Selected Financial Data
Set forth below is selected consolidated financial and other data of Teekay Tankers Ltd. and its subsidiaries for fiscal years 2012 through 2016, 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, 2015 and 2014.
From time to time we have purchased vessels from Teekay Corporation (or
Teekay
) and from Teekay Offshore Partners L.P. (or
TOO
), an entity controlled by Teekay. During 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 were deemed to be business acquisitions between entities under common control. Accordingly, we have accounted for these transactions 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. As a result, our consolidated statements of income (loss) for the years ended December 31, 2015, 2014, 2013, and 2012 reflect the results of operations of these vessels, referred to herein as the "
Entities under Common Control
," as if we had acquired them when 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 3 – Acquisition of Entities under Common Control.
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (or
GAAP
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
|
|
—
|
|
|
|
(1)
|
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.
|
|
|
(2)
|
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)
|
Time-charter hire expense includes vessel operating lease expense incurred to charter-in vessels.
|
|
|
(4)
|
Earnings (loss) per share is determined by dividing (a) net income (loss) after adding (deducting) the amount of net income (loss) attributable to the Entities under Common Control by (b) the weighted-average number of shares outstanding during the applicable period. 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)
|
Vessels and equipment consists of (a) vessels, at cost less accumulated depreciation, and (b) advances on any newbuildings.
|
|
|
(6)
|
Total debt includes the current and long-term portion of debt, and amounts due to affiliates.
|
|
|
(7)
|
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,
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
Revenues
|
$
|
526,896
|
|
|
$
|
514,193
|
|
|
$
|
240,884
|
|
|
$
|
172,338
|
|
|
$
|
195,885
|
|
Interest income from investment in term loans
|
—
|
|
|
—
|
|
|
9,118
|
|
|
7,677
|
|
|
11,499
|
|
Voyage expenses
|
(55,241
|
)
|
|
(19,816
|
)
|
|
(11,223
|
)
|
|
(8,337
|
)
|
|
(4,618
|
)
|
Net revenues
|
$
|
471,655
|
|
|
$
|
494,377
|
|
|
$
|
238,779
|
|
|
$
|
171,678
|
|
|
$
|
202,766
|
|
|
|
(8)
|
EBITDA and Adjusted EBITDA are non-GAAP financial measures. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA before (loss) gain on sale of vessels, asset impairments, realized losses on interest rate swaps, unrealized gains on derivative instruments, dilution gain on share issuance by the equity accounted investment and share of the above items in non-consolidated equity accounted investments. Both measures are used as supplemental financial measures by management and by external users of our financial statements, such as investors, as discussed below:
|
|
|
•
|
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 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 Report 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
(i)
|
The following table reflects certain non-GAAP adjustments to the results of our equity accounted 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 it should be noted that this measure includes the Adjusted EBