an existing charter.
The followingConsistent with our methodology and disclosures in prior years, the table below presents the aggregate market values and carrying values of our vessels that we have determined have a market value that is less than their carrying value as of January 1, 2017.2019. While the market values of these vessels are below their carrying values, no
impairment has been recognized on any of these vessels in 20162018 as the estimated future undiscounted cash flows relating to such vessels are greater than their carrying values.
We consider the vessels reflected in the following table to be at a higher risk of future impairment.impairment as compared to other vessels in our fleet. This table is disaggregated for vessels which have estimated future undiscounted cash flows that are marginally or significantly greater than their respective carrying values. Vessels with estimated future cash flows significantly greater than their respective carrying values woulddo not necessarily represent vessels that would likely be impaired in the next twelve months. The recognition of an impairment in the future for those vessels may primarily depend upon our deciding to dispose of the vessel instead of continuing to operate it. In deciding whether to dispose of a vessel, we determine whether it is economically preferable to sell the vessel or continue to operate it. This assessment includes an estimation of the net proceeds expected to be received if the vessel is sold in its existing condition compared to the present value of the vessel’s estimated future revenue, net of operating costs. Such estimates are based on the charter market outlook and estimated operating costs, given a vessel’s type, condition and age. In addition, we typically do not dispose of a vessel that is servicing an existing customer contract. The recognition of an impairment in the future may be more likely for vessels that have estimated future undiscounted cash only marginally greater than their respective carrying values.
| | Aframax, Suezmax and Product Tankers (in thousands of U.S. dollars, except number of vessels) | # Vessels | | Market Values (1) | | Carrying Values | # Vessels | | Market
Values (1) | | Carrying
Values |
Conventional Tankers (2) | 12 |
| | $ | 160,200 |
| | $ | 278,159 |
| 11 |
| | 163,400 |
| | 276,763 |
|
Conventional Tankers (3) | 29 |
| | $ | 798,200 |
| | $ | 1,315,415 |
| 32 |
| | 816,000 |
| | 1,281,396 |
|
| Total | 41 |
|
| 958,400 |
|
| 1,593,574 |
| 43 |
|
| 979,400 |
|
| 1,558,159 |
|
| |
| (1) | Market values are determined using reference to second-hand market comparables. Since vessel values can be volatile, our estimates of market value shown above may not be indicative of either the current or future prices we could obtain if we sold any of the vessels. |
| |
| (2) | Undiscounted cash flows are marginally greater than the carrying values. |
| |
| (3) | Undiscounted cash flows are significantly greater than the carrying values. |
Judgments and Uncertainties. Depreciation is calculated using an estimated useful life of 25 years for conventional crude oil and product tankers, commencing at the date the vessel was originally delivered from the shipyard. However, the actual life of a vessel may be different than the estimated useful life, with a shorter actual useful life resulting in an increase in quarterly depreciation and potentially resulting in an impairment loss. The estimated useful life of our vessels takes into account design life, commercial considerations and regulatory restrictions. Our estimates of future cash flows involve assumptions about future charter rates, vessel utilization, operating expenses, dry-docking expenditures, vessel residual values, the probability of the vessel being sold and the remaining estimated life of our vessels. Our estimated charter rates are based on rates under existing vessel contracts and market rates at which we expect we can re-charter our vessels. Our estimates of vessel utilization, including estimated off-hire time, are based on historical experience and our projections of the number of future conventional tanker voyages. Our estimates of operating expenses and dry-docking expenditures are based on historical operating and dry-docking costs and our expectations of future inflation and operating requirements. Vessel residual values are a product of a vessel’s lightweight tonnage and an estimated scrap rate. The remaining estimated lives of our vessels used in our estimates of future cash flows are consistent with those used in the calculations of depreciation.
In our experience, certain assumptions relating to our estimates of future cash flows are more predictable by their nature, including estimated revenue under existing contract terms, on-going operating costs and remaining vessel life. Certain assumptions relating to our estimates of future cash flows require more discretion and are inherently less predictable, such as future charter rates beyond the firm period of existing contracts and vessel residual values, due to factors such as the volatility in vessel charter rates and vessel values. We believe that the assumptions used to estimate future cash flows of our vessels are reasonable at the time they are made. We can make no assurances, however, as to whether our estimates of future cash flows, particularly future vessel charter rates or vessel values, will be accurate.
Effect if Actual Results Differ from Assumptions. If we conclude that a vessel or equipment is impaired, we recognize a loss in an amount equal to the excess of the carrying value of the asset over its fair value at the date of impairment. The written-down amount becomes the new lower cost basis and will result in a lower annual depreciation expense than for periods before the vessel impairment. Consequently, any changes tin our estimates of future undiscounted cash flows may result in a different impairment amount, including no impairment, and a different future annual depreciation expense.
Dry docking
Description. We capitalize a substantial portion of the costs we incur during dry docking and amortize those costs on a straight-line basis from the completion of a dry docking to the estimated date of completion of the next dry docking. We immediately expense costs for routine repairs and maintenance performed during dry docking that do not improve or extend the useful lives of the assets.
Judgments and Uncertainties. Amortization of capitalized dry-docking expenditure requires us to estimate the period of the next dry docking. While we typically dry dock each vessel every two and a half to five years, we may dry dock the vessels at an earlier date. The actual life of a vessel may be different, with a shorter life resulting in an increase in the quarterly depreciation and potentially resulting in an impairment loss. The estimates and assumptions regarding expected cash flows require considerable judgment and are based upon existing contracts, historical experience, financial forecasts and industry trends and conditions. We are not aware of any indicators of impairments nor any regulatory changes or environmental liabilities that we anticipate will have a material impact on our current or future operations.
Effect if Actual Results Differ from Assumptions. If we change our estimate of the next dry dockdry-dock date, we will adjust our annual amortization of dry-docking expenditures.
Valuation of Derivative Instruments
Description. Our risk management policies permit the use of derivative financial instruments to manage interest rate risk. We also have a stock purchase warrant from our involvement in the formation of TIL and entered into a time-charter swap agreement to reduce our exposure to spot tanker market rate variability for certain vessels that are employed in the Aframax revenue sharing pooling arrangement. Changes in fair value of derivative financial instruments that are not designated as cash flow hedges for accounting purposes are recognized in earnings in the consolidated statements of income.
Judgments and Uncertainties. The fair value of our derivative instruments and the change in fair value of our derivative instruments from period to period result from our use of interest rate swap agreements, a time-charter swap agreement and a stock purchase warrant.agreements.
The fair value of our interest rate swap agreements is the estimated amount that we would receive or pay to terminate the agreements in an arm’s length transaction under normal business conditions at the reporting date, taking into account current interest rates and the current credit worthiness of ourselves and the interest rate swap counterparties. The estimated amount for interest rate swap agreements is the present value of estimated future cash flows, being equal to the difference between the benchmark interest rate and the fixed rate in the interest rate swap agreement, multiplied by the notional principal amount of the interest rate swap agreement at each interest reset date.
The fair value of our interest rate swap agreements at the end of each period is most significantly impacted by the interest rate implied by the benchmark interest rate yield curve, including its relative steepness. Interest rates have experienced significant volatility in recent years in both the short and long term. While the fair value of our interest rate swap agreements is typically more sensitive to changes in short-term rates, significant changes in the long-term benchmark interest rate also materially impact our interest rate swap agreements.
The fair value of our interest rate swap agreements is also impacted by changes in our specific credit risk included in the discount factor. We discount our interest rate swap agreements with reference to the credit default swap spreads of global industrial companies with a similar credit rating and by considering any underlying collateral. The process of determining credit worthiness requires significant judgment in determining which source of credit risk information most closely matches our risk profile.
The benchmark interest rate yield curve and our specific credit risk are expected to vary over the life of the interest rate swap agreements. The larger the notional amount of the interest rate swap agreements outstanding and the longer the remaining duration of the interest rate swap agreements, the larger the impact of any variability in these factors will be on the fair value of our interest rate swaps. We economically hedge the interest rate exposure on a significant amount of our long-term debt and for long durations. As such, we have historically experienced, and we expect to continue to experience, material variations in the period-to-period fair value of our derivative instruments.
The fair value of our time-charter swap agreement is the estimated future payments we would receive under normal business conditions at the reporting date, taking into account current spot tanker market rates (or spot rates) and the current credit worthiness of ourselves and the time-charter swap counterparty. The estimated amount for the time-charter swap agreement is the present value of estimated future cash flows, being equal to the difference between a fixed rate and a floating rate based on the spot tanker market.
The estimated fair value of our time-charter swap agreement at the end of each period is most significantly impacted by the spot rate and the expected volatility of the spot market. Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in the supply of and demand for tanker capacity and changes to the supply of and demand for oil and oil products. The cyclical nature of the tanker industry may cause significant increases or decreases in spot rates which will have a material impact on the time-charter swap agreement.
The estimated value of the stock purchase warrant was determined using a Monte-Carlo simulation and is based, in part, on the historical price of common shares of TIL, the risk-free interest rate, vesting conditions and the historical volatility of comparable companies. The fair value of our stock purchase warrant at the end of each period is most significantly impacted by the stock price of TIL and the expected volatility of the TIL stock price. TIL seeks to opportunistically acquire, operate and sell modern second hand tankers to benefit from an expected recovery in the current cyclical low of the tanker market. Pending such transactions, TIL is employing its oil tankers on the spot market. Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in the supply of and demand for tanker capacity and changes in the supply of and demand for oil and oil products. The cyclical nature of the tanker industry may cause significant increases or decreases in the value of TIL’s vessels, TIL’s stock price and the value of the stock purchase warrant we hold.
Effect if Actual Results Differ from Assumptions. Although we measure the fair value of our derivative instruments utilizing the inputs and assumptions described above, if we were to terminate the interest rate swap agreements and time-charter swap or sell the stock purchase warrant at the reporting date, the amount we would pay or receive to terminate the interest rate swap agreements and time-charter swap and the amount we would receive upon sale of the stock purchase warrant may differ from our estimate of fair value. If the estimated fair value differs from the actual termination amount, an adjustment to the carrying amount of the applicable derivative asset or liability would be recognized in earnings for the current period. Such adjustments could be material. See Item 18 – Financial Statements: Note 12 – Derivative Instruments for the effects on the change in fair value of our derivative instruments on our consolidated statements of (loss) income.
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| Item 6. | Directors, Senior Management and Employees |
Our Board of Directors and executive officers oversee and supervise our operations. Subject to this oversight and supervision, our operations are managed generally by our Manager.
Our President and Chief Executive Officer, Kevin Mackay, and our Chief Financial Officer, Vincent LokStewart Andrade, allocate their time between managing our business and affairs directly as such officers and indirectly as officers of our Manager, and the business and affairs of Teekay Corporation, for which they also serve as executive team member and Executive Vice President and Chief Financial Officer, respectively.officers. The amount of time Messrs. Mackay and LokAndrade allocate among our business and the businesses of Teekay Corporation our Manager and other subsidiaries of Teekay Corporation varies from time to time depending on the various circumstances and needs of the businesses, such as the relative levels of strategic activities of the businesses.
Our officers and certain individuals providing services to us or our subsidiaries may face a conflict regarding the allocation of their time between our business and the other business interests of Teekay Corporation or its affiliates. We intend to seek to cause our officers to devote as much time to the management of our business and affairs as is necessary for the proper conduct thereof.
Please also read Item 7 – Major Shareholders and Related Party Transactions:Transactions - Related Party Transactions.
Directors and Executive Officers of Teekay Tankers Ltd.
The following table provides information aboutlists the directors and executive officers of Teekay Tankers Ltd.Ltd and their ages as of December 31, 2018. The business address of each of our directors and officers listed below is c/o 4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08 Bermuda. Ages of the directors and executive officers are as of December 31, 2016.
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| | | | |
| Name | | Age | | Position |
| Stewart Andrade | | 46 | | Chief Financial Officer |
| Arthur Bensler | | 5961 | | ChairmanChair of the Board of Directors |
| Richard J.F. Bronks | | 5153 | | Director (1) |
| Richard T. du Moulin | | 7072 | | Director (1) |
| Kenneth Hvid | | 4850 | | Director(2) |
| William Lawes | | 7375 | | Director (1) |
Vincent Lok | | 48 | | Chief Financial Officer |
| Kevin Mackay | | 4850 | | President and Chief Executive Officer |
| Bjorn Moller | | 5961 | | Director |
| Richard Paterson | | 67 | | Director (1) |
| |
| (1) | Member of Audit Committee, Conflicts Committee, and Nominating and Governance Committee. |
| |
(2) | Appointed February 22, 2017. |
Director William Lawes retired from the Board of Directors (or the Board) effective March 13, 2019. Directors Bjorn Moller and Richard J.F. Bronks will retire from the Board, effective at the 2019 annual meeting of shareholders. The Board has also nominated David Schellenberg, a current director of Teekay Corporation, to stand for election as a director at the 2019 annual meeting.
Certain biographical information about each of these individuals included in the table above, other than Mr. Lawes, is set forth below.
Stewart Andrade was appointed Chief Financial Officer of Teekay Tankers in December 2017. He joined Teekay in 2002 and has worked in a variety of roles at Teekay and has been responsible for executing a number of strategic transactions, including acquisitions and the establishment of joint ventures, to grow Teekay Tankers into one of the world’s leading tanker companies. Mr. Andrade is also responsible for strategy and business development for Teekay’s tanker business, a role he has held since 2015. Prior to joining Teekay, Mr. Andrade worked in Ernst and Young’s consulting practice providing advisory services to a variety of Canadian and international organizations. Mr. Andrade is a Canadian Chartered Professional Accountant.
Arthur Bensler joined the Boardwas appointed Chair and Director of Directors as ChairmanTeekay Tankers in June 2013. He has served as Corporate Secretary from 2007 to September 2014 and as General Counsel to the Company since its inception. Mr. Bensleralso is Executive Vice President Corporate Secretary and General Counsel of Teekay Corporation (NYSE:TK) and President of Teekay Shipping (Canada) Ltd. He has more than 1520 years of experience in the shipping industry, joining Teekay Corporation in 1998 as General Counsel. He was promoted to the position of Vice President and General Counsel in 2002, became the Corporate Secretary of Teekay Corporation in 2003 and was further promoted to Executive Vice President and General Counsel in 2006. Mr. Bensler was appointed Corporate Secretary of Teekay Tankers in 2007 and has served as General Counsel to the Company since its inception. In addition to his role as General Counsel, he serves as Assistant Corporate Secretary of Teekay GP L.L.C, the general partner of Teekay LNG Partners L.P. Mr. Bensler served as Committee Director of the Britannia Steamship Insurance Association Limited from January 2005 to April 2010 and has served as a Committee Director of The Standard Club Ltd., a mutual insurance association, since November 2010, where he is also a member of the Nominating & Governance Committee and the Strategy Committee.
Richard J.F. Bronks joined the Board of Directors of Teekay Tankers Ltd. in January 2008. Mr. Bronks retired from Goldman Sachs in 2007, where he held a number of positions during his career. From 2004 until March 2007, Mr. Bronks was responsible for building Goldman Sachs’ equity, bond and loan financing business in emerging markets, including Central and Eastern Europe, Russia, the Former Soviet Union, the Middle East, Turkey and Africa. From 1999 to 2004, Mr. Bronks served as a co-head of Goldman’s global commodity business, engaged in the trading of commodities and commodity derivatives, and the shipping and storage of physical commodities. From 1993 to 1999, Mr. Bronks served as a member of Goldman’s oil derivatives business in London and New York. Prior to joining Goldman Sachs, Mr. Bronks was employed by BP Oil International, in both its oil derivatives business and its crude oil trading business.
Richard T. du Moulin joined ourthe Board of Directors of Teekay Tankers in December 2007. Mr. du Moulin is currently the President of Intrepid Shipping L.L.C., a position he has held since he founded Intrepid Shipping in 2002. From 1998 to 2002, Mr. du Moulin served as ChairmanChair and Chief Executive Officer of Marine Transport Corporation. Mr. du Moulin is a member of the Board of Trustees and ChairmanChair of the SeamensSeamen’s Church Institute of New York and New Jersey. Mr. du Moulin currently serves as an advisor to Hudson Structured Capital Management, a Director of Tidewater Inc.private equity firm and is on the boardBoard of Pangaea Logistics Solutions, Ltd., a dry bulk shipping company. Mr. du Moulin served as ChairmanChair of Intertanko, the leading trade organization for the tanker industry, from 1996 to 1999 and served as a director of Globe Wireless L.L.C. and Tidewater, Inc.
Kenneth Hvid joined ourthe Board of Directors onTeekay Tankers in February 22, 2017. He was appointed President and Chief Executive Officer of Teekay Corporation onin February 1, 2017 and has been elected as a Teekay Corporation director effective as of its 2019 annual meeting of shareholders. Mr. Hvid has served as a director of Teekay Offshore GP LLC, the general partner of Teekay Offshore Partners L.P. since 2011.2011,and was reappointed as a director of Teekay GP L.L.C., the general partner of Teekay LNG Partners L.P. in September 2018, having served as a director previously from 2015 to 2017. He joined Teekay Corporation in 2000 and was responsible for leading its global procurement activities until he was promoted in 2004 to Senior Vice President, Teekay Gas Services. During this time, Mr. Hvid was involved in leading Teekay through its entry and growth
in the LNG business. He held this position until the beginning of 2006, when he was appointed President of theits Teekay Navion Shuttle Tankers and Offshore division. In that role he was responsible for theTeekay’s global shuttle tanker business as well as initiatives in the floating storage and offtake business and related offshore activities. Mr. Hvid served as Teekay's Chief Strategy Officer and Executive Vice President from 2011 to December 2015, as a director of Teekay GP L.L.C. from 2011 to June 2015, and as President and Chief Executive Officer of Teekay Offshore Group Ltd., from May 2015 until January 31, 2017. In January 2014, Mr. Hvid also joined the board of Tanker Investments Ltd., an Oslo Stock Exchange listed company established by Teekay Corporation and Teekay Tankers Ltd., and serves as its Chairman. Mr. Hvid has 28 years of global shipping experience, 12 of which were spent with A.P. Moller in Copenhagen, San Francisco and Hong Kong. In 2007, Mr. Hvid joined the boardBoard of Gard P.& I. (Bermuda) Ltd.
William Lawes joined our Board of Directors in January 2008. In January 2014, Mr. Lawes also joined the board of Tanker Investments Ltd., an Oslo Stock Exchange listed company established by Teekay Corporation and Teekay Tankers Ltd., and serves as Chairman of the Audit Committee. Mr. Lawes served as a Managing Director and a member of the Europe, Africa and Middle East Regional Senior Management Board of JPMorgan Chase and its predecessor banks based in London from 1987 until 2002. His functional responsibility was Chief Credit and Counterparty Risk Officer for the region. Prior to joining JPMorgan Chase, he was Global Head of Shipping Finance at Grindlays Bank. Mr. Lawes is qualified as a member of the Institute of Chartered Accountants of Scotland. Since March 2005, Mr. Lawes has served as a Director and Chairman of the Audit Committee of Diana Shipping Inc., a global provider of shipping transportation services. He was appointed as Trustee and Member of the Finance and Investment Committee of Seafarers UK in 2016.
Vincent LokKevin Mackay has served as Chief Financial Officer of Teekay Tankers Ltd. since October 2007. Mr. Lok has served as Teekay Corporation’s Executive Vice President and Chief Financial Officer since July 2007. He has held a number of finance and accounting positions with Teekay Corporation, including Controller from 1997 until his promotions to the positions of Vice President, Finance in March 2002 and Senior Vice President and Treasurer in February 2004. He was subsequently appointed Senior Vice President and Chief Financial Officer in November 2006. Mr. Lok also serves as a director of Teekay GP L.L.C., the general partner of Teekay LNG Partners L.P. and as the Chief Financial Officer of our Manager. Prior to joining Teekay Corporation, Mr. Lok worked as a Chartered Accountant with Deloitte & Touche LLP. Mr. Lok is also a Chartered Financial Analyst.
Kevin Mackay became President and Chief Executive Officer of Teekay Tankers Ltd. in June, 2014 running oneand leads a global network of commercial offices in Asia, Europe and North America, with the world’s leading tanker companies.responsibility of marketing Teekay's fleet of conventional tankers. Mr. Mackay joined Teekay Tankers from Phillips 66, where he headed the global marine business unit, responsible for all aspects of marine transportation, from commercial toincluding chartering, operations, demurrage, strategy and freight trading, business improvement and marine risk management. He held a similar role as the General Manager, Commercial Marine at ConocoPhillips from 2009 to 2012 before the formation of Phillips 66. Mr. Mackay started his career working for Neptune Orient Lines in Singapore from 1991 to 1995. He then helped establishjoined AET Inc. Limited (AET)(AET) (formerly American Eagle Tankers Inc.) in Houston, where he rose through various roles, ultimately towas the Regional Director - Americas, Senior Vice President, responsible for AET’sAET's business in the Americas. Mr. Mackay holds a B.Sc. (Econ) HonorsHonours from the London School of Economics & Political Science. He is currently a serving as a board member on the International Tanker Oil Pollution Federation and as an Executive Committee Member in INTERTANKO.
Bjorn Moller served as ourTeekay Tankers’ Chief Executive Officer from October 2007 until March 2011. Mr. Moller also served as the President and Chief Executive Officer of Teekay Corporation from April 1998 until March 2011. He also served as Vice ChairmanChair and Director of Teekay GP L.L.C., the general partner of Teekay LNG Partners L.P., from when it was formed in November 2004, and Vice ChairmanChair and Director of Teekay Offshore GP L.L.C., the general partner of Teekay Offshore Partners L.P., from when it was formed in August 2006, in each case until March 2011. Mr. Moller continues to serve as a Director of Teekay Tankers Ltd. and Teekay Corporation and is a director of Kattegat Limited, the parent company of Resolute Investments, Ltd., the largest shareholder of Teekay Corporation. Mr. Moller has over 35 years of experience in the shipping industry and served as ChairmanChair of the International Tanker Owners Pollution Federation from 2006 to 2013. He served in senior management positions with Teekay Corporation for more than 20 years, and led Teekay’s overall operations from January 1997, following his promotion to the position of Chief Operating Officer. Prior to that, Mr. Moller headed Teekay Corporation’s global chartering operations and business development activities. Mr. Moller is also a director of Kattegat Limited, the parent company of Resolute Investments, Ltd., the largest shareholder of Teekay Corporation.
Richard Paterson joined the Board of Teekay Tankers in August 2017. He is a Certified Public Accountant who retired from PriceWaterhouseCoopers LLP (PwC) in 2011 after 37 years of service. At the time of his retirement, Mr. Paterson served as the global leader of PwC’s Consumer, Industrial Products and Services Practices comprising the automotive, consumer and retail, energy utilities and mining, industrial products, pharmaceutical and health industry sectors. Mr. Paterson also served as Managing Partner of PwC’s Houston Office and U.S. Energy Practice and supervised audits of ExxonMobil Corporation from 2002 to 2006. Previous to this position, Mr. Paterson lived in Moscow, Russia where he led PwC’s Energy Practice for Europe, Middle East and Asia and also supervised the audits of OAO Gazprom. Mr. Paterson is a member of the National Association of Corporate Directors and serves on the Boards of Parker Drilling Company and Montage Resources Corporation. He is a past Board member of Zaff GP LLC, the U.S./Russia Business Council and the U.S. Energy Association and stepped down in July 2017, from the Board and Chair of the Audit Committee of Tidewater, the leading offshore vessel service provider to the oil and gas industry. He also resigned as a member of the Board of Saipem Canada, Inc., a private company, in September 2017.
Compensation of Directors and Senior Management
Executive Compensation
OurThe compensation of our executive officers that are employees of Teekay Corporation or other subsidiaries thereof and their compensation (other than any awards under our long-term incentive plan described below) is set and paid by Teekay Corporation or its subsidiaries, and we reimburse Teekay Corporation for time spent by our executive officers on our management matters. This reimbursement is a component of the management fee we pay our Manager, pursuant to the Management Agreement. For the year ended December 31, 2016,2018, the aggregate amount of such reimbursement excluding any long-term incentive plan awards issued directly by us was $0.9$1.8 million (2015: $1.4(2017: $1.3 million; and 2014: $1.12016: $0.9 million). Teekay Corporation’s annual bonus plan, in which each of our executive officers participates, considers both company performance and team performance.
Compensation of Directors
Officers of us or Teekay Corporation who serve as our directors do not receive additional compensation for their service as directors. Each of our non-employee directors receives compensation for attending meetings of the Board of Directors, as well as committee meetings. Non-employee directors receive an annual cash fee of $50,000$60,000 and an annual award of $70,000$75,000 paid by way of a grant of restricted stock units or stock options, at the director's choice. In addition, members of the Audit Committee each receive a committee cash fee of $7,500 per year, and the chair of the Audit Committee receives a fee of $12,500$17,000 per year for serving in that role. Members of the Conflicts Committee each receive a committee fee of $7,500 per year, and the chair of the Conflicts Committee receives a fee of $12,500 per year for serving in that role. TheMembers of the Nominating and Governance Committee receive a committee fee of $5,000 per year, and the chair of the
Nominating and Governance Committee receives a fee of $5,000$10,000 per year for serving in that role. In addition, each director is reimbursed for out-of-pocket expenses in connection with attending meetings of the Board of Directors and committees. Each director is fully indemnified by us for actions associated with being a director to the extent permitted under Marshall Islands law.
During 2016,2018, our fourfive non-employee directors and one Board observer, David A. Hollander, received an aggregate of $260,000$799,500 in cash fees for their services as directors (2015: $260,000; 2014:(2017: $303,125; 2016: $260,000). In addition, each non-employee director received a $70,000$75,000 annual award for 20162018 to be paid by way of a grant of, at the director’s choice, restricted stock units or stock options, granted under our 2007 Long-Term Incentive Plan pursuant to this annual retainer. During 2016,2018, we granted 284,693504,097 options (2015: nil; 2014: 152,346)(2017: 396,412; 2016: 284,693) and 9,358168,029 restricted stock units (2015: 51,948; 2014: 17,073)(2017: nil; 2016: 9,358) to non-employee directors. The stock options and restricted stock units vest immediately.
Long-Term Incentive Program
In the year ended December 31, 2016,2018, we granted under our 2007 Long-Term Incentive Plan options to acquire up to 216,043736,327 shares of Class A common stock (2015: 58,434; 2014: 110,829)(2017: 486,329; 2016: 216,043) and 279,980762,640 restricted stock units (2015: 192,387; 2014: 586,014)(2017: 382,437; 2016: 279,980) to officers of the Company and certain employees of Teekay’sTeekay Corporation’s subsidiaries that provide services to us. Each option under the plans has a 10-year term and vests equally over three years from the grant date. Each restricted stock unit is equal in value to one share of our Class A common sharesstock plus reinvested dividends from the grant date to the vesting date. Upon vesting, the value of the restricted stock unit awards is paid to each recipient in the form of shares of Class A common stock. We intend to satisfy these grants by issuing shares from authorized capital. Please read Item 18 – Financial Statements: Note 14 – Capital Stock.
Board Practices
OurEffective March 13, 2019, our Board of Directors (or the Board) currently consists of six members. Directors are appointed to serve for a one-year term and until their successors are appointed or until they resign or are removed. Following the 2019 annual meeting of shareholders and related Board membership changes described above, the Board intends to reduce the size of the Board to five members.
There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
The Board has determined that each of our directors and director nominees, other than Bjorn Moller, a director of Teekay Corporation, Arthur Bensler, the Executive Vice President and General Counsel of Teekay Corporation, and Kenneth Hvid, the President and Chief Executive Officer of Teekay Corporation, has no material relationship with Teekay Tankers Ltd.us (either directly or as a partner, shareholder or officer of an organization that has a relationship with Teekay Tankers Ltd.)us) and is independent within the meaning of Teekay Tankers Ltd.’sour director independence standards, which reflect the NYSE director independence standards, as currently in effect and as they may be changed from time to time.
The Board has adopted our Corporate Governance Guidelines that address, among other things, director qualification standards, director functions and responsibilities, director access to management, director compensation and management succession. This document is available under “Investors - Teekay Tankers Ltd. - Governance” from the “About Us—Corporate Governance” sectionhome page of our website (www.teekay.com)at www.teekay.com.
NYSE does not require a company like ours, which is a “foreign private issuer” and of which more than 50% of the voting power is held by another company, to have a majority of independent directors on the Board of Directors or to establish compensation or nominating/corporate governance committees composed of independent directors.
Nevertheless, theThe Board has the following three committees: Audit Committee, Conflicts Committee, and Nominating and Governance Committee. The membership of these committees as of December 31, 2016 and the function of each of the committees are described below. Each of the committees is currently comprised of independent members and operates under a written charter adopted by the Board. All of the committee charters are available under “Other Information—Corporate“Investors - Teekay Tankers Ltd. - Governance” infrom the Investor Centrehome page of our Web sitewebsite at www.teekay.com. During 2016,2018, the Board held foursix meetings. DirectorsEach director attended all boardBoard meetings. There was one committee member absent for one committee meeting in 2016.The members of the Audit Committee, Conflicts Committee and Nominating and Governance Committee attended all meetings.
Our Audit Committee is composed entirely of directors who satisfy applicable NYSE and SEC audit committee independence standards. Our Audit Committee is comprised of William LawesRichard Paterson (Chair), Richard J.F. Bronks and Richard du Moulin. All members of the committee are financially literatefinancially-literate and the Board has determined that Mr. LawesPaterson qualifies as an audit committee financial expert.
The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of:
the integrity of our consolidated financial statements;
our compliance with legal and regulatory requirements;
the independent auditors’ qualifications and independence; and
the performance of our internal audit function and independent auditors.
Our Conflicts Committee is composed entirely of directors who satisfy the heightened NYSE and SEC independence standards applicable to Audit Committee membership. The Conflicts Committee is comprised of Richard du Moulin (Chair), Richard J.F. Bronks, and William Lawes.Richard Paterson. The Conflicts Committee Committee:
reviews specific matters that the Board refers to the committee for consideration and which constitute (a) matters the Board believes may involve conflicts of interest between (i) us and (ii) our controlling shareholder Teekay Corporation or its affiliates (other than us) or (b)represent material related-party transactions, including transactions between us and our or Teekay Corporation’s officers or directors or their affiliates. affiliates; and
determines if the resolution of the conflict of interest is fair and reasonable to us and recommends to the Board action to be taken with respect to any such matter.
The Board is not obligated to seek approval of the Conflicts Committee on any matter and may determine the resolution of any conflict of interest itself.
Our Nominating and Governance Committee is comprised entirely of directors who satisfy the general NYSE independence standards. Our Nominating and Governance Committee is comprised of Richard J.F. Bronks (Chair), Richard du Moulin and William Lawes.Richard Paterson.
The Nominating and Governance Committee:
identifies individuals qualified to become Board members;
selectsmembers and recommends to the Board director and committee member candidates;nominees for election as directors;
maintainmaintains oversight of the operation and effectiveness of the Board of Directors and theour corporate governance of the Company;governance;
develops, updates and recommends to the Board corporate governance principles and policies applicable to us, monitors compliance with these principles and policies and recommends to the Board appropriate changes;
monitors compliance with such principles and policies;
discharges responsibilities of the Board relating to the Board’sits compensation;
exercises overall responsibility for approving and evaluating our incentive compensation and equity-based plans; and
oversees the evaluation of the Board and its committees.
Crewing and Staff
Our Manager provides us with allsome of our staff, other thanwhile others are employed directly by our Chief Executive Officer and Chief Financial Officer.subsidiaries. Our executive officers have the authority to hire additional staff as they deem necessary.
As of December 31, 2016,2018, approximately 1,7002,100 seagoing staff served on our vessels. The majority of our subsidiaries employ seagoing staff directly and certain subsidiaries of Teekay Corporation employ the crews for one of our vessels.directly. These crews serve on the vessels pursuant to service agreements between our Manager, acting on our behalf, and those subsidiaries.
Teekay Corporation and its affiliates regard attracting and retaining motivated seagoing personnel as a top priority. Teekay Corporation has entered into a Collective Bargaining Agreement with the Philippine Seafarers’ Union, an affiliate of the International Transport Workers’ Federation (or ITF), and a Special Agreement with ITF London, which covers substantially all of the officers and seamenseafarers that operate our vessels. We believe that Teekay Corporation’s relationships with these labor unions are good.
We believe that Teekay Corporation’s commitment to training is fundamental to the development of the highest caliber of seafarers for marine operations. Teekay Corporation’s cadet training approach is designed to balance academic learning with hands-on training at sea. Teekay Corporation has relationships with training institutions in Australia, Canada, Croatia, India, Latvia, Norway, the Philippines, South Africa and the United Kingdom. After receiving formal instruction at one of these institutions, a cadet’s training continues onboardon-board vessels. Teekay Corporation also has a career development plan that was devised to ensure a continuous flow of qualified officers who are trained on its vessels and familiarized with its operational standards, systems and policies. We believe that high-quality crewing and training policies will play an increasingly important role in distinguishing larger independent shipping companies that have in-house or affiliate capabilities from smaller companies that must rely on outside ship managers and crewing agents on the basis of customer service and safety.
Share Ownership
The following table sets forth certain information regarding beneficial ownership, as of December 31, 2016,2018, of our Class A common stock by our directors and executive officers as a group. None of these persons beneficially owns any of our Class B common stock. The information is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person or entity beneficially owns any shares that the person or entity (a) has or shares voting or investment power or (b) has the right to acquire as of March 1, 20172019 (60 days after December 31, 2016)2018) through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares set forth in the following table. Information for all persons listed below is based on information delivered to us.
| | | Identity of Person or Group | Class A Common Stock | | Percent of Class A Common Stock Owned | | Percent of Total Class A and Class B Common Stock Owned(1) | Class A Common Stock | | Percent of Class A Common Stock Owned | | Percent of Total Class A and Class B Common Stock Owned |
All directors and executive officers as a group (8 persons) (1) | 1,220,526 |
| | 0.9 | % | | 0.8 | % | |
All directors and executive officers as a group (9 persons) (1) | | 2,748,305 |
| | 1.2 | % | | 1.0 | % |
| |
| (1) | Excludes shares of Class A and Class B common stock beneficially owned by Teekay Corporation. Please read Item 7 - Major Shareholders and Related Party Transactions for more detail. Also excludes shares beneficially owned by our former director, Peter Evensen, who retired from the Board on January 31, 2017. |
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| Item 7. | Major Shareholders and Related Party Transactions |
The following table sets forth information regarding the beneficial ownership, as of March 1, 2017,2019, of our Class A and Class B common stock by each entity or group we know to beneficially own more than 5% of the outstanding shares of our Class A common stock or our Class B common stock. Information for certain holders is based on their latest filings with the SEC or information delivered to us. The number of shares beneficially owned by each entity or group is determined under SEC rules and the information is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person or entity beneficially owns any shares as to which the person or entity has or shares voting or investment power. In addition, an entity or group beneficially owns any shares that the entity or group has the right to acquire as of April 30, 20172019 (60 days after March 1, 2017)2019) through the exercise of any stock option or other right. Unless otherwise indicated, each entity or group listed below has sole voting and investment power with respect to the shares set forth in the following table.
| | | Identity of Person or Group |
Class A Common Stock | | Percent of Class A Common Stock Owned | | Class B Common Stock | | Percent of Class B Common Stock Owned | | Percent of Total Class A and Class B Common Stock Owned |
Class A Common Stock | | Percent of Class A Common Stock Owned | | Class B Common Stock | | Percent of Class B Common Stock Owned | | Percent of Total Class A and Class B Common Stock Owned |
Teekay Corporation (1) | 19,309,646 |
| | 13.6 | % | | 23,232,757 |
| | 100.0 | % | | 25.7 | % | 40,290,460 |
| | 17.4 | % | | 37,007,981 |
| | 100.0 | % | | 28.8 | % |
Huber Capital Management, LLC (2) | 19,539,671 |
| | 13.8 | % | | — |
| | — |
| | 11.8 | % | |
BlackRock, Inc.(2) | | 16,936,909 |
| | 7.3 | % | | — |
| | — |
| | 6.3 | % |
Huber Capital Management, LLC (3) | | 12,838,805 |
| | 5.5 | % | | — |
| | — |
| | 4.8 | % |
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| (1) | The voting power represented by shares beneficially owned by Teekay Corporation is 7.5%9.7% for its Class A common stock, 45.0%44.5% for its Class B common stock and 52.5%54.1% for its total Class A and Class B common stock. |
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| (2) | According to the Schedule 13G filed with the SEC on February 8, 2019, BlackRock, Inc. has sole voting power and sole dispositive power as to 16,483,004 and 16,936,909 of the shares, respectively. The voting power represented by shares beneficially owned by BlackRock, Inc. is 7.1% for its Class A common stock. |
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| (3) | According to the Schedule 13G/A filed with the SEC on February 13, 2017,2019, Huber Capital Management, LLC has sole voting power and sole dispositive power as to 8,301,0706,815,661 and 19,539,67112,838,805 of the shares, respectively. The voting power represented by shares of Class A common stock beneficially owned by Huber Capital Management, LLC is 7.6% for Class A common stock and 7.6% for total Class A and Class B common stock.2.9%. |
Our Class B common stock entitles the holder thereof to five votes per share, subject to a 49% aggregate Class B common stock voting power maximum, while our Class A common stock entitles the holder thereof to one vote per share. Except as otherwise provided by the Marshall Islands Business Corporations Act, holders of shares of our Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of shareholders, including the election of directors. Teekay Corporation currently controls all of our outstanding Class B common stock and 19,309,64640,290,460 shares of our Class A common stock. Because of our dual-class structure, Teekay Corporation may continue to control all matters submitted to our shareholders for approval even if it and its affiliates come to own significantly less than 50% of our outstanding shares of capital stock. Shares of our Class B common stock will convert into shares of our Class A common stock on a one-for-one basis upon certain transfers thereof or if the aggregate number of outstanding shares of Class A common stock and Class B common stock beneficially owned by Teekay Corporation and its affiliates falls below 15% of the aggregate number of outstanding shares of our common stockstock.
We are controlled by Teekay Corporation. We are not aware of any arrangements, the operation of which may at a subsequent date result in a change in control of us.
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| B. | Related Party Transactions |
Please read Item"Item 18 – Financial statements: Note 15 – Related Party TransactionsTransactions" for a description of ouradditional information about these and various other related-party transactions.
Relationship with Teekay Corporation
Control
Through its ownership of our capital stock, Teekay Corporation controls us. Please read “—Major Shareholders” above.
Business Opportunities
Under a contribution, conveyance and assumption agreement entered into in connection with our initial public offering in December 2007, Teekay Corporation and we agreed that Teekay Corporation and its other affiliates may pursue any Business Opportunity (as defined
below) of which it, they or we become aware. Business Opportunities may include, among other things, opportunities to charter-out, charter-in or acquire oil tankers or to acquire tanker businesses.
Pursuant to the contribution, conveyance and assumption agreement, we agreed that:
Teekay Corporation and its other affiliates may engage (and will have no duty to refrain from engaging) in the same or similar activities or lines of business as us, and that we will not be deemed to have an interest or expectancy in any business opportunity, transaction or other matter (each a Business Opportunity) in which Teekay Corporation or any of its other affiliates engages or seeks to engage merely because we engage in the same or similar activities or lines of business as that related to such Business Opportunity;
if Teekay Corporation or any of its other affiliates (whether through our Manager, any of Teekay Corporation’s or any of its other affiliate’s officers or directors who are also officers or directors of us, or otherwise) acquires knowledge of a potential Business Opportunity that may be deemed to constitute a corporate opportunity of both Teekay Corporation and us, then (i) neithernone of Teekay Corporation, our Manager noror any of suchtheir officers or directors will have any duty to communicate or offer such Business Opportunity to us and (ii) Teekay Corporation may pursue or acquire such Business Opportunity for itself or direct such Business Opportunity to another person or entity; and
any Business Opportunity of which our Manager or any person who is an officer or director of Teekay Corporation (or any of its other affiliates) and of us becomes aware shall be a Business Opportunity of Teekay Corporation.
If Teekay Corporation or its other affiliates no longer beneficially own shares representing at least 20% of the total voting power of our outstanding capital stock, and no person who is an officer or director of us is also an officer or director of Teekay Corporation or its other affiliates, then the business opportunity provisions of the contribution, conveyance and assumption agreement will terminate.
Our articles of incorporation also renounce in favor of Teekay Corporation business opportunities that may be attractive to both Teekay Corporation and us. This provision likewise effectively limits the fiduciary duties we or our shareholders otherwise may be owed regarding these business opportunities by our directors and officers who also serve as directors or officers of Teekay Corporation or its other affiliates.
Non-competition Agreement
In connection with our acquisition from Teekay Corporation of 13 vessels in June 2012 as part of the 2012 Acquired Business transaction, we entered into a non-competition agreement with Teekay Corporation. The following discussion describes certain provisions of the agreement.
Non-competition. Under the non-competition agreement, Teekay Corporation has agreed that neither it nor any of its controlled affiliates other than us will own or operate conventional oil or product tankers until June 15, 2015. However, this restriction does not prevent Teekay Corporation or any of its controlled affiliates from, among other things:
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(a) | owning, operating or chartering any conventional oil or product tankers that Teekay Corporation and its controlled subsidiaries owned or chartered-in as of June 15, 2012 (or any replacement tankers upon any actual or constructive loss of such vessels); |
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(b) | providing ship management services relating to conventional oil or product tankers; or |
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(c) | acquiring up to a 9.9 percent interest in any publicly traded company that owns, operates or charters conventional oil or product tankers; acquiring up to a 50 percent interest in any company that engages no more than the lesser of 20 percent of its assets or $100 million in the business of owning, operating or chartering conventional oil or product tankers; or owning any interests in us, Teekay Offshore Partners L.P. or Teekay LNG Partners L.P. |
Right of First Refusal. The non-competition agreement also provides us with a right of first refusal to acquire existing or newbuilding conventional and product tankers pursuant to opportunities Teekay Corporation develops prior to June 15, 2015. The non-competition agreement generally provides that Teekay Corporation must offer us such acquisition opportunities at their fair market value, for existing tankers, or the fully built-up cost, for newbuildings, and the price may include an allocation of design and development costs for any newbuildings constructed using an energy efficient design developed by Teekay Corporation.
Please see Item 10 - Additional Information: Material Contracts.
Teekay Tankers’ Executive Officers and Certain of its Directors
Kevin Mackay, who has served since June 2014 as our President and Chief Executive Officer, is also an executive officer of our Manager and a member of the executive team of Teekay Corporation.
Vincent Lok,Stewart Andrade, our Chief Financial Officer, is also the Chief Financial Officer of our Manager and the Executive Vice President, Strategy and Chief Financial OfficerBusiness Development of Teekay Corporation.
Arthur Bensler, our ChairmanChair of the Board, is also Executive Vice President and General Counsel of Teekay Corporation and Director and President of Teekay Shipping (Canada) Ltd.Corporation.
Kenneth Hvid, a member of our Board, of Directors, is President and Chief Executive Officer of Teekay Corporation and has been appointed to join its Board of Directors effective as of its 2019 annual meeting of shareholders. Mr. Hvid is also a Director of the general partner of Teekay Offshore Partners L.P. and a Director of Teekay GP L.L.C.
Bjorn Moller, a member of our Board, is a Director of Teekay Offshore GP L.L.C.Corporation and is also a Director of Kattegat Limited, the parent company of Resolute Investments, Ltd., the largest shareholder of Teekay Corporation. He will remain as a Director of Teekay Corporation following his retirement from our Board at our 2019 annual meeting of shareholders.
David Schellenberg, an expected nominee for Director of our Board, is a Director of Teekay Corporation.
Because our executive officers are employees of Teekay Corporation orsubsidiaries other of its subsidiaries,than us, their compensation (other than any awards under our long-term incentive plan) is set and paid by Teekay Corporation or such other applicable subsidiaries. Pursuant to an agreement with Teekay Corporation, we have agreed to reimburse Teekay Corporation or its applicable subsidiaries for time spent by our executive officers on our management matters.
Acquisitions
In May 2017, we completed the acquisition from a subsidiary of Teekay Corporation of the remaining 50% interest in Teekay Tanker Operations Ltd. (or TTOL), which owns conventional tanker commercial management and technical management operations and directly administers four commercially managed tanker RSAs. Please read “Item 18 - Financial Statements: Note 7 - Investments in and advances to Equity-Accounted for Investments.”
In July 2015, we acquired the ship-to-ship transfer business (or TMS) from a company jointly owned by Teekay Corporation and a Norway-based marine transportation company, I.M. Skaugen SE. In addition to full-service lightering and lightering support, TMS also provides consultancy and LNG terminal management services.
In January 2014, we and Teekay Corporation jointly created TIL, for it to opportunistically acquire, operate, and sell modern second-hand tankers and TIL completed a private equity placement in which we and Teekay Corporation co-invested. In addition, we each received a stock purchase warrant to acquire up to an additional 750,000 shares of TIL’s common stock. In November 2017 we completed a merger with TIL by acquiring all of the remaining 27.0 million issued and outstanding common shares of TIL, by way of a share-for-share exchange resulting in TIL becoming our wholly-owned subsidiary. Please read “Item 18 - Financial Statements: Note 23 - Acquisition of Tanker Investments Ltd.”
Registration Rights Agreement
In connection with our initial public offering, we entered into a registration rights agreement with Teekay Corporation pursuant to which we granted Teekay Corporation and its affiliates certain registration rights with respect to shares of our Class A and Class B common stock owned by them. Pursuant to the agreement, Teekay Corporation has the right, subject to certain terms and conditions, to require us, on up to three separate occasions, to register under the U.S. Securities Act of 1933, as amended, shares of Class A common stock, including Class A common stock issuable upon conversion of Class B common stock, held by Teekay Corporation and its affiliates for offer and sale to the public (including by way of underwritten public offering) and incidental or “piggyback” rights permitting participation in certain registrations of our common stock.
We have agreed to pay all registration expenses, including the reasonable fees and expenses of one counsel on behalf of the holders of the securities to be registered, but excluding any underwriting discounts or commissions attributable to the sale of shares of Class A common stock.
Management Agreement
In connection with our initial public offering in December 2007, we entered into the long-term Management Agreement with our Manager, which currently is Teekay Corporation's subsidiary Teekay Shipping Ltd., as successor by merger to the initial manager, Teekay Tankers Management Services Ltd., a subsidiary of Teekay Corporation.
Pursuant to the Management Agreement, the Manager provideshas agreed to provide the following types of services to us: commercial (primarily vessel chartering), technical (primarily vessel maintenance and crewing), administrative (primarily accounting, legal and financial) and strategic (primarily advising on acquisitions, strategic planning and general management of the business).
Our Manager has agreed to use its best efforts to provide these services upon our request in a commercially reasonable manner and may provide these services directly to us or subcontract for certain Since commencement of these services with other entities, primarily other Teekay Corporation subsidiaries. Under the Management Agreement, ourthe Manager remains responsible for any subcontracted services. We will indemnify our Manager for any losses it incurs in connection with providing servicesto subsidiaries of TTOL to provide to us, excluding losses caused by the recklessness, gross negligencethrough its subsidiaries or willful misconductaffiliates, commercial management and technical services for most of our Manager or its employees or agents, for which losses our Manager will indemnify us.fleet. In August 2014, we purchased from Teekay Corporation a 50% interest in TTOL and in May 2017 we acquired the remaining 50% interest in TTOL.
The following discussion describes certain provisions of the Management Agreement, as it has been amended.
Compensation of the Manager
Management Fee.Fees. In return for services under the Management Agreement, we pay our Manager a management fee based on the following components:management fees:
Commercial services fee. We payPrior to October 1, 2018, we paid a fee to our Manager for commercial services it provides to us currentlyfee equal to 1.25% of the gross revenue attributable to the vessels on time charter, our Manager commercially managesmanaged for us and which operated under time charters or were spot traded (excluding vessels participating in the Teekay Suezmax Pool, Teekay Aframax Pools orRSAs). Subsequent to our acquisition of the Taurus Tankers LR2 Pool). We paid commercial service feesremaining 50% interest in TTOL in May 2017, our share of $1.9 million for 2016, $1.2 million for 2015, and $1.1 million for 2014 excluding the Manager's commercial management fees of $0.2 million for 2015has been eliminated. Commencing October 1, 2018, we elected to provide our own commercial services, effectively eliminating the prior subcontracting arrangement between our Manager and $0.2 million for 2014 attributable to the Entities under Common Control.TTOL.
Technical services fee. We pay aPrior to October 1, 2018, we paid an annual fee to our Managerper vessel for technical services andour Manager provided to us. Commencing October 1, 2018, we paidelected to provide our own technical services, fees of $9.2 million for 2016, $7.0 million for 2015,effectively eliminating the prior subcontracting arrangement between our Manager and $5.6 million for 2014 excluding the technical management fees of $0.4 million for 2015 and $0.4 million for 2014 attributable to the Entities under Common Control.TTOL.
Administrative and strategic services fees. We pay fees to our Manager for administrative and strategic services that reimburse our Manager for its related direct and indirect expenses in providing suchadministrative and strategic services and which includesinclude a profit margin. The amount of the profit margin is based on the most recent transfer pricing study performed by an independent, nationally recognized accounting firm with respect to similar administrative and strategic services. The transfer pricing study is updated at least annually. We paid administrative and strategic services fees of $10.1 million for 2016, $8.4 million for 2015, and $8.7 million for 2014 excluding administrative and strategic services fees of $0.7 million for 2015 and $0.9 million for 2014 attributable to the Entities under Common Control.
For additional information about these services and fee, please see Item 18 – Financial Statements: Note 3"Note 4 – Acquisition of Entities under Common ControlControl" and Item"Item 18 – Financial Statements: Note 15f15e – Related Party Transactions – Management fee -– Related and Other,Other", in our consolidated financial statements included in this Annual Report.
Performance Fee. In order to provide our Manager with an incentive to improve the results of our operations and financial condition, the Management Agreement also provides for payment to our Manager of a performance fee in certain circumstances, in addition to the basic fees described above. Our Manager generally is entitled to payment of a performance fee equal to 20% of the Gross Cash Available for Distribution (as defined in the Management Agreement) if in a given fiscal year this figure exceeds $3.20 per share of our common stock (subject to adjustment for stock dividends, splits, combinations and similar events, and based on the weighted-average number of shares outstanding for the year) (or the Incentive Threshold).
Since January 1, 2008, we have maintainedWe maintain an internal account (or the Cumulative Dividend Account) that reflects, on an aggregate basis, the amount by which our dividends for a fiscal year are greater or less than the $2.65 per share annual incentive baseline (subject to adjustments for stock dividends, splits, combinations and similar events, and based on the weighted-average number of shares outstanding for the fiscal year).baseline. The Cumulative Dividend Account is intended to ensure that our shareholders receive an equivalent of at least $2.65 per share in annualized dividends before any performance fee is paid. If Gross Cash Available for Distribution per share exceeds the Incentive Threshold in respect of a particular fiscal year, we will only pay our Manager a performance fee if the Cumulative Dividend Account is zero or positive; if there is a deficit in the Cumulative Dividend Account, the performance fee may be reduced. Following the end of each five-year period, commencing January 1, 2013, the Cumulative Dividend Account balance will beis reset to zero. We paid no performance fees to our Manager in 2016, 2015,2018, 2017 or 2014.2016.
Term and Termination Rights. Subject to certain termination rights, the initial term of the Management Agreement will expire on December 31, 2022. If not terminated, the Management Agreement will automatically renew for a five-year period and thereafter be extended in additional five-year increments if we do not provide notice of termination in the fourth quarter of the year immediately preceding the end of the respective term.
We may terminateIf we or the Management Agreement in certain circumstances, including, among others, if:
our Manager materially breaches the Management Agreement (and the matter is unresolved after a 90-day dispute resolution period) or experiences certain bankruptcy events or experiences a change of control to which we do no consent;
we had provided notice in the fourth quarter of 2016 after two-thirds of our Board of Directors elects to terminate the Management Agreement such termination would have been effective on December 31, 2017 (we did not provide such notice); or
we provide notice in the fourth quarter of 2021, which termination would be effective on December 31, 2022. If the Management Agreement extends pursuant to its terms as described above, we can elect to exercise this optional termination right in the fourth quarter of the year immediately preceding the end of the respective term.
If we elect to terminate the Management Agreement under either of the last two bullet points described above,certain circumstances, our Manager will receive a payment (the Termination Payment) in an amount equal to the aggregate performance fees payable for the immediately preceding five fiscal years.
Any such Termination Payment will be paid to our Manager in four quarterly installments over the course of the fiscal year following termination.
Our Manager may terminate the Management Agreement prior to the end of its term under either of the following two circumstances:
after December 18, 2012 with 12 months’ notice. At our option, our Manager will continue to provide technical services to us for up to an additional two-year period from termination, provided that our Manager or its affiliates continue in the business of providing such services to third parties for similar types of vessels; or
if we materially breach the agreement and the matter is unresolved after a 90-day dispute resolution period.
If our Manager elects to terminate the Management Agreement under the second circumstance described above, our Manager will receive the Termination Payment, payable in four quarterly installments over the course of the first year following termination.
The Management Agreement will terminate automatically and immediately if we experience any of certain changes of control. Upon any such termination, we will be required to pay our Manager the Termination Payment in a single installment.
Pooling Agreements
Teekay Suezmax Pool
In November 2015, we and certain third party vessel owners entered into a new revenue sharing pool agreement (the Suezmax Pooling Agreement) with Teekay Chartering Limited, a subsidiary of TTOL. Pursuant to this agreement, we have agreed to include in the pool certain qualifying Suezmax-class crude tankers that are employed and operate in the spot market or pursuant to time charters of less than one year.
Prior to November 2015, we along with certain third party vessel owners and operators were parties to a revenue sharing pool agreement (the Gemini Pooling Agreement) pursuant to which these pool participants had each agreed to include in the pool certain qualifying Suezmax-class crude tankers of the pool participants and their respective affiliates, including us, that operated in the spot market or pursuant to time charters of less than one year. The Gemini Suezmax Pool was jointly and equally owned by TTOL, in which Teekay Corporation and we each have a 50% interest, and a third party.
As of December 31, 2016, the Teekay Suezmax Pool consisted of 29 Suezmax tankers (including 16 of our tankers). Vessels trading in the Gemini Suezmax Pool completed their voyages in early 2016, and upon completion, these vessels delivered to and continued to trade in the Teekay Suezmax Pool. The Gemini Suezmax Pool has completed all operations and is in the process of being wound up.
A participating Suezmax tanker will no longer participate in the Teekay Suezmax Pool if it becomes subject to a time charter with a term exceeding one year, unless otherwise agreed by all pool participants. In addition, vessels no longer participate in the pool if they suffer an actual or constructive total loss or if they are sold to or become controlled by a person who is not an affiliate of a party to the Suezmax Pooling Agreement.
Vessel owners remain responsible for the technical management of their vessels in the Teekay Suezmax Pool, and our Manager provides these technical services with respect our vessels pursuant to the Management Agreement.
Allocation of Suezmax Pool Earnings. The Teekay Suezmax Pool provides a revenue sharing mechanism whereby aggregate revenues and related expenses of the pool are distributed to pool participants based on an allocation formula. Revenues generated by vessels operating in the Suezmax Pool less voyage expenses (such as fuel and port charges) incurred by these vessels and other applicable expenses are pooled and allocated according to a specified weighting system that recognizes each vessel’s earnings capability based on its characteristics, speed and bunker consumption, as well as actual on-hire performance. The allocation for each vessel participating in the pool is established based on observations and historical consumption and performance measures of the individual vessel. Payments based on net cash flow applicable to each tanker are made on a monthly basis to pool participants and adjusted every six months based on the weighting system.
Commercial Management Fee and Working Capital Payments. Teekay Chartering Limited provides commercial services to pool participants and otherwise administers the pool in exchange for a fee currently equal to $350 per vessel per day plus 1.25% of the gross revenues attributable to the participant’s vessels.
Upon delivery of each of our vessels to the Teekay Suezmax Pool, we are required to advance working capital in an aggregate amount of $1.5 million, subject to adjustments made at the discretion of the pool manager. We may be required to advance additional working capital funds from time to time. Working capital advances are returned when a vessel no longer participates in the pool, less any set-offs for outstanding liabilities or contingencies. Please read Item 18 – Financial Statements: Note 15i – Related Party Transactions.
Term and Termination. There is no specific expiration date for the Suezmax Pooling Agreement. However, the Teekay Suezmax Pool may be wound up if there are no participants. A pool participant may withdraw from the Teekay Suezmax Pool upon at least 90 days’ notice and shall cease to participate in the Suezmax Pool if, among other things, it materially breaches the Suezmax Pooling Agreement and fails to resolve the breach within a specified cure period or experiences certain bankruptcy events.
Teekay Aframax Pools
We entered into revenue sharing pool agreements (the Teekay Pooling Agreements) with Teekay Corporation and Teekay Chartering Limited, a subsidiary of TTOL. Pursuant to the Teekay Pooling Agreements, we and Teekay Corporation have agreed to include in the Teekay Aframax Pools all of our and its respective Aframax-class oil tankers that are employed in the spot market or operate pursuant to time charters of less than 90 days. As of December 31, 2016, the Teekay Aframax Pools consisted of 35 Aframax tankers, which included three of our owned tankers, four of our in-chartered tankers, and five of our owned LR2 product tankers which are commercially managed by and cross trading from the Taurus Tankers LR2 pool. Any Aframax tanker that becomes subject to a time charter with a term of at least 90 days or becomes subject to enforcement action under a ship-mortgage foreclosure or similar proceeding will no longer participate in the Teekay Aframax Pools, unless otherwise agreed by Teekay Corporation and us. In addition, vessels will no longer participate in the pool if they suffer an actual or constructive total loss or if they are sold to or become controlled by a third party who is not a party to the Teekay Pooling Agreements.
Under the Teekay Pooling Agreements, Teekay Chartering Limited commercially manages the Teekay Aframax Pools by providing chartering and marketing services for all participating tankers. We remain responsible for the technical management of our vessels in the Teekay Aframax Pools, and our Manager provides these technical services to us pursuant to the Management Agreement.
Allocation of Teekay Aframax Pools’ Earnings. The Teekay Aframax Pools provide a revenue sharing mechanism whereby aggregate revenues and related expenses of the pools are distributed to pools’ participants based on an allocation formula. Revenues generated by vessels operating in the Teekay Aframax Pools less voyage expenses (such as fuel and port charges) incurred by these vessels and other applicable expenses are pooled and allocated according to a specified weighting system that recognizes each vessel’s earnings capability based on its characteristics, speed and bunker consumption, as well as actual on-hire performance. The allocation for each vessel participating in the pools is established based on observations and historical consumption and performance measures of the individual vessel. Payments based on net cash flow applicable to each tanker are made on a monthly basis to pool participants and adjusted every six months based on the weighting system.
Commercial Management Fee and Working Capital Payments. Teekay Chartering Limited provides commercial services to us and otherwise administers the pools in exchange for a fee currently equal to $350 per vessel per day plus 1.25% of the gross revenues attributable to the participant’s vessels.
Upon delivery of each of our vessels to the Teekay Aframax Pools, we are required to advance to Teekay Chartering Limited $250,000 for working capital purposes. We may be required to advance additional working capital funds from time to time. Working capital advances will be returned to us when a vessel no longer participates in the pools, less any set-offs for outstanding liabilities or contingencies. Please read Item 18 – Financial Statements: Note 15i – Related Party Transactions.
Term and Termination Rights. Subject to certain termination rights, the initial term of the Teekay Pooling Agreement expires on December 31, 2022. If not terminated, the Teekay Pooling Agreement will automatically renew for a five-year period and thereafter be extended in additional five-year increments unless we provide a notice of termination in the fourth quarter of the year immediately preceding the end of the respective term.
We may also terminate the Teekay Pooling Agreement in certain other circumstances, including, among others, if:
Teekay Chartering Limited or Teekay Corporation materially breaches the Teekay Pooling Agreement (and the matter is unresolved after a 90-day dispute resolution period) or experiences certain bankruptcy events or if Teekay Chartering Limited experiences a change of control to which we do no consent; or
theTIL Management Agreement terminates for any reason.
Either Teekay Chartering Limited or Teekay Corporation may terminate the Teekay Pooling Agreement prior to the end of its term under any of the following circumstances:
after December 18, 2012 with 12 months’ notice;
if we materially breach the Teekay Pooling Agreement and the matter is unresolved after a 90-day dispute resolution period; or
if the Management Agreement terminates for any reason.
Taurus Tankers LR2 Pool
We along with certain third party vessel owners and operators are parties to a revenue sharing pool agreement (the Taurus Pooling Agreement) pursuant to which these pool participants have each agreed to include in the pool certain qualifying LR2-class product tankers of the pool participants and their respective affiliates, including us, that operate in the spot market or pursuant to time charters of less than one year. The Taurus Tankers LR2 Pool is indirectly owned by TTOL.
As of December 31, 2016, the Taurus Tankers LR2 Pool consisted of 11 LR2 product tankers, including five of our owned LR2 product tankers which have been deployed into the Aframax pools. A participating LR2 product tanker will no longer participate in the Taurus Tankers LR2 Pool if it becomes subject to a time charter with a term exceeding one year, unless otherwise agreed by all pool participants. In addition, vessels will no longer participate in the pool if they suffer an actual or constructive total loss or if they are sold to or become controlled by a person who is not an affiliate of a party to the Taurus Pooling Agreement.
Vessel owners remain responsible for the technical management of their vessels in the Taurus Tankers LR2 Pool, and our Manager provides these technical services with respect our vessels pursuant to the Management Agreement.
Allocation of Taurus Pool Earnings. The Taurus Tankers LR2 Pool provides a revenue sharing mechanism whereby aggregate revenues and related expenses of the pool are distributed to pool participants based on an allocation formula. Revenues generated by vessels operating in the Taurus Tankers LR2 Pool less voyage expenses (such as fuel and port charges) incurred by these vessels and other applicable expenses are pooled and allocated according to a specified weighting system that recognizes each vessel’s earnings capability based on its characteristics, speed and bunker consumption, and actual on-hire performance. The allocation for each vessel participating in the pool is established based on observations and historical consumption and performance measures of the individual vessel. Payments based on net cash flow applicable to each tanker are made on a monthly basis to pool participants and adjusted every six months based on the weighting system.
Commercial Management Fee and Working Capital Payments. Taurus Tankers LR2 Pool provides commercial services to pool participants and otherwise administers the pool in exchange for a fee currently equal to $275 per vessel per day plus 1.25% of the gross revenues attributable to the participant’s vessels.
Upon delivery of each of our vessels to the Taurus Tankers LR2 Pool, we are required to advance working capital in an aggregate amount of $1.0 million, subject to adjustments made at the discretion of the pool manager. We may be required to advance additional working capital funds from time to time. Working capital advances will be returned to us when a vessel no longer participates in the pool, less any set-offs for outstanding liabilities or contingencies. Please read Item 18 – Financial Statements: Note 15i – Related Party Transactions
Term and Termination. There is no specific expiration date for the Taurus Pooling Agreement. However, the pool may be wound up if there are no participants. A pool participant may withdraw from the Taurus Tankers LR2 Pool upon at least 90 days’ notice and shall cease to participate in the Taurus Tankers LR2 Pool if, among other things, it materially breaches the Taurus Pooling Agreement and fails to resolve the breach within a specified cure period or experiences certain bankruptcy events.
Teekay’s Commercial and Technical Operations (TTOL)
In August 2014, we purchased from Teekay Corporation a 50% interest in TTOL, which owns conventional tanker commercial management and technical management operations, including direct ownership in three commercially managed tanker pools (as described above), for an aggregate price of approximately $23.7 million, including net working capital. As consideration for this acquisition, we issued to Teekay Corporation 4.2 million Class B common shares, which had an approximate value of $17.0 million, or $4.03 per share, on the acquisition closing date. In addition, we reimbursed Teekay Corporation for $6.7 million of working capital we assumed from Teekay Corporation in connection with the purchase.
Investment in Tanker Investments Ltd. (TIL)
In January 2014, we and Teekay Corporation jointly created TIL, which seeks to opportunistically acquire, operate, and sell modern secondhand tankers. TIL completed a $250 million equity private placement in which we and Teekay Corporation co-invested $25 million each for a combined 20% initial ownership in the new company. In addition, each of we and Teekay Corporation received (a) a preferred share entitling it to appoint one TIL director and (b) a stock purchase warrant to acquire up to an additional 750,000 shares of TIL’s common stock, linked to TIL’s future share price performance. Please see Item 18 – Financial Statements: Note 11—Derivative Instruments, in our consolidated financial statements included in this Annual Report. In March 2014, TIL completed a $175 million initial public offering and listed its shares on the Oslo Stock Exchange, which reduced our ownership interest in TIL from 10.0% to 6.5%.
In October 2014, we purchased in the open market an additional 0.9 million common shares in TIL. We acquired these shares at a price of NOK 69 per share, or a purchase price of $10.0 million.
As of December 31, 2014, TIL had completed the acquisition of two 2010-built VLCC vessels from us for an aggregate purchase price of $154 million plus related working capital on closing of $1.7 million, four 2009-built Suezmax tankers from Teekay Corporation and six 2009, 2010 and 2011-built Aframax tankers and two 2012-built coated Aframax vessels from third parties. TIL had also signed an agreement to acquire four 2009-built and two 2010-built Suezmax tankers from a third party, which delivered in the first half of 2015. In the first quarter of 2016, TIL completed the sales of the two 2010-built VLCC vessels, which brought the total number of vessels owned by TIL to 18.
In January 2014, TIL entered into a long-term management agreement with our Manager, pursuant to which theour Manager providesagreed to provide to TIL commercial, technical, administrative and corporate services and personnel, including TIL’s executive officers, in exchange for management services fees and reimbursement of expenses. In connection with our acquisition of TIL in November 2017, our Manager waived the management services fees payable under the TIL management agreement to the extent such fees exceed the fees payable under the existing Management Agreement between us and the Manager, but the Manager did not waive the transaction fee that is payable in the event of any sale of vessels owned by TIL subsidiaries as of date of the TIL merger, which fee is equal to 1.0% of the aggregate consideration payable to us, TIL or its subsidiaries pursuant to a sale contract.
During 2015, TIL repurchased 3.3 million of its own shares on the open market. The common shares were repurchased at a weighted average price of NOK 105.2 per share, or a gross purchase price of $40.6 million. During 2016, TIL repurchased 3.3 million of its own shares in the open market. The common shares were repurchased at a weighted average price of NOK 80.2 per share, or a gross purchase of $31.8 million. As of December 31, 2016, our ownership interest in TIL was 11.3% (December 31, 2015 - 10.2%).
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| Item 8. | Financial Information |
Consolidated Financial Statements and Notes
Please see Item"Item 18 – Financial StatementsStatements" for additional information required to be disclosed under this Item.
Legal Proceedings
From time to time we have been, and we expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business, principally personal injury and property casualty claims. Such claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations. Please read Item 18 – Financial Statements: Note 22 – Shipbuilding Contracts for a description of legal action we have commenced against STX.
Dividend Policy
Prior to the first quarter of 2013, we paidWe have adopted a variable quarterly cash dividend equal to our Cash Available for Distribution each quarter, subject to any reserves determined by our Board of Directors. Dividends are paid equally on a per-share basis between our Class A common stock and our Class B common stock. Cash Available for Distribution represented net income (loss), plus depreciation and amortization, unrealized losses from derivatives, non-cash items and any write-offs or other non-recurring items, less unrealized gains from derivatives and net income attributed to the historical results of vessels acquired by us from Teekay Corporation, prior to their acquisition by us, for the period these vessels were owned and operated by Teekay Corporation. On February 21, 2013, we announced that our Board of Directors elected to move to a fixed quarterly cash dividend of $0.03 per share, which commenced in the quarter ended March 31, 2013. On December 14, 2015, we announced our current dividend policy under which quarterly dividends are expected to range from 30% to 50% of our quarterly adjusted net income, subject to the discretion ofreserves our Board of Directors with amay determine are necessary for the prudent operations of the company. Effective May 2018, we eliminated the payment of our minimum quarterly dividend of $0.03 per share. Adjusted net (loss) income is a non-GAAP measure which excludes specific items affecting net (loss) income that are typically excluded by securities analysts in their published estimates of our financial results. Our dividend policy is reviewed by our Board of Directors from time to time and subject to change.
The timing and amount of dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements, the requirements of Marshall Islands law, restrictions in financing agreements and other factors deemed relevant by our Board of Directors.
Significant Changes
Please read Item"Item 5 – Operating and Financial Review and Prospects: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Developments in 20162018 and Early 2017.2019” and “Item 18 - Financial Statements: Note 24 - Subsequent Events” for descriptions of significant changes that have occurred since December 31, 2018.
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| Item 9. | The Offer and Listing |
Our Class A common stock is listed on the New York Stock Exchange (or NYSE) under the symbol “TNK”. The following table sets forth the high and low prices for our Class A common stock on the NYSE for each of the periods indicated.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended | Dec 31, 2016 | | Dec 31, 2015 | | Dec 31, 2014 | | Dec 31, 2013 | | Dec 31, 2012 | | | | | | | | |
| High | $ | 6.89 |
| | $ | 8.53 |
| | $ | 5.95 |
| | $ | 4.02 |
| | $ | 6.33 |
| | | | | | | | |
| Low | $ | 1.90 |
| | $ | 4.82 |
| | $ | 3.18 |
| | $ | 2.38 |
| | $ | 2.38 |
| | | | | | | | |
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| Quarters Ended | Mar 31, 2017 | | Dec 31, 2016 | | Sept 30, 2016 | | Jun 30, 2016 | | Mar 31, 2016 | | Dec 31, 2015 | | Sept 30,
2015 | | Jun 30, 2015 | | Mar 31, 2015 |
| High | $ | 2.70 |
| | $ | 2.85 |
| | $ | 3.28 |
| | $ | 4.16 |
| | $ | 6.89 |
| | $ | 8.53 |
| | $ | 7.88 |
| | $ | 7.88 |
| | $ | 7.05 |
|
| Low | $ | 1.96 |
| | $ | 1.90 |
| | $ | 2.42 |
| | $ | 2.87 |
| | $ | 3.26 |
| | $ | 6.31 |
| | $ | 4.88 |
| | $ | 5.70 |
| | $ | 4.82 |
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| Months Ended | Mar 31, 2017 | | Feb 28, 2017 | | Jan 31, 2017 | | Dec 31, 2016 | | Nov 30, 2016 | | Oct 31, 2016 | | | | | | |
| High | $ | 2.40 |
| | $ | 2.70 |
| | $ | 2.51 |
| | $ | 2.78 |
| | $ | 2.64 |
| | $ | 2.85 |
| | | | | | |
| Low | $ | 1.96 |
| | $ | 2.26 |
| | $ | 2.21 |
| | $ | 2.21 |
| | $ | 1.90 |
| | $ | 2.10 |
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| Item 10. | Additional Information |
Articles of Incorporation and Bylaws
Our Amended and Restated Articles of Incorporation, as amended on November 27, 2017 and July 6, 2018, have been filed as Exhibit 1.1 to our Report on Form 6-K furnished to the SEC on November 30, 2018, and our Amended and Restated Bylaws have been filed as Exhibits 3.1 andExhibit 3.2 respectively, to Amendment No. 1 to our Registration Statement on Form F-1 (File No. 333-147798), filed with the SEC on December 11, 2007, and are each hereby incorporated by reference into this Annual Report.
The rights, preferences and restrictions attaching to each class of our capital stock are described in the section entitled “Description of Capital Stock” of our prospectus (File No. 333-196915), filed with the SEC on June 19, 2014, and hereby incorporated by reference into this Annual Report.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by the laws of the Republic of The Marshall Islands or by our Articles of Incorporation or Bylaws.
Material Contracts
The following is a summary of each material contract, other than material contracts entered into in the ordinary course of business, to which we or any of our subsidiaries is a party, for the two years immediately preceding the date of this Annual Report, each of which is included in the list of exhibits in Item 19:
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| a) | Management Agreement dated December 18, 2007 between Teekay Tankers Ltd. and Teekay Tankers Management Services Ltd., as amended by Amendment No. 1 dated as of May 7, 2009, Amendment No. 2 dated as of September 21, 2010, and Amendment No. 3 dated as of January 1, 2011.2011 and Amendment No. 4 dated as of March 31, 2019. Please read Item 4. – Information on the Company – B. Business Overview for a description of this Management Agreement. |
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| b) | Addendum to Management Agreement dated March 23, 2016 between Teekay Tankers Ltd. and Teekay Tankers Management Services Ltd. This Addendum allows Teekay Tankers Management Services Ltd. to sub-contract commercial management of vessels to certain parties, subject to certain terms. |
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| c) | Technical Services Agreement dated December 18, 2007 between Teekay Tankers Management Services Ltd. and Teekay Shipping Limited. Please read Item 4. – Information on the Company – B. Business Overview for a description of this Technical Services Agreement. |
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| d) | Commercial Management Services Agreement dated February 29, 2008 between Teekay Tankers Management Services Ltd. and Teekay Chartering Limited. Please read Item 4. – Information on the Company – B. Business Overview for a description of this Commercial Management Agreement. |
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| e) | Teekay Tankers Ltd. 2007 Long-Term Incentive Plan. |
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d) | Agreement dated November 28, 2007, for a U.S. $229,000,000 Secured Revolving Credit Facility between Teekay Tankers Ltd., Nordea Bank Finland PLC and various other banks. |
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e)f) | Registration Rights Agreement between Teekay Tankers Ltd. and Teekay Corporation. |
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f)g) | Shareholders Agreement dated September 30, 2010 for a U.S. $98,000,000 shipbuilding contract among Teekay Tankers Holding Ltd., Kriss Investment Company and High-Q Investment Ltd. |
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g)h) | PurchaseMaster Ship Management Agreement dated June 15,August 31, 2012 between Teekay CorporationShipping Limited and Teekay Tankers Ltd. For the sale and purchase of the entire membership interests in Godavari Spirit L.L.C., Axel Spirit L.L.C., Mahanadi Spirit L.L.C., Teesta Spirit L.L.C., Hugli Spirit L.L.C., Americas Spirit L.L.C., Australian Spirit L.L.C., Pinnacle Spirit L.L.C., Donegal Spirit L.L.C., Galway Spirit L.L.C., Limerick Spirit L.L.C., Summit Spirit L.L.C., and Zenith Spirit L.L.C. |
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h) | Non-competition Agreement dated June 15, 2012 between Teekay Corporation and Teekay TankersMarine Ltd. Please read Item 74. – Major Shareholders and Related Party Transaction:Information on the Company – B. Related Party TransactionsBusiness Overview for a discussion on the agreement.description of this Master Ship Management Agreement. |
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| i) | Secured Term Loan and Revolving Credit Facility Agreement dated January 8, 2016 between Teekay Tankers Ltd., Nordea Bank Finland PLC and various other banks, for a $894.4 million long-term debt facility, consisting of both a term loan and a revolving credit facility, which is scheduled to mature in January 2021. |
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| j) | Secured Term Loan Facility Agreement dated August 28, 2015 between Teekay Tankers Ltd., ABN AMRO Capital USA LLC and various other banks for the principal amount of $397.2 million, which matured on January 29, 2016. The loan facility is secured by the 12 modern Suezmax tankers we acquired from Principal Maritime and has a variable interest rate of LIBOR plus a margin of 2.25%. Repayments are to be made in two equal quarterly installments of $10.0 million with a balloon repayment due at maturity. This loan facility was refinanced through the new loan agreement in January 2016, referred to above. |
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| k) | Secured Term Loan Facility Agreement dated January 30, 2015 between Teekay Tankers Ltd., ABN AMRO Capital USA LLC, DNB Capital LLC and DNB Markets, Inc., for the principal amount of approximately $126.6 million, which matured on January 29, 2016. The loan facility is secured by the four LR2 product tankers and one Aframax tanker we acquired during the quarter ended March 31, 2015 and has a variable interest rate of LIBOR plus a margin of 2.50% to 2.80%. Repayments are to be made in four equal quarterly installments of $3.0 million with a balloon repayment due at maturity. This loan facility was refinanced through the new loan agreement in January 2016, referred to above. |
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| l) | Equity Distribution Agreement, dated November 18, 2015, between Teekay Tankers Ltd. and Evercore Group L.L.C. Under this Agreement, we implemented a continuous offering program through which we may, from time to time, issue Class A common stock with an aggregate offering price of up to $80.0 million, through Evercore, as sale agent. |
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| m) | Equity Distribution Agreement, dated June 4, 2015, between Teekay Tankers Ltd. and Evercore Group L.L.C. Under this Agreement, we implemented a continuous offering program through which we may, from time to time, issue Class A common stock with an aggregate offering price of up to $80.0 million, through Evercore, as sale agent. In September 2015, we concluded this COP after selling approximately 11.3 million shares for net proceeds of $78.2 million. |
offering price of up to $80.0 million, through Evercore, as sale agent. In September 2015, we concluded this COP after selling approximately 11.3 million shares for net proceeds of $78.2 million.
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| n) | Registration Rights Agreement, dated August 4, 2015, by and among Teekay Tankers Ltd. and Veritable Maritime Holdings, LLC. Under this Agreement, we agreed to prepare and file a shelf registration statement to register offers and sales of certain shares of our Class A Common Stock that we issued to Veritable Maritime Holdings, LLC and certain of its affiliates as partial consideration for our purchase of certain vessels from certain wholly ownedwholly-owned indirect subsidiaries of Veritable Maritime Holdings, LLC. |
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| o) | Common Stock Purchase Agreement, dated August 4, 2015, by and among Teekay Tankers Ltd. and the purchasers named therein. Under this Agreement, we issued 9,118,797 shares of our Class A Common Stock to a group of institutional investors for $6.65 per share. |
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| p) | Secured Revolving Credit Facility Agreement dated December 18, 2017 between Teekay Tankers Ltd., Nordea Bank AB and various other banks, for a $270.0 million long-term debt facility which is scheduled to mature in December 2022. |
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| q) | Agreement and Plan of Merger, dated as of May 31, 2017, by and among Teekay Tankers Ltd., Royal 2017 Ltd. and Tanker Investments Ltd. (or TIL) under which we completed a merger with TIL by acquiring all of the remaining 27.0 million issued and outstanding common shares of TIL, by way of a share-for-share exchange of 3.3 shares of our Class A common stock for each share of TIL common stock, and as a result, TIL became a wholly-owned subsidiary. |
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| r) | Voting and Support Agreement, dated as of May 31, 2017, between Teekay Corporation, Teekay Holdings Limited, Teekay Finance Limited, Tanker Investments Ltd. and Teekay Tankers Ltd., providing, among other things, that Teekay Corporation will support the Merger with TIL. |
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| s) | Purchase Agreement, dated as of May 31, 2017, between Teekay Tankers Ltd. and Teekay Holdings Limited (or THL), under which we purchased the remaining 50% of the issued and outstanding shares of Teekay Tanker Operations Ltd. from THL. |
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| t) | Voting and Support Agreement, dated as of September 14, 2017, by and among Teekay Tankers Ltd., Huber Capital Management, LLC and Joseph R. Huber, providing, among other things, that Huber Capital Management, LLC and Joseph R. Huber would vote certain shares of the Company's Class A Common Stock in favor of a charter amendment in connection with our merger with TIL. |
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| u) | Share Subscription Agreement, dated January 13, 2017, between Teekay Tankers Ltd. and THL, under which we agreed to issue a total of 2,155,172 shares of our Class A common stock for an aggregate purchase price of $5,000,000. |
Exchange Controls and Other Limitations Affecting Security Holders
We are not aware of any governmental laws, decrees or regulations, including foreign exchange controls, in the Republic of Thethe Marshall Islands that restrict the export or import of capital or that affect the remittance of dividends, interest or other payments to holders of our securities that are non-resident and not citizens.citizens and otherwise not conducting business or transactions in the Marshall Islands.
We are not aware of any limitations on the right of non-resident or foreign owners to hold or vote our securities imposed by the laws of the Republic of Thethe Marshall Islands or our Articles of Incorporation and Bylaws.
Material U.S. Federal Income Tax Considerations
The following is a discussion of certain material U.S. federal income tax considerations that may be relevant to shareholders. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended (or the Code), legislative history, applicable U.S. Treasury Regulations (or Treasury Regulations), judicial authority and administrative interpretations, all as in effect on the date of this Annual Report, and which are subject to change, possibly with retroactive effect, or are subject to different interpretations. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. Unless the context otherwise requires, references in this section to “we,” “our” or “us” are references to Teekay Tankers Ltd.
This discussion is limited to shareholders who hold their common stock as a capital asset for tax purposes. This discussion does not address all tax considerations that may be important to a particular shareholder in light of the shareholder’s circumstances, or to certain categories of shareholders that may be subject to special tax rules, such as:
dealers in securities or currencies,
traders in securities that have elected the mark-to-market method of accounting for their securities,
persons whose functional currency is not the U.S. dollar,
persons holding our common stock as part of a hedge, straddle, conversion or other “synthetic security” or integrated transaction,
certain U.S. expatriates,
financial institutions,
insurance companies,
persons subject to the alternative minimum tax,
persons that actually or under applicable constructive ownership rules own 10% or more of our common stock (by vote or value), and
entities that are tax-exempt for U.S. federal income tax purposes.
If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. Partners in partnerships holding our common stock should consult their tax advisors to determine the appropriate tax treatment of the partnership’s ownership of our common stock.
This discussion does not address any U.S. estate tax considerations or tax considerations arising under the laws of any state, local or non-U.S. jurisdiction. Each shareholder is urged to consult its tax advisor regarding the U.S. federal, state, local, non-U.S. and other tax consequences of the ownership or disposition of our common stock.
United States Federal Income Taxation of U.S. Holders
As used herein, the term U.S. Holder means a beneficial owner of our common stock that is, for U.S. federal income tax purposes: (i) a U.S. citizen or U.S. resident alien (or a U.S. Individual Holder), (ii) a corporation or other entity taxable as a corporation, that was created or organized under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate whose income is subject to U.S. federal income taxation regardless of its source, or (iv) a trust that either is subject to the supervision of a court within the United States and has one or more U.S. persons with authority to control all of its substantial decisions or has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
Distributions
We are taxed as a corporation for U.S. federal income tax purposes. Subject to the discussion of passive foreign investment companies (or PFICs) below, any distributions made by us to a U.S. Holder generally will constitute dividends, which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of our current and accumulated earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in our common stock and thereafter as capital gain, which will be either long termlong-term or short termshort-term capital gain depending upon whether the U.S. Holder has held the common stock for more than one year. U.S. Holders that are corporations for U.S. federal income tax purposes generally will not be entitled to claim a dividends received deduction with respect to any distributions they receive from us. For purposes of computing allowable foreign tax credits for U.S. federal income tax purposes, dividends received with respect to our common stock will be treated as foreign source income and generally will be treated as “passive category income.”
Subject to holding period requirements and certain other limitations, dividends received with respect to our common stock by a U.S. Holder who is an individual, trust or estate (or a Non-Corporate U.S. Holder) will be treated as “qualified dividend income” that is taxable to such Non-Corporate U.S. Holder at preferential capital gain tax rates provided that we are not classified as a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (we intend to take the position that we are not now and have never been classified as a PFIC, as discussed below). Any dividends received with respect to our common stock not eligible for these preferential rates will be taxed as ordinary income to a Non-Corporate U.S. Holder.
Special rules may apply to any “extraordinary dividend” paid by us. Generally, an extraordinary dividend is a dividend with respect to a share of common stock if the amount of the dividend is equal to or in excess of 10% of a common shareholder’sstockholder’s adjusted tax basis (or fair market value in certain circumstances) in such common stock. In addition, extraordinary dividends include dividends received within a one yearone-year period that, in the aggregate, equal or exceed 20% of a shareholder’sstockholder’s adjusted tax basis (or fair market value in certain circumstances). If we pay an “extraordinary dividend” on our common stock that is treated as “qualified dividend income,” then any loss recognized by a Non-Corporate U.S. Holder from the sale or exchange of such common stock will be treated as long–term capital loss to the extent of the amount of such dividend.
Certain Non-Corporate U.S. Holders currently are subject to a 3.8% tax on certain investment income, including dividends. Non-Corporate U.S. Holders should consult their tax advisors regarding the effect, if any, of this tax on their ownership of our common stock.
Sale, Exchange or Other Disposition of Common Stock
Subject to the discussion of PFICs below, a U.S. Holder generally will recognize capital gain or loss upon a sale, exchange or other disposition of our common stock in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder’s tax basis in such stock. Subject to the discussion of extraordinary dividends above, such gain or loss generally will be treated as (a) long–term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition, or short term capital gain or loss otherwise and (b) U.S. source gain or loss, as applicable, for foreign tax credit purposes. Non-Corporate U.S. Holders may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
Certain Non-Corporate U.S. Holders currently are subject to a 3.8% tax on certain investment income, including capital gains from the sale or other disposition of stock. Non-Corporate U.S. Holders should consult their tax advisors regarding the effect, if any, of this tax on their disposition of our common stock.
Consequences of Possible PFIC Classification
A non–U.S.non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and certain subsidiaries pursuant to a “look through” rule, either: (i) at least 75% of its gross income is “passive” income; or (ii) at least 50% of the average value of its assets is attributable to assets that produce or are held for the production of passive income. For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. By contrast, income derived from the performance of services does not constitute “passive income.”
There are legal uncertainties involved in determining whether the income derived from our time-chartering activities constitutes rental income or income derived from the performance of services, including legal uncertainties arising from the decision in Tidewater Inc. v. United States , 565 F.3d 299 (5th Cir. 2009), which held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign sales corporation provision of the Code. However, the Internal Revenue Service (or IRS) stated in an Action on Decision (AOD 2010-01) that it disagrees with, and will not acquiesce to, the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would not follow the Tidewater decision in interpreting the PFIC provisions of the Code. Moreover, the market value of our stock may be treated as reflecting the value of our assets at any given time. Therefore, a decline in the market value of our stock, (whichwhich is not within our control)control, may impact thatthe determination of whether we are a PFIC. Nevertheless, based on our and our subsidiaries’ current assets and operations, we intend to take the position that we are not now and have never been a PFIC. No assurance can be given, however, that the IRS, or a court of law, will accept our position or that we would not constitute a PFIC for any future taxable year if there were to be changes in our or our subsidiaries’ assets, income or operations.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder generally would be subject to different taxation rules depending on whether the U.S. Holder makes a timely and effective election to treat us as a “Qualified Electing Fund” (a QEF election). As an alternative to making a QEF election, a U.S. Holder should be able to make a “mark–to–market” election with respect to our common stock, as discussed below.
Taxation of U.S. Holders Making a Timely QEF Election.Election. A U.S. Holder who makes a timely QEF election (an Electing Holder) must report the Electing Holder’s pro rata share of our ordinary earnings and net capital gain, if any, for each taxable year for which we are a PFIC that ends with or within the Electing Holder’s taxable year, regardless of whether or not the Electing Holder received distributions from us in that year. Such income inclusions would not be eligible for the preferential tax rates applicable to qualified dividend income. The Electing Holder’s adjusted tax basis in our common stock will be increased to reflect taxed but undistributed earnings and profits. Distributions of earnings and profits that were previously taxed will result in a corresponding reduction in the Electing Holder’s adjusted tax basis in our common stock and will not be taxed again once distributed. An Electing Holder generally will recognize capital gain or loss on the sale, exchange or other disposition of our common stock. A U.S. Holder makes a QEF election with respect to any year that we are a PFIC by filing IRS Form 8621 with the U.S. Holder’s timely filed U.S. federal income tax return (including extensions).
If a U.S. Holder has not made a timely QEF election with respect to the first year in the U.S. Holder’s holding period of our common stock during which we qualified as a PFIC, the U.S. Holder may be treated as having made a timely QEF election by filing a QEF election with the U.S. Holder’s timely filed U.S. federal income tax return (including extensions) and, under the rules of Section 1291 of the Code, a “deemed sale election” to include in income as an “excess distribution” (described below) the amount of any gain that the U.S. Holder would otherwise recognize if the U.S. Holder sold the U.S. Holder’s common stock on the “qualification date.” The qualification date is the first day of our taxable year in which we qualified as a “qualified electing fund” with respect to such U.S. Holder. In addition to the above rules, under very limited circumstances, a U.S. Holder may make a retroactive QEF election if the U.S. Holder failed to file the QEF election documents in a timely manner. If a U.S. Holder makes a timely QEF election for one of our taxable years, but did not make such election with respect to the first year in the U.S. Holder’s holding period of our common stock during which we qualified as a PFIC and the U.S. Holder did not make the deemed sale election described above, the U.S. Holder also will be subject to the more adverse rules described below.
A U.S. Holder’s QEF election will not be effective unless we annually provide the U.S. Holder with certain information concerning our income and gain, calculated in accordance with the Code, to be included with the U.S. Holder’s U.S. federal income tax return. We have not provided our U.S. Holders with such information in prior taxable years and do not intend to provide such information in the current taxable year. Accordingly, U.S. Holders will not be able to make an effective QEF election at this time. If, contrary to our expectations, we determine that we are or will be a PFIC for any taxable year, we will provide U.S. Holders with the information necessary to make an effective QEF election with respect to our common stock.
Taxation of U.S. Holders Making a “Mark–to–Market” Election. If we were to be treated as a PFIC for any taxable year and, as we anticipate, our Class A common stock were treated as “marketable stock,” then, as an alternative to making a QEF election, a U.S. Holder would be allowed to make a “mark–to–market”“mark-to-market” election with respect to our Class A common stock, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made for the first year a U.S. Holder holds or is deemed to hold our Class A common stock and for which we are a PFIC, the U.S. Holder generally would include as ordinary income in each taxable year that we are a PFIC the excess, if any, of the fair market value of the U.S. Holder’s Class A common stock at the end of the taxable year over the U.S. Holder’s adjusted tax basis in the Class A common stock. The U.S. Holder also would be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the Class A common stock over the fair market value thereof at the end of the taxable year that we are a PFIC, but only to the extent of the net amount previously included in income as a result of the mark–to–marketmark-to-market election. A U.S. Holder’s tax
basis in our Class A common stock would be adjusted to reflect any such income or loss recognized. Gain recognized on the sale, exchange or other disposition of our Class A common stock in taxable years that we are a PFIC
would be treated as ordinary income, and any loss recognized on the sale, exchange or other disposition of our Class A common stock in taxable years that we are a PFIC would be treated as ordinary loss to the extent that such loss does not exceed the net mark–to–marketmark-to-market gains previously included in income by the U.S. Holder. Because the mark–to–marketmark-to-market election only applies to marketable stock, however, it would not apply to a U.S. Holder’s indirect interest in any of our subsidiaries that were also determined to be PFICs.
If a U.S. Holder makes a mark-to-market election for one of our taxable years and we were a PFIC for a prior taxable year during which such U.S. Holder held our Class A common stock and for which (i) we were not a QEF with respect to such U.S. Holder and (ii) such U.S. Holder did not make a timely mark-to-market election, such U.S. Holder would also be subject to the more adverse rules described below in the first taxable year for which the mark-to-market election is in effect and also to the extent the fair market value of the U.S. Holder’s Class A common stock exceeds the U.S. Holder’s adjusted tax basis in the Class A common stock at the end of the first taxable year for which the mark-to-market election is in effect.
Taxation of U.S. Holders Not Making a Timely QEF or Mark–to–Market Election. If we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF election or a “mark–to–market” election for that year (a Non–ElectingNon-Electing Holder) would be subject to special rules resulting in increased tax liability with respect to (i) any “excess distribution” (i.e., the portion of any distributions received by the Non–Electing Holder on our common stock in a taxable year in excess of 125% of the average annual distributions received by the Non–Electing Holder in the three preceding taxable years, or, if shorter, the Non–Electing Holder’s holding period for our common stock), and (ii) any gain realized on the sale, exchange or other disposition of our common stock. Under these special rules:
the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for our common stock;
the amount allocated to the current taxable year and any taxable year prior to the taxable year we were first treated as a PFIC with respect to the Non-Electing Holder would be taxed as ordinary income in the current taxable year;
the amount allocated to each of the other taxable years would be subject to U.S. federal income tax at the highest rate of tax in effect for the applicable class of taxpayer for that year; and
an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.
Additionally, for each year during which a U.S. Holder owns our common stock, we are a PFIC, and the total value of all PFIC stock that such U.S. Holder directly or indirectly owns exceeds certain thresholds, such U.S. Holder will be required to file IRS Form 8621 with its annual U.S. federal income tax return to report its ownership of our common stock. In addition, if a Non–Electing Holder who is an individual dies while owning our common stock, such Non-Electing Holder’s successor generally would not receive a step–up in tax basis with respect to such common stock.
U.S. Holders are urged to consult their tax advisors regarding the PFIC rules, including the PFIC annual reporting requirements, as well as the applicability, availability and advisability of, and procedure for, making QEF, Mark-to-Market and other available elections with respect to us, and the U.S. federal income tax consequences of making such elections.
Consequences of Possible Controlled Foreign Corporation Classification
If CFC Shareholders (generally, U.S. Holders who each own, directly, indirectly or constructively, 10% or more of the total combined voting power of our outstanding shares entitled to vote) own directly, indirectly or constructively more than 50% of either the total combined voting power of our outstanding shares entitled to vote or the total value of all of our outstanding shares, we generally would be treated as a controlled foreign corporation (or a CFC ).
CFC Shareholders are treated as receiving current distributions of their respective share of certain income of the CFC without regard to any actual distributions and are subject to other burdensome U.S. federal income tax and administrative requirements but generally are not also subject to the requirements generally applicable to shareholders of a PFIC. In addition, a person who is or has been a CFC Shareholder may recognize ordinary income on the disposition of shares of the CFC. Although we do not believe we are or will become a CFC, U.S. persons owning a substantial interest in us should consider the potential implications of being treated as a CFC Shareholder in the event we become a CFC in the future.
The U.S. federal income tax consequences to U.S. Holders who are not CFC Shareholders would not change in the event we become a CFC in the future.
U.S. Return Disclosure Requirements for U.S. Individual Holders
U.S. Individual Holders who hold certain specified foreign financial assets, including stock in a foreign corporation that is not held in an account maintained by a financial institution with an aggregate value in excess of $50,000 on the last day of a taxable year, or $75,000 at any time during that taxable year, may be required to report such assets on IRS Form 8938 with their U.S. federal income tax return for that taxable year. This reporting requirement does not apply to U.S. Individual Holders who report their ownership of our sharescommon stock under the PFIC annual reporting rules described above. Penalties apply for failure to properly complete and file IRS Form 8938. U.S. Individual Holders are encouraged to consult with their tax advisors regarding the possible application of this disclosure requirement.
requirement to their investment in our common stock.
United States Federal Income Taxation of Non-U.S. Holders
A beneficial owner of our common stock (other than a partnership, including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder is a Non–U.S.Non-U.S. Holder.
Distributions
In general, a Non–U.S. Holder will not be subject to U.S. federal income tax on distributions received from us with respect to our common stock unless the distributions are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States). If a Non–U.S. Holder is engaged in a U.S. trade or business within the United States and the distributions are deemed to be effectively connected to that trade or business, the Non-U.S. Holder generally will be subject to U.S. federal income tax on those distributions in the same manner as if it were a U.S. Holder.
Sale, Exchange or Other Disposition of Common Stock
In general, a Non-U.S. Holder is not subject to U.S. federal income tax on any gain resulting from the disposition of our common stock unless (a) such gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business inwithin the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States) or (b) the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year in which such disposition occurs and meets certain other requirements. If a Non-U.S. Holder is engaged in a U.S. trade or business within the United States and the disposition of our common stock is deemed to be effectively connected to that trade or business, the Non-U.S. Holder generally will be subject to U.S. federal income tax on the resulting gain in the same manner as if it were a U.S. Holder.
Information Reporting and Backup Withholding
In general, payments of distributions with respect to, or the proceeds of a disposition of, our common stock to a Non–Corporate U.S. Holder will be subject to information reporting requirements. These payments to a Non–Corporate U.S. Holder also may be subject to backup withholding if the Non–Corporate U.S. Holder:
fails to timely provide an accurate taxpayer identification number;
is notified by the IRS that it has failed to report all interest or distributions required to be shown on its U.S. federal income tax returns; or
in certain circumstances, fails to comply with applicable certification requirements.
Non–U.S. Holders may be required to establish their exemption from information reporting and backup withholding on payments made to them within the United States, or through a U.S. payor, by certifying their status on IRS Form W–8BEN, W-8BEN-E, W–8ECI, W-8EXP, or W–8IMY, as applicable.
Backup withholding is not an additional tax. Rather, a shareholder generally may obtain a credit for any amount withheld against its liability for U.S. federal income tax (and obtain a refund of any amounts withheld in excess of such liability) by accurately completing and timely filing a U.S. federal income tax return with the IRS.
Non-United States Tax Considerations
Marshall Islands Tax Considerations
Because we and our subsidiaries do not, and we do not expect that we and our subsidiariesor they will, conduct business, transactions or operations in the Republic of Thethe Marshall Islands, and because all documentation related to our initial public offering and follow-on offerings was executed outside of the Republic of Thethe Marshall Islands, under current Marshall Islands law, no taxes or withholdings will be imposed by the Republicholders of the Marshall Islands on distributions, including upon a return of capital, made to shareholders, so long as such personsour common stock that are not citizens of and do not reside in, maintain offices in, noror engage in business, operations, or transactions in the Republic of Thethe Marshall Islands. Furthermore, noIslands will not be subject to Marshall Islands taxation or withholding on dividends that we make to our shareholders. In addition, such shareholders will not be subject to Marshall Islands stamp, capital gains or other taxes will be imposed by the Republic of The Marshall Islands on the purchase, ownership or disposition by such persons of our common stock, and they will not be required by the Republic of the Marshall Islands to file a tax return relating to the common stock.
It is the responsibility of each shareholder to investigate the legal and tax consequences, under the laws of pertinent jurisdictions, including the Marshall Islands, of such shareholder's investment in us. Accordingly, each shareholder is urged to consult a tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each shareholder to file all state, local and non-U.S., as well as U.S. federal tax returns that may be required of such shareholder.
Documents on Display
Documents concerning us that are referred to herein may be accessed on our website under "Investors - Teekay Tankers Ltd. - Financials & Presentations" from the home page of our website at www.teekay.com, or may be inspected at our principal executive offices at 4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08 Bermuda. Those documents electronically filed via the SEC’s Electronic Data Gathering, Analysis, and Retrieval (or EDGAR) system may also be obtained from the SEC’s website at www.sec.gov, free of charge, or from the Public Reference Section of the SEC at 100F Street, N.E., Washington, D.C. 20549, at prescribed rates. Further information on the operation of the SEC public reference rooms may be obtained by calling the SEC at 1-800-SEC-0330.charge.
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| Item 11. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk from foreign currency fluctuations, changes in interest rates and changes in spot tanker market rates and changes in the stock price of TIL in connection with our warrant to purchase TIL common shares.rates. We have not used foreign currency forward contracts to manage foreign currency fluctuation, but we may do so in the future. We use interest rate swaps to manage interest rate risks. We do not use these financial instruments for trading or speculative purposes.
Foreign Currency Fluctuation Risk
Our primary economic environment is the international shipping market. Transactions in this market generally utilize the U.S. Dollars. Consequently, virtually all our revenues and the majority of our operating costs are in U.S. Dollars. We incur certain voyage expenses, vessel operating expenses, dry-docking expenditures and general and administrative expenses in foreign currencies, the most significant of which are Euro, Singaporean Dollar Canadian Dollar and British Pound. There is a risk that currency fluctuations will have a negative effect on the value of cash flows. We did not enter into forward contracts as a hedge against changes in certain foreign exchange rates during 2016, 20152018, 2017 or 2014.2016.
Interest Rate Risk
We are exposed to the impact of interest rate changes primarily through our floating-rate borrowings that require us to make interest payments based on LIBOR. Significant increases in interest rates could adversely affect operating margins, results of operations and our ability to service our debt. From time to time, we use interest rate swaps to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our floating-rate debt.
We are exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, we only enter into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.
The table below provides information about financial instruments as at December 31, 2016,2018, that are sensitive to changes in interest rates, including our debt, obligations related to capital leases and interest rate swaps. For long-term debt and obligations related to capital leases, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected contractual maturity dates.
| | | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Total | | Fair Value Asset / (Liability) | | Rate (1) | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | | Fair Value Asset / (Liability) | | Rate (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in millions of U.S. dollars, except percentages) | (in millions of U.S. dollars, except percentages) |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Variable rate | 171.4 |
| | 175.6 |
| | 110.0 |
| | 110.0 |
| | 374.7 |
| | 941.7 |
| | (923.3 | ) | | 2.61 | % | (96.7 | ) | | (108.6 | ) | | (392.8 | ) | | (86.6 | ) | | — |
| | — |
| | (684.7 | ) | | (666.8 | ) | | 4.5 | % |
| Fixed-rate | | (10.0 | ) | | (10.0 | ) | | (37.3 | ) | | — |
| | — |
| | — |
| | (57.3 | ) | | (56.2 | ) | | 5.4 | % |
| | | | | | | | | | | | | | | | | | | |
| Obligation related to capital leases | | (20.9 | ) | | (21.8 | ) | | (23.4 | ) | | (25.3 | ) | | (27.2 | ) | | (256.7 | ) | | (375.3 | ) | | (377.7 | ) | | 7.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Dollar-denominated interest rate swaps(2) | | 46.3 |
| | 46.3 |
| | — |
| | — |
| | — |
| | — |
| | 92.6 |
| | 1.3 |
| | 1.5 | % |
U.S. Dollar-denominated interest rate swaps(2) | | — |
| | — |
| | 150.0 |
| | — |
| | — |
| | — |
| | 150.0 |
| | 3.2 |
| | 1.6 | % |
U.S. Dollar-denominated interest rate swap(2) | — |
| | — |
| | — |
| | 200.0 |
| | — |
| | 200.0 |
| | 0.4 |
| | 1.46 | % | — |
| | — |
| | 50.0 |
| | — |
| | — |
| | — |
| | 50.0 |
| | 1.5 |
| | 1.2 | % |
U.S. Dollar-denominated interest rate swap(2) | — |
| | — |
| | — |
| | — |
| | 150.0 |
| | 150.0 |
| | 1.5 |
| | 1.55 | % | |
U.S. Dollar-denominated interest rate swap(2) | — |
| | — |
| | — |
| | — |
| | 50.0 |
| | 50.0 |
| | 1.3 |
| | 1.16 | % | |
| |
| (1) | Rate refers to the weighted-average effective interest rate for our long-term debt as at December 31, 2016,2018, including the margin we pay on our variable-rate debt.and fixed-rate debt, and the average imputed interest rate we pay for our capital lease obligations. |
| |
| (2) | Interest payments on U.S. Dollar-denominated debt and interest rate swaps are based on LIBOR. The average variable rate paid to us under our interest rate swaps is set quarterly at the three-month LIBOR. |
Equity Price Risk
We arePrior to our acquisition of TIL, we were exposed to the changes in the stock price of TIL. We havehad a stock purchase warrant entitling us to purchase up to 750,000 shares of common stock of TIL at a fixed price of $10 per share. Alternatively, if the shares of TIL’s common stock trade on a National Stock Exchange or over-the-counter market denominated in Norwegian Kroner, the Company may also had the option to exercise the stock purchase warrant at 61.67 Norwegian Kroner (or NOK) per share. The stock purchase warrant vestsvested in four equally sized tranches. Each tranche willwould vest and become exercisable when and if the fair market value of a share of the TIL common stock equals or exceeds 77.08 NOK, 92.50 NOK, 107.91 NOK and 123.33 NOK, respectively, for such tranche for any ten consecutive trading days. The stock purchase warrant expireswas scheduled to expire on January 23, 2019.2019; however, upon completing the merger with TIL on November 27, 2017, the stock purchase warrant was canceled. Please read Item 18 – Financial Statements: Note 1112 – Derivative Instruments.
Spot Tanker Market Rate Risk
The cyclical nature of the tanker industry causes significant increases or decreases in the revenue that we earn from our vessels, particularly those that trade in the spot tanker market. From time to time we may use forward freight agreements as a hedgetool to protect against changes in spot tanker market rates. Forward freight agreements involveare contracts used to providebuy or sell a fixed numbervolume of theoretical voyages along afreight on specified route at a contracted charter rate.trade routes. Forward freight agreements settle in cash based on the difference between the contracted charter rate and the average rate of an identified index.
To reduce our exposure, in Junethe second quarter of 2016 we entered into a time-charter swap agreement for 55% of two Aframax equivalentAframax-equivalent vessels for a period of 11 months plus an additional two months at the counterparty’s option. The fair value of this derivative agreement iswas the estimated amount that we would receive or pay to terminate the agreement at the reporting date, based on the present value of our projection of future Aframax spot market tanker rates, which have beenwas derived from current Aframax spot market tanker rates and estimated future rates. As at December 31, 2016, the fair value of May 1, 2017, the time-charter swap counter party did not exercise the two-month option and as such, the agreement was positive $0.9 million.completed as of June 30, 2017.
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| Item 12. | Description of Securities Other than Equity Securities |
Not applicable.
Part II
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| Item 13. | Defaults, Dividend Arrearages and Delinquencies |
None.
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| Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds |
None.
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| Item 15. | Controls and Procedures |
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the Exchange Act)) that are designed to ensure that (i) information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We conducted an evaluation of our disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 31, 2016.2018.
The Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all errors and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining for us adequate internal controlscontrol over financial reporting.reporting for us.
Our internal controls wereare designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal controlscontrol over financial reporting include those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of management and ourthe directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included
review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation.
Because of its inherent limitations, internal controlscontrol over financial reporting may not prevent or detect misstatements even when determined to be effective and can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Based on the evaluation, management determined that internal controlscontrol over financial reporting werewas effective as of December 31, 2016.2018.
Our independent auditors, KPMG LLP, an independent registered public accounting firm, hashave audited the accompanying consolidated financial statements and our internal control over financial reporting. Their attestation report on the effectiveness of our internal control over financial reporting can be found on page F-2 of this Annual Report.
There were no changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rule 13a – 15 (f)15(f) under the Exchange Act) that occurred during the year ended December 31, 2016.2018.
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| Item 16A. | Audit Committee Financial Expert |
The Board of Directors has determined that directorDirector and Chair of the Audit Committee, William Lawes,Richard Paterson, qualifies as an audit committee financial expert and is independent under applicable NYSE and SEC standards.
We have adopted a Standards of Business Conduct Policy for all our employees and directors. This document is available under “Investors – Teekay Tankers Ltd. - Governance” from the home page of our web sitewebsite (www.teekay.com). We also intend to disclose, under the “Investors – Teekay Corporation –Tankers Ltd. - Governance” section of our web site,website (www.teekay.com), any waivers to or amendments of our Standards of Business Conduct Policy for thethat benefit of our directors and executive officers.
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| Item 16C. | Principal Accountant Fees and Services |
Our principal accountant for 20162018 and 20152017 was KPMG LLP, Chartered Accountants. The following table shows the fees we paid or accrued for audit services provided by KPMG LLP.
| | Fees (in thousands of U.S. dollars) | 2016 | | 2015 | 2018 | | 2017 |
Audit Fees (1) | 408 |
| | 294 |
| 517 |
| | 545 |
|
Tax Fees (2) | 24 |
| | — |
| 9 |
| | 34 |
|
| | 432 |
| | 294 |
| 526 |
| | 579 |
|
| |
| (1) | Audit fees represent fees for professional services provided in connection with the audit of our consolidated financial statements, review of our quarterly consolidated financial statements, as well as other professional services in connection with the review of our regulatory filings. |
| |
| (2) | For 2016,2018 and 2017, tax fees principally included corporate tax compliance fees. |
No tax services were provided to us by the auditors during the term of their appointment in 2015. No other services were provided to us by the auditors during 20162018 or 2015.2017.
The Audit Committee of our Board of Directors has the authority to pre-approve permissible audit-related and non-audit services not prohibited by law to be performed by our independent auditors and any associated fees. Engagements for proposed services either may be separately pre-approved by the Audit Committee or entered into pursuant to detailed pre-approval policies and procedures established by the Audit Committee, as long as the Audit Committee is informed on a timely basis of any engagement entered into on that basis. The Audit Committee separately pre-approved all engagements and fees paid to our principal accountants in 20162018 and 2015.2017.
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| Item 16D. | Exemptions from the Listing Standards for Audit Committees |
Not applicable.
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| Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
Not applicable.
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| Item 16F. | Change in Registrant’s Certifying Accountant |
Not applicable.
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| Item 16G. | Corporate Governance |
As a foreign private issuer and “controlled company” under SEC rules, we are not required to comply with certain corporate governance practices followed by other U.S. companies that are not controlled companies under the New York Stock Exchange (or NYSE) listing standards. The following areis the significant waysway in which our corporate governance practices differ from those followed by domestic companies:U.S. controlled companies listed on the NYSE:
Our Board of Directors is not comprised of a majority of independent directors, as required for domestic companies under the New York Stock Exchange listing requirements.
As a foreign private issuer, we are not required to obtain shareholder approval prior to the adoption of equity compensation plans or certain equity issuances, including, among others, issuing 20% or more of our outstanding common shares or voting power in a transaction.
There are no other significant ways in which our corporate governance practices differ from those followed by controlled domestic companies under the listing requirements of the New York Stock Exchange. See Item 6 – Directors, Senior Management and Employees: Board Practices.NYSE.
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| Item 16H. | Mine Safety Disclosure |
Not applicable
Part III
| |
| Item 17. | Financial Statements |
Not applicable.
| |
| Item 18. | Financial Statements |
The following financial statements, together with the related reports of KPMG LLP, Independent Registered Public Accounting Firm, thereon are filed as part of this Annual Report:
All schedules for which provision is made in the applicable accounting regulations of the SEC are not required, are inapplicable or have been disclosed in the Notes to the Consolidated Financial Statements and therefore have been omitted.
The following exhibits are filed as part of this Annual Report:
|
| |
| Amended and Restated Articles of Incorporation of Teekay Tankers Ltd., as amended (1)(17) |
| Amended and Restated Bylaws of Teekay Tankers Ltd. (1) |
| Contribution, Conveyance and Assumption Agreement (1) |
| Management Agreement, as amended by Amendment No. 1 dated as of May 7, 2009, Amendment No. 2 dated as of September 21, 2010 and Amendment No. 3 dated as of January 1, 2011 (20) |
| Addendum to Management Agreement dated March 23, 2016.2016 (8)(19) |
4.3 | Amendment No. 4 to Management Agreement dated as of March 31, 2019 |
| Gross Revenue Sharing Pool Agreement (1) |
4.4
| Teekay Tankers Ltd. 2007 Long-Term Incentive Plan (10) |
4.5 | Technical Services Agreement dated November 28,as of December 18, 2007, for a U.S. $229,000,000 Secured Revolving Credit Facility between Teekay Tankers Management Services Ltd., Nordea Bank Finland PLC and various other banks.Teekay Shipping Limited. (1)(18) |
4.6
| Registration Rights Agreement between Teekay Tankers Ltd. and Teekay Corporation. (1) |
4.7 | Commercial Management Services Agreement dated as of February 29, 2008, between Teekay Tankers Management Services Ltd. and Teekay Chartering Limited. (18) |
| Purchase Agreement dated April 7, 2008, for the purchase of Ganges Spirit L.L.C (formerly Delaware Shipping L.L.C) between Teekay Tankers Ltd., and Teekay Corporation. (2) |
4.8 | Purchase Agreement dated April 7, 2008, for the purchase of Narmada Spirit L.L.C (formerly Adair Shipping L.L.C) between Teekay Tankers Ltd., and Teekay Corporation. (2) |
4.9 | Purchase Agreement dated June 12, 2009 for the purchase of Ashkini Spirit L.L.C (formerly Ingeborg Shipping L.L.C) between Teekay Tankers Ltd., and Teekay Corporation. (3) |
4.10 | Purchase Agreement dated April 6, 2010 between Teekay Corporation and Teekay Tankers Ltd. for the sale and purchase of the entire membership interests in Yamuna Spirit L.L.C., Kaveri Spirit L.L.C., and Helga Spirit L.L.C. (4) |
4.11 | Facility Agreement dated July 5, 2010 for a U.S. $57,500,000 loan facility among Alpha Elephant Inc, Solar VLCC Corporation, Deutsche Bank Luxembourg S.A. and Deutsche Bank AG, London Branch. (5) |
4.12 | Facility Agreement dated July 5, 2010 for a U.S. $57,500,000 loan facility among Beta Elephant Inc, Solar VLCC Corporation, Deutsche Bank Luxembourg S.A. and Deutsche Bank AG, London Branch. (5) |
4.13 | Transfer Certificate dated July 15, 2010 among Deutsche Bank Luxembourg S.A., Deutsche Bank AG, London Branch and VLCC A Investment L.L.C. (5) |
4.14 | Transfer Certificate dated July 15, 2010 among Deutsche Bank Luxembourg S.A., Deutsche Bank AG, London Branch and VLCC B Investment L.L.C. (5) |
4.15 | Shareholders Agreement dated September 30, 2010 for a U.S. $98,000,000 shipbuilding contract among Teekay Tankers Holding Ltd., Kriss Investment Company and High-Q Investment Ltd. (6) |
4.16 | Purchase Agreement dated November 1, 2010 between Teekay Corporation and Teekay Tankers Ltd. For the sale and purchase of the entire membership interests in Esther Spirit L.L.C., and Iskmati Spirit L.L.C. (7) |
4.17 | Purchase Agreement dated June 15, 2012 between Teekay Corporation and Teekay Tankers Ltd. For the sale and purchase of the entire membership interests in Godavari Spirit L.L.C., Axel Spirit L.L.C., Mahanadi Spirit L.L.C., Teesta Spirit L.L.C., Hugli Spirit L.L.C., Americas Spirit L.L.C., Australia Spirit L.L.C., Pinnacle Spirit L.L.C., Donegal Spirit L.L.C., Galway Spirit L.L.C., Limerick Spirit L.L.C., Summit Spirit L.L.C., and Zenith Spirit L.L.C. (9) |
4.18 | Non-competitionMaster Ship Management Agreement dated June 15,August 31, 2012, between Teekay CorporationShipping Limited and Teekay TankersMarine Ltd.(11)(18)
|
4.19 | Secured Term Loan and Revolving Credit Facility Agreement dated January 8, 2016 between Teekay Tankers Ltd., Nordea Bank Finland PLC and various other banks, for a $894.4 million long-term debt facility. (17)(8) |
4.20 | Secured Term Loan Facility Agreement dated August 28, 2015 between Teekay Tankers Ltd., ABN AMRO Capital USA LLC and various other banks for the principal amount of $397.2 million. (17)(8) |
4.21 | Secured Term Loan Facility Agreement dated January 30, 2015 between Teekay Tankers Ltd., ABN AMRO Capital USA LLC, DNB Capital LLC and DNB Markets, Inc., for the principal amount of approximately $126.6 million. (17)(8) |
4.22 | Registration Rights Agreement, dated August 4, 2015, by and among Teekay Tankers Ltd. and the persons set forth on Schedule I thereto. (12)(11) |
4.23 | Common Stock Purchase Agreement, dated August 4, 2015, by and among Teekay Tankers Ltd. and the purchasers named therein. (12) |
| Share Subscription Agreement, dated January 13, 2017, between Teekay Tankers Ltd. and Teekay Holdings Limited.(18) |
|
| |
| Agreement and Plan of Merger, dated as of May 31, 2017, by and among Teekay Tankers Ltd., Royal 2017 Ltd. and Tanker Investments Ltd. (13) |
| Voting and Support Agreement, dated as of May 31, 2017, between Teekay Corporation, Teekay Holdings Limited, Teekay Finance Limited, Tanker Investments Ltd. and Teekay Tankers Ltd. (13) |
| Purchase Agreement, dated as of May 31, 2017, between Teekay Tankers Ltd. and Teekay Holdings Limited (13) |
| Voting and Support Agreement, dated as of September 14, 2017, by and among Teekay Tankers Ltd., Huber Capital Management LLC and Joseph R. Huber (16) |
| Secured Revolving Credit Facility Agreement dated December 18, 2017 between Teekay Tankers Ltd., Nordea Bank AB and various other banks, for the principal amount of $270.0 million.(18) |
| List of Subsidiaries of Teekay Tankers Ltd. |
| Equity Distribution Agreement, dated November 18, 2015, between Teekay Tankers Ltd. and Evercore Group L.L.C. (14) |
| Memorandum of Agreement, dated August 4, 2015, by and between Courage Holdings, LLC and Rio Spirit L.L.C. and related Schedule of Agreements Substantially Identical to that Memorandum of Agreement. (15)(14) |
| Equity Distribution Agreement, dated June 4, 2015, between Teekay Tankers Ltd. and Evercore Group L.L.C. (16)(15) |
| Rule 13a-14(a)/15d-14(a) Certification of Teekay Tankers Ltd.’s Chief Executive Officer. |
| Rule 13a-14(a)/15d-14(a) Certification of Teekay Tankers Ltd.’s Chief Financial Officer. |
| Teekay Tankers Ltd. Certification of Kevin Mackay, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| |
| Teekay Tankers Ltd. Certification of Vincent Lok,Stewart Andrade, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Consent of KPMG LLP, as independent registered public accounting firm. |
| 101 | The following materials for the Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 20162018 formatted in XBRL: |
| | 101.INS XBRL Instance Document |
| | 101.SCH XBRL Taxonomy Extension Schema |
| | 101.CAL XBRL Taxonomy Extension Calculation Linkbase |
| | 101.DEF XBRL Taxonomy Extension Definition Linkbase |
| | 101.LAB XBRL Taxonomy Extension Label Linkbase |
| | 101.PRE XBRL Taxonomy Extension Presentation Linkbase |
___________________________
| |
| (1) | Previously filed as an exhibitExhibits 3.2, 10.1, 10.3 and 4.1 to the Company’s Amendment No. 1 to the Registration Statement on Form F-1 (Registration No. 33-147798), filed with the SEC on December 11, 2007, and hereby incorporated by reference to such Amendment No. 1 to Registration Statement. |
| |
| (2) | Previously filed as an exhibitExhibits 4.1 and 4.2 to the Company’s Report on Form 6-K furnished to the SEC on May 28, 2008, and hereby incorporated by reference to such Report. |
| |
| (3) | Previously filed as an exhibit to the Company’s Report on Form 6-K furnished to the SEC on September 30, 2009, and hereby incorporated by reference to such Report. |
| |
| (4) | Previously filed as an exhibit to the Company’s Report on Form 6-K furnished to the SEC on June 1, 2010 and hereby incorporated by reference to such Report. |
| |
| (5) | Previously filed as an exhibit to the Company’s Report on Form 6-K furnished to the SEC on September 10, 2010 and hereby incorporated by reference to such Report. |
| |
| (6) | Previously filed as Exhibit 4.11 to the Company’s Report on Form 6-K furnished to the SEC on November 30, 2010 and hereby incorporated by reference to such Report. |
| |
| (7) | Previously filed as Exhibit 4.12 to the Company’s Report on Form 6-K furnished to the SEC on November 30, 2010 and hereby incorporated by reference to such Report. |
| |
| (8) | Previously filed as an exhibit toExhibit 4.19, 4.20 and 4.21to the Company’s Report on Form 20-F filed with the SEC on April 27, 2016 and hereby incorporated by reference to such Report. |
| |
| (9) | Previously filed as Exhibit 4.17 to the Company’s Report on Form 6-K furnished to the SEC on September 17, 2012 and hereby incorporated by reference to such Report. |
| |
| (10) | Previously filed as Exhibit 99.1 to the Company’s Registration Statement on Form, S-8 filed with the SEC on March 7, 201421, 2018 and hereby incorporated by reference to such Registration Statement. |
| |
| (11) | Previously filed as Exhibit 4.18 to the Company’s Report on Form 20-F filed with the SEC on April 30, 2013 and hereby incorporated by reference to such Report. |
| |
(12) | Previously filed as Exhibit 10.2 to the Company’s Report on Form 6-K filed with the SEC on November 18, 2015 and hereby incorporated by reference to such Report. |
| |
(13)(12) | Previously filed as Exhibit 10.1 to the Company’s Report on Form 6-K furnished to the SEC on August 7, 2015 and hereby incorporated by reference to such Report. |
| |
| (13) | Previously filed as Exhibits 1.1, 1.2, and 1.3 to the Company’s Report on Form 6-K filed with the SEC on June 1, 2017 and hereby incorporated by reference to such Report. |
| |
| (14) | Previously filed as ExhibitExhibits 1.1 and 10.3 to the Company’s Report on Form 6-K filed with the SEC on November 18, 2015 and hereby incorporated by reference to such Report. |
| |
| (15) | Previously filed as Exhibits 10.3 and 10.4Exhibit 1.1 to the Company’s Report on Form 6-K filed with the SEC on November 18,June 4, 2015 and hereby incorporated by reference to such Report. |
| |
| (16) | Previously filed as Appendix D to Exhibit 1.199.1 to the Company’sCompany's Report on Form 6-K furnished tofiled with the SEC on June 4, 2015October 25, 2017 and hereby incorporated by reference to such Report. |
| |
| (17) | Previously filed as an exhibitExhibit 1.1 to the Company's Report on Form 6-K filed with the SEC on November 30, 2018 and hereby incorporated by reference to such Report. |
| |
| (18) | Previously filed as Exhibits 4.5, 4.7, 4.19, 4.25 and 4.30 to the Company Report on Form 20-F filed with the SEC on April 24, 2018 and hereby incorporated by reference to such Report. |
| |
| (19) | Previously filed as Exhibit 10.4 to the Company’s Report on Form 20-F filed with the SEC on April 27, 2016 and hereby incorporated by reference to such Report. |
| |
| (20) | Previously filed as Exhibit 4.2 to the Company’s Report on Form 20-F filed with the SEC on April 12, 2011 and hereby incorporated by reference to such Report. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
| | | | | | |
| | | | | TEEKAY TANKERS LTD. |
| | | | |
Date: April 26, 201710, 2019 | | | | By: | | /s/ Vincent LokStewart Andrade |
| | | | | | | Vincent LokStewart Andrade |
| | | | | | | Chief Financial Officer |
| | | | | | | (Principal Financial and Accounting Officer) |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and Shareholders
Teekay Tankers Ltd.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of Teekay Tankers Ltd. andsubsidiaries (the “Company”)Company) as of December 31, 20162018 and 2015, and2017, the related consolidated statements of (loss) income, cash flows, and changes in equity for each of the years in the three-yearthree‑year period ended December 31, 2016. 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 10, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its accounting policies for revenue recognition as of January 1, 2018 due to the adoption of ASU 2014-09 - Revenue from Contracts with Customers, and the classification of restricted cash on the statement of cash flows for 2018 and comparative periods due to the adoption of ASU 2016-18 - Statement of Cash Flows: Restricted Cash.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the CompanyWe have served as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April 26, 2017 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.auditor since 2011.
/s/ KPMG LLP
Chartered Professional Accountants
Vancouver, Canada
April 26, 201710, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and Shareholders
Teekay Tankers Ltd.:
Opinion on Internal Control Over Financial Reporting
We have audited Teekay Tankers Ltd. and subsidiariessubsidiaries’ (the “Company")Company) internal control over financial reporting as of December 31, 2016,2018, based on the criteria established inInternal Control-IntegratedControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of (loss) income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated April 10, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in the accompanying Form 20-F.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’sAn entity's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sAn entity's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the companyentity are being made only in accordance with authorizations of management and directors of the company;entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sentity’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2016 and 2015, and the related consolidated statements of income, cash flows, and changes in equity for each of the years in the three-year period ended December 31, 2016, and our report dated April 26, 2017, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chartered Professional Accountants
Vancouver, Canada
April 26, 2017
10, 2019
TEEKAY TANKERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME (notes 1 and 3)4)
(in thousands of U.S. dollars, except share and per share amounts)
|
| | | | | | | | | | | |
| | Year Ended
December 31, 2016
$ | | Year Ended
December 31, 2015
$ | | Year Ended
December 31, 2014
$ |
| REVENUES | | | | | |
Net pool revenues (notes 15f and 15i) | 300,295 |
| | 370,583 |
| | 138,631 |
|
Time charter revenues (note 15f) | 97,374 |
| | 75,375 |
| | 94,213 |
|
| Voyage charter revenues | 90,032 |
| | 41,283 |
| | 8,040 |
|
Interest income from investment in term loans (note 6) | — |
| | — |
| | 9,118 |
|
Other revenues (note 23) | 39,195 |
| | 26,952 |
| | — |
|
| Total revenues | 526,896 |
|
| 514,193 |
|
| 250,002 |
|
| | | | | | |
| Voyage expenses | (55,241 | ) | | (19,816 | ) | | (11,223 | ) |
Vessel operating expenses (notes 15f and 15g) | (182,598 | ) | | (137,164 | ) | | (98,403 | ) |
Time-charter hire expense (note 17) | (59,647 | ) | | (74,898 | ) | | (22,160 | ) |
| Depreciation and amortization | (104,149 | ) | | (73,760 | ) | | (53,292 | ) |
General and administrative expenses (note 15f) | (18,211 | ) | | (17,354 | ) | | (12,821 | ) |
(Loss) gain on sale of vessels (note 21) | (20,594 | ) | | 771 |
| | 9,955 |
|
Restructuring charges (note 23) | — |
| | (4,772 | ) | | — |
|
| Income from operations | 86,456 |
|
| 187,200 |
|
| 62,058 |
|
| | | | | | |
| Interest expense | (29,784 | ) | | (17,389 | ) | | (9,128 | ) |
| Interest income | 117 |
| | 107 |
| | 287 |
|
Realized and unrealized loss on derivative instruments (note 11) | (964 | ) | | (1,597 | ) | | (1,712 | ) |
Equity income (note 8) | 13,101 |
| | 14,411 |
| | 5,228 |
|
Other (expense) income (note 16) | (6,071 | ) | | (3,097 | ) | | 3,805 |
|
| Net income | 62,855 |
|
| 179,635 |
|
| 60,538 |
|
| | | | | | |
Per common share amounts (note 20) | | | | | |
| • Basic earnings per share |
| $0.40 |
| |
| $1.36 |
| |
| $0.67 |
|
| • Diluted earnings per share |
| $0.40 |
| |
| $1.35 |
| |
| $0.66 |
|
| • Cash dividends declared |
| $0.18 |
| |
| $0.24 |
| |
| $0.12 |
|
| | | | | | |
Weighted-average number of Class A and Class B common stock outstanding (note 20) | | | | | |
| • Basic | 156,323,348 |
| | 130,136,228 |
| | 85,882,685 |
|
| • Diluted | 156,565,415 |
| | 130,717,709 |
| | 86,247,137 |
|
|
| | | | | | | | | | | |
| | Year Ended
December 31, 2018
$ | | Year Ended
December 31, 2017
$ | | Year Ended
December 31, 2016
$ |
| REVENUES | | | | | |
Voyage charter revenues (notes 2 and 3) | 651,388 |
| | 125,774 |
| | 90,032 |
|
Time charter revenues (notes 3 and 15e) | 59,786 |
| | 112,100 |
| | 97,374 |
|
Other revenues (notes 3 and 15e) | 44,589 |
| | 53,368 |
| | 53,029 |
|
Net pool revenues (notes 2, 3, 15e and 15h) | — |
| | 139,936 |
| | 310,108 |
|
| Total revenues | 755,763 |
|
| 431,178 |
|
| 550,543 |
|
| | | | | | |
Voyage expenses (notes 2 and 15e) | (360,576 | ) | | (77,368 | ) | | (53,604 | ) |
Vessel operating expenses (notes 15e and 15f) | (209,131 | ) | | (175,389 | ) | | (182,598 | ) |
Time-charter hire expense (note 11) | (19,538 | ) | | (30,661 | ) | | (59,647 | ) |
| Depreciation and amortization | (118,514 | ) | | (100,481 | ) | | (104,149 | ) |
General and administrative expenses (note 15e) | (39,775 | ) | | (32,879 | ) | | (33,199 | ) |
Gain (loss) on sale of vessels (note 20) | 170 |
| | (12,984 | ) | | (20,594 | ) |
| Restructuring charges | (1,195 | ) | | — |
| | — |
|
| Income from operations | 7,204 |
|
| 1,416 |
|
| 96,752 |
|
| | | | | | |
| Interest expense | (58,653 | ) | | (31,294 | ) | | (29,784 | ) |
| Interest income | 879 |
| | 907 |
| | 117 |
|
Realized and unrealized gain (loss) on derivative instruments (note 12) | 3,032 |
| | 1,319 |
| | (964 | ) |
Equity income (loss) (note 7) | 1,220 |
| | (25,370 | ) | | 7,680 |
|
Freight tax and other tax expenses (note 21) | (9,412 | ) | | (5,330 | ) | | (7,511 | ) |
Other income (note 16) | 3,182 |
| | 329 |
| | 1,533 |
|
| Net (loss) income | (52,548 | ) |
| (58,023 | ) |
| 67,823 |
|
| | | | | | |
Per common share amounts (note 19) | | | | | |
| • Basic (loss) earnings per share |
| ($0.20 | ) | |
| ($0.31 | ) | |
| $0.40 |
|
| • Diluted (loss) earnings per share |
| ($0.20 | ) | |
| ($0.31 | ) | |
| $0.40 |
|
| • Cash dividends declared |
| $0.03 |
| |
| $0.12 |
| |
| $0.18 |
|
| | | | | | |
Weighted-average number of Class A and Class B common stock outstanding (note 19) | | | | | |
| • Basic | 268,492,922 |
| | 187,235,377 |
| | 170,098,572 |
|
| • Diluted | 268,492,922 |
| | 187,235,377 |
| | 170,340,639 |
|
Related party transactions (note 15)
The accompanying notes are an integral part of the consolidated financial statements.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (notes 1 and 3)4)
(in thousands of U.S. dollars)
|
| | | | | |
| | As at
December 31, 2016
$ | | As at
December 31, 2015
$ |
| ASSETS | | | |
| Current | | | |
| Cash and cash equivalents | 68,108 |
| | 96,417 |
|
| Restricted cash | 750 |
| | 870 |
|
Pool receivables from affiliates, net (note 15i) | 24,598 |
| | 62,735 |
|
| Accounts receivable | 30,247 |
| | 28,313 |
|
Vessels held for sale (note 21) | 33,802 |
| | — |
|
Due from affiliates (note 15g) | 41,420 |
| | 67,159 |
|
Current portion of derivative asset (note 11) | 875 |
| | — |
|
| Prepaid expenses | 15,684 |
| | 24,320 |
|
| Total current assets | 215,484 |
|
| 279,814 |
|
Vessels and equipment
At cost, less accumulated depreciation of $459.3 million (2015 - $391.0 million) (note 21) | 1,605,372 |
| | 1,767,925 |
|
Investment in and advances to equity accounted investments (note 8) | 81,273 |
| | 86,808 |
|
Derivative assets (note 11) | 4,538 |
| | 5,164 |
|
Intangible assets - net (note 24) | 17,658 |
| | 29,619 |
|
Goodwill (note 24) | 8,059 |
| | — |
|
| Other non-current assets | 41 |
| | 146 |
|
| Total assets | 1,932,425 |
|
| 2,169,476 |
|
| LIABILITIES AND EQUITY | | | |
| Current | | | |
| Accounts payable | 12,265 |
| | 16,717 |
|
Accrued liabilities (notes 9 and 15g) | 27,224 |
| | 62,029 |
|
Current portion of long-term debt (note 10) | 171,019 |
| | 174,047 |
|
Current portion of derivative liabilities (note 11) | 1,108 |
| | 6,330 |
|
| Current portion of in-process revenue contracts | — |
| | 1,223 |
|
| Deferred revenue | 4,394 |
| | 2,676 |
|
Due to affiliates (note 15g) | 20,912 |
| | 26,630 |
|
| Total current liabilities | 236,922 |
|
| 289,652 |
|
Long-term debt (note 10) | 761,997 |
| | 990,558 |
|
Derivative liabilities (note 11) | — |
| | 4,208 |
|
Other long-term liabilities (note 12) | 12,882 |
| | 7,597 |
|
| Total liabilities | 1,011,801 |
|
| 1,292,015 |
|
Commitments and contingencies (notes 8,11 and 17) |
| |
|
| Equity | | | |
Common stock and additional paid-in capital (300 million shares authorized, 136.1 million Class A and 23.2 million class B shares issued and outstanding as of December 31, 2016 (2015 - 132.8 million Class A and 23.2 million Class B shares issued and outstanding) (notes 4 and 14) | 1,103,304 |
| | 1,094,874 |
|
| Accumulated deficit | (182,680 | ) | | (217,413 | ) |
| Total equity | 920,624 |
|
| 877,461 |
|
| Total liabilities and equity | 1,932,425 |
|
| 2,169,476 |
|
|
| | | | | |
| | As at
December 31, 2018
$ | | As at
December 31, 2017
$ |
| ASSETS | | | |
| Current | | | |
| Cash and cash equivalents | 54,917 |
| | 71,439 |
|
Restricted cash (note 17) | 2,153 |
| | 1,599 |
|
Pool receivables from affiliates, net (note 15h) | 56,549 |
| | 15,550 |
|
| Accounts receivable, including affiliate balances of $2.1 million (2017 - $0.8 million) | 17,365 |
| | 19,288 |
|
Due from affiliates (note 15f) | 39,663 |
| | 49,103 |
|
Current portion of derivative assets (note 12) | 2,905 |
| | 1,016 |
|
| Prepaid expenses | 34,096 |
| | 18,690 |
|
Other current assets (note 2) | 17,943 |
| | — |
|
| Total current assets | 225,591 |
|
| 176,685 |
|
Restricted cash - long-term (note 17) | 3,437 |
| | 2,672 |
|
Vessels and equipment
At cost, less accumulated depreciation of $494.4 million (2017 - $512.0 million) (notes 10 and 20) | 1,401,551 |
| | 1,737,792 |
|
Vessels related to capital leases
At cost, less accumulated depreciation of $111.3 million (2017 - $25.4 million) (notes 11 and 20) | 482,010 |
| | 227,722 |
|
Investment in and advances to equity-accounted for investments (note 7) | 25,766 |
| | 25,460 |
|
Derivative assets (note 12) | 2,973 |
| | 4,226 |
|
| Other non-current assets | 74 |
| | 127 |
|
Intangible assets
At cost, less accumulated depreciation of $10.9 million (2017 - $8.2 million) (note 8) | 11,625 |
| | 14,605 |
|
Goodwill (note 8) | 8,059 |
| | 8,059 |
|
| Total assets | 2,161,086 |
|
| 2,197,348 |
|
| LIABILITIES AND EQUITY | | | |
| Current | | | |
| Accounts payable, including affiliate balances of $0.6 million (2017 - $nil) | 11,146 |
| | 7,860 |
|
Accrued liabilities (notes 9, 12 and 15f) | 40,856 |
| | 34,608 |
|
Current portion of long-term debt (note 10) | 106,236 |
| | 166,745 |
|
Current portion of derivative liabilities (note 12) | 57 |
| | — |
|
Current obligation related to capital leases (note 11) | 20,896 |
| | 7,227 |
|
| Deferred revenue | — |
| | 557 |
|
Due to affiliates (note 15f) | 18,570 |
| | 19,717 |
|
| Total current liabilities | 197,761 |
|
| 236,714 |
|
Long-term debt (note 10) | 629,170 |
| | 785,557 |
|
Long-term obligation related to capital leases (note 11) | 354,393 |
| | 141,681 |
|
Other long-term liabilities (note 21) | 32,829 |
| | 26,795 |
|
| Total liabilities | 1,214,153 |
|
| 1,190,747 |
|
Commitments and contingencies (notes 7, 10, 11 and 12) |
| |
|
| Equity | | | |
Common stock and additional paid-in capital (585.0 million shares authorized, 231.6 million Class A and 37.0 million class B shares issued and outstanding as of December 31, 2018) (2017 - 385.0 million shares authorized, 231.2 million Class A and 37.0 million Class B shares issued and outstanding) (notes 5 and 14) | 1,295,929 |
| | 1,294,998 |
|
| Accumulated deficit | (348,996 | ) | | (288,397 | ) |
| Total equity | 946,933 |
|
| 1,006,601 |
|
| Total liabilities and equity | 2,161,086 |
|
| 2,197,348 |
|
The accompanying notes are an integral part of the consolidated financial statements.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (notes 1 and 3)4)
(in thousands of U.S. dollars)
|
| | | | | | | | |
| | Year Ended
December 31, 2016
$ | | Year Ended
December 31, 2015
$ | | Year Ended
December 31, 2014
$ |
| Cash and cash equivalents provided by (used for) | | | | | |
| OPERATING ACTIVITIES | | | | | |
| Net income | 62,855 |
| | 179,635 |
| | 60,538 |
|
| Non-cash items: | | | | | |
| Depreciation and amortization | 104,149 |
| | 73,760 |
| | 53,292 |
|
Loss (gain) on sale of vessels (note 21) | 20,594 |
| | (771 | ) | | (9,955 | ) |
Unrealized gain on derivative instruments (note 11) | (9,679 | ) | | (8,193 | ) | | (8,281 | ) |
Equity income (note 8) | (13,101 | ) | | (14,411 | ) | | (5,228 | ) |
| Other | 9,270 |
| | 2,266 |
| | (1,450 | ) |
Change in operating assets and liabilities (note 18) | 44,496 |
| | (25,880 | ) | | (50,904 | ) |
| Expenditures for dry docking | (8,608 | ) | | (39,617 | ) | | (17,072 | ) |
| Net operating cash flow | 209,976 |
|
| 166,789 |
|
| 20,940 |
|
| FINANCING ACTIVITIES | | | | | |
| Proceeds from long-term debt, net of issuance costs | 906,149 |
| | 688,695 |
| | 98,796 |
|
| Repayments of long-term debt | (162,092 | ) | | (40,029 | ) | | (20,367 | ) |
| Prepayment of long-term debt | (979,877 | ) | | (191,592 | ) | | (167,000 | ) |
Proceeds from long-term debt of Entities under Common Control (note 3) | — |
| | — |
| | 10,368 |
|
Repayment from long-term debt of Entities under Common Control (note 3) | — |
| | (4,632 | ) | | (3,309 | ) |
Net advances from affiliates (note 3) | — |
| | (825 | ) | | (17,376 | ) |
Equity contribution from Teekay Corporation to Entities under Common Control (note 3) | — |
| | 1,928 |
| | 3,001 |
|
Equity contribution from Teekay Corporation (note 15e) | — |
| | — |
| | 1,267 |
|
Acquisition of the Explorer Spirit and Navigator Spirit from Teekay Offshore Partners L.P. (note 3) | — |
| | (31,870 | ) | | — |
|
| Cash dividends paid | (46,847 | ) | | (15,139 | ) | | (10,165 | ) |
Proceeds from equity offerings, net of offering costs (note 4) | 7,558 |
| | 242,264 |
| | 111,190 |
|
| Net financing cash flow | (275,109 | ) |
| 648,800 |
|
| 6,405 |
|
| INVESTING ACTIVITIES | | | | | |
Proceeds from the sale of vessels and equipment (note 21) | 27,550 |
| | 11,080 |
| | 154,000 |
|
Expenditures for Principal Maritime Vessel acquisitions (note 21) | — |
| | (612,000 | ) | | — |
|
| Expenditures for vessels and equipment | (9,226 | ) | | (236,229 | ) | | (2,084 | ) |
Loan repayments from High-Q joint venture (note 8) | 3,500 |
| | 1,000 |
| | 1,950 |
|
Return of capital from (investment in) TTOL (note 8) | 15,000 |
| | (239 | ) | | (6,494 | ) |
Investment in and advances to TIL (note 8) | — |
| | — |
| | (35,045 | ) |
Deposit for vessel purchase (note 21) | — |
| | — |
| | (3,700 | ) |
Investment in term loans (note 6) | — |
| | — |
| | 1,179 |
|
Acquisition of SPT (note 24) | — |
| | (45,581 | ) | | — |
|
| Net investing cash flow | 36,824 |
|
| (881,969 | ) |
| 109,806 |
|
| (Decrease) increase in cash and cash equivalents | (28,309 | ) | | (66,380 | ) | | 137,151 |
|
| Cash and cash equivalents, beginning of the year | 96,417 |
| | 162,797 |
| | 25,646 |
|
| Cash and cash equivalents, end of the year | 68,108 |
| | 96,417 |
| | 162,797 |
|
|
| | | | | | | | |
| | Year Ended
December 31, 2018
$ | | Year Ended
December 31, 2017
$ | | Year Ended
December 31, 2016
$ |
| Cash, cash equivalents and restricted cash (used for) provided by | | | | | |
| OPERATING ACTIVITIES | | | | | |
| Net (loss) income | (52,548 | ) | | (58,023 | ) | | 67,823 |
|
| Non-cash items: | | | | | |
| Depreciation and amortization | 118,514 |
| | 100,481 |
| | 104,149 |
|
(Gain) loss on sale of vessels (note 20) | (170 | ) | | 12,984 |
| | 20,594 |
|
Unrealized gain on derivative instruments (note 12) | (579 | ) | | (937 | ) | | (9,679 | ) |
Equity (income) loss (note 7) | (1,220 | ) | | 25,370 |
| | (7,680 | ) |
| Other | 11,664 |
| | 8,093 |
| | 9,943 |
|
Change in operating assets and liabilities (note 17) | (54,952 | ) | | 6,590 |
| | 30,004 |
|
| Expenditures for dry docking | (27,972 | ) | | (14,069 | ) | | (8,608 | ) |
| Net operating cash flow | (7,263 | ) |
| 80,489 |
|
| 206,546 |
|
| | | | | | |
| FINANCING ACTIVITIES | | | | | |
| Proceeds from long-term debt, net of issuance costs | 81,397 |
| | 232,825 |
| | 906,149 |
|
| Repayments of long-term debt | (165,365 | ) | | (109,006 | ) | | (162,092 | ) |
| Prepayment of long-term debt | (137,717 | ) | | (443,796 | ) | | (979,877 | ) |
Proceeds from financing related to sales and leasebacks (note 11) | 241,339 |
| | 153,000 |
| | — |
|
Scheduled repayments of obligations related to capital leases (note 11) | (14,958 | ) | | (4,090 | ) | | — |
|
Return of capital to Teekay Corporation (note 4) | — |
| | — |
| | (15,000 | ) |
| Cash dividends paid | (8,052 | ) | | (20,679 | ) | | (46,847 | ) |
Proceeds from equity offerings, net of offering costs (note 5) | — |
| | 8,521 |
| | 7,558 |
|
Proceeds from issuance of common stock, net of share issuance costs (note 5) | — |
| | 5,000 |
| | — |
|
| Other | (92 | ) | | (241 | ) | | (744 | ) |
| Net financing cash flow | (3,448 | ) |
| (178,466 | ) |
| (290,853 | ) |
| | | | | | |
| INVESTING ACTIVITIES | | | | | |
Proceeds from the sales of vessels and equipment (note 20) | 589 |
| | 52,131 |
| | 27,550 |
|
| Expenditures for vessels and equipment | (5,827 | ) | | (4,732 | ) | | (9,226 | ) |
Loan repayments from equity-accounted for investment (note 7) | — |
| | 550 |
| | 3,500 |
|
| Return of capital from equity-accounted for investments | 746 |
| | — |
| | — |
|
Cash acquired in TIL acquisition, net of transaction fees (note 23) | — |
| | 30,831 |
| | — |
|
| Net investing cash flow | (4,492 | ) |
| 78,780 |
|
| 21,824 |
|
| | | | | | |
| Decrease in cash, cash equivalents and restricted cash | (15,203 | ) | | (19,197 | ) | | (62,483 | ) |
| Cash, cash equivalents and restricted cash, beginning of the year | 75,710 |
| | 94,907 |
| | 157,390 |
|
Cash, cash equivalents and restricted cash, end of the year (note 17d) | 60,507 |
| | 75,710 |
| | 94,907 |
|
Supplemental cash flow information (note 18)17)
The accompanying notes are an integral part of the consolidated financial statements.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (notes 1 and 3)4)
(in thousands of U.S. dollars, except share amounts)
|
| | | | | | | | | | | | | | | | | |
| | EQUITY |
| | Equity of Entities under Common Control
$ | | Common Stock and Paid-in Capital | | | | |
| | Thousands of Common Stock
# | | Class A
$ | | Class B
$ | | Accumulated Deficit
$ | | Total
$ |
| Balance as at December 31, 2013 | 16,158 |
|
| 83,591 |
|
| 673,092 |
|
| 125 |
|
| (388,545 | ) |
| 300,830 |
|
| Net income | 3,396 |
| | — |
| | — |
| | — |
| | 57,142 |
| | 60,538 |
|
Proceeds from issuance of Class A common stock, net of offering costs of $4.8 million (note 4) | — |
| | 24,167 |
| | 111,190 |
| | — |
| | — |
| | 111,190 |
|
Value assigned to share issuance to Teekay Corporation for purchase of TTOL (note 4) | — |
| | 4,221 |
| | — |
| | 17,010 |
| | — |
| | 17,010 |
|
Purchase of TTOL from Teekay Corporation (note 8) | — |
| | — |
| | — |
| | — |
| | (6,626 | ) | | (6,626 | ) |
Equity contribution from Teekay Corporation (note 15e) | — |
| | — |
| | — |
| | — |
| | 1,267 |
| | 1,267 |
|
Net change in parent's equity from Entities under Common Control (note 3) | 3,001 |
| | — |
| | — |
| | — |
| | — |
| | 3,001 |
|
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (10,165 | ) | | (10,165 | ) |
Equity-based compensation (note 14) | — |
| | 85 |
| | 1,233 |
| | — |
| | — |
| | 1,233 |
|
| Balance as at December 31, 2014 | 22,555 |
|
| 112,064 |
|
| 785,515 |
|
| 17,135 |
|
| (346,927 | ) |
| 478,278 |
|
| Net income | 2,708 |
| | — |
| | — |
| | — |
| | 176,927 |
| | 179,635 |
|
Proceeds from issuance of Class A common stock, net of offering costs (note 4) | — |
| | 37,201 |
| | 246,032 |
| | — |
| | — |
| | 246,032 |
|
Proceeds from issuance of Class B common stock, net of offering costs (note 4) | — |
| | 6,512 |
| | — |
| | 45,500 |
| | — |
| | 45,500 |
|
Value adjustment to share issuance to Teekay Corporation for purchase of TTOL (note 8) | — |
| | — |
| | — |
| | — |
| | (239 | ) | | (239 | ) |
Net change in parent's equity from Entities under Common Control (note 3) | 1,928 |
| | — |
| | — |
| | — |
| | — |
| | 1,928 |
|
Acquisition of SPT Explorer and Navigator Spirit from Teekay Offshore Partners L.P. (note 3) | (27,191 | ) | | — |
| | — |
| | — |
| | (13,311 | ) | | (40,502 | ) |
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (33,863 | ) | | (33,863 | ) |
Equity-based compensation (note 14) | — |
| | 254 |
| | 692 |
| | — |
| | — |
| | 692 |
|
| Balance as at December 31, 2015 | — |
|
| 156,031 |
|
| 1,032,239 |
|
| 62,635 |
|
| (217,413 | ) |
| 877,461 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 62,855 |
| | 62,855 |
|
Proceeds from issuance of Class A common stock, net of offering costs (note 4) | — |
| | 3,020 |
| | 7,558 |
| | — |
| | — |
| | 7,558 |
|
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (28,122 | ) | | (28,122 | ) |
Equity-based compensation (note 14) | — |
| | 253 |
| | 872 |
| | — |
| | — |
| | 872 |
|
| Balance as at December 31, 2016 | — |
| | 159,304 |
| | 1,040,669 |
| | 62,635 |
| | (182,680 | ) | | 920,624 |
|
|
| | | | | | | | | | | | | | | | | |
| | EQUITY |
| | Equity of Entities under Common Control
$ | | Common Stock and Paid-in Capital | | | | |
| | Thousands of Common Stock
# | | Class A
$ | | Class B
$ | | Accumulated Deficit
$ | | Total
$ |
| Balance as at December 31, 2015 | 22,018 |
|
| 156,031 |
|
| 1,032,239 |
|
| 62,635 |
|
| (217,413 | ) |
| 899,479 |
|
| Net income | 4,968 |
| | — |
| | — |
| | — |
| | 62,855 |
| | 67,823 |
|
Proceeds from issuance of Class A common stock, net of offering costs (note 5) | — |
| | 3,020 |
| | 7,558 |
| | — |
| | — |
| | 7,558 |
|
Net change in parent's equity from Entities under Common Control (note 4) | 130 |
| | — |
| | — |
| | — |
| | — |
| | 130 |
|
Return of capital from Entities under Common Control (note 4) | (15,000 | ) | | — |
| | — |
| | — |
| | — |
| | (15,000 | ) |
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (28,122 | ) | | (28,122 | ) |
Equity-based compensation (note 14) | — |
| | 253 |
| | 872 |
| | — |
| | — |
| | 872 |
|
| Balance as at December 31, 2016 | 12,116 |
| | 159,304 |
| | 1,040,669 |
| | 62,635 |
| | (182,680 | ) | | 932,740 |
|
| Net income (loss) | 1,304 |
| | — |
| | — |
| | — |
| | (59,327 | ) | | (58,023 | ) |
Proceeds from issuance of Class A common stock, net of offering costs (note 5) | — |
| | 5,955 |
| | 13,521 |
| | — |
| | — |
| | 13,521 |
|
Acquisition of the remaining 50% of TTOL (note 5) | (13,420 | ) | | 13,775 |
| | — |
| | 25,897 |
| | (25,711 | ) | | (13,234 | ) |
Acquisition of TIL (note 5) | — |
| | 88,978 |
| | 151,262 |
| | — |
| | — |
| | 151,262 |
|
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (20,679 | ) | | (20,679 | ) |
Equity-based compensation (note 14) | — |
| | 190 |
| | 1,014 |
| | — |
| | — |
| | 1,014 |
|
| Balance as at December 31, 2017 | — |
| | 268,202 |
| | 1,206,466 |
| | 88,532 |
| | (288,397 | ) | | 1,006,601 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (52,548 | ) | | (52,548 | ) |
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (8,052 | ) | | (8,052 | ) |
Equity-based compensation (note 14) | — |
| | 357 |
| | 1,220 |
| | — |
| | — |
| | 1,220 |
|
| Other | — |
| | — |
| | (289 | ) | | — |
| | 1 |
| | (288 | ) |
| Balance as at December 31, 2018 | — |
| | 268,559 |
| | 1,207,397 |
| | 88,532 |
| | (348,996 | ) | | 946,933 |
|
The accompanying notes are an integral part of the consolidated financial statements.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| |
| 1. | Summary of Significant Accounting Policies |
Nature of operations
The Company (as defined below) is engaged in the international marine transportation of crude oil and refined petroleum products through the operation of its oil and product tankers as well as providing ship-to-ship transfer services. The Company’s revenues are earned in international markets.
Basis of presentation and consolidation principles
During October 2007, Teekay Corporation (Teekay) formed Teekay Tankers Ltd., a Marshall Islands corporation (together with its wholly owned subsidiaries and the Entities under Common Control, as described in note 3, collectively the Company), to acquire from Teekay a fleet of nine double-hull Aframax-class oil tankers in connection with the Company’s initial public offering (or IPO). As of December 31, 2016, the Company’s fleet included a total of 51 vessels, of which seven were chartered-in and one was 50%-owned through the High-Q Investment Ltd. joint venture (or High-Q).
The consolidated financial statements reflect the financial position, results of operations and cash flows of Teekay Tankers Ltd., its wholly-owned subsidiaries, equity accounted investments and the Entities under Common Control. TheThese consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (GAAP). They include the accounts of Teekay Tankers Ltd., a Marshall Islands corporation, its wholly-owned subsidiaries and all significant intercompany balancesthe Entities under Common Control, as described in note 4, and transactions have been eliminated upon consolidation.any variable interest entities (or VIEs) of which it is the primary beneficiary (collectively, the Company).
Use of estimates
The preparation of these consolidated 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 couldmay differ from those estimates. In addition, estimates have been made when allocating expenses from Teekay Corporation (Teekay) to the Entities under Common Control and such estimates may not be reflective of what actual results would have been if the Entities under Common Control had operated independently. Significant intercompany balances and transactions have been eliminated upon consolidation.
Currency translation
Prior to the Company's adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business, (or ASU 2017-01) on October 1, 2017, the Company accounted for the acquisition of vessels from Teekay as a transfer of a business between entities under common control. The method of accounting for such transfers, as well as the acquisition of other businesses from Teekay, was 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. The amount by which the proceeds paid by the Company differs from Teekay's historical carrying value of the acquired business is accounted for as a return of capital to, or contribution of capital from, Teekay. In addition, transfers of net assets between entities under common control were accounted for as if the transfer occurred from the date that the Company and the acquired business were both under the common control of Teekay and had begun operations (note 2).
On May 31, 2017, the Company acquired from Teekay Holdings Ltd., a wholly-owned subsidiary of Teekay, the remaining 50% interest in Teekay Tanker Operations Ltd. (or TTOL). As a result of the acquisition, the Company's consolidated financial statements prior to the date the Company acquired a controlling interest in TTOL have been retroactively adjusted to eliminate the use of the equity method of accounting for the original 50% interest in TTOL and to include 100% of the assets and liabilities and results of TTOL during the periods they were under common control of Teekay and had begun operations. All intercorporate transactions between the Company and TTOL that occurred prior to the acquisition of a controlling interest in TTOL by the Company have been eliminated upon consolidation (note 4).
In July 2017 and during 2018, the Company completed sales-leaseback financing arrangements with four and 10 lessor entities established by financial institutions, respectively. The Company is considered to be the primary beneficiary of the lessor entities under the arrangements and has since consolidated these VIEs (note 11).
On November 27, 2017, the Company completed its merger with Tanker Investments Ltd. (TIL), as a result of which TIL became a wholly-owned subsidiary of the Company. Prior to the merger, the Company accounted for its 11.3% interest in TIL using the equity method (notes 7 and 23).
Foreign currency
The Company’sconsolidated financial statements are stated in U.S. Dollars and the functional currency of the Company is the U.S. dollar.Dollar. Transactions involving other currencies during the year are converted into U.S. dollarsDollars using the exchange rates in effect at the time of the transactions. At the balance sheet date, monetary assets and liabilities that are denominated in currencies other than the U.S. dollarDollar are translated to reflect the year-end exchange rates. Resulting gains or losses are reflected in other (expenses) incomeexpenses in the accompanying consolidated statements of (loss) income.
OperatingRevenues
Voyage charters
Revenues from voyage charters are recognized on a proportionate performance method. The Company uses a discharge-to-discharge basis in determining proportionate performance for all spot voyages that contain a lease and a load-to-discharge basis in determining proportionate performance for all spot voyages that do not contain a lease. The Company does not begin recognizing revenue until a charter has been agreed to by the customer and the Company, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. Revenues from the Company’s vessels performing voyage charters within revenue sharing arrangements follow the same revenue recognition policy as voyage charters not in revenue sharing arrangements (or RSAs). The voyage revenues and expenses
Revenues and voyage expenses, or net revenue, of the vessels operating in poolrevenue sharing arrangements are pooled and the resulting aggregate net pool revenues,contribution from all vessels in the revenue sharing arrangement, calculated on a time charter equivalent basis, areis allocated to the poolrevenue sharing arrangement participants according to an agreed formula. The agreed formula used to allocate the aggregate net pool revenuescontribution varies between pools;revenue sharing arrangements; however, the formula generally allocates revenuesthe aggregate net contribution to poolthe participants of the revenue sharing arrangements on the basis of the number of days a vessel operates in the poolrevenue sharing arrangement with weighting adjustments made to reflect vessels’
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
differing capacities and performance capabilities. The same revenue and expense recognition principles stated above are applied in determiningdifference between the net pool revenuesrevenue earned by a vessel of the pool. The pools are responsible for payingCompany performing voyage expensescharters within a revenue sharing arrangement and distributeits allocated share of the aggregate net pool revenues tocontribution is reflected within voyage expenses. For those revenue sharing arrangements where the participants. The Company accounts fordoes not have an undivided interest in the working capital associated with it, the Company’s allocated share of the aggregate net allocation from the pool as revenues and amountscontribution due from the pool are includedrevenue sharing arrangement is reflected in the Company’s consolidated balance sheet as pool receivables from affiliates net.(note 2). The consolidated balance sheets reflect in other current assets the accrued portion of revenues for those voyages that commence prior to balance sheet date and complete after the balance sheet date.
Time charters
The Company recognizes revenues from time charters dailyaccounted for as operating leases on a straight-line basis over the term of the charter as the applicable vessel operates under the charter. The Company does not recognize revenues during days that the vessel is off hire. When the time charter contains a profit-sharing agreement, the Company recognizes the profit-sharing or contingent revenues when the contingency is resolved. All revenues from voyage charters are recognized on a proportionate performance method. The Company uses a discharge-to-discharge basis in determining proportionate performance for all spot voyages. The Company does not begin recognizing revenue until a charter has been agreed to by the customer and the Company, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. The consolidated balance sheets reflect in accounts receivable, any accrued revenue and in deferred revenue, the deferred portion of revenues and expenses, which will be earned in subsequent periods.periods (note 2).
Other revenues
Other revenues are earned from the offshore ship-to-ship transfer of commodities, primarily crude oil and refined oil products, but also liquid gases and various other products which are referred to as support operations. In addition, other revenues are also earned from other technical activities such as the commercial and technical management of vessels, terminal management, consultancy, procurement and equipment rental. Other revenues from short-term contracts are recognized as services are completed based on percentage of completion or in the case of long-term contracts, are recognized over the duration of the contract period.period (note 2).
Operating expenses
Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. In addition, the difference between the net revenue earned by a vessel of the Company performing voyage charters within a revenue sharing arrangement and its allocated share of the aggregate net contribution is reflected within voyage expenses. The Company, as shipowner, pays voyage expenses under voyage charters; itscharters. The Company’s customers
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
pay voyage expenses under time charters. charters, except when the vessel is off-hire during the term of a time charter, in which case the Company pays voyage expenses. Voyage expenses are recognized when incurred.
Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. The Company pays vessel operating expenses under both voyage and time charters and for vessels which earn net pool revenue, as described below. Voyage expenses and vesselabove. Vessel operating expenses are recognized when incurred.
The Company recognizes the expense from vessels time-chartered from other owners, which is included in time-charter hire expense, on a straight-line basis over the firm period of the charters.
Share-based compensation
The Company grants stock options and restricted stock units as incentive-based compensation to certain employees of Teekay who support the operations of the Company. The Company measures the cost of such awards using the grant date fair value of the award and recognizes that cost, net of estimated forfeitures, over the requisite service period, which generally equals the vesting period. For stock-based compensation awards subject to graded vesting, the Company calculates the value for the award as if it is a single award with one expected life and amortizes the calculated expense for the entire award on a straight-line basis over the vesting period of the award. The Company also grants common stock and fully vested stock options as incentive-based compensation to non-management directors, which are expensed immediately (see note(note 14).
Cash and cash equivalents
The Company classifies all highly liquid investments with an original maturity date of three months or less as cash and cash equivalents.
Restricted Cashcash
The Company maintains restricted cash deposits relating to certain contracts which were assumed as part of the acquisition of the ship-to-ship transfer business, in 2015 (note 24)LNG terminal management and for certain freight forward agreements (notes 12 and 17d). Attached to these contracts are certain performance guarantees required by the Company.
Restricted cash - long-term
The Company maintains restricted cash deposits for the purposes of the margin requirements of the Company's obligations related to certain capital leases (notes 11 and 17d).
Accounts receivable and allowance for doubtful accounts and investment
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in term loans andthousands of U.S. dollars, other loan receivablesthan share or per share data)
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance based on historical write-off experience and customer economic data. The Company reviews the allowance for doubtful accounts regularly and past due balances are reviewed for collectability. Account balances are written off against the allowance when the Company believes that the receivable will not be recovered. There are no significant amounts recorded as allowance for doubtful accounts as at December 31, 20162018 and 2015.2017. The consolidated balance sheets reflect, in accounts receivable, any amounts where the right to consideration is conditioned upon the passage of time, and in other current assets, any accrued revenue where the right to consideration is conditioned upon something other than the passage of time.
Other loan receivables
The Company’s investment in term loans and advances to equity accountedequity-accounted for investments are recorded at cost. The premium paid over the outstanding principal amount was amortized to interest income over the term of the loan using the effective interest rate method. The Company analyzes its loans for collectability during each reporting period. A loan loss provision is recorded,recognized, based on current information and events, if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors the Company considers in determining that a loan loss provision is required include, among other things, an assessment of the financial condition of the debtor, payment history of the debtor, general economic conditions, the credit rating of the debtor (when available), any information provided by the debtor regarding their ability to repay the loan, and the fair value of the underlying collateral. When a loan loss provision is recorded,recognized, the Company measures the amount of the loss provision based on the present value of expected future cash flows discounted at the loan’s effective interest rate and recognizes the resulting provisionloss in the consolidated statements of (loss) income. The carrying value of the loans is adjusted each subsequent period to reflect any changes in the present value of the expected future cash flows, which may result in increases or decreases to the loan loss provision.
The following table contains a summaryreflects the carrying value of the Company’s financing receivables by type andof borrower, the method by which the Company monitors the credit quality of its financing receivables on a quarterly basis.basis and the grade as of December 31, 2018.
| | | Class of Financing Receivable | | Credit Quality Indicator | | Grade | | December 31, 2016
$ | | December 31, 2015
$ | | Credit Quality Indicator | | Grade | | December 31, 2018
$ | | December 31, 2017
$ |
| Advances to equity accounted investments | | Other internal metrics | | Performing | | 10,480 | | 13,980 |
| |
| Advances to equity-accounted for investments | | | Other internal metrics | | Performing | | 9,930 | | 9,930 |
|
| | | 10,480 | | 13,980 |
| | 9,930 | | 9,930 |
|
Equity accountedEquity-accounted for investments
The Company’s investments in joint ventures in which the High-Q joint venture, Teekay Tanker Operations Ltd. (or TTOL)Company has the ability to exercise significant influence over the operating and Tanker Investments Ltd. (or TIL)financial policies of the entity are accounted for using the equity method of accounting. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and the Company’s proportionate share of earnings or losses and distributions. The Company evaluates its equity accounted investmentequity-accounted for investments for impairment when events or circumstances indicate that the carrying value of such investment may have experienced an other-than-temporary decline in value below its carrying value. If thean equity-accounted for investment is impaired and if its estimated fair value is less than theits carrying value, the carrying value is written down to its estimated fair value and the resulting impairment is recorded in the Company’s consolidated statements of (loss) income. The Company’s maximum exposure to loss is the amount it has invested in its equity accounted investments, including stock purchase warrants of TIL.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
equity-accounted for investments.
Vessels and equipment
All pre-delivery costs incurred during the construction of newbuildings, including interest, supervision and technical costs, are capitalized. The acquisition cost and all costs incurred to restore used vessels purchased by the Company to the standard required to properly service the Company’s customers are capitalized.
Vessel capital modifications include the addition of new equipment or certain modifications to the vessel that are aimed at improving or increasing the operational efficiency and functionality of the asset. This type of expenditure is capitalized and depreciated over the estimated useful life of the modification. Expenditures covering recurring routine repairs or maintenance are expensed as incurred.
Depreciation is calculated on a straight-line basis over a vessel’s estimated useful life, less an estimated residual value. Depreciation for vessels is calculated using an estimated useful life of 25 years from the date the vessel is delivered from the shipyard, or a shorter period if regulations prevent the Company from operating the vessels for 25 years. Depreciation of vessels and equipment (including depreciation attributable to the Entities under Common Control and excluding amortization of dry-docking costs and intangible assets) for the years ended December 31, 2018, 2017 and 2016 2015totaled $95.2 million, $80.1 million, and 2014 totaled $81.5 million, $59.5 million, and $42.5 million, respectively.
Vessel capital modifications include the addition of new equipment or can encompass various modifications to the vessel which are aimed at improving or increasing the operational efficiency and functionality of the asset. This type of expenditure is capitalized and depreciated over the estimated useful life of the modification. Expenditures covering recurring routine repairs or maintenance are expensed as incurred.
Generally, the Company dry docks each vessel every two and a half to five years. The Company capitalizes a substantial portion of thecertain costs incurred during dry docking and amortizes those costs on a straight-line basis over its estimated useful life, which typically is from the completion of a dry docking or intermediate survey to the estimated completion of the next dry docking. The Company includes in capitalized dry docking those costs incurred as part of the dry dock to meet classification and regulatory requirements. The Company expenses costs related to routine repairs and maintenance performed during dry docking that do not improve or extend the useful lives of the assets. When significant dry-docking expenditures occur prior to the expiration of the original amortization period, the remaining unamortized balance of the original dry-docking cost is expensed in the month of the subsequent dry docking.
The following table summarizes the change in the Company’s capitalized dry dockingdry-docking costs, from January 1, 20142016 to December 31, 2016:2018:
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016
$ | | 2015
$ | | 2014
$ | 2018
$ | | 2017
$ | | 2016
$ |
| Balance at the beginning of the year | 62,146 |
| | 35,509 |
| | 29,269 |
| 48,460 |
| | 49,298 |
| | 62,146 |
|
| Cost incurred for dry docking | 9,340 |
| | 39,617 |
| | 17,072 |
| 27,896 |
| | 16,239 |
| | 9,340 |
|
| Dry-dock amortization | (18,736 | ) | | (12,866 | ) | | (10,832 | ) | (20,326 | ) | | (17,077 | ) | | (18,736 | ) |
| Vessel sales | (3,452 | ) | | (114 | ) | | — |
| (11 | ) | | — |
| | (3,452 | ) |
| Balance at the end of the year | 49,298 |
|
| 62,146 |
|
| 35,509 |
| 56,019 |
|
| 48,460 |
|
| 49,298 |
|
Vessels and equipment that are intended to be “held and used” in the Company's business are assessed for impairment when events or circumstances indicate the carrying amount of the asset may not be recoverable. If the asset’s net carrying value exceeds the net undiscounted cash flows expected to be generated over its remaining useful life, the carrying amount of the asset is reduced to its estimated fair value. EstimatedThe estimated fair value for the Company's impaired vessels is determined based onusing discounted cash flows or appraised values. In cases where an active second handsecond-hand sale and purchase market does not exist, the Company uses a discounted cash flow approach to estimate the fair value of an impaired vessel. In cases where an active second handsecond-hand sale and purchase market exists, an appraised value is generally used to estimate the fair value of an impaired vessel. An appraised value is generally the amount the Company would expect to receive if it were to sell the vessel. Such appraisal is normally completed by the Company.Company and is based on second-hand sale and purchase data.
Vessels and equipment that are “held for sale” are measured at the lower of their carrying amount or fair value less costs to sell and are not depreciated while classified as held for sale. Interest, other expenses and related liabilities attributable to vessels and equipment classified as held for sale, continue to be recognized as incurred.
Goodwill and intangible assets
Goodwill is not amortized but is reviewed for impairment at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. A reporting unit is a component of the Company that constitutes a business for which discrete financial information is available and regularly reviewed by management. When goodwill is reviewed for impairment, the Company may elect to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. Alternatively, the Company may bypass this step and use a fair value approach to identify potential goodwill impairment and, when necessary, measure the amount of impairment. The Company uses a discounted cash flow model to determine the fair value of reporting units, unless there is a readily determinable fair market value. The Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment, effective October 1, 2018 (note 2). Consequently, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill.
Customer relatedCustomer-related intangible assets are amortized over the expected life of a customer contract or the expected duration that the customer relationships are estimated to contribute to the cash flows of the Company. The amount amortized each year is weighted based on the projected revenue to be earned under the contracts or projected revenue to be earned as a result of the customer relationships. Intangible assets are assessed for impairment when and if impairment indicators exist. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.
Debt issuance costs
Debt issuance costs related to loan facilities,recognized debt liabilities, including fees, commissions and legal expenses, are directly deducteddeferred and presented as a direct deduction from the carrying amount of that loan facility.the debt liability. Debt issuance costs which are not attributable to a specific debt liability or where the debt issuance costs exceed the carrying value of the related debt liability (primarily undrawn revolving credit facilitiesfacilities) are deferred and term loanspresented as other non-current assets in the Company's consolidated balance sheets. Debt issuance costs are amortized using the effective interest rate method over the term of the relevant loan. Amortization of debt issuance costs is included in interest expense in the Company’s consolidated statements of (loss) income.
Fees paid to substantially amend a non-revolving credit facility are associated with the extinguishment of the old debt instrument, if applicable, and included in determining the debt extinguishment gain or loss to be recognized. In addition, any unamortized debt issuance costs are written off. If the amendment is considered not to be a substantial amendment, then the fees would be associated with the replacement or modified debt instrument and, along with any existing unamortized premium, discount and unamortized debt issuance costs, would be amortized as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument using the effective interest method. Other related costs incurred with third parties directly related to the modification, other than the loan amendment fee, are expensed as incurred.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Fees paid to amend a revolving credit facility are deferred and amortized over the term of the modified revolving credit facility. If the borrowing capacity of the revolving credit facility increases as a result of the amendment, unamortized debt issuance costs of the original revolving credit facility are amortized over the remaining term of the modified revolving credit facility. If the borrowing capacity of the revolving credit facility decreases as a result of the amendment, a proportionate amount (based on the reduction in borrowing capacity) of the unamortized debt issuance costs of the original revolving credit facility are written off and the remaining amount is amortized over the remaining term of the modified revolving credit facility.
Income taxes
The Company recognizes the tax benefits from uncertain tax positions only if it is more likely than not that the tax position taken or expected to be taken in a tax return will be sustained on examination by the taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefits recognized in the Company’s consolidated financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.expense in the Company's consolidated statements of (loss) income.
The Company believes that it and its subsidiaries are not subject to income taxation under the laws of the Republic of The Marshall Islands or Bermuda, or that distributions by its subsidiaries to the Company will not be subject to any income taxes under the laws of such countries, and that it qualifies for the Section 883 exemption under U.S. federal income tax purposes.
Derivative instruments
All derivative instruments are initially recorded at fair value as either assets or liabilities in the accompanying consolidated balance sheets and subsequently remeasured to fair value each quarter,period end, regardless of the purpose or intent forof holding the derivative. The method of recognizing the resulting gains or losses areis dependent on whether the derivative contracts are designed to hedge a specific risk and whether the contracts qualify for hedge accounting. The Company does not apply hedge accounting to its derivative instruments, however it could for certain types of interest rate swaps that it may enter into in the future.
When a derivative is designated as a cash flow hedge, the Company formally documents the relationship between the derivative and the hedged item. This documentation includes the strategy and risk management objective for undertaking the hedge and the method that will be used to assess the effectiveness of the hedge. Any hedge ineffectiveness is recognized immediately in earnings, as are any gains and losses on the derivative that are excluded from the assessment of hedge effectiveness. The Company does not apply hedge accounting if it is determined that the hedge was not effective or will no longer be effective, the derivative was sold or exercised, or the hedged item was sold, repaid or no longer possibleprobable of occurring.
For derivative financial instruments designated and qualifying as cash flow hedges, changes in the fair value of the effective portion of the derivative financial instruments are initially recorded as a component of accumulated other comprehensive income in total equity. In the periods when the hedged items affect earnings, the associated fair value changes on the hedging derivatives are transferred from total equity to the corresponding earnings line item in the Company's consolidated statements of (loss) income. The ineffective portion of the change in fair value of the derivative financial instruments is immediately recognized in earnings in the Company's consolidated statements of (loss) income. If a cash flow hedge is terminated and the originally hedged item is still considered possibleprobable of occurring, the gains and losses initially recognized in total equity remain there until the hedged item impacts earnings, at which point they are transferred to the corresponding earnings line item in the Company's consolidated statements of (loss) income. If the hedged items are no longer possibleprobable of occurring, amounts recognized in total equity are immediately transferred to the earnings item in the Company's consolidated statements of (loss) income.
For derivative financial instruments that are not designated or that do not qualify as hedges under Financial Accounting Standards Board (or FASB) ASC 815, Derivatives and Hedging, the changes in the fair value of the derivative financial instruments are recognized in earnings. Gains and losses from the Company’s non-designated derivatives are recorded in realized and unrealized lossgain (loss) on derivative instruments in the Company’s consolidated statements of (loss) income.
Earnings (loss) per share
Earnings (loss) per share is determined by dividing (a) net income (loss) of the Company after deducting the amount of net income (loss) attributable to the Entities under Common Control which were purchased solely with cash by (b) the weighted-average number of shares outstanding during the applicable period.period and the equivalent shares outstanding that are attributable to the Entities under Common Control. The calculation of weighted-average number of shares includes the total Class A and total Class B shares outstanding during the applicable period. The computation of diluted earnings per share assumes the exercise of all dilutive stock options and restricted stock units using the treasury stock method. The computation of diluted loss per share does not assume such exercises.
| |
| 2. | Recent Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, (or ASU 2014-09). ASU 2014-09 will requirerequires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i)
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue as each performance obligation is satisfied. ASU 2014-09 isbecame effective for the Company as of January 1, 2018 and shallmay be applied, at the Company’s option, retrospectively to each period presented or as a cumulative-effect adjustment as of such date. The Company has elected to apply ASU 2014-09 only to those contracts that were not completed as of January 1, 2018. The Company has adopted ASU 2014-09 as a cumulative-effect adjustment as of the date of adoption. The Company expects thathas identified the following differences on adoption of ASU 2014-09 may result2014-09:
The Company previously presented the net allocation for its vessels participating in a changeRSAs as net pool revenues. The Company has determined that it is the principal in voyages its vessels perform that are included in the method of recognizingRSAs. As such, the revenue from those voyages is presented in voyage charters, wherebycharter revenues and the Company’s methoddifference between this amount and the Company's net allocation from the RSA is presented as voyage expenses. This had the effect of determining proportional performance will change from discharge-to-dischargeincreasing voyage charter revenues and voyage expenses for the year ended December 31, 2018 by $292.6 million. There was no cumulative impact to load-to-discharge. This will result in no revenue being recognized from discharge of the prior voyage to loading of the current voyage and all revenue being recognized from loading of the current voyage to discharge of the current voyage. This change will result in revenue being recognized later in the voyage which may cause additional volatility in revenue and earnings between periods. opening equity as at January 1, 2018.
The Company previously presented all accrued revenue as a component of accounts receivable. The Company has determined that if the right to such consideration is in the process of validating aspects of its preliminary assessment of ASU 2014-09, determining the transitional impact and completing other items required for the adoption of ASU 2014-09.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars,conditioned upon something other than share or per share data)
the passage of time, such accrued revenue should be presented apart from accounts receivable. This had the effect of increasing other current assets and decreasing accounts receivable by $17.9 million at December 31, 2018.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (orASU 2016-02). ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right of useright-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. LeasesFor lessees, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company expectsASU 2016-02 requires lessors to adoptclassify leases as a sales-type, direct financing, or operating lease. A lease is a sales-type lease if any one of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating that the lessor has transferred substantially all of the risks and benefits of the underlying asset to the lessee and a third party, the lease is a direct financing lease. All leases that are not sales-type leases or direct financing leases are operating leases. ASU 2016-02 is effective January 1, 2018. A modified retrospective2019, with early adoption permitted. The Company adopted ASU 2016-02 on January 1, 2019. FASB issued an additional accounting standards update in July 2018 that made further amendments to accounting for leases, including allowing the use of a transition approach whereby a cumulative effect adjustment is required for lessees for capital and operating leases existing at, or entered into after, the beginningmade as of the earliest comparative period presented in the financial statements,effective date, with certain practical expedients available.no retrospective effect. The Company expects thathas elected to use this new optional transition approach. To determine the cumulative effect adjustment, the Company will not reassess lease classification, initial direct costs for any existing leases and whether any expired or existing contracts are or contain leases. The adoption of ASU 2016-02 will result in a change in accounting method for the lease portion of the daily charter hire for the Company’s chartered-in vessels accounted for as operating leases with firm periods of greater than one year.year as well as a small number of office leases. Under ASU 2016-02, the Company will recognize a right of useright-of-use asset and a lease liability on the balance sheet for these charters and office leases based on the present value of future minimum lease payments, whereas currently no right of useright-of-use asset or lease liability is recognized. This will have the resultOn January 1, 2019, a right of increasing the Company’s assetsuse asset and liabilities.a lease liability of $11.0 million, were each recognized. The pattern of expense recognition of chartered-in vesselvessels is expected to remain substantially unchanged, unless the right of useright-of-use asset becomes impaired. The Company is in the process of validating aspects of its preliminary assessment of ASU 2016-02, determining the transitional impact and completing other items required for the adoption of ASU 2016-02.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting (or ASU 2016-09). ASU 2016-09 simplifies aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for the Company January 1, 2017 with early adoption permitted. The Company expects the impact of adopting this new accounting guidance will result in a change in presentation of cash payments for tax withholdings on share settled equity awards from an operating cash outflow to financing cash outflow on the Company's statements of cash flows.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This update replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update is effective for the Company as of January 1, 2020, with a modified-retrospective approach. The Company is currently evaluating the effect of adopting this new guidance.
In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which, among other things, provides guidance on two acceptable approaches of classifying distributions received from equity method investees in the statement of cash flows. This update isbecame effective for the Company as of January 1, 2018, with a retrospective approach. The Company is currently evaluatinghas elected to classify distributions received from equity method investees in the effectconsolidated statement of adoptingcash flows based on the nature of the distribution. The adoption of this new guidance.update did not have a material impact on the Company.
| |
3. | Acquisition of Entities under Common Control |
On December 18, 2015,In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows: Restricted Cash, (or ASU 2016-18). ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities are also required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 became effective for the Company acquired from Teekay Offshore Partners L.P.as of January 1, 2018. Adoption of ASU 2016-18 resulted in the Company including in its consolidated statement of cash flows changes in cash, cash equivalents and restricted cash.
In January 2017, the FASB issued Accounting Standards Update 2017-01, Clarifying the Definition of a Business, (or TOOASU 2017-01), which. ASU 2017-01 changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 requires an entity controlled by Teekay Corporation (or Teekay), two conventional oil tankers (the Explorer Spirit, formerly known as the SPT Explorer, and the Navigator Spirit), associated working capital and debt facilities, for an aggregate price of $39.0 million, including working capital of approximately $8.6 million and net of outstanding debt of approximately $49.6 million (or the 2015 Acquired Business). Of this net amount, $30.4 million was paid on closingto evaluate if substantially all of the transaction in December 2015 and the remaining $8.6 million was settled in the first quarter of 2016. As part of this acquisition Teekay paid the Company $2.9 million to terminate the existing time-charters for the Explorer Spirit and Navigator Spirit. Subsequent to the acquisition, Teekay entered into a contract with the Company to guarantee commitments under the existing credit facilities related to the two vessels for a payment of $1.5 million. As a result of the 2015 Acquired Business, the Company's consolidated financial statements prior to the date of the Company acquired interests in the vessels are retroactively adjusted to include the results of these vessels during the periods they were under common control of Teekay and had begun operations. The effect of adjusting such information to account for the 2015 Acquired Business in periods prior to the Company's acquisition thereof is referred to as the Entities under Common Control.
Assets and liabilities of the vessels the Company acquired from TOO were reflected on the Company's consolidated balance sheet at TOO’s historical carrying values. The amount of the net purchase price of $39.0 million that was in excess of TOO’s historical carryingfair value of the netgross assets acquired is concentrated in a single identifiable asset or a group of $25.0 millionsimilar identifiable assets; if so, the set of transferred assets and activities is not a business. ASU 2017-01 also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. Unlike a business combination, no goodwill or bargain purchase gain is recognized as part of an asset acquisition. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. The Company adopted this standard effective October 1, 2017, and this standard was accounted for as a $14.0 million return of capital to Teekay.
All periods priorapplied to the acquisition of these vessels from TOO have been retroactively adjustedTIL (note 23).
In October 2017, the FASB issued Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment (or ASU 2017-04). Pursuant to includethis update, goodwill impairment will now be measured as the results of these vessels, as is required foramount by which a reorganization of entities under common control. All intercorporate transactions relating to these vessels between the Company and Teekay that occurred prior to the vessels’ acquisition by the Company have been eliminated upon consolidation.reporting unit’s carrying value exceeds its fair
The effect of adjusting the Company’s consolidated financial statements to account for these common control exchanges increased the Company’s net income for the years ended December 31, 2015 and 2014 by $2.7 million and $3.4 million, respectively. The adjustments for the Entities under Common Control increased the Company’s revenues for the years ended December 31, 2015 and 2014 by $9.8 million and $14.4 million, respectively.
In the preparation of the comparative amounts in these consolidated financial statements, shore-based costs for commercial management services (voyage expenses), ship management services (vessel operating expenses) and corporate/administrative services (general and administrative) were not identifiable as relating solely to each specific vessel. Costs for commercial management services were allocated based on the rates charged by Teekay to third parties to provide such services. Costs for ship management services were allocated based on internal estimates of the cost to provide this function. Costs for corporate/administrative services were allocated based on the actual per day costs incurred for the Company’s other conventional tankers. Management believes these allocations reasonably present the interest expense and the general and administrative expenses of the Entities under Common Control.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
value, not to exceed the carrying value of goodwill. ASU 2017-04 eliminated existing guidance that required an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. ASU 2017-04 requires prospective adoption approach and is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company elected to adopt ASU 2017-04 on October 1, 2018. The adoption of this update did not have a material impact on the Company.
In August 2018, the FASB issued Accounting Standards Update 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, (or ASU 2018-15). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company has elected to adopt ASU 2018-15 on October 1, 2018, and such adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.
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4.3. | Public Offerings and Private PlacementsRevenue |
The Company’s primary source of revenue is from chartering its vessels (Aframax tankers, Suezmax tankers and Long Range 2 (or LR2) tankers) to its customers. The Company utilizes two primary forms of contracts, consisting of voyage charters and time-charters.
The extent to which the Company employs its vessels on voyage charters versus time charters is dependent upon the Company’s chartering strategy and the availability of time charters. Spot market rates for voyage charters, including conventional voyages and lightering voyages, are volatile from period to period, whereas time charters provide a stable source of monthly revenue. The Company also provides ship-to-ship support services, which includes managing the process of transferring cargo between seagoing ships positioned alongside each other, either stationary or underway, as well as commercial management services to third-party owners of vessels. Finally, the Company manages LNG terminals and procures LNG-related goods and services for terminal owners and other customers.
Voyage Charters
Voyage charters are charters for a specific voyage that are usually priced on a current or "spot" market rate and then adjusted for any pool participation based on predetermined criteria, if applicable. Voyage charters for full service lightering voyages may also be priced based on pre-agreed terms. The performance obligations within a voyage charter contract, which will typically include the lease of the vessel to the charterer as well as the operation of the vessel, are satisfied as services are rendered over the duration of the voyage, as measured using the time that has elapsed from commencement of performance. In addition, any expenses that are unique to a particular voyage, including fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions, are the responsibility of the vessel owner. The Company’s voyage charters will normally contain a lease; however, judgment is necessary to determine whether this is the case based upon the decision-making rights the charterer has under the contract. Such contracts are considered either fixed or variable, depending on certain conditions. Delays caused by the charterer result in additional consideration. Payment for the voyage is not due until the voyage is completed. The duration of a single voyage will typically be less than three months. The Company does not engage in any specific tactics to minimize vessel residual value risk due to the short-term nature of the contracts.
Time Charters
Pursuant to a time charter, the Company charters a vessel to a customer for a fixed period of time, generally one year or more. The performance obligations within a time-charter contract, which will include the lease of the vessel to the charterer as well as the operation of the vessel, are satisfied as services are rendered over the duration of such contract, as measured using the time that has elapsed from commencement of performance. In addition, any expenses that are unique to a particular voyage, including any fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions, are the responsibility of the customer, as long as the vessel is not off-hire. Hire is typically invoiced monthly in advance for time-charter contracts, based on a fixed daily hire amount. However, certain sources of variability exist, including off-hire and sometimes profit share revenue. If the vessel is off-hire due to mechanical breakdown or for any other reason, the charterer does not pay charter hire for this time. For contracts including a profit share component, the profit share consideration occurs when actual spot tanker rates earned by the vessel exceed certain thresholds for a period of time. Variable consideration of the Company’s contracts is typically recognized as incurred, as either such revenue is allocated and accounted for under lease accounting requirements or, alternatively, such consideration is allocated to distinct periods within a contract that such variable consideration was incurred in. The Company does not engage in any specific tactics to minimize vessel residual value risk.
As at December 31, 2018, two of the Company’s vessels operated under time-charter contracts with the Company’s customers, both of which are scheduled to expire in 2019. As at December 31, 2018, the future hire payments expected to be received by the Company under time charters then in place were approximately $6.3 million. The hire payments should not be construed to reflect a forecast of total charter hire revenues for any of the periods. Future hire payments do not include hire payments generated from new contracts entered into after December 31, 2018, from unexercised option periods of contracts that existed on December 31, 2018 or from variable consideration, if any. In addition, future hire payments presented above have been reduced by estimated off-hire time for required period maintenance. Actual amounts may vary given future events such as unplanned vessel maintenance.
The carrying amount of the Company's owned vessels employed on time charters as at December 31, 2018, was $58.3 million (2017 - $517.9 million). The cost and accumulated depreciation of the vessels employed on these time charters as at December 31, 2018 were $88.2 million (2017 - $754.2 million) and $29.9 million (2017 - $236.3 million), respectively. As at December 31, 2018, the Company had no (2017 - $0.5 million) advanced payments recognized as contract liabilities that are expected to be recognized as time-charter revenues in the following period which are included in deferred revenue on the Company's consolidated balance sheets.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Other Revenues
Ship-to-ship support services include managing the process of transferring cargo between seagoing ships positioned alongside each other. Each operation is typically completed in less than 48 hours. The performance obligations within a commercial management contract are satisfied as services are rendered over the duration of such contracts. The management fee, consisting of a fixed component based on the number of days a vessel was under management and a variable component based on the vessel’s monthly earnings, is invoiced monthly in arrears for commercial management contracts. The performance obligations within an LNG terminal management contract are satisfied as services are rendered over the duration of such contracts. The management fee, consisting of a fixed amount, subject to contingent annual inflationary adjustments, is typically invoiced monthly in arrears. Substantially all of the Company’s performance obligations are satisfied over the duration of the associated contract, and the Company uses the proportion of elapsed time as its method to recognize revenue over the contract duration. The variable consideration of the Company’s contracts is typically recognized as incurred as such consideration is allocated to distinct periods within a contract.
Revenue Table
The following table summarizescontains a breakdown of the issuances of common shares overCompany's revenue by contract type for the three years endingended December 31, 2016:2018, 2017 and 2016. All revenue is part of the Company's conventional tanker segment, except for revenue for ship-to-ship support services and LNG terminal management, consultancy, procurement and other related services, which are part of the Company's ship-to-ship transfer segment.
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| | | | | | | | | | | | | | | | | | |
| Date | Number of Common Stock Issued | | | Offering Price
(Per Share) | | Gross Proceeds | | Net Proceeds | | Teekay's Ownership After the Offering | | Use of Proceeds |
| August 2014 | 4,220,945 |
| (1) | |
| $4.03 |
| | 17,010 |
| | 17,010 |
| | 28.7 | % | | Acquisition of interest in TTOL |
| December 2014 | 24,166,666 |
| (2) | |
| $4.80 |
| | 116,000 |
| | 111,190 |
| | 26.2 | % | | Acquisition of conventional tankers |
| January 2015 | 3,000,000 |
| (3) | |
| $4.57 |
| | 13,716 |
| | 13,685 |
| | 25.5 | % | | Acquisition of conventional tankers |
| July 2015 | 6,511,812 |
| (4) | |
| $6.99 |
| | 45,500 |
| | 45,500 |
| | 28.3 | % | | Acquisition of the ship-to-ship business |
| August 2015 | 13,630,075 |
| (5) | |
| $6.65 |
| | 90,640 |
| | 90,640 |
| | 28.8 | % | | Acquisition of conventional tankers |
| August - October 2015 | 7,180,083 |
| (5) | | $6.12 - $7.92 |
| | 49,268 |
| | 49,268 |
| | 26.2 | % | | Acquisition of conventional tankers |
| Continuous offering program during 2015 | 13,391,100 |
| (6) | | $6.04 - $7.70 |
| | 94,594 |
| | 92,439 |
| | (6) |
| | General purposes including acquisitions of conventional tankers |
| Continuous offering program during 2016 | 3,020,000 |
| (7) | | $2.38 - $2.75 |
| | 7,747 |
| | 7,558 |
| | (7) |
| | General corporate purposes |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ | | 2016
$ |
Voyage charters (1) | | | | | |
| Suezmax | 359,443 |
| | 6,696 |
| | 11,218 |
|
| Aframax | 119,830 |
| | 26,250 |
| | 30,591 |
|
| LR2 | 67,245 |
| | — |
| | — |
|
| Full service lightering | 104,870 |
| | 92,828 |
| | 48,223 |
|
| Total | 651,388 |
| | 125,774 |
| | 90,032 |
|
| | | | | | |
| Time-charters | | | | | |
| Aframax | 35,531 |
| | 50,964 |
| | 54,593 |
|
| Suezmax | 16,898 |
| | 45,745 |
| | 30,597 |
|
| LR2 | 7,357 |
| | 15,391 |
| | 12,184 |
|
| Total | 59,786 |
| | 112,100 |
| | 97,374 |
|
| | | | | | |
| Other revenue | | | | | |
| Ship-to-ship support services | 28,629 |
| | 33,436 |
| | 29,973 |
|
| Commercial management | 8,829 |
| | 12,946 |
| | 13,834 |
|
| LNG terminal management, consultancy, procurement and other | 7,131 |
| | 6,986 |
| | 9,222 |
|
| Total | 44,589 |
| | 53,368 |
| | 53,029 |
|
| | | | | | |
Net pool revenues (1) | | | | | |
| Suezmax | — |
| | 91,854 |
| | 173,747 |
|
| Aframax | — |
| | 22,718 |
| | 79,457 |
|
| LR2 | — |
| | 25,353 |
| | 48,599 |
|
| MR | — |
| | 11 |
| | 8,305 |
|
| Total | — |
| | 139,936 |
| | 310,108 |
|
| Total revenues | 755,763 |
| | 431,178 |
| | 550,543 |
|
| |
| (1) | Represents Class B common shares issuedPrior to Teekaythe January 1, 2018 adoption of ASU 2014-09, the Company presented the net allocation for its vessels participating in RSAs as partial considerationnet pool revenues. The Company has determined that it is the principal in voyages performed by its vessels included in the RSAs. As such, the revenue from those voyages is presented in voyage charter revenues and the difference between this amount and the Company's net allocation from the RSA is presented as voyage expenses. The adoption of ASU 2014-09 had the impact of increasing voyage charter revenues and voyage expenses for the Company’s acquisitionyear ended December 31, 2018 by $292.6 million. The comparative periods do not include the impact of the 50% interest in TTOL, which shares had an approximate valueJanuary 1, 2018 adoption of $15.6 million, or $3.70 per share when the purchase price was agreed between the parties.ASU 2014-09. |
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(2) | Represents 20.0 million shares of Class A common stock issued to the public and 4.2 million shares of Class A common stock issued to Teekay in a concurrent private placement. The proceeds from the issuance was used to acquire modern second hand tankers (see note 21) and for general corporate purposes. Please refer to Item 7 – Major Shareholders and Related Parties. |
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(3) | In December 2014, the Company granted the underwriters a 30-day option to purchase up to an additional 3.0 million shares of the Company’s Class A common stock from the December 2014 offering. The underwriters exercised this option and on January 2, 2015, the Company issued 3.0 million shares of Class A common stock for net proceeds of $13.7 million. |
| |
(4) | Represents Class B common shares issued to Teekay as consideration for the Company’s acquisition of the ship-to-ship transfer business. The shares had an approximate value of $45.5 million, or $6.99 per share, when the purchase price was agreed between the parties. |
| |
(5) | Represents 9.1 million shares of Class A common stock issued to the public and 4.5 million shares of Class A common stock issued to Teekay in a concurrent private placement. The proceeds from the issuances were used to acquire 12 modern Suezmax tankers from Principal Maritime Tankers (or PrincipalMaritime) (see note 21). The Company also issued approximately 7.2 million shares of Class A common stock to Principal Maritime as partial consideration for the vessels acquired. The shares had an approximate value of $49.3 million and are based on market prices at the time each vessel was delivered.
|
| |
(6) | In June 2015, the Company implemented a continuous offering program (or COP) under which the Company may issue shares of its Class A common stock at market prices up to a maximum aggregate amount of $80.0 million. The initial $80.0 million program was concluded in September 2015. The Company re-launched another $80.0 million COP in November 2015. The portion of the Company’s voting power and ownership held by Teekay at December 31, 2015 was 53.6% and 25.9%, respectively.
|
| |
(7) | In December 2016, the Company re-opened its $80.0 million COP. The portion of the Company's voting power and ownership held by Teekay at December 31, 2016 was 52.9% and 25.4%, respectively. |
Significant Customers
The following table presents total revenues and percentageAcquisition of total revenues for customers that accounted for more than 10% of the Company’s total revenues during the periods presented. Total revenues from customers attributable to the Entities under Common Control are included in the table.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
Statoil ASA (2) | (1) | | (1) | | $ | 38.3 | million |
| |
(1) | Less than 10% of the total revenues |
| |
(2) | Conventional tanker segment |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Concentration of Credit Risk
There is a concentration of credit risk with respectFrom time to time the Company has acquired from Teekay, or other entities controlled by Teekay, vessels or interests in businesses. These acquisitions (including, among others, the remaining 50% interest in TTOL in May 2017) were deemed to be vessel or business acquisitions between entities under common control. Accordingly, for transactions prior to the total amounts due from affiliatesCompany's adoption of ASU 2017-01 on October 1, 2017, the Company accounted for these transactions in a manner similar to the pooling of interests method. Under this method of accounting, the Company’s consolidated financial statements, for periods prior to the respective dates the interests in the vessels or applicable businesses were actually acquired by the Company, are retroactively adjusted to include the results of the acquired vessels and pool receivables from affiliates with these amounts being due from affiliatesbusinesses. The periods retroactively adjusted include all periods that the Company and the acquired vessels or businesses were both under common control of Teekay and had begun operations. All financial or operational information contained in these financial statements for the periods prior to the respective dates the interests in the vessels and businesses were actually acquired by the Company, and during which the Company and the applicable vessels or businesses were under common control of Teekay, are retroactively adjusted to include the results of these acquired vessels and businesses and are collectively referred to as at Decemberthe “Entities under Common Control”.
TTOL Transactions
On May 31, 2016 (see note 15i). The2017, the Company also relies onacquired from Teekay CharteringHoldings Ltd., a wholly-owned subsidiary of Teekay, to actively managethe remaining 50% interest in TTOL for $39.0 million, which included $13.1 million for working capital. TTOL owns conventional tanker commercial management and administer all voyage-related functions for vessels on time charter contracts and for vessels trading in the Teekay Aframax RSA Pool (a vessel pooling arrangement of Aframax tankers), the Teekay Classic Aframax Pool (a vessel pooling arrangement for Aframax tankers older than 15 years), the Suezmax RSA Pool (a vessel pooling arrangement of Suezmax tankers), and the Taurus RSA Pool (a vessel pooling arrangement of product tankers).
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6. | Investment in Term Loans |
In July 2010, thetechnical management operations. The Company invested in two term loans for a total cost of $115.6issued approximately 13.8 million (or the Loans) which were scheduled to mature in July 2013. The Loans were secured by first priority mortgages registered on two 2010-built Very Large Crude Carriers (or VLCCs). The Loans had an annual interest rate of 9% per annum and included a repayment premium feature that was to provide a total investment yield of approximately 10% per annum.
The borrowers under the Loans had been in default on their interest payment obligations since the first quarter of 2013, and subsequently, in defaultshares of the repaymentCompany's Class B common stock to Teekay as consideration in addition to the working capital consideration of the loan principal from the loan maturity date in July 2013. On March 21,$13.1 million. In August 2014, the Company took ownership of the VLCCs and the Loans were concurrently discharged. The VLCCs had an estimated fair value of $144.0 million on that date, which approximated all amounts owing under the Loans, including $9.1 million of accrued interest. The transfer of ownership of the VLCCs and concurrent discharging of the Loans was treated as a non-cash transaction in the Company’s 2014 consolidated statement of cash flows.
In May 2014, the Company sold the two wholly-owned subsidiaries, each of which owned one VLCC, to TIL (see note 21).
On July 31, 2015, the Company acquired a ship-to-ship transfer business (or SPT)purchased from a company jointly-owned by Teekay and a Norway-based marine transportation company, I.M. Skaugen SE (see note 24). Following the acquisition, the Company has two reportable segments, its conventional tanker segment and its ship-to-ship transfer segment. The Company’s conventional tanker segment consists of the operation of all of its tankers, including those employed on full service lightering contracts. The Company’s ship-to-ship transfer segment consists of the Company’s lightering support services, including those provided to the Company’s conventional tanker segment as part of full service lightering operations and other related services. Segment results are evaluated based on income from operations. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Company’s consolidated financial statements.
The following table includes results for the Company’s revenue and income from operations by segment for the years ended December 31, 2016 and 2015. Prior to 2015, the Company had one operating segment.
|
| | | | | | | | | | | |
| Year Ended December 31, 2016 | Conventional
Tanker
Segment
$ | | Ship-to-Ship
Transfer
Segment
$ | | Inter-segment
Adjustment (1)
$ | | Total
$ |
| Revenues | 488,961 |
| | 41,136 |
| | (3,201 | ) | | 526,896 |
|
| Voyage expenses | (58,442 | ) | | — |
| | 3,201 |
| | (55,241 | ) |
| Vessel operating expenses | (150,100 | ) | | (32,498 | ) | | — |
| | (182,598 | ) |
| Time-charter hire expense | (57,368 | ) | | (2,279 | ) | | — |
| | (59,647 | ) |
| Depreciation and amortization | (99,024 | ) | | (5,125 | ) | | — |
| | (104,149 | ) |
| General and administrative expenses | (14,444 | ) | | (3,767 | ) | | — |
| | (18,211 | ) |
| (Loss) gain on sale of vessels | (20,926 | ) | | 332 |
| | — |
| | (20,594 | ) |
Income (loss) from operations (2) | 88,657 |
|
| (2,201 | ) | | — |
| | 86,456 |
|
| Equity income | 13,101 |
| | — |
| | — |
| | 13,101 |
|
| |
(1) | The ship-to-ship transfer segment provides lightering support services to the conventional tanker segment for full service lightering operations and the pricing for such services is based on estimated costs incurred of approximately $25,000 per voyage. |
| |
(2) | Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources). |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
|
| | | | | | | | | | | |
| Year Ended December 31, 2015 | Conventional
Tanker
Segment
$ | | Ship-to-Ship
Transfer
Segment
$ | | Inter-segment
Adjustment (1)
$ | | Total
$ |
| Revenues | 496,455 |
| | 18,587 |
| | (849 | ) | | 514,193 |
|
| Voyage expenses | (19,468 | ) | | (348 | ) | | — |
| | (19,816 | ) |
| Vessel operating expenses | (123,572 | ) | | (14,441 | ) | | 849 |
| | (137,164 | ) |
| Time-charter hire expense | (74,860 | ) | | (38 | ) | | — |
| | (74,898 | ) |
| Depreciation and amortization | (72,118 | ) | | (1,642 | ) | | — |
| | (73,760 | ) |
| General and administrative expenses | (15,369 | ) | | (1,985 | ) | | — |
| | (17,354 | ) |
| Gain on sale of vessel | 771 |
| | — |
| | — |
| | 771 |
|
| Restructuring charge | (4,445 | ) | | (327 | ) | | — |
| | (4,772 | ) |
Income (loss) from operations (2) | 187,394 |
| | (194 | ) | | — |
| | 187,200 |
|
| Equity income | 14,411 |
| | — |
| | — |
| | 14,411 |
|
| |
(1) | The ship-to-ship transfer segment provides lightering support services to the conventional tanker segment for full service lightering operations and the pricing for such services is based on estimated costs incurred of approximately $25,000 per voyage. |
| |
(2) | Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources). |
A reconciliation of total segment assets to total assets presented in the accompanying consolidated balance sheets is as follows:
|
| | | | | |
| | As at
December 31, 2016
$ | | As at
December 31, 2015
$ |
| Conventional Tanker | 1,807,602 |
| | 2,020,317 |
|
| Ship-to-Ship Transfer | 26,468 |
| | 24,429 |
|
| Cash and cash equivalents | 68,108 |
| | 96,417 |
|
| Accounts receivable | 30,247 |
| | 28,313 |
|
| Total assets | 1,932,425 |
| | 2,169,476 |
|
| |
8. | Investments in and advances to Equity Accounted Investments |
|
| | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ |
| High-Q Joint Venture | 22,025 |
| | 21,166 |
|
| Tanker Investments Ltd. | 47,710 |
| | 44,195 |
|
| Teekay Tanker Operations Ltd. | 11,538 |
| | 21,447 |
|
| Total | 81,273 |
| | 86,808 |
|
| |
a. | The Company has a joint venture arrangement with Wah Kwong Maritime Transport Holdings Limited (or Wah Kwong), whereby the Company has a 50% economic interest in the High-Q joint venture, which is jointly controlled by the Company and Wah Kwong. The High-Q joint venture owns one VLCC, which is trading on a fixed time charter-out contract expiring in 2018. Under the contract, the vessel earns a fixed daily rate and an additional amount if the daily rate of any sub-charter earned exceeds a certain threshold. |
As at December 31, 2016, the High-Q joint venture has a loan outstanding with a financial institution with a balance of $48.5 million (December 31, 2015 - $54.2 million). The loan is secured by a first-priority mortgage on the VLCC owned by the High-Q joint venture and 50% of the outstanding loan balance is guaranteed by the Company. The High-Q joint venture has an interest rate swap agreement with a notional amount of $48.5 million that expires in June 2018, 50% of which is guaranteed by the Company. The interest rate swap exchanges a receipt of floating interest based on 3-months LIBOR for a payment of a fixed rate of 1.47% every three months.
| |
b. | In January 2014, the Company and Teekay formed TIL, which seeks to opportunistically acquire, operate and sell modern second-hand tankers. The Company purchased 2.5 million shares of common stock for $25.0 million and received a stock purchase warrant entitling it to purchase up to 750,000 additional shares of common stock of TIL (see note 11). The stock purchase warrant is a derivative asset which had an estimated fair value of $0.3 million as at December 31, 2016 (December 31, 2015 - $5.2 million). The Company also received one preferred share, which entitles the Company to elect one Board member of TIL. The preferred share does not give the Company a right to any dividends or distributions of TIL. In October 2014, the Company purchased an additional 0.9 million common shares of TIL on the open market. The common shares were acquired at a price of NOK 69 per share, or a purchase price of $10.0 million.
|
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
In May 2014, the Company sold two wholly-owned subsidiaries, each of which owns one VLCC, to TIL (see note 21).
In 2015, TIL had repurchased 3.3 million of its own shares on the open market. The common shares were repurchased at a weighted average price of NOK 105.2 per share, or a gross purchase price of $40.6 million. In 2016, TIL repurchased 3.3 million of its own shares in the open market. The common shares were repurchased at a weighted average price of NOK 80.2 per share, or a gross purchase of $31.8 million. As of December 31, 2016, the Company’s ownership interest in TIL was 11.3% (December 31, 2015 - 10.2%). As of December 31, 2016, the value of the Company's 3.4 million shares of common stock of TIL was $14.3 million (December 31, 2015 - $42.1 million).
| |
c. | In August 2014, the Company purchased from Teekay ainitial 50% interest in TTOL which owns conventional tanker commercial management and technical management operations, including the direct ownership in five commercially managed tanker pools, for an aggregate price of approximately $23.7 million, including net working capital. Teekay retained the remaining 50% interest in TTOL. |
As consideration for thisthe 2014 acquisition, the Company issued to Teekay 4.2 million Class B common shares. The 4.2 million Class B common shares had an approximate value of $15.6 million, or $3.70 per share, when the purchase price was agreed to between the parties and a value of $17.0 million, or $4.03 per share, on the acquisition closing date. The purchase price, for accounting purposes, iswas based upon the value of the Class B common shares on the acquisition closing date. In addition, the Company reimbursed Teekay for $6.7 million of working capital it assumed from Teekay in connection with the 2014 purchase. The book value
As a result of the Company's acquisition of a controlling interest in TTOL in May 2017, the Company's consolidated financial statements prior to the date the Company acquired the controlling interest have been retroactively adjusted to eliminate the equity method of accounting previously used for the original 50% interest owned and to include 100% of the assets acquired, including working capital, was $16.9 millionand liabilities and results of TTOL on a consolidated basis during the periods TTOL and the Company were under common control of Teekay and had begun operations. The effect of adjusting such information to accounts in periods prior to the Company's acquisition of the remaining 50% thereof is included in the Entities under Common Control. All intercorporate transactions between the Company and TTOL that occurred prior to the acquisition by the Company have been eliminated upon consolidation.
Assets and liabilities of TTOL are reflected on the dateCompany’s consolidated balance sheets at TTOL’s historical carrying values. The amount of acquisition. Thethe net consideration of $39.0 million that was in excess of the purchase price over the Company’s proportionate interest in the bookTTOL’s historical carrying value of the net assets acquired which amounted to $6.9of $13.3 million ishas been accounted for as an equity distribution to Teekay. The portion of the purchase price paid with the 4.2a $25.7 million of Class B common shares is reflected in the statement of cash flows as a non-cash transaction. The Company accounts for its ownership interest in TTOL using the equity method.
In January 2016, the Company received $15.0 million as a return of capital from TTOL.to Teekay.
A condensed summaryThe effect of adjusting the Company’s consolidated financial informationstatements to account for equity accounted investments (11.3% to 50.0% owned) shown on a 100% basis are as follows:
|
| | | | | |
| | As at December 31, |
| | 2016
$ | | 2015
$ |
| Cash and cash equivalents | 62,817 |
| | 97,933 |
|
| Other current assets | 33,321 |
| | 206,460 |
|
| Vessels and equipment | 816,943 |
| | 855,232 |
|
| Other non-current assets | 20,558 |
| | 25,304 |
|
| | | | |
| Current portion of long-term debt | 43,677 |
| | 149,301 |
|
| Other current liabilities | 32,840 |
| | 41,321 |
|
| Long-term debt | 367,201 |
| | 485,627 |
|
| Other non-current liabilities | 26,341 |
| | 31,269 |
|
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ | | 2014
$ |
| Revenues | 169,601 |
| | 225,596 |
| | 94,244 |
|
| Income from operations | 73,782 |
| | 109,253 |
| | 16,460 |
|
| Realized and unrealized loss on derivative instruments | (244 | ) | | (689 | ) | | (831 | ) |
| Net income | 50,313 |
| | 90,059 |
| | 3,598 |
|
Forthe TTOL common control transaction decreased the Company’s net loss for the year ended December 31, 2017 by $1.3 million and increased the Company's net income for the year ended December 31, 2016 by $5.0 million. The adjustments for the Entities under Common Control related to the TTOL transaction increased the Company’s revenues for the years ended December 31, 2017 and 2016 by $8.6 million and $23.6 million, respectively.
In addition, prior to the acquisition TTOL had paid dividends to the Company recorded equity incomeand Teekay, which have now been accounted for as a return of $13.1 million (2015 - $14.4capital on the consolidated statements of cash flows. The effect of adjusting for the TTOL common control transaction decreased the Company's inflow of cash from investing activities by $15.0 million and 2014 – $5.2 million). Equity income is comprisedincreased the Company's outflow of cash from financing activities by $15.0 million, for the Company’s share of net income from the High-Q joint venture, TIL, and TTOL.year ended December 31, 2016.
| |
9.5. | Accrued LiabilitiesPublic Offerings and Private Placements |
The following table summarizes the issuances of common shares over the three years ended December 31, 2018:
|
| | | | | | | | | | | | | | | | | |
| Date | Number of Common Stock Issued | | Offering Price
(Per Share) | | Gross Proceeds | | Net Proceeds | | Teekay's Ownership After the Offering | | Use of Proceeds |
| Continuous offering program during 2016 | 3,020,000 |
| (1) | $2.38 - $2.75 |
| | 7,747 |
| | 7,558 |
| | (1 | ) | | General corporate purposes |
| January 2017 | 2,155,172 |
| (2) |
| $2.32 |
| | 5,000 |
| | 5,000 |
| | 25.7 | % | | General corporate purposes |
| May 2017 | 13,775,224 |
| (3) |
| $1.88 |
| | 25,897 |
| | 25,897 |
| | 31.4 | % | | Acquisition of controlling interest in TTOL |
| November 2017 | 88,977,544 |
| (4) |
| $1.70 |
| | 151,262 |
| | 151,262 |
| | 24.1 | % | | TIL Merger |
| Continuous offering program during 2017 | 3,800,000 |
| (5) | $2.26 - $2.41 |
| | 8,826 |
| | 8,521 |
| | (5 | ) | | General corporate purposes |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| |
| (1) | In December 2016, the Company re-opened its $80.0 million continuous offering program (or COP). The portion of the Company's voting power and ownership held by Teekay at December 31, 2016 was 52.9% and 25.4%, respectively. |
| |
| (2) | Represents Class A common shares issued in a private placement to Teekay. The gross proceeds were used for general corporate purposes, including to strengthen the Company's liquidity position and to delever its balance sheet. |
| |
| (3) | Represents Class B common shares issued to Teekay as consideration for the Company's acquisition of the remaining 50% interest in TTOL, which shares had an approximate value of $25.9 million, or $1.88 per share, on the closing date of the transaction (notes 4 and 7). |
| |
| (4) | Represents Class A common shares issued to the shareholders of TIL as consideration for the Company's acquisition of the remaining 88.7% interest in TIL. The shares had an approximate value of $151.3 million, or $1.70 per share, on the closing date of the transaction (notes 7 and 23). |
| |
| (5) | In January 2017, the Company re-opened its $80.0 million COP. The portion of the Company's voting power and ownership held by Teekay at December 31, 2017 was 54.1% and 28.8% respectively. |
The Company has two reportable segments, its conventional tanker segment and its ship-to-ship transfer segment. The Company’s conventional tanker segment consists of the operation of all of its tankers, including the operations from TTOL and TIL, which were acquired in 2017 (notes 7 and 23) and those tankers employed on full service lightering contracts. The Company’s ship-to-ship transfer segment consists of the Company’s lightering support services, including those provided to the Company’s conventional tanker segment as part of full service lightering operations and LNG terminal management, consultancy, procurement and other related services. Segment results are evaluated based on income (loss) from operations. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Company’s consolidated financial statements.
The following tables include results for the Company’s revenue and income (loss) from operations by segment for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | |
| Year Ended December 31, 2018 | Conventional
Tanker
Segment
$ | | Ship-to-Ship
Transfer
Segment
$ | | Inter-segment
Adjustment (1)
$ | | Total
$ |
Revenues (2)(3) | 720,076 |
| | 48,175 |
| | (12,488 | ) | | 755,763 |
|
Voyage expenses (3) | (373,064 | ) | | — |
| | 12,488 |
| | (360,576 | ) |
| Vessel operating expenses | (174,278 | ) | | (34,853 | ) | | — |
| | (209,131 | ) |
| Time-charter hire expense | (13,537 | ) | | (6,001 | ) | | — |
| | (19,538 | ) |
| Depreciation and amortization | (114,062 | ) | | (4,452 | ) | | — |
| | (118,514 | ) |
General and administrative expenses (4) | (36,481 | ) | | (3,294 | ) | | — |
| | (39,775 | ) |
| Gain on sale of vessel | — |
| | 170 |
| | — |
| | 170 |
|
| Restructuring charges | (152 | ) | | (1,043 | ) | | — |
| | (1,195 | ) |
| Income (loss) from operations | 8,502 |
|
| (1,298 | ) | | — |
| | 7,204 |
|
| Equity income | 1,220 |
| | — |
| | — |
| | 1,220 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, 2017 | Conventional
Tanker
Segment
$ | | Ship-to-Ship
Transfer
Segment
$ | | Inter-segment
Adjustment (1)
$ | | Total
$ |
Revenues (2)(3) | 391,267 |
| | 50,422 |
| | (10,511 | ) | | 431,178 |
|
Voyage expenses (3) | (87,879 | ) | | — |
| | 10,511 |
| | (77,368 | ) |
| Vessel operating expenses | (135,740 | ) | | (39,649 | ) | | — |
| | (175,389 | ) |
| Time-charter hire expense | (25,666 | ) | | (4,995 | ) | | — |
| | (30,661 | ) |
| Depreciation and amortization | (95,433 | ) | | (5,048 | ) | | — |
| | (100,481 | ) |
General and administrative expenses (4) | (29,539 | ) | | (3,340 | ) | | — |
| | (32,879 | ) |
| (Loss) gain on sale of vessel | (13,034 | ) | | 50 |
| | — |
| | (12,984 | ) |
| Income (loss) from operations | 3,976 |
| | (2,560 | ) | | — |
| | 1,416 |
|
| Equity loss | (25,370 | ) | | — |
| | — |
| | (25,370 | ) |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
|
| | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ |
| Voyage and vessel | 15,631 |
| | 30,112 |
|
| Corporate accruals | 504 |
| | 19,255 |
|
| Interest | 2,527 |
| | 4,742 |
|
| Payroll and benefits to related parties | 8,562 |
| | 7,920 |
|
| Total | 27,224 |
| | 62,029 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, 2016 | Conventional
Tanker
Segment
$ | | Ship-to-Ship
Transfer
Segment
$ | | Inter-segment
Adjustment (1)
$ | | Total
$ |
Revenues (2)(3) | 512,608 |
| | 41,136 |
| | (3,201 | ) | | 550,543 |
|
Voyage expenses (3) | (56,805 | ) | | — |
| | 3,201 |
| | (53,604 | ) |
| Vessel operating expenses | (150,100 | ) | | (32,498 | ) | | — |
| | (182,598 | ) |
| Time-charter hire expense | (57,368 | ) | | (2,279 | ) | | — |
| | (59,647 | ) |
| Depreciation and amortization | (99,024 | ) | | (5,125 | ) | | — |
| | (104,149 | ) |
General and administrative expenses (4) | (29,432 | ) | | (3,767 | ) | | — |
| | (33,199 | ) |
| (Loss) gain on sale of vessel | (20,926 | ) | | 332 |
| | — |
| | (20,594 | ) |
| Income (loss) from operations | 98,953 |
| | (2,201 | ) | | — |
| | 96,752 |
|
| Equity income | 7,680 |
| | — |
| | — |
| | 7,680 |
|
| |
| (1) | The ship-to-ship transfer segment provides lightering support services to the conventional tanker segment for full service lightering operations and the pricing for such services is based on actual costs incurred during 2018 and 2017 (2016 - based on estimated costs of approximately $25,000 per voyage). |
| |
| (2) | Revenues, net of the inter-segment adjustment, earned from the ship-to-ship transfer segment are reflected in other revenues in the Company's consolidated statements of (loss) income. |
| |
| (3) | The comparative periods do not include the impact of the January 1, 2018 adoption of ASU 2014-09 (see note 2). |
| |
| (4) | Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources) (note 15e). |
A reconciliation of total segment assets to total assets presented in the accompanying consolidated balance sheets is as follows:
|
| | | | | |
| | As at
December 31, 2018
$ | | As at
December 31, 2017
$ |
| Conventional Tanker | 2,069,854 |
| | 2,089,099 |
|
| Ship-to-Ship Transfer | 36,315 |
| | 36,810 |
|
| Cash and cash equivalents | 54,917 |
| | 71,439 |
|
| Total assets | 2,161,086 |
| | 2,197,348 |
|
| |
| 7. | Investments in and advances to Equity-Accounted for Investments |
|
| | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ |
| High-Q Joint Venture | 25,766 |
| | 24,546 |
|
| Gemini Tankers L.L.C. | — |
| | 914 |
|
| Total | 25,766 |
| | 25,460 |
|
| |
| a. | The Company has a joint venture arrangement with Wah Kwong Maritime Transport Holdings Limited (or Wah Kwong), whereby the Company has a 50% economic interest in the High-Q joint venture, which is jointly controlled by the Company and Wah Kwong. The High-Q joint venture owns one VLCC, which traded on a fixed time charter-out contract that expired in May 2018. Under the fixed contract, the vessel earned a daily rate and an additional amount if the daily rate of sub-charter earnings exceeded a certain threshold. The VLCC completed its dry dock in July 2018 and subsequently began trading on spot voyage charters in a pool managed by a third party. |
As at December 31, 2018, the High-Q joint venture has a loan outstanding with a financial institution with a balance of $37.5 million (December 31, 2017 - $42.7 million). The loan is secured by a first-priority mortgage on the VLCC owned by the High-Q joint venture and 50% of the outstanding loan balance is guaranteed by the Company. The High-Q joint venture also had an interest rate swap agreement that expired in June 2018. The interest rate swap exchanged a receipt of floating interest based on 3-months LIBOR for a payment of a fixed rate of 1.47% every three months.
| |
| b. | On May 31, 2017, the Company entered into a Merger Agreement to acquire the remaining 27.0 million issued and outstanding common shares of TIL, by way of a share-for-share exchange of 3.3 shares of Class A common stock of the Company for each of TIL common stock not owned by the Company. Prior to the completion of the merger, the Company accounted for its 11.3% investment in TIL using the equity method. On November 27, 2017, the Company completed the merger with TIL, and the Company remeasured its equity investment in TIL to fair value based on the relative share exchange value at the date of the acquisition, which resulted in the recognition of a net write-down of $26.7 million presented in equity income (loss) on the consolidated statements of (loss) income (note 23). |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| |
| c. | On May 31, 2017, the Company acquired from Teekay Holdings Ltd., a wholly-owned subsidiary of Teekay, the remaining 50% interest in TTOL for $39.0 million, which included $13.1 million for assumed working capital (note 4). The Company issued approximately 13.8 million shares of the Company's Class B common stock to Teekay as consideration in addition to the working capital consideration of $13.1 million. As a result, the Company now consolidates TTOL and thus, all comparative periods have been retroactively adjusted to include TTOL on a consolidated basis (note 4) and TTOL's results are not included in the summary of equity-accounted for investment results below. Prior to the May 31, 2017 purchase, the Company equity-accounted for its initial 50% interest in TTOL. |
A condensed summary of the Company’s financial information for equity-accounted for investments (11.3% to 50.0% owned) shown on a 100% basis are as follows:
|
| | | | | |
| | As at December 31, |
| | 2018
$ | | 2017
$ |
| Cash, cash equivalents and restricted cash | 1,697 |
| | 2,231 |
|
| Other current assets | 2,488 |
| | 4,774 |
|
| Vessels and equipment | 81,789 |
| | 83,417 |
|
| | | | |
| Current portion of long-term debt | 5,378 |
| | 5,616 |
|
| Other current liabilities | 452 |
| | 572 |
|
| Long-term debt | 31,742 |
| | 36,645 |
|
| Other non-current liabilities | 20,436 |
| | 19,207 |
|
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ | | 2016
$ |
| Revenues | 9,601 |
| | 107,691 |
| | 169,631 |
|
| Income from operations | 4,159 |
| | 11,640 |
| | 62,998 |
|
| Realized and unrealized (loss) gain on derivative instruments | (104 | ) | | 26 |
| | (244 | ) |
| Net income (loss) | 2,441 |
| | (8,967 | ) | | 39,536 |
|
For the year ended December 31, 2018, the Company recorded equity income (loss) of $1.2 million (2017 - $(25.4) million and 2016 – $7.7 million). Equity income for the year ended December 31, 2018 is comprised of the Company's share of net income from the High-Q joint venture. Equity loss for the year ended December 31, 2017 is comprised of the Company’s share of net (loss) income from the High-Q joint venture, Gemini Tankers L.L.C. and from TIL for the period from January 1, 2017 until November 27, 2017, which includes an other than temporary impairment write-down of the investment in TIL (note 23). Equity income for the year ended December 31, 2016 is comprised of the Company's share of net income from the High-Q joint venture, TIL and Gemini Tankers L.L.C.
| |
| 8. | Goodwill and Intangible Assets |
Goodwill
The carrying amount of goodwill for the conventional segment was $1.9 million as at December 31, 2018 and 2017. In 2018, 2017 and 2016, the Company conducted its annual goodwill impairment review of its conventional segment and concluded that no impairment had occurred.
The carrying amount of goodwill for the ship-to-ship transfer segment was $6.2 million as at December 31, 2018 and 2017. In 2018, 2017 and 2016, the Company conducted its annual goodwill impairment review of its ship-to-ship transfer segment and concluded that no impairment had occurred.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Intangible Assets
The carrying amounts of intangible assets are as follows:
|
| | | | | |
| | As at |
| | December 31, 2018 |
| | December 31, 2017 |
|
| | $ | | $ |
Customer relationships
At cost, less accumulated amortization of $8.2 million (2017 - $6.0 million) (1) | 9,724 |
| | 11,853 |
|
Customer contracts
At cost, less accumulated amortization of $2.7 million (2017 - $2.0 million) (1) | 1,901 |
| | 2,642 |
|
Favorable time-charter out contracts
At cost, less accumulated amortization of $nil (2017 - $0.2 million) | — |
| | 110 |
|
| | 11,625 |
| | 14,605 |
|
| |
| (1) | The customer relationships and customer contracts are being amortized over weighted average amortization periods of 10 years and 7.6 years, respectively. Amortization of intangible assets for the year ended December 31, 2018 was $2.9 million (2017 - $3.3 million, 2016 - $3.9 million). Amortization of intangible assets for the five years subsequent to 2018 is expected to be $2.2 million (2019), $2.0 million (2020), $1.8 million (2021), $1.6 million (2022), $1.5 million (2023) and $2.5 million (thereafter). |
|
| | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ |
| Voyage and vessel | 23,922 |
| | 19,404 |
|
| Corporate accruals | 1,587 |
| | 1,244 |
|
| Interest and dividends | 6,678 |
| | 3,984 |
|
| Payroll and benefits (note 15h) | 8,669 |
| | 9,976 |
|
| Total | 40,856 |
| | 34,608 |
|
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016
$ | | 2015
$ | 2018
$ | | 2017
$ |
| Revolving credit facilities due through 2021 | 466,195 |
| | 530,971 |
| |
| Revolving credit facilities due through 2022 | | 417,997 |
| | 539,735 |
|
| Term loans due through 2021 | 475,466 |
| | 635,330 |
| 323,995 |
| | 423,512 |
|
| Total principal | 941,661 |
|
| 1,166,301 |
| 741,992 |
|
| 963,247 |
|
| Less: unamortized discount and debt issuance costs | (8,645 | ) | | (1,696 | ) | (6,586 | ) | | (10,945 | ) |
| Total debt | 933,016 |
|
| 1,164,605 |
| 735,406 |
|
| 952,302 |
|
| Less: current portion | (171,019 | ) | | (174,047 | ) | (106,236 | ) | | (166,745 | ) |
| Non-current portion of long-term debt | 761,997 |
|
| 990,558 |
| 629,170 |
|
| 785,557 |
|
As at December 31, 2016,2018, the Company had threetwo revolving credit facilities (or the Revolvers), which, as at such date, provided for available aggregate borrowings of up to $500.5$429.8 million, of which $34.3$11.8 million was undrawn (December 31, 20152017 - $545.5$628.3 million, of which $14.6$88.6 million was undrawn). Interest payments are based on LIBOR plus margins, which at December 31, 20162018 ranged between 0.45%2.00% and 2.00%2.75% (December 31, 20152017 - 0.45% and 0.60%2.75%). The total amount available under the Revolvers reduces by $64.1$16.8 million (2017)(2019), $67.3$16.8 million (2018)(2020), and $369.1$309.5 million (2021) and $86.7 million (2022). As at December 31, 20162018 the Company also had twothree term loans outstanding, which totaled $475.5$324.0 million (December 31, 20152017 - $635.3$423.5 million). Interest payments on the term loans are based on a combination of a fixed rate of 5.4% (December 31, 2017 - 5.40%) and variable rates based on LIBOR plus margins, whichmargins. As at December 31, 2016,2018, the margin ranged from 0.30% to 2.00% (December 31, 20152017 - 0.30% to 2.80%2.00%). The term loan repayments are made in quarterly or semi-annual payments. OneTwo of the term loanloans also hashave a balloon or bullet repayment due at maturity in 2020 and 2021. These revolving creditThe Company's debt facilities and term loans are further described below.
In November 2018, a wholly-owned subsidiary of the Company entered into a working capital loan facility agreement (or the Working Cap Loan) which provides available aggregate borrowings of up to $40.0 million for the subsidiary, with the option to increase the facility up to an additional $15.0 million, subject to approval of the lender. A portion of the proceeds will be used to provide working capital in relation to certain vessels trading in the RSAs and to fund pooling operations. The Working Cap Loan has an initial maturity date of six months after the first utilization date but shall be continually extended for further periods of six months thereafter unless and until the lender gives notice in writing that no further extensions shall occur. Interest payments will be based on LIBOR plus a margin of 3.50%. The Working Cap Loan is collateralized by the assets of Teekay Tankers Chartering Pte. Ltd. and the RSAs. The Working Cap Loan also requires the Company to maintain its paid-
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
in capital contribution and the retained distributions of the RSA participants in an amount equal to the greater of (a) an amount equal to the minimum average capital contributed per vessel in respect of the RSA (including cash, bunkers or other working capital contributions and amounts accrued to the RSA participants but unpaid) and (b) $15.0 million. As at December 31, 2018, no amounts had been drawn under this facility.
In November 2018, the Company completed an $84.7 million sale-leaseback financing transaction relating to four of the Company's vessels (note 11). Proceeds from the sale-leaseback transaction were used to refinance one of the Company's corporate revolvers, which matured in November 2018 and to prepay a portion of the Company's 2017 Revolver, described below.
In September 2018, the Company completed a $156.6 million sale-leaseback financing transaction relating to six of the Company's vessels (note 11). Proceeds from the sale-leaseback transaction were used to prepay a portion of the Company's 2017 Revolver, described below.
In July 2017, the Company completed a $153.0 million sale-leaseback financing transaction relating to four of the Company's vessels (note 11). Proceeds from the sale-leaseback transaction were used to prepay a portion of the Company's 2016 Debt Facility, described below.
In December 2017, the Company entered into a $270.0 million long-term debt facility (or the 2017 Revolver), which is scheduled to mature in December 2022. In December 2017, $215.8 million of the 2017 Revolver was used to refinance two of the Company's debt facilities that were assumed in the merger with TIL (note 23). These debt facilities were scheduled to mature in April 2019 and June 2020. As at December 31, 2018, the 2017 Revolver is collateralized by seven of the Company's vessels, together with other related security. The 2017 Revolver also requires that the Company maintain a minimum hull coverage ratio of 125% of the total outstanding drawn balance for the facility period. Such requirement is assessed on a semi-annual basis with reference to vessel valuations compiled by two or more agreed upon third parties. Should the ratio drop below the required amount, the lender may request the Company either prepay a portion of the loan in the amount of the shortfall or provide additional collateral in the amount of the shortfall, at the Company's option. As of December 31, 2018, this ratio was 163% (December 31, 2017 - 191%). The vessel values used in this ratio are appraised values prepared by the Company based on second-hand sale and purchase market data. A decline in the tanker market could negatively affect the ratio. In addition, the Company is required to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $35.0 million and at least 5% of the Company's total consolidated debt.
In January 2016, the Company entered into a $894.4 million long-term debt facility (or the New2016 Debt Facility), consisting of both a term loan, which is scheduled to mature in December 2020, and a revolving credit component, which are bothis scheduled to mature in January 2021. In JanuaryThe 2016 $845.8 million of the New Debt Facility was used to repay the Company’s two bridge loan facilities, which matured in late January 2016, and a portion of the Company’s corporate revolving credit facility, which was scheduled to mature in 2017. As at December 31, 2016 the corporate revolving credit facility had an outstanding balance of $55.1 million (December 31, 2015 - $447.0 million). The New Debt Facility is collateralized by 3629 of the Company's vessels, together with other related security. The New2016 Debt Facility also requires that the Company maintain a minimum hull coverage ratio of 125% of the total outstanding drawn balance for the facility period. Such requirement is assessed on a semi-annual basis with reference to vessel valuations compiled by two or more agreed upon third parties. Should the ratio drop below the required amount, the lender may request the Company either prepay a portion of the loan in the amount of the shortfall or provide additional collateral in the amount of the shortfall, at the Company's option. As at December 31, 2016,2018, this ratio was 140%137% (December 31, 2017 - 145%). The vessel values used in this ratio are appraised values prepared by the Company based on second-hand sale and purchase market data. A decline in the tanker market could negatively affect the ratio. In addition, the Company is required to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $35.0 million and at least 5% of the Company's total consolidated debt.
The Company's remaining two remaining Revolversterm loans are collateralized by five of the Company’s vessels, together with other related security. One of the Revolvers requires that the Company’s applicable subsidiary maintain a minimum hull coverage ratio of 105% of the total outstanding drawn balance for the facility period. Such requirement is assessed on an annual basis, with reference to vessel valuations compiled by one or more agreed upon third parties. Should the ratio drop below the required amount, the lender may request the Company to either prepay a portion of the loan in the amount of the shortfall or provide additional collateral in the amount of the shortfall, at the Company's option. As at December 31, 2016, such revolver, with a minimum hull coverage ratio requirement, had an outstanding balance of $72.0 million (December 31, 2015 - $84.0 million) and a hull coverage ratio of 117% (December 31, 2015 - 138%). The vessel value used in this ratio is an appraised value prepared by the Company based on second-hand sale and purchase market data. A decline in the tanker market could negatively affect the ratio. One of the Revolvers is guaranteed by Teekay and contains covenants that require Teekay to maintain the greater of free cash (cash and cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $50.0 million and at least 5.0% of Teekay’s total consolidated debt which has recourse to Teekay. In addition, one of the Revolvers requires the Company and certain of its subsidiaries to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $35.0 million and at least 5.0% of the Company’s total consolidated debt.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
The Company's remaining term loan isare collateralized by twosix of the Company’s vessels, together with certain other related security. TheOne of the term loan is guaranteed by Teekay and containsloans contain covenants that require Teekay to maintain the greater of (a) free cash (cash and cash equivalents) of at least $50.0 million and (b) an aggregate of free cash and undrawn committed revolving credit lines with at least six months to maturity of at least 5.0% of Teekay’s total consolidated debt which has recourse(excluding the debt of Teekay LNG Partners L.P., or TGP). In addition, an event of default of this term loan will occur if any financial indebtedness of Teekay in excess of $50.0 million is not paid when due. The other term loan requires Teekay and the Company collectively, to Teekay.maintain the greater of (a) free cash (cash and cash equivalents) of at least $100.0 million and (b) an aggregate of free cash and undrawn committed revolving credit lines with at least six months to maturity of at least 7.5% of Teekay's total consolidated debt (excluding the debt of TGP). In addition, an event of default of this term loan will occur if any indebtedness of Teekay that exceeds $100.0 million is not paid when due.
As at December 31, 2016,2018, the Company was in compliance with all covenants inwith respect to the Revolvers and term loans. Teekay has also advised the Company that Teekay iswas in compliance with all covenants relating to the revolving credit facilities and term loans to which the Company is a party.
The Company and certain other subsidiaries of Teekay are borrowers under one term loan arrangement. Under this arrangement, each of the borrowers is obligated on a joint and several basis. For accounting purposes, obligations resulting from long-term debt joint and several liability arrangements are measured at the sum of the amount the Company agreed to pay, on the basis of its arrangement with its co-obligor, and any additional amount the Company expects to pay on behalf of its co-obligor. As of December 31, 2016, the term loan arrangement had an outstanding balance of $nil from its co-obligor. The Company does not expect to pay any amount on behalf of its co-obligor. Teekay has agreed to indemnify the Company in respect of any losses and expenses arising from any breach by the co-obligors of the terms and conditions of the term loan.
The weighted-average effective interest rate on the Company’s long-term debt as at December 31, 20162018 was 2.4%4.6% (December 31, 20152017 – 1.6%3.5%). This rate does not reflect the effect of the Company’s interest rate swap agreements (see note 11)(note 12).
The aggregate annual long-term principal repayments required to be made by the Company under the Revolvers and term loans subsequent to December 31, 20162018 are $171.4 million (2017), $175.6 million (2018), $110.0$106.7 million (2019), $110.0$118.6 million (2020), and $374.7$430.1 million (2021) and $86.6 million (2022).
Operating Leases
Charters-in
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
As at December 31, 2018, minimum commitments incurred by the Company relating to eight chartered-in vessels accounted for as operating leases, including three workboats for the Company's lightering support services, were approximately $36.9 million (2019), $23.5 million (2020) and $2.0 million (2021).
Charters-out
As at December 31, 2018, two of the Company’s vessels operated under fixed-rate time charter contracts with the Company’s customers, of which both contracts are scheduled to expire in 2019. As at December 31, 2018, the minimum scheduled future revenues to be received by the Company under time charters then in place were approximately $6.3 million (note 3).
Capital Lease Obligations
|
| | | | | |
| | As at | | As at |
| | December 31, 2018 | | December 31, 2017 |
| | $ | | $ |
| Total obligations related to capital leases | 375,289 |
| | 148,908 |
|
| Less: current portion | (20,896 | ) | | (7,227 | ) |
| Long-term obligations related to capital leases | 354,393 |
| | 141,681 |
|
In November 2018, the Company completed an $84.7 million sale-leaseback financing transaction with a financial institution relating to four of the Company's tankers, consisting of two Aframax tankers, one Suezmax tanker and one LR2 product tanker, the Explorer Spirit, Navigator Spirit, Pinnacle Spirit and Trysil Spirit.
In September 2018, the Company completed a $156.6 million sale-leaseback financing transaction with a financial institution relating to six of the Company's Aframax tankers, the Blackcomb Spirit, Emerald Spirit, Garibaldi Spirit, Peak Spirit, Tarbet Spirit and Whistler Spirit.
In July 2017, the Company completed a $153.0 million sale-leaseback financing transaction with a financial institution relating to four of the Company's Suezmax tankers, the Athens Spirit, Beijing Spirit, Moscow Spirit and Sydney Spirit.
Under these arrangements, the Company transferred the vessels to subsidiaries of the financial institutions (or collectively, the Lessors) and leased the vessels back from the Lessors on bareboat charters ranging from nine- to 12-year terms. The Company has the option to purchase each of the 14 tankers at various times starting between July 2020 and November 2021 until the end of their respective lease terms. The Company is also obligated to purchase six of the Aframax vessels upon maturity of their respective bareboat charters.
The Company understands that these vessels and lease operations are the only assets and operations of the Lessors. The Company operates the vessels during the lease term, and as a result, is considered to be the Lessors' primary beneficiary and therefore, the Company consolidates the Lessors for financial reporting purposes.
The liabilities of the Lessors are loans and are non-recourse to the Company. The amounts funded to the Lessors in order to purchase the vessels materially match the funding to be paid by the Company's subsidiaries under these lease-back transactions. As a result, the amounts due by the Company's subsidiaries to the Lessors have been included in obligations related to capital leases as representing the Lessors' loans.
The bareboat charters related to each of these vessels require that the Company maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least 6 months to maturity) of $35.0 million and at least 5.0% of the Company's consolidated debt and obligations related to capital leases (excluding applicable security deposits reflected in restricted cash - long-term on the Company's consolidated balance sheets).
Four of the bareboat charters require the Company to maintain, for each vessel, a minimum hull coverage ratio of 90% of the total outstanding principal balance during the first three years of the lease period and 100% of the total outstanding principal balance thereafter. As at December 31, 2018, this ratio was approximately 101% (December 31, 2017 - 105%).
Six of the bareboat charters require the Company to maintain, for each vessel, a minimum hull coverage ratio of 75% of the total outstanding principal balance during the first year of the lease period, 78% for the second year, 80% for the following two years and 90% of the total outstanding principal balance thereafter. As at December 31, 2018, this ratio was approximately 91% (December 31, 2017 - nil).
The remaining four bareboat charters also require the Company to maintain, for each vessel, a minimum hull overage ratio of 100% of the total outstanding principal balance. As at December 31, 2018, this ratio was approximately 122% (December 31, 2017 - nil).
Such requirements are assessed annually with reference to vessel valuations compiled by one or more agreed upon third parties. As at December 31, 2018, the Company was in compliance with all covenants in respect of the obligations related to capital leases.
As at December 31, 2018, the total remaining commitments under the 14 capital leases for Suezmax, Aframax and LR2 product tankers were approximately $557.1 million, including imputed interest of $181.8 million, repayable from 2019 through 2030, as indicated below:
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
|
| | | | |
| Year | | Commitment |
| 2019 | | $ | 47,962 |
|
| 2020 | | $ | 47,373 |
|
| 2021 | | $ | 47,237 |
|
| 2022 | | $ | 47,230 |
|
| 2023 | | $ | 47,222 |
|
| Thereafter | | $ | 320,064 |
|
| |
| 12. | Derivative Instruments |
Interest rate swaps
The Company uses interest rate swaps in accordance with its overall risk management policies. The Company enters into interest rate swap agreements which exchange a receipt of floating interest for a payment of fixed interest to reduce the Company’s exposure to interest rate variability on its outstanding floating-rate debt. The Company has not designated, for accounting purposes, its interest rate swaps as cash flow hedges of its U.S. Dollar denominated LIBOR borrowings.
In February 2016, in connection with the Company’s new long-term debt facility entered into at that time, the Company entered into nine interest rate swaps. Four of the interest rate swaps commenced andin October 2016, are scheduled to terminate in October 2016 and December 2020 respectively, and have notional amounts of $50.0 million each, at inception, with fixed rates of 1.462%. The remaining five interest rate swaps commenced in the first quarter of 2016 and are scheduled to terminate in January 2021, of which one swap has a notional amount of $75.0 million, one swap has a notional amount of $50.0 million, and three swaps have notional amounts of $25.0 million each with fixed rates of 1.549%, 1.155% and 1.549%, respectively.
As at December 31, 2016,2018, the Company was committed to the following interest rate swap agreements:
| | | | Interest Rate Index | | Principal Amount
$ | | Fair Value /
Carrying Amount of
Asset (Liability)
$ | | Remaining
Term
(years) | | Fixed Interest
Rate (1) | Interest Rate Index | | Notional Amount
$ | | Fair Value /
Carrying Amount of
Asset
$ | | Remaining
Term
(years) | | Fixed Interest
Rate (1) |
| LIBOR-Based Debt: | | | | | | | | | | |
U.S. Dollar-denominated interest rate swaps (2) | | LIBOR | | 92,563 |
| | 1,250 |
| | 2.0 | | 1.46% |
| U.S. Dollar-denominated interest rate swaps | LIBOR | | 200,000 |
| | 397 |
| | 4.0 | | 1.46% | LIBOR | | 150,000 |
| | 3,175 |
| | 2.0 | | 1.55% |
| U.S. Dollar-denominated interest rate swaps | LIBOR | | 150,000 |
| | 1,479 |
| | 4.0 | | 1.55% | LIBOR | | 50,000 |
| | 1,453 |
| | 2.0 | | 1.16% |
| U.S. Dollar-denominated interest rate swaps | LIBOR | | 50,000 |
| | 1,267 |
| | 4.0 | | 1.16% | |
| |
| (1) | Excludes the margin the Company pays on its variable-rate debt, which, as of December 31, 20162018 ranged from 0.30% to 2.00%3.50%. |
| |
| (2) | Notional amount reduces quarterly. |
The Company is potentially exposed to credit loss in the event of non-performance by the counterparty to the interest rate swap agreements in the event that the fair value results in an asset being recorded. In order to minimize counterparty risk, the Company only enters into interest rate swap agreements with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time transactions are entered into.
Stock purchase warrant
TheDuring 2017, the Company hashad one stock purchase warrant entitlingwhich had entitled it to purchase up to 750,000 shares of common stock of TIL under certain conditions at a fixed price of $10 per share. Alternatively, if the shares of TIL’s common stock trade on a National Stock Exchange or over-the-counter market denominated in Norwegian Kroner, the Company may also exercise thepre-determined prices. The stock purchase warrant was not exercised and was canceled upon completion of the TIL merger in November 2017 (notes 7 and 23) and as a result, no value was recorded for this warrant on the Company's consolidated balance sheet at 61.67 Norwegian Kroner (or NOK)December 31, 2018 and 2017.
Time-charter swap
Effective June 1, 2016, the Company entered into a time-charter swap agreement for 55% of two Aframax equivalent vessels. Under such agreement, the Company received $27,776 per share.day, less a 1.25% brokerage commission and paid 55% of the net revenue distribution of two Aframax equivalent vessels employed in the Company’s Aframax RSA, less $500 per day, for a period of 11 months plus an additional two months at the counterparty’s option. The stockpurpose of the agreement was to reduce the Company’s exposure to spot tanker market rate variability for certain of its vessels that are employed in the Aframax RSA. The Company did not designate, for accounting purposes, the time-charter swap as a cash flow hedge. As of May 1, 2017, the time-charter swap counter-party did not exercise the two-month option, and as such, the agreement was completed as of June 30, 2017.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
purchase warrant expires on January 23, 2019. For purposes of vesting, the stock purchase warrant is divided into four equally sized tranches. If the shares of TIL’s common stock trade on a National Stock Exchange or over-the-counter market denominated in Norwegian Kroner, each tranche will vest and become exercisable when and if the fair market value of a share of the TIL common stock equals or exceeds $77.08 NOK, $92.50 NOK, $107.91 NOK and $123.33 NOK, respectively, for such tranche for any 10 consecutive trading days, subject to certain trading value requirements. As at December 31, 2016, the first two tranches have vested.
Forward freight agreements
Time-charter swap
Effective June 1, 2016, theThe Company entered into a time-charter swap agreement for 55% of two Aframax equivalent vessels. Under such agreement, the Company will receive $27,776 per day, less a 1.25% brokerage commission, and pay 55% of the net revenue distribution of two Aframax equivalent vessels employeduses forward freight agreements (or FFAs) in the Company’s Aframax revenue sharing pooling arrangement, less $500 per day, for a period of 11 months plus an additional two months at the counterparty’s option. The purpose of the agreement isnon-hedge-related transactions to reduce the Company’sincrease or decrease its exposure to spot tanker market rate variability for certain of its vessels thatrates, within defined limits. Net gains and losses from FFAs are employedrecorded within realized and unrealized gain (loss) on derivative instruments in the Aframax revenue sharing pooling arrangement. The Company has not designated, for accounting purposes, the time-charter swap as a cash flow hedge.Company's consolidated statements of (loss) income.
The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Company’s consolidated balance sheets.
|
| | | | | | | | | | | | | | |
| | Current portion of derivative asset
$ | | Derivative assets
$ | | Accrued liabilities
$ | | Current portion of derivative liabilities
$ | | Derivative liabilities
$ |
| As at December 31, 2016 | | | | | | | | | |
| Interest rate swap agreements | — |
| | 4,251 |
| | (254 | ) | | (1,108 | ) | | — |
|
| Stock purchase warrant | — |
| | 287 |
| | — |
| | — |
| | — |
|
| Time-charter swap agreement | 875 |
| | — |
| | (667 | ) | | — |
| | — |
|
| | 875 |
| | 4,538 |
| | (921 | ) | | (1,108 | ) | | — |
|
| | | | | | | | | | |
| As at December 31, 2015 | | | | | | | | | |
| Interest rate swap agreements | — |
| | — |
| | (2,359 | ) | | (6,330 | ) | | (4,208 | ) |
| Stock purchase warrant | — |
| | 5,164 |
| | — |
| | — |
| | — |
|
| Time-charter swap agreement | — |
| | — |
| | — |
| | — |
| | — |
|
| | — |
| | 5,164 |
| | (2,359 | ) | | (6,330 | ) | | (4,208 | ) |
|
| | | | | | | | | | | |
| | Current portion of derivative assets
$ | | Derivative assets
$ | | Accrued assets (liabilities)
$ | | Current portion of derivative liabilities
$ |
| As at December 31, 2018 | | | | | | | |
| Interest rate swap agreements | 2,905 |
| | 2,973 |
| | 422 |
| | — |
|
| Forward freight agreements | — |
| | — |
| | (3 | ) | | (57 | ) |
| | 2,905 |
| | 2,973 |
| | 419 |
| | (57 | ) |
| | | | | | | | |
| As at December 31, 2017 | | | | | | | |
| Interest rate swap agreements | 1,016 |
| | 4,226 |
| | (39 | ) | | — |
|
| | 1,016 |
| | 4,226 |
| | (39 | ) | | — |
|
Realized and unrealized gains (losses) gains relating to interest rate swaps, stock purchase warrant and the time-charter swap and FFAs are recognized in earnings and reported in realized and unrealized lossgain (loss) on derivative instruments in the Company’s consolidated statements of (loss) income as follows:
|
| | | | | | | | |
| | Year Ended
December 31, 2016
$ | | Year Ended
December 31, 2015
$ | | Year Ended
December 31, 2014
$ |
| Realized (losses) gains relating to: | | | | | |
| Interest rate swaps agreements | (12,797 | ) | | (9,790 | ) | | (9,993 | ) |
| Time-charter swap agreement | 2,154 |
| | — |
| | — |
|
| | (10,643 | ) | | (9,790 | ) | | (9,993 | ) |
| | | | | | |
| Unrealized gains (losses) relating to: | | | | | |
| Interest rate swaps agreements | 13,681 |
| | 7,686 |
| | 7,044 |
|
| Stock purchase warrant | (4,877 | ) | | 507 |
| | 1,237 |
|
| Time-charter swap agreement | 875 |
| | — |
| | — |
|
| | 9,679 |
| | 8,193 |
| | 8,281 |
|
| Total realized and unrealized loss on derivatives | (964 | ) | | (1,597 | ) | | (1,712 | ) |
| |
12. | Other Long-Term Liabilities |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
The following is a roll-forward of the Company’s freight tax liabilities which are recorded in its consolidated balance sheets in other long-term liabilities, from January 1, 2015 to December 31, 2016:
|
| | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ |
| Balance of unrecognized tax benefits as at January 1 | 7,597 |
| | 4,852 |
|
| Increases for positions related to the current year | 6,777 |
| | 3,294 |
|
| Changes for positions taken in prior years | (800 | ) | | 42 |
|
| Decreases related to statute of limitations | (692 | ) | | (591 | ) |
| Balance of unrecognized tax benefits as at December 31 | 12,882 |
| | 7,597 |
|
The Company does not presently anticipate its uncertain tax positions will significantly increase or decrease in the next 12 months; however, actual developments could differ from those currently expected. The tax years 2010 through 2016 remain open to examination by some of the major jurisdictions in which the Company is subject to tax.
The Company recognizes freight tax expenses in other expenses in its consolidated statements of income. Interest and penalties on freight tax expenses are included in the roll-forward schedule above and are approximately $0.8 million and $1.3 million for the years ended December 31, 2016 and 2015, respectively. |
| | | | | | | | |
| | Year Ended
December 31, 2018
$ | | Year Ended
December 31, 2017
$ | | Year Ended
December 31, 2016
$ |
| Realized gains (losses) relating to: | | | | | |
| Interest rate swaps agreements | 2,316 |
| | (994 | ) | | (12,797 | ) |
| Time-charter swap agreement | — |
| | 1,106 |
| | 2,154 |
|
| Forward freight agreements | 137 |
| | 270 |
| | — |
|
| | 2,453 |
| | 382 |
| | (10,643 | ) |
| | | | | | |
| Unrealized gains (losses) relating to: | | | | | |
| Interest rate swaps agreements | 636 |
| | 2,099 |
| | 13,681 |
|
| Stock purchase warrant | — |
| | (287 | ) | | (4,877 | ) |
| Time-charter swap agreement | — |
| | (875 | ) | | 875 |
|
| Forward freight agreements | (57 | ) | | — |
| | — |
|
| | 579 |
| | 937 |
| | 9,679 |
|
| Total realized and unrealized gain (loss) on derivatives | 3,032 |
| | 1,319 |
| | (964 | ) |
| |
| 13. | Fair Value Measurements |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents and restricted cash – The fair value of the Company’s cash and cash equivalents and restricted cash approximates its carrying amounts reported in the consolidated balance sheets.
Long-term debt – The fair values of the Company’s fixed-rate and variable-rate long-term debt is estimated using discounted cash flow analyses, based on quoted market pricesrates currently available for debt with similar terms and remaining maturities and the current credit worthiness of the Company.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Long-term obligation related to capital leases - The fair values of the Company's long-term obligation related to capital leases is estimated using discounted cash flow analyses, based on rates currently available for debt with similar terms and remaining maturities and the current credit worthiness of the Company.
Derivative instruments
| |
| a. | The fair valuevalues of the Company’s interest rate swap agreements are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates, and if the swap is not collateralized, the current credit worthiness of either the Company or the swap counterparties. The estimated amount is the present value of future cash flows. The inputs used to determine the future cash flows include the fixed interest rate of the swaps and market interest rates. Given the current volatility in the credit markets, it is reasonably possible that the amounts recorded as derivative assets and liabilities could vary by material amounts in the near term. |
| |
| b. | TheIn 2016, Company has entered into a time-charter swap agreement for 55% of two Aframax equivalent vessels (see note 11)(note 12). The fair value of this derivative agreement iswas the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, based on the present value of the Company's projection of future Aframax spot market tanker rates, which have beenwere derived from current Aframax spot market tanker rates and estimated future rates.rates, as well as an estimated discount rate. The time-charter swap agreement was completed as of December 31, 2017. |
The estimated fair value of the time-charter swap agreement as of December 31, 2016 is based upon an estimated average daily tanker rate of approximately $18,000 over the remaining duration of the contract. In developing and evaluating this estimate, the Company considers the current tanker market fundamentals as well as the short and long-term outlook. A higher or lower average daily tanker rate would result in a higher or lower fair value liability.
Changes in fair value during the year ended December 31, 20162017 for the Company's time-charter swap agreement, which is described below and was measured at fair value on the recurring basis using significant unobservable inputs (Level 3), are as follows:
|
| | |
| | Year Ended
December 31, 20162017
$ |
| Fair value asset - beginning of the year | 875 |
|
| Settlements | (1,106 | ) |
| Realized and unrealized gain | 231 |
|
Fair value asset - at the beginningend of the year | — |
|
Settlements | (2,154 | ) |
Realized and unrealized gain included in earnings | 3,029 |
|
Fair value at the end of the year | 875 |
|
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| |
| c. | During January 2014, the Company received a stock purchase warrant entitling it to purchase up to 750,000 shares of the common stock of TIL (see note 11). The estimated fair value of the stock purchase warrant was determined using a Monte-Carlo simulation and is based, in part, on the historical price of common shares of TIL, the risk-free interest rate, vesting conditions and the historical volatility of comparable companies. The estimated fair value of the stock purchase warrant as of December 31, 2016 iswas based on the historical volatility of comparable companies of 47.83%. A higherOn November 27, 2017, the merger of TIL was completed, resulting in TIL becoming a wholly-owned subsidiary of the Company. Under the terms of the agreement, warrants to purchase or lower volatility wouldacquire shares of common stock of TIL that had not been exercised as of the effective time of the merger, were canceled. As a result, no value was recorded for this warrant in a higher or lower fair value of this derivative asset.the Company's consolidated balance sheets at December 31, 2017 (notes 7b and 12). |
Changes in fair value during the yearsyear ended December 31, 2016 and 20152017 for the TIL stock purchase warrant are as follows:
|
| | | | | |
| | Year Ended
December 31, 2016
$ | | Year Ended
December 31, 2015
$ |
| Fair value at the beginning of the year | 5,164 |
| | 4,657 |
|
| Unrealized (loss) gain included in earnings | (4,877 | ) | | 507 |
|
| Fair value at the end of the year | 287 |
| | 5,164 |
|
|
| | |
| Year Ended
December 31, 2017
$ |
| Fair value at the beginning of the year | 287 |
|
| Unrealized loss included in earnings | (287 | ) |
| Fair value at the end of the year | — |
|
The Company categorizes its fair value estimates using a fair value hierarchy based on the inputs used to measure fair value. 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 includes the estimated fair value, carrying value and categorization using the fair value hierarchy of those assets and liabilities that are measured at their estimated fair value on a recurring and non-recurring basis, as well as certain financial instruments that are not measured at fair value.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
|
| | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Fair Value Hierarchy Level | | Carrying Amount Asset/ (Liability)
$ | | Fair Value Asset/ (Liability)
$ | | Carrying Amount Asset/ (Liability)
$ | | Fair Value Asset/ (Liability)
$ |
| Recurring: | | | | | | | | | |
| Cash and cash equivalents and restricted cash | Level 1 | | 68,858 |
| | 68,858 |
| | 97,287 |
| | 97,287 |
|
Derivative instruments (note 11) | | | | | | | | | |
Interest rate swap agreements (1) | Level 2 | | 3,143 |
| | 3,143 |
| | (10,538 | ) | | (10,538 | ) |
Time-charter swap agreement (1) | Level 3 | | 875 |
| | 875 |
| | — |
| | — |
|
| Stock purchase warrant | Level 3 | | 287 |
| | 287 |
| | 5,164 |
| | 5,164 |
|
| | | | | | | | | | |
| Non-recurring: | | | | | | | | | |
Vessels held for sale (note 21) | Level 2 | | 33,802 | | 33,802 | | — | | — |
| | | | | | | | | | |
| Other: | | | | | | | | | |
| Advances to equity accounted investments | Note (2) | | 10,480 |
| | Note (2) |
| | 13,980 |
| | Note (2) |
|
| Long-term debt, including current portion | Level 2 | | (933,016 | ) | | (923,306 | ) | | (1,164,605 | ) | | (1,140,135 | ) |
|
| | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Fair Value Hierarchy Level | | Carrying Amount Asset/ (Liability)
$ | | Fair Value Asset/ (Liability)
$ | | Carrying Amount Asset/ (Liability)
$ | | Fair Value Asset/ (Liability)
$ |
| Recurring: | | | | | | | | | |
Cash and cash equivalents and restricted cash (note 17d) | Level 1 | | 60,507 |
| | 60,507 |
| | 75,710 |
| | 75,710 |
|
Derivative instruments (note 12) | | | | | | | | | |
Interest rate swap agreements (1) | Level 2 | | 5,878 |
| | 5,878 |
| | 5,242 |
| | 5,242 |
|
Freight forward agreements (1) | Level 2 | | (57 | ) | | (57 | ) | | — |
| | — |
|
| | | | | | | | | | |
| Other: | | | | | | | | | |
| Advances to equity-accounted for investments | Note (2) | | 9,930 |
| | Note (2) |
| | 9,930 |
| | Note (2) |
|
| Long-term debt, including current portion | Level 2 | | (735,406 | ) | | (723,031 | ) | | (952,302 | ) | | (946,105 | ) |
| Obligations related to capital leases, including current portion | Level 2 | | (375,289 | ) | | (377,652 | ) | | (148,908 | ) | | (147,401 | ) |
| |
| (1) | The fair valuevalues of the Company's interest rate swap agreements and time-charter swap agreementFFAs at December 31, 2016 excludes2018 and 2017 exclude accrued interest expenseincome and expenses, which isare recorded in accounts receivables and accrued liabilities, respectively, in these consolidated financial statements. |
| |
| (2) | The advances to equity accountedequity-accounted for investments, together with the Company’s investments in the equity accountedequity-accounted for investments, form the net aggregate carrying value of the Company’s interests in the equity accountedequity-accounted for investments in these consolidated financial statements. The fair values of the individual components of such aggregate interests areas at December 31, 2018 and 2017 were not determinable. |
The authorized capital stock of Teekay Tankers Ltd. at December 31, 2016 and 2015,2018 was 100,000,000 shares of Preferred Stock (2017 - 100,000,000 shares of Preferred Stock), with a par value of $0.01 per share 200,000,000(2017 - $0.01 per share), 485,000,000 shares of Class A common stock (2017 - 285,000,000 shares of Class A common stock), with a par value of $0.01 per share (2017 - $0.01 per share), and 100,000,000 shares of Class B common stock (2017 - 100,000,000 shares of Class B common stock), with a par value of $0.01 per share.share (2017 - $0.01 per share). The shares of Class A common stock entitle the holder to one vote per share while the shares of Class B common stock entitle the holder to five votes per share, subject to a 49% aggregate Class B common stock voting
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
power maximum. As at December 31, 2016,2018, the Company had 136.1231.6 million shares of Class A common stock (2015(2017 – 132.8231.2 million), 23.237.0 million shares of Class B common stock (2015(2017 – 23.237.0 million) and no shares of Preferred Stock issued and outstanding (2015(2017 – nil).
Commencing in December 2015, the Company adopted a new dividend policy under which quarterly dividends were set to range from 30% to 50% of its quarterly adjusted net income, subject to the discretion of its Board of Directors, with a minimum quarterly dividend of $0.03 per share.share under the Company's current policy, which is subject to change. Effective May 2018, the Company eliminated the payment of its minimum quarterly dividend of $0.03 per share in order to preserve liquidity during the cyclical downturn of the tanker spot market. Under the revised dividend policy, quarterly dividends are expected to range from 30% to 50% of the Company's quarterly adjusted net income, subject to reserves its Board of Directors may determine are necessary for the prudent operations of the company. Dividend payments are subject to the discretion of the Company's Board of Directors, and the policy remains subject to change. Adjusted net income (loss) is a non-GAAP measure which excludes specific items affecting net income (loss) that are typically excluded by securities analysts in their published estimates of the Company's financial results. Prior to the change, the Company had a fixed dividend policy whereby annual dividends were set at an amount of $0.12 per share, payable quarterly. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of Class A common stock and Class B common stock are entitled to share equally in any dividends that the Board of Directors declares from time to time out of funds legally available for dividends.
Upon the Company’s liquidation, dissolution or winding-up, the holders of Class A common stock and Class B common stock shall be entitled to share equally in all assets remaining after the payment of any liabilities and the liquidation preferences on any outstanding preferred stock. Shares of the Company’s Class A common stock are not convertible into any other shares of the Company’s capital stock. Each share of Class B common stock is convertible at any time at the option of the holder thereof into one share of Class A common stock. Upon any transfer of shares of Class B common stock to a holder other than Teekay (or any of its affiliates or any successor to Teekay’s business or to all or substantially all of its assets), such shares of Class B common stock shall automatically convert into Class A common stock upon such transfer. In addition, all shares of Class B common stock will automatically convert into shares of Class A common stock if the aggregate number of outstanding shares of Class A common stock and Class B common stock beneficially owned by Teekay and its affiliates falls below 15% of the aggregate number of outstanding shares of common stock. All such conversions will be effected on a one-for-one basis.
Stock-based compensation
As at December 31, 2016,2018, the Company had reserved under its 2007 Long-Term Incentive Plan a total of 4,000,00010,000,000 shares of Class A common stock for issuance pursuant to awards to be granted (2015under the plan (2017 – 4,000,000 Class A common stock). For the year ended December 31, 2016,2018, a total of 9,358168,029 shares (2015(2017 – 51,948nil shares, 20142016 – 17,0739,358 shares) of Class A common stock were granted and issued to the Company’s non-management directors as part of their annual compensation. The compensation relating to the granting of such stock
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
has been included in general and administrative expenses in the amounts of $0.2 million, nil, and $35.0 thousand $0.3 million, and $0.1 million for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively.
The Company also grants options and restricted stock units as incentive-based compensation under the Teekay Tankers Ltd. 2007 Long-Term Incentive Plan to certain non-management directors of the Company and to certain employees of Teekay subsidiaries that provide services to the Company. The Company measures the cost of such awards using the grant date fair value of the award and recognizes that cost, net of estimated forfeitures, over the requisite service period. The requisite service period consists of the period from the grant date of the award to the earlier of the date of vesting or the date the recipient becomes eligible for retirement. For stock-based compensation awards subject to graded vesting, the Company calculates the value for the award as if it was one single award with one expected life and amortizes the calculated expense for the entire award on a straight-line basis over the requisite service period. The compensation cost of the Company‘s stock-based compensation awards is reflected in general and administrative expenses in the Company’s consolidated statements of income.income (loss).
During 2016,2018, the Company granted 0.30.5 million (2015(2017 - nil; 20140.4 million; 2016 - 0.20.3 million) stock options with an exercise price of $3.74$1.22 per share (2014(2017 - $4.10)$2.23; 2016 - $3.74) to the Company’s non-management directors. These stock options have a ten-year term and vest immediately. The Company also granted 0.20.7 million (2015(2017 - 58 thousand; 20140.5 million; 2016 - 0.10.2 million) stock options with an exercise price of $3.74$1.22 per share (2015(2017 - $5.39; 2014$2.23; 2016 - $4.25)$3.74) to an officerthe officers of the Company and to certain employees of Teekay subsidiaries that provide services to the Company. Each stock option granted has a ten-year term and vests equally over three years from the grant date.
The weighted-average fair value of the stock options granted during 20162018 was $0.87$0.35 per option (2015(2017 - $1.97$0.67 per option; 2016 - $0.87 per option), estimated on the grant date using the Black-Scholes option pricing model. The following assumptions were used in computing the fair value of the stock options granted: expected volatility of 51.3% (201548.7% (2017 - 49.0%50.2%; 2016 - 51.3%); expected life of five years (2015(2017 - five years; 2016 - five years); dividend yield of 7.8% (20155.5% (2017 - 2.1%5.0%; 2016 - 7.8%); and risk-free interest rate of 1.2% (20152.6% (2017 - 1.4%2.1%; 2016 - 1.2%). The expected life of the stock options granted was estimated using the historical exercise behavior of employees of Teekay that receive stock options from Teekay. The expected volatility was based on historical volatility as calculated using historical data during the five years prior to the grant date.
The weighted-average grant-date fair value of stock options granted in June 2014 and March 2014 was $1.38 per option and $1.37 per option, respectively, estimated on the grant date using the Black-Scholes option pricing model. The following assumptions were used in computing the fair value of the stock options granted: expected volatility of 46.0% for the June 2014 grant and 47.7% for the March 2014 grant; expected life of five years; dividend yield of 2.8% for the June 2014 grant and 2.9% for the March 2014 grant; and risk-free interest rate of 1.6%. The expected life of the stock options granted was estimated using the historical exercise behavior of employees of Teekay that receive stock options from Teekay. The expected volatility was based on historical volatility as calculated using historical data during the five years prior to the grant date.
A summary of the Company’s stock option information for the years ended December 31, 2016, 2015,2018, 2017, and 20142016 is as follows:
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | Options (#) | | Weighted-Average Exercise Price ($) | | Options (#) | | Weighted-Average Exercise Price ($) | | Options (#) | | Weighted-Average Exercise Price ($) |
| Outstanding - beginning of year | 1,670,305 |
| | 3.10 |
| | 822,345 |
| | 3.99 |
| | 321,609 |
| | 4.39 |
|
| Granted | 1,240,424 |
| | 1.22 |
| | 882,741 |
| | 2.23 |
| | 500,736 |
| | 3.74 |
|
| Forfeited / expired | (34,765 | ) | | 1.56 |
| | (34,781 | ) | | 2.23 |
| | — |
| | — |
|
| Outstanding - end of year | 2,875,964 |
| | 2.31 |
| | 1,670,305 |
| | 3.10 |
| | 822,345 |
| | 3.99 |
|
| | | | | | | | | | | | |
| Exercisable - end of year | 1,797,493 |
| | 2.69 |
| | 1,055,250 |
| | 3.34 |
| | 530,034 |
| | 3.97 |
|
A summary of the Company’s non-vested stock option activity and related information for the years ended December 31, 2018, 2017 and 2016 is as follows:
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | Options (#) | | Weighted-Average Grant Date Fair Value ($) | | Options (#) | | Weighted-Average Grant Date Fair Value ($) | | Options (#) | | Weighted-Average Grant Date Fair Value ($) |
| Outstanding non-vested stock options - beginning of year | 615,055 |
| | 2.68 |
| | 292,311 |
| | 4.02 |
| | 132,689 |
| | 4.75 |
|
| Granted | 736,326 |
| | 1.22 |
| | 486,329 |
| | 2.23 |
| | 216,043 |
| | 3.74 |
|
| Vested | (238,145 | ) | | 2.95 |
| | (128,804 | ) | | 4.14 |
| | (56,421 | ) | | 4.64 |
|
| Forfeited / expired | (34,765 | ) | | 1.56 |
| | (34,781 | ) | | 2.23 |
| | — |
| | — |
|
| Outstanding non-vested stock options - end of year | 1,078,471 |
| | 1.66 |
| | 615,055 |
| | 2.68 |
| | 292,311 |
| | 4.02 |
|
As of December 31, 2018, there was $0.3 million (2017 - $0.3 million, 2016 - $0.2 million) of total unrecognized compensation cost related to non-vested stock options granted. During the year ended December 31, 2018, the Company recognized $0.2 million (2017 - $0.2 million, 2016 - $0.1 million) of expenses related to the stock options granted to the officers of the Company and to certain employees of Teekay subsidiaries that provide services to the Company.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| | Options (#) | | Weighted-Average Exercise Price ($) | | Options (#) | | Weighted-Average Exercise Price ($) | | Options (#) | | Weighted-Average Exercise Price ($) |
| Outstanding - beginning of year | 321,609 |
| | 4.39 |
| | 263,175 |
| | 4.16 |
| | — |
| | — |
|
| Granted | 500,736 |
| | 3.74 |
| | 58,434 |
| | 5.39 |
| | 263,175 |
| | 4.16 |
|
| Outstanding - end of year | 822,345 |
| | 3.99 |
| | 321,609 |
| | 4.39 |
| | 263,175 |
| | 4.16 |
|
| | | | | | | | | | | | |
| Exercisable - end of year | 530,034 |
| | 3.97 |
| | 188,920 |
| | 4.13 |
| | 152,346 |
| | 4.10 |
|
A summary of the Company’s non-vested stock option activity and related information for the years ended December 31, 2016, 2015 and 2014 is as follows:
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| | Options (#) | | Weighted-Average Grant Date Fair Value ($) | | Options (#) | | Weighted-Average Grant Date Fair Value ($) | | Options (#) | | Weighted-Average Grant Date Fair Value ($) |
| Outstanding non-vested stock options - beginning of year | 132,689 |
| | 4.75 |
| | 110,829 |
| | 4.25 |
| | — |
| | — |
|
| Granted | 216,043 |
| | 3.74 |
| | 58,434 |
| | 5.39 |
| | 110,829 |
| | 4.25 |
|
| Vested | (56,421 | ) | | 4.64 |
| | (36,574 | ) | | 4.25 |
| | — |
| | — |
|
| Outstanding non-vested stock options - end of year | 292,311 |
| | 4.02 |
| | 132,689 |
| | 4.75 |
| | 110,829 |
| | 4.25 |
|
As of December 31, 2016, there was $0.2 million (2015 - $0.2 million, 2014 - $0.1 million) of total unrecognized compensation cost related to non-vested stock options granted. During the year ended December 31, 2016, the Company recognized $0.1 million (2015 - $0.1 million, 2014 - $0.2 million) of expenses related to the stock options granted to an officer of the Company.
As at December 31, 2016,2018, the intrinsic value of the outstanding in-the-money stock options was $nil (2015(2017 - $0.8 million)$nil; 2016 - $nil) and the intrinsic value of the exercisable stock options was $nil (2015(2017 - $0.5 million)$nil; 2016 - $nil). As at December 31, 2016,2018, the weighted-average remaining life of options vested and expected to vest was 8.58.1 years (2015(2017 - 8.68.3 years; 2016 - 8.5 years) and the weighted-average remaining life of the exercisable stock options was 8.37.7 years (2015(2017 - 8.28.0 years; 2016 - 8.3 years).
During 2016,2018, the Company granted 0.30.8 million (2015(2017 - 0.20.4 million; 20142016 - 0.60.3 million) restricted stock units to the officers of the Company and to certain employees of Teekay subsidiaries that provide services to the Company, with an aggregate fair value of $1.0$0.9 million (2015(2017 - $1.0$0.8 million; 20142016 - $2.3$1.0 million). Each restricted stock unit is equal in value to one share of the Company’s common shares plus reinvested dividends from the grant date to the vesting date. The restricted stock units vest equally over three years from the grant date. Any portion of a restricted stock unit award that is not vested on the date of a recipient’s termination of service is cancelled, unless their termination arises as a result of the recipient’s retirement and, in that case, the restricted stock unit award will continue to vest in accordance with the vesting schedule. Upon vesting, the value of the restricted stock unit awards, net of withholding taxes, is paid to each recipient in the form of common shares.
For the year ended December 31, 2016,2018, the Company recorded an expense of $1.4$0.7 million (2015(2017 - $1.4$0.8 million, 20142016 - $1.2$1.4 million) related to the restricted stock units in general and administrative expenses. During the year ended December 31, 2016, 0.42018, 0.3 million restricted stock units (2015(2017 - 0.3 million; 2016 - 0.4 million) with a market value of $1.5$0.3 million (2015(2017 - $2.3$0.6 million; 2016 - $1.5 million) vested and that amount, net of withholding taxes, was paid to the grantees by issuing 0.2 million shares (2015(2017 - 0.2 million shares; 2016 - 0.2 million shares) of Class A common stock.
| |
| 15. | Related Party Transactions |
Acquisitions and Acquisition of Entities under Common Control
| |
| a. | On July 31, 2015,November 27, 2017, the Company acquired SPT (see note 24) and on December 18, 2015completed its merger with TIL. As consideration for the merger, the Company acquiredissued 88,977,544 Class A common shares to the Explorer SpiritTIL shareholders (other than the Company and Navigator Spirit (see note 3)its subsidiaries), including 8,250,000 shares to Teekay, for $151.3 million, or $1.70 per share (notes 5 and 23). |
| |
| b. | In August 2014,On May 31, 2017, the Company purchasedacquired from Teekay Holdings Ltd., a wholly-owned subsidiary of Teekay, the remaining 50% ownership inof TTOL, which owns conventional tanker commercial management and technical management operations including the direct ownership in three commercially managedand currently administers four commercially-managed tanker pools, for an aggregate price of $23.7 million, including $6.7 million in net working capital (see note 8c)revenue sharing arrangements (notes 4 and 7c). |
| |
| c. | In January 2014,2017, the Company and Teekay formed TIL. The Company purchased 2.5 millionissued 2,155,172 shares of Class A common stock in a private placement to Teekay at a price of TIL$2.32 per share for $25.0gross proceeds of $5.0 million (note 5). |
Management Fee – Related and Other
| |
| d. | The Company's operations are conducted in part by its subsidiaries who receive services from Teekay's wholly-owned subsidiary, Teekay Shipping Ltd. (or the Manager, formerly known as Teekay Tankers Management Services Ltd.), and receivedits affiliates. The Manager provides various services under a stock purchase warrant. Inlong-term management agreement (the Management Agreement). Commencing October 2014,1, 2018, the Company purchased an additional 0.9 million common shareselected to receive commercial and technical management services for its owned and leased vessels (other than certain former TIL vessels, which are managed by a third party) from its wholly-owned subsidiaries and will no longer contract these services from the Manager. Prior to this date, the Manager was required to provide these services to the Company, which it did by subcontracting such services from the Company's subsidiary TTOL and its affiliates. Certain of TIL on the open marketCompany’s vessels participate in revenue sharing arrangements that, with the exception of a Medium Range (or MR) revenue sharing arrangement, are managed by TTOL or Teekay Tankers Chartering Pte Ltd. (collectively, the Pool Managers). |
| |
| e. | Amounts received and paid by the Company for a purchase price of $10.0 million USD (see notes 8b and 11).such related party transactions for the periods indicated were as follows: |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| |
d. | In May 2014, the Company sold two wholly-owned subsidiaries, each of which owned one VLCC, to TIL for the aggregate proceeds of $154.0 million plus related working capital on closing of $1.7 million (see note 21). |
| |
e. | In April 2010, when the Company purchased the Kaveri Spirit Suezmax tanker from Teekay, Teekay provided indemnification to the Company for the costs required to repair heating coils on the vessel. During the first quarter of 2014, the repairs were performed to coincide with the scheduled dry docking of the vessel. The Company received a $1.3 million indemnification payment from Teekay, which was treated as a reduction to the purchase price originally paid by the Company for the vessel.
|
Management Fee – Related and Other |
| | | | | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ | | 2016
$ |
Time-charter revenues (i) | — |
| | — |
| | 5,404 |
|
RSA pool management fees and commissions (ii) | — |
| | (2,799 | ) | | (9,813 | ) |
Commercial management fees (iii) | — |
| | (1,187 | ) | | (1,870 | ) |
Vessel operating expenses - technical management fee (iv) | (10,400 | ) | | (8,775 | ) | | (9,155 | ) |
Strategic and administrative service fees (v) | (32,918 | ) | | (21,185 | ) | | (10,122 | ) |
Secondment fees (vi) | (679 | ) | | (382 | ) | | — |
|
Lay-up services revenues (vii) | — |
| | 33 |
| | 302 |
|
LNG terminal services revenues (viii) | 1,689 |
| | 388 |
| | 70 |
|
Technical management fee recoveries (ix) | 13,811 |
| | 7,666 |
| | — |
|
Service revenues (x) | 1,019 |
| | 1,939 |
| | — |
|
| Entities under Common Control (note 4) | | | | | |
RSA pool management fees and commissions (ii) | — |
| | 2,799 |
| | 9,813 |
|
Commercial management fees (iii) | — |
| | 1,187 |
| | 1,870 |
|
Strategic and administrative service fees (v) | — |
| | (7,026 | ) | | (15,508 | ) |
Secondment fees (vi) | — |
| | (248 | ) | | (644 | ) |
Technical management fee revenues (ix) | — |
| | 4,890 |
| | 11,742 |
|
Service revenues (x) | — |
| | 1,772 |
| | 5,482 |
|
| |
f. | Teekay and its wholly owned subsidiary and the Company’s manager, Teekay Tankers Management Services Ltd. (the Manager), provide commercial, technical, strategic and administrative services to the Company pursuant to a long-term management agreement (the Management Agreement). In addition, certain of the Company’s vessels participate in pooling arrangements that, with the exception of a Medium Range pool, are managed by entities owned in whole or in part by subsidiaries of Teekay (collectively the Pool Managers). Such related party transactions were as follows:
|
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ | | 2014
$ |
Time-charter revenues (i) | 5,404 |
| | 392 |
| | 13,728 |
|
Lay-up services revenues (ii) | 302 |
| | — |
| | — |
|
LNG terminal services revenues (iii) | 70 |
| | — |
| | — |
|
Pool management fees and commissions (iv) | (9,813 | ) | | (10,445 | ) | | (5,292 | ) |
Commercial management fees (v) | (1,870 | ) | | (1,236 | ) | | (1,117 | ) |
Vessel operating expenses - technical management fee (vi) | (9,155 | ) | | (7,039 | ) | | (5,613 | ) |
Strategic and administrative service fees (vii) | (10,122 | ) | | (8,356 | ) | | (8,676 | ) |
| Entities under Common Control (note 3) | | | | | |
Time-charter revenues (viii) | — |
| | 4,558 |
| | 6,572 |
|
Bareboat charter revenues (ix) | — |
| | — |
| | 1,156 |
|
| Commercial management fees | — |
| | (246 | ) | | (226 | ) |
| Vessel operating expenses - technical management fee | — |
| | (430 | ) | | (399 | ) |
| Strategic and administrative service fees | — |
| | (660 | ) | | (861 | ) |
| |
(i)i | In December 2015, immediately after the completion of the 2015 Acquired Business, the Company chartered-out the Navigator Spirit to Teekay under a fixed-rate time-charter contract, which was due to expire in July 2016. On May 18, 2016, the contract was transferred to the Americas Spirit, which subsequently expired on July 15, 2016. The Company also had chartered-out the Pinnacle Spirit and Summit Spirit to Teekay under fixed-rate time-charter contracts, which expired in the fourth quarter of 2014. |
| |
(ii) | The Company recorded revenue of $0.3 million for the year ended December 31, 2016 to provide lay-up services to Teekay for two of its in-chartered vessels. |
| |
(iii) | In November 2016, the Company's ship-to-ship transfer business signed an operational and maintenance subcontract with Teekay LNG Bahrain Operations L.L.C., an entity wholly owned by Teekay LNG Partners L.P. (or TGP), for the Bahrain LNG Import Terminal (or the Terminal). The Terminal is owned by Bahrain LNG W.I.L., a joint venture for which Teekay LNG Operating L.L.C., an entity wholly owned by TGP, has a 30% interest.
|
| |
(iv)ii. | The Company’s share of the Pool Managers’TTOL’s fees for revenue sharing arrangements are reflected as a reduction to net pool revenues from affiliates on the Company’s consolidated statements of (loss) income. The Company acquired the remaining 50% interest in TTOL on May 31, 2017 (notes 4 and note 7c). Subsequent to the acquisition, the Company's share of TTOL's fees has been eliminated. |
| |
(v)iii. | The Manager’s commercial management fees for vessels on time-charter out contracts and spot-traded vessels, which are not included in the pooling arrangement, whichRSAs. These fees are reflected in voyage expenses on the Company’s consolidated statements of (loss) income. Subsequent to the Company's acquisition of the remaining 50% interest in TTOL, the Company's share of the Manager's commercial management fees has been eliminated. |
| |
(vi)iv. | The cost of ship management services provided by the Manager has been presented as vessel operating expenses on the Company’s consolidated statements of (loss) income. Commencing October 1, 2018, the Company has elected to receive ship management services for its own vessels from its wholly-owned subsidiaries and will no longer subcontract these services from the Manager. |
| |
(vii)v. | The Manager’s strategic and administrative service fees have been presented in general and administrative fees, except for fees related to technical management services, which have been presented in vessel operating expenses, on the Company’s consolidated statements of (loss) income. The Company’s executive officers are employees of Teekay or subsidiaries thereof, and their compensation (other than any awards under the Company’s long-term incentive plan described in note 14) is set and paid by Teekay or such other subsidiaries. The Company reimburses Teekay for time spent by its executive officers on the Company’s management matters through the strategic portion of the management fee. |
| |
(viii)vi. | The Company pays secondment fees for services provided by some employees of Teekay. Secondment fees have been presented in general and administrative expenses, except for fees related to technical management services, which have been presented in vessel operating expenses on the Company's consolidated statements of (loss) income. |
| |
| vii. | The Company recorded $4.6revenue of $0.3 million for the year ended December 31, 2016 to provide lay-up services to Teekay for two of its in-chartered vessels. |
| |
| viii. | In November 2016, the Company's ship-to-ship transfer business signed an operational and maintenance subcontract with Teekay LNG Bahrain Operations L.L.C., an entity wholly-owned by TGP, for the Bahrain LNG Import Terminal. The terminal is owned by Bahrain LNG W.I.L., a joint venture for which Teekay LNG Operating L.L.C., an entity wholly-owned by TGP, has a 30% interest. |
| |
| ix. | The Company receives reimbursements from Teekay, which subcontracts technical management services from the Manager. These reimbursements have been presented in general and administrative expenses on the Company's consolidated statements of (loss) income. Commencing October 1, 2018, the Company has elected to receive technical management services for its own vessels from its wholly-owned subsidiaries and will no longer subcontract these services from the Manager. |
| |
| x. | The Company recorded revenue of $1.0 million and $6.6$1.9 million related to a time-charter out contract for the Explorer Spirit for the years ended December 31, 20152018 and 2014,2017, respectively, relating to TTOL's administration of certain revenue sharing arrangements and provision of certain commercial services to participants in the arrangements. The Company also recorded revenue of $1.8 million and $5.5 million for the years ended December 31, 2017 and 2016, respectively, associated with the Entities under Common Control. The vessel was under a fixed-rate time-charter contract with SPT which expired in September 2015.Commencing October 1, 2018, the Company has elected to receive certain commercial services from its wholly-owned subsidiaries and will no longer subcontract these services from the Manager. |
| |
(ix) | The Company recorded $0.9 million related to a bareboat charter contract for the Explorer Spirit for the year ended December 31, 2014, associated with the Entities under Common Control. The vessel was under a fixed-rate bareboat contract with SPT which expired in March 2014. The Company also recorded $0.3 million related to a bareboat charter contract for the Navigator Spirit for the year ended December 31, 2014, associated with the Entities under Common Control. The vessel was under a fixed-rate bareboat charter contract with SPT which expired in January 2014.
|
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| |
g.f. | The Manager and other subsidiaries of Teekay collect revenues and remit payments for expenses incurred by the Company’s vessels. Such amounts, which are presented in the consolidated balance sheets in due from affiliates or due to affiliates, are without interest or stated terms of repayment. In addition, $8.6$7.6 million and $7.9$8.7 million were payable to the Manager as at December 31, 20162018 and 2015,2017, respectively, for reimbursement of the Manager’s crewing and manning costs to operate the Company’s vessels and such amounts are included in accrued liabilities in the consolidated balance sheets. The amounts owing from the Pool Managers,RSAs, which are reflected in the consolidated balance sheets as pool receivables from affiliates, are without interest and are repayable upon the terms contained within the applicable pool agreement. In addition, the Company had advanced $35.7 million and $46.8 million as at December 31, 2016 and 2015, respectively, to the Pool Managers for working capital purposes. The Company may be required to advance additional working capital funds from time to time. Working capital advances will be returned to the Company when a vessel no longer participates in the applicable pooling arrangement, less any set-offs for outstanding liabilities or contingencies. These activities, which are reflected in the consolidated balance sheets as due from affiliates, are without interest or stated terms of repayment. |
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
balance sheets as pool receivables from affiliates, are without interest and are repayable upon the terms contained within the applicable revenue sharing agreement. In addition, the Company had advanced $34.9 million and $45.1 million as at December 31, 2018 and 2017, respectively, to the RSAs for working capital purposes. The Company may be required to advance additional working capital funds from time to time. Working capital advances will be returned to the Company when a vessel no longer participates in the applicable RSA, less any set-offs for outstanding liabilities or contingencies. These activities, which are reflected in the consolidated balance sheets as due from affiliates, are without interest or stated terms of repayment.
| |
h.g. | The Management Agreement provides for payment to the Manager of a performance fee in certain circumstances. If Gross Cash Available for Distribution for a given fiscal year exceeds $3.20 per share of the Company’s weighted average outstanding common stock (or the Incentive Threshold), the Company is generally required to pay a performance fee equal to 20% of all Gross Cash Available for Distribution for such year in excess of the Incentive Threshold. The Company did not incur any performance fees for the years ended December 31, 2016, 20152018, 2017 and 2014.2016. Cash Available for Distribution represents net income plus depreciation and amortization, unrealized losses from derivatives, non-cash items and any write-offs or other non-recurring items, less unrealized gains from derivatives and net income attributable to the historical results of vessels acquired by the Company from Teekay, prior to their acquisition by us, for the period when these vessels were owned and operated by Teekay. Gross Cash Available for Distribution represents Cash Available for Distribution without giving effect to any deductions for performance fees and reduced by the amount of any reserves the Company’s Board of Directors may establish during the applicable fiscal period that have not already reduced the Cash Available for Distribution. |
| |
i.h. | Pursuant to certain pooling arrangements (see note 5), the Pool Managers provideRSAs, TTOL provides certain commercial services to the poolRSA participants and administeradministers the poolsRSAs in exchange for a fee currently equal to 1.25% of the gross revenues attributable to each poolRSA participant’s vessels and a fixed amount per vessel per day which ranges from $275 to $350. Voyage revenues and voyage expenses of the Company’s vessels operating in these pool arrangementsRSAs are pooled with the voyage revenues and voyage expenses of other poolRSA participants. The resulting net pool revenues, calculated on a time-charter equivalent basis, are allocated to the poolRSA participants according to an agreed formula. The Company accounts for the net allocation from the pools as “net pool revenue” on the consolidated statements of income. The pool receivable from affiliates as at December 31, 20162018 and 20152017 was $24.6$56.5 million and $62.7$15.6 million, respectively. |
| |
16. | Other (Expense) Income |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ | | 2014
$ |
| Income tax (expense) recovery | (7,511 | ) | | (3,339 | ) | | 154 |
|
| Gain on initial recognition of stock purchase warrant | — |
| | — |
| | 3,420 |
|
| Foreign exchange gain | 1,449 |
| | 252 |
| | 138 |
|
| Other (expense) income | (9 | ) | | (10 | ) | | 93 |
|
| Total | (6,071 | ) |
| (3,097 | ) |
| 3,805 |
|
Charters-in
As at December 31, 2016, minimum commitments to be incurred by the Company under vessel operating leases by which the Company charters-in nine vessels, including two workboats for the lightering support services, were approximately $26.8 million (2017), $8.3 million (2018), $8.3 million (2019), $8.3 million (2020), and $1.4 million (2021). The Company recognizes the expense from these charters, which is included in time-charter hire expense, on a straight-line basis over the firm period of the charters.
Charters-out
As at December 31, 2016, 13 of the Company’s vessels and one in-chartered vessel operated under fixed-rate time charter contracts with the Company’s customers, of which seven contracts are scheduled to expire in 2017, six contracts are scheduled to expire in 2018 and one contract is scheduled to expire in 2019. As at December 31, 2016, minimum scheduled future revenues to be received by the Company under time charters then in place were approximately $136.5 million, comprised of $93.4 million (2017), $40.5 million (2018) and $2.6 million (2019). The carrying amount of the Company's owned vessels which are employed on these time charters as at December 31, 2016, was $471.7 million (2015 - $442.5 million). The cost and accumulated depreciation of the vessels employed on these time charters as at December 31, 2016 were $683.2 million (2015 - $596.7 million) and $211.5 million (2015 - $154.2 million), respectively.
The minimum scheduled future revenues should not be construed to reflect total charter hire revenues for any of the years. Minimum scheduled future revenues do not include revenue generated from new contracts entered into after December 31, 2016, revenue from unexercised option periods of contracts that existed on December 31, 2016, or variable or contingent revenues. In addition, minimum scheduled future revenues
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
presented above have been reduced by estimated off-hire time for period maintenance. Actual amounts may vary given unscheduled future events such as vessel maintenance.
| |
18. | Supplemental Cash Flow Information |
| |
a. | The changes in non-cash working capital items related to operating activities for the years ended December 31, 2016, 2015, and 2014 are as follows: |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ | | 2014
$ |
| Accounts receivable and interest receivable | (2,128 | ) | | (13,506 | ) | | (8,464 | ) |
| Pool receivables from affiliates | 38,137 |
| | (27,481 | ) | | (24,489 | ) |
| Due from affiliates | 25,501 |
| | 12,361 |
| | (14,511 | ) |
| Prepaid expenses and other current assets | 8,251 |
| | (11,400 | ) | | 987 |
|
| Accounts payable and accrued liabilities | (21,265 | ) | | 32,876 |
| | (3,174 | ) |
| Due to affiliates | (5,718 | ) | | (12,181 | ) | | (928 | ) |
| Deferred revenue | 1,718 |
| | 2,039 |
| | (2,324 | ) |
| Other | — |
| | (8,588 | ) | | 1,999 |
|
| Change in operating assets and liabilities | 44,496 |
|
| (25,880 | ) |
| (50,904 | ) |
| |
b.i. | Cash interest paid (including interest paid byPursuant to a service agreement with the Entities under Common Control) duringTeekay Aframax RSA, from time to time, the years ended December 31,Company may hire vessels to perform full service lightering services. During 2018, 2017 and 2016, 2015, and 2014 totalled $38.5the Company recognized $28.4 million, $22.8$14.1 million and $18.3$13.1 million, respectively. |
| |
c. | The portion ofrespectively, related to vessels which were chartered-in from the consideration paidRSA to Teekay forassist with full service lightering operations. These amounts have been presented in voyage expenses on the acquisition of a 50% interest in TTOL in 2014 consisting of 4.2 million of Class B common shares was treated as a non-cash transaction in the Company’sCompany's consolidated statements of cash flows for the year ended December 31, 2016 (see note 8c).(loss) income. |
As of December 31, 2016, the Company adopted the new accounting standard ASC-205-40, Presentation of Financial Statements - Going Concern, which requires management to assess if the Company will have sufficient liquidity to continue as a going concern for the one-year period following the issuance of its financial statements. The Company has a portion of a loan facility that is maturing in the first quarter of 2018 and expects that spot tanker rates in 2017 will be lower than those of 2016, resulting in lower cash flow from vessel operations.
Based on these factors, over the one-year period following the issuance of its financial statements, the Company expects it will need to obtain additional sources of financing, in addition to amounts generated from operations, to meet its minimum liquidity requirements under its financial covenants. These anticipated sources of financing include the refinancing of the loan facility maturing in the first quarter of 2018 as well as obtaining other debt financing.
The Company is actively pursuing the alternatives described above, which it considers probable of completion based on the Company’s history of being able to refinance loan facilities for similar types of vessels and Teekay’s history of being able to obtain additional debt financing for existing vessels.
Based on the Company’s liquidity at the date these consolidated financial statements were issued, the liquidity it expects to generate from operations over the following year, and by incorporating the Company’s plans to raise additional liquidity that it considers probable of completion, the Company estimates that it will have sufficient liquidity to continue as a going concern for at least the one-year period following the issuance of these consolidated financial statements.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ | | 2016
$ |
| Foreign exchange gain | 3,133 |
| | 79 |
| | 1,413 |
|
| Other income | 49 |
| | 250 |
| | 120 |
|
| Total | 3,182 |
|
| 329 |
|
| 1,533 |
|
| |
| 17. | Supplemental Cash Flow Information |
| |
| a. | The changes in non-cash working capital items related to operating activities for the years ended December 31, 2018, 2017 and 2016 are as follows: |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ | | 2016
$ |
| Accounts receivable, including other current assets | (16,020 | ) | | 14,603 |
| | (108 | ) |
| Pool receivables from affiliates | (40,999 | ) | | 16,193 |
| | 38,137 |
|
| Due from affiliates | 9,440 |
| | 17,562 |
| | 18,371 |
|
| Prepaid expenses | (15,507 | ) | | 8,767 |
| | 2,313 |
|
| Accounts payable and accrued liabilities | 9,778 |
| | (13,996 | ) | | (26,821 | ) |
| Due to affiliates | (1,147 | ) | | (32,641 | ) | | (3,606 | ) |
| Deferred revenue | (557 | ) | | (3,898 | ) | | 1,718 |
|
| Other | 60 |
| | — |
| | — |
|
| Change in operating assets and liabilities | (54,952 | ) |
| 6,590 |
|
| 30,004 |
|
| |
| b. | Cash interest paid (including interest paid by the Entities under Common Control) during the years ended December 31, 2018, 2017, and 2016 totaled $47.6 million, $26.4 million, and $38.5 million, respectively. |
| |
| c. | In November 2017, the Company acquired the outstanding shares of TIL through issuing 89.0 million Class A common shares, which was treated as a non-cash transaction in the Company's consolidated statement of cash flows. As a result of this transaction, the Company acquired $37.6 million in cash and paid $6.9 million in transaction costs (note 23). |
| |
| d. | The Company maintains restricted cash deposits relating to certain contracts which were assumed as part of the acquisition of the ship-to-ship transfer business in 2015, LNG terminal management and for certain freight forward agreements (note 12). Attached to these contracts are certain performance guarantees required by the Company. The Company also maintains restricted cash deposits for the purposes of the margin requirements of the Company's obligations related to certain capital leases (note 11). Total cash, cash equivalents and restricted cash are as follows: |
|
| | | | | | | | | | | |
| | As at December 31, 2018 | | As at December 31, 2017 | | As at December 31, 2016 | | As at December 31, 2015 |
| | $ | | $ | | $ | | $ |
| Cash and cash equivalents | 54,917 |
| | 71,439 |
| | 94,157 |
| | 156,520 |
|
Restricted cash - current | 2,153 |
| | 1,599 |
| | 750 |
| | 870 |
|
| Restricted cash - long-term | 3,437 |
| | 2,672 |
| | — |
| | — |
|
| | 60,507 |
| | 75,710 |
| | 94,907 |
| | 157,390 |
|
Accounting standard ASC-205-40, Presentation of Financial Statements - Going Concern, requires management to assess if the Company will have sufficient liquidity to continue as a going concern for the one-year period following the issuance of its consolidated financial statements.
Two of the Company’s term loans, with an aggregate outstanding balance of $166.4 million, are guaranteed by Teekay and contain certain covenants (see note 10). As part of the Company’s assessment of its liquidity, it has considered Teekay’s ability to comply with the covenants of these term loans for the one-year period following the issuance of the Company’s consolidated financial statements. Teekay has informed the Company that it expects it will comply with all required covenants and have sufficient liquidity to continue as a going concern for at least the one-year period following the issuance of Teekay's consolidated financial statements, taking into account Teekay's plans to refinance its
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
senior notes coming due in January 2020. Consequently, the Company does not expect any negative impact on its liquidity as a result of Teekay’s obligations under the two term loans.
Based on the Company’s liquidity at the date these consolidated financial statements were issued, including the liquidity it had recently generated from the completion of the Working Cap Loan (note 10) and the sale-leaseback of 10 vessels in 2018 (note 11), and the liquidity it expects to generate from its February 2019 sale-leaseback financing transaction (note 24) and operations over the following year based on an expected tanker market recovery, the Company estimates that it will have sufficient liquidity to continue as a going concern for at least the one-year period following the issuance of these consolidated financial statements.
| |
| 19. | (Loss) Earnings Per Share |
The net (loss) income available for common shareholders and (loss) earnings per common share presented in the table below excludes the results of operations of the Entities under Common Control (see note 3)which were purchased solely with cash (note 4).
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2016
$ | | 2015
$ | | 2014
$ |
| Net income | 62,855 |
| | 179,635 |
| | 60,538 |
|
| Less: Net income attributable to the Entities under Common Control | — |
| | (2,708 | ) | | (3,396 | ) |
| Net income available for common shareholders | 62,855 |
|
| 176,927 |
|
| 57,142 |
|
| Weighted-average number of common shares - basic | 156,323,348 |
| | 130,136,228 |
| | 85,882,685 |
|
| Dilutive effect of stock-based awards | 242,067 |
| | 581,481 |
| | 364,452 |
|
| Weighted average number of common shares - diluted | 156,565,415 |
|
| 130,717,709 |
|
| 86,247,137 |
|
| Earnings per common share: | | | | | |
| - Basic | 0.40 |
| | 1.36 |
| | 0.67 |
|
| - Diluted | 0.40 |
| | 1.35 |
| | 0.66 |
|
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ | | 2016
$ |
| Net (loss) income | (52,548 | ) | | (58,023 | ) | | 67,823 |
|
| | | | | | |
Weighted-average number of common shares - basic (1) | 268,492,922 |
| | 187,235,377 |
| | 170,098,572 |
|
| Dilutive effect of stock-based awards | — |
| | — |
| | 242,067 |
|
Weighted average number of common shares - diluted (1) | 268,492,922 |
|
| 187,235,377 |
|
| 170,340,639 |
|
| (Loss) earnings per common share: | | | | | |
| - Basic | (0.20 | ) | | (0.31 | ) | | 0.40 |
|
| - Diluted | (0.20 | ) | | (0.31 | ) | | 0.40 |
|
| |
| (1) | The weighted-average number of common shares outstanding for periods prior to May 2017 has been retroactively adjusted to include the approximately 13.8 million shares of the Company's Class B common stock issued to Teekay as consideration for the acquisition of 50% of TTOL in May 2017. |
Stock-based awards, whichthat have an anti-dilutive effect on the calculation of diluted earnings per common share, are excluded from this calculation. In the years where a loss attributable to shareholders has been incurred, all stock-based awards are anti-dilutive. For the yearsyear ended December 31, 2016, 14 thousand restricted stock units (2015 - nil, 2014 - nil) had an anti-dilutive effect on the calculation of diluted earnings per common share. For the yearsyear ended December 31, 2016, 2015, and 2014, options to acquire 0.7 million shares, 44 thousand shares, and 0.1 million shares of the Company’s Class A common stock respectively, had an anti-dilutive effect on the calculation of diluted earnings per common share.
| |
21.20. | Vessel Sales and Vessel AcquisitionsSale of Vessels |
Vessel SalesThe Company's consolidated statement of loss for the year ended December 31, 2018 includes a net gain on sale of vessel of $0.2 million relating to one lightering support vessel, which was sold and delivered to its buyer in the second quarter of 2018.
In November 2018, the Company completed an $84.7 million sale-leaseback financing transaction relating to four of the Company's vessels, including two Aframax tankers, one Suezmax tanker and one LR2 product tanker (see note 11).
In September 2018, the Company completed a $156.6 million sale-leaseback financing transaction relating to six of the Company's Aframax tankers (see note 11).
During 2017, the Company completed the sales of three Aframax tankers which were delivered to their respective buyers in the second, third and fourth quarters of 2017. The Company recognized an aggregate loss on sale of the vessels of $11.2 million.
In July 2017, the Company completed a $153.0 million sale-leaseback financing transaction relating to four of the Company's Suezmax tankers (note 11).
The Company's consolidated statement of income for the year ended December 31, 2016 includes an aggregate loss on sale of vessels of $20.6 million of two Medium Range (or MR) tankers and two Suezmax tankers. One MR tanker was sold in November 2016 for a sales price of $13.2 million, and the Company recognized a loss on sale of the vessel of $8.1 million. The vessel was previously written down to its agreed sales price in the third quarter of 2016. The other MR tanker was sold in August 2016 for a sales price of $14.0 million, and the Company recognized a loss on sale of the vessel of $6.6 million. The vessel was previously written down to its agreed sales price in the second quarter of 2016.
In November 2016, the Company sold two lightering support vessels related to the ship-to-ship transfer business for an aggregate sales price of $0.4 million and recognized a gain on sale of the vessels of $0.3 million.
In October 2016, the Company entered into agreements to sell two Suezmax tankers, for an aggregate sales price of $33.8 million. The two vessels havehad been classified as vessels held for sale on the consolidated balance sheets as of December 31, 2016 and were written down to their agreed sales price. The Company recognized a loss on sale of vessels of $6.2 million in 2016. The twoOne Suezmax tankers weretanker was delivered to their respective buyers in January 2017 and March 2017 (note 25).
In November 2015, the Company sold one conventional tanker for a sales price of $11.2 million. The Company recognized a gain on sale of the vessel of $0.8 million in the year ended December 31, 2015.
In May 2014, the Company sold two wholly-owned subsidiaries, each of which owned one VLCC, to TIL for aggregate proceeds of $154.0 million plus related working capital on closing of $1.7 million. The Company used $152.0 million of the sale proceeds to prepay one of the Company’s revolving credit facilities and the remainder of the proceeds for general corporate purposes. The Company recognized a $10.0 million gain on the sale of the two subsidiaries to TIL for the year ended December 31, 2014, which is reflected in the Company’s consolidated statements of income.
Vessel Acquisitions
In August 2015, the Company agreed to acquire 12 modern Suezmax tankers from Principal Maritime. As of December 31, 2015, all 12 of the vessels had been delivered for a total purchase price of $661.3 million, consisting of $612.0 million in cash and approximately 7.2 million shares of the Company’s Class A common stock which were directly issued to Principal Maritime and which are treated as a non-cash transaction in the consolidated statements of cash flow. The value of these shares was approximately $49.3 million. To finance the cash portion of the acquisition price, the Company secured a $397.2 million loan facility with a maturity date of January 29, 2016. The loan was fully drawn as of December 31, 2015. In addition, the Company issued approximately 13.6 million shares of its Class A common stock for net proceeds of $90.6 million, including approximately 4.5 million shares which were issued to Teekay (see note 4). The Company financed the remainder of the cash purchase price with existing liquidity. The loan facility was refinanced in January 2016 (see note 10).
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
its respective buyer in January 2017. The Company recognized a loss on the sale of the vessel of $0.3 million in the three months ended March 31, 2017. In December 2014,February 2017, the date of delivery of the other Suezmax tanker to its owner was extended, and as a result, the sales price was reduced by $1.3 million. The vessel sale was completed in March 2017, and the Company signed an agreement to acquire one 2008-built Aframax tanker forrecognized a purchase priceloss on sale of $37.0 million and placed $3.7the vessel of $1.5 million in an escrow fund related to this purchase,2017.
| |
| 21. | Freight Tax and Other Tax Expenses |
The following is a roll-forward of the Company’s freight tax liabilities which wasare recorded in other non-current assets in the Company’sits consolidated balance sheets as ofin other long-term liabilities, from January 1, 2017 to December 31, 2014. In December 2014,2018:
|
| | | | | |
| | Year Ended December 31, |
| | 2018
$ | | 2017
$ |
| Balance of unrecognized tax benefits as at January 1 | 26,054 |
| | 12,882 |
|
Increases related to the TIL merger (note 23) | — |
| | 8,528 |
|
| Increases for positions related to the current year | 5,399 |
| | 1,910 |
|
| Changes for positions taken in prior years | 1,701 |
| | 3,641 |
|
| Decreases related to statute of limitations | (1,095 | ) | | (907 | ) |
| Balance of unrecognized tax benefits as at December 31 | 32,059 |
| | 26,054 |
|
The Company does not presently anticipate its uncertain tax positions will significantly increase or decrease in the next 12 months; however, actual developments could differ from those currently expected. The tax years 2013 through 2018 remain open to examination by some of the major jurisdictions in which the Company also signed agreementsis subject to acquire four modern LR2 vessels for a total purchase pricetax.
The Company recognizes freight tax expenses in its consolidated statements of $193.3 million. In January 2015, the Company secured a loan facility(loss) income. Interest and penalties on freight tax expenses are included in the amountroll-forward schedule above and are approximately $5.4 million and $4.2 million, for the years ended December 31, 2018 and 2017, respectively. Net foreign exchange gains on freight tax expenses are also included in the roll-forward schedule above and are approximately a reduction of $126.6$3.3 million with a maturity date of January 30, 2016. The loan facility was fully drawn in March 2015 and was secured by$0.1 million for the Aframax tankeryears ended December 31, 2018 and the four modern LR2 vessels which delivered in February and March 2015. The loan facility was refinanced in January 2016 (see note 10).2017, respectively.
| |
| 22. | Shipbuilding Contracts |
In April 2013, four special purpose subsidiary companies of the Company entered into agreements with STX Offshore & Shipbuilding Co., Ltd (or STX) of South Korea to construct four fuel-efficient 113,000 dead-weight tonne LR2 product tanker newbuildings. At the same time, the Company entered an Option Agreement with STX allowing the Company to order up to an additional 12 vessels. The payment of the Company’s first shipyard installment was contingent on the Company receiving acceptable refund guarantees for the shipyard installment payments. At around the same time, however, STX commenced a voluntary financial restructuring with its lenders, and as a result, STX’s ability to obtain the necessary refund guarantees in respect of the four firm shipbuilding contracts was severely affected. In October and November 2013, the Company exercised its rights under the Option Agreement to order eight additional newbuildings. The further required shipbuilding contracts were not entered into by STX within the timeframe specified in the Option Agreement. By December 2013, the Company had determined that there was no prospect of the refund guarantees being provided under any of the firm shipbuilding contracts, and by February 2014 determined there was no prospect of the same in respect of the further contracts to be entered pursuant to the Option Agreement or of that agreement being otherwise performed by STX. In December 2013, the subsidiaries of the Company gave STX notice that they were treating STX as having repudiated the four firm shipbuilding contracts. In February 2014, the Company gave STX notice that it was treating STX as having repudiated the Option Agreement. In February and March 2014, the Company and its subsidiaries commenced legal proceedings against STX for damages. This involved arbitration proceedings in London in respect ofhaving repudiated the four firm shipbuilding contracts and English High Courtthe Option Agreement in London, U.K. In the same year, STX issued proceedings in respect of the Option Agreement. In November 2014, the Company, on behalf of the subsidiaries, placed $0.6 million in an escrow account as cash security in respect of STX’s legal costs relating to the arbitration proceedings. These funds were classified as cash and cash equivalents in the Company’s consolidated balance sheet as of December 31, 2015.Korea.
On February 15, 2016, each of the Company’s four subsidiaries had successfully obtained an English Court Order requiring STX to pay a total of $32.4$8.9 million per subsidiary in respect of the four firm shipbuilding contracts. As a result, the Company’s subsidiaries have exercised their rights under English law to seek the assistance of the English court in the enforcement of the arbitration awards. The Company and its subsidiaries are also pursuing other routes to enforce the awards against STX. Additionally, the $0.6 million cash deposit was refunded to the Company in March 2016.
STX has filed for bankruptcy protection and as of December 31, 2016, all Korean enforcement actions arewere stayed. STX has had thatits bankruptcy protection recognized in England and Wales. The Company willwas not be in a position to take any further action on enforcement and recognition of its award in the UKU.K. or Korea while the bankruptcy protection remainsremained in place.
In March 2017, the Korean courts upheld the Company's subsidiaries' claims for the firm contracts in the bankruptcy proceedings. In November 2017, STX underwent a rehabilitation plan, which resulted in the Company's subsidiaries being entitled to receive 7% of the $8.9 million award in cash to be paid annually through 2026, and 93% of the award in equity of STX.
In June 2018, the Company's subsidiaries, under their entitlement as part of the STX rehabilitation plan, received a total of 315,856 shares of STX, representing a minor percentage ownership interest.
As at December 31, 2018, the STX shares had been de-listed. No amounts have been recorded as receivable in respect of these awards due to uncertainty of their collection.
The Option Agreement case has gone through trial and, despite finding thatvalue. In addition, the Company had valid option agreements,has not recognized a receivable in respect to the judgment was ruled against the Companynon-interest-bearing cash award due to uncertainty of delivery dates. The Company is considering whether to appeal this ruling.collection.
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| 23. | Other Revenues and Restructuring Charges |
For the year ended December 31, 2016, the Company recognized $37.9 million (2015 - $17.7 million) of revenue from its lightering support operations (see note 7) and amortized $1.2 million (2015 - $4.8 million) of its in-process revenue contracts which is included in other revenues on the consolidated statements of income.
For the year ended December 31, 2015, the Company recognized $4.7 million of restructuring charges, of which $4.4 million related to the termination of the employment of certain seafarers upon the expiration of a time-charter out contract. This $4.4 million termination charge was recovered from the customer and the recovery is reflected in other revenues on the consolidated statements of income. The remaining $0.3 million of restructuring costs related to severance payments made in relation to the acquisition of the ship-to-ship business (see note 24).
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24. | Acquisition of SPTTanker Investments Ltd. |
On JulyMay 31, 2015,2017, the Company acquired SPT fromentered into a company jointly-owned by Teekaymerger agreement to acquire the remaining 27.0 million issued and a Norway-based marine transportation company, I.M. Skaugen SE, for a cash purchase price of $47.3 million (including $1.8 million for working capital). To finance this acquisition, Teekay subscribed for approximately 6.5 millionoutstanding common shares of the Company’sTIL, by way of a share-for-share exchange of 3.3 shares of Class BA common stock at a subscription price of approximately $6.99 per share. SPT provides a full suite of ship-to-ship transfer services in the oil, gas and dry bulk industries. In addition to full service lightering and lightering support, it also provides consultancy and LNG terminal management services. This acquisition establishes the Company for each TIL common stock. On November 17, 2017, the Company's shareholders voted in favor of increasing the authorized number of its Class A common shares to permit the issuance of Class A common shares as consideration for the merger with TIL. Concurrently, the merger was approved by the shareholders of TIL. The Company amended its amended and restated articles of incorporation and completed the merger on November 27, 2017, as a global company in the ship-to-ship transfer business, which is expected to increase the Company’s fee-based revenue and its overall fleet utilization. As at July 31, 2015, SPT owned and operated a fleet of six ship-to-ship support vessels and had one chartered-in Aframax tanker. See note (3) to the table below.
The acquisition of SPT was accounted for using the acquisition method of accounting, based upon estimates of fair value as at December 31, 2016.
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
result of which TIL became a wholly-owned subsidiary of the Company. As consideration for the merger, the Company issued 88,977,544 Class A common shares to the TIL shareholders (other than the Company and its subsidiaries) for $151.3 million, or $1.70 per share.
Pursuant to this acquisition, the Company acquired a modern fleet of 10 Suezmax tankers, six Aframax tankers and two LR2 product tankers with an average age of 7.3 years, assumed $47.1 million of net working capital and other long-term liabilities and assumed long-term debt with a principal balance outstanding of $338.9 million. The following table summarizesmerger with TIL was accounted for as an acquisition of assets. The purchase price of the final estimatesacquisition consisted of the fair value of the Company's shares issued on the merger date ($151.3 million), the transaction costs associated with the merger ($6.9 million) and the fair value of the Company's 11.3% pre-existing ownership in TIL at the close of the merger ($19.2 million), for a total acquisition cost of $177.4 million. Net working capital and other long-term liabilities of $47.1 million and $337.1 million of long-term debt assumed were recognized at their fair values on November 27, 2017. The remaining amount of the SPT assets acquiredpurchase price was allocated to vessels ($467.2 million) and liabilities assumed by the Companyexisting time-charter contracts ($0.2 million), on the acquisition date. Such estimates ofa relative fair value were finalized in the first quarter of 2016 and resulted in an increase in goodwill of $8.1 million and a decrease in intangible assets by $8.4 million from preliminary estimates. Such changes did not have a material impact to the Company's consolidated statements of income for 2016.basis.
|
| | |
| As at
July 31, 2015
$
|
ASSETS | |
Cash, cash equivalents and short-term restricted cash | 1,292 |
|
Accounts receivable | 10,332 |
|
Prepaid expenses and other current assets | 3,763 |
|
Vessels and equipment | 6,475 |
|
Other assets | 143 |
|
Intangible assets subject to amortization | |
Customer relationships (1)
| 17,901 |
|
Customer contracts (1)
| 4,599 |
|
Goodwill (2)
| 8,059 |
|
Total assets acquired | 52,564 |
|
LIABILITIES | |
Accounts payable | (3,650 | ) |
Accrued liabilities | (3,276 | ) |
Total liabilities assumed | (6,926 | ) |
Net assets acquired (3)
| 45,638 |
|
| |
(1) | The customer relationships and customer contracts are being amortized over a weighted average amortization period of 10 years and 7.6 years, respectively. As at December 31, 2016, the gross carrying amount, accumulated amortization and net carrying amount were $22.5 million, $4.8 million and $17.7 million (December 31, 2015 - $30.9 million, $1.3 million and $29.6 million), respectively. Amortization of intangible assets for the five fiscal years subsequent to 2016 is expected to be $3.2 million (2017), $2.9 million (2018), $2.2 million (2019), $2.0 million (2020), $1.8 million (2021) and $5.6 million (thereafter). |
| |
(2) | Goodwill recognized from this acquisition attributed $1.9 million to the Company's conventional tanker segment and $6.2 million to the Company's ship-to-ship transfer segment. |
| |
(3) | Prior to the SPT acquisition date, SPT had in-chartered the Explorer Spirit (formerly known as the SPT Explorer) from Teekay, which was acquired by the Company in December 2015. Retroactively adjusting the Company’s consolidated financial statements for the acquisition of the Explorer Spirit has resulted in $1.4 million of the SPT acquisition purchase price being characterized as the settlement of a pre-existing relationship. Such amount has been accounted for as a reduction to revenue on the SPT acquisition date.
|
Operating results of SPT are reflected in the Company’s consolidated financial statements commencing July 31, 2015, the effective date of acquisition. The following table provides comparative summarized consolidated pro forma financial information for the Company for the year ended December 31, 2015, giving effect to the Company’s acquisition of SPT as if it had taken place on January 1, 2014:
|
| | | | | |
| | Unaudited Pro Forma Year ended December 31, 2015 $ | | Unaudited Pro Forma Year ended December 31, 2014 $ |
| Revenues | 549,893 |
| | 304,523 |
|
| Net income | 174,275 |
| | 53,269 |
|
| Earnings per common share: | | | |
| Basic | 1.30 |
| | 0.58 |
|
| Diluted | 1.30 |
| | 0.57 |
|
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
| |
| a. | In late October 2016,February 2019, the Company entered into agreements to sellsigned a term sheet for a $63.7 million sale-leaseback financing transaction for two of its Suezmax tankers, the Ganges Spirit and the Yamuna Spirit, for an aggregate sales price of $33.8 million. These vessels were classified as held for sale on the consolidated balance sheets as at December 31, 2016 and their net book values were written down to their sales prices. The Ganges Spirittankers. If completed, its sale in January 2017 and the Company expects to recognize a loss on saleincrease its liquidity position by approximately $25 million after the repayment of this vesseloutstanding debt related to these vessels. The transaction, which remains subject to customary conditions precedent and execution of approximately $0.3 milliondefinitive documentation, is expected to be completed in the second quarter ended March 31, 2017 (see note 21).of 2019. |
In February 2017, the date of delivery of the Yamuna Spirit to its new owner was extended, and as a result the sales price was reduced by $1.3 million. The sale was completed in March 2017 and the Company expects to recognize a loss on the sale of this vessel of $1.5 million in the quarter ended March 31, 2017.
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b. | In January 2017, the Company sold approximately 3.8 million shares of its Class A common stock under its COP for net proceeds of $8.6 million, net of issuance costs. In addition, the Company issued 2.2 million new shares of its Class A common stock to Teekay in a private placement for gross proceeds of $5.0 million, and the price per share was set to equal the weighted average price of the Company's Class A common stock for the ten trading days ending on the date of issuance.
|
| |
c. | In March 2017, the Company entered into an agreement to sell one Aframax Tanker, the Kyeema Spirit. The Company expects to recognize a loss on sale of this vessel of approximately $2.6 million in the quarter ended March 31, 2017.
|
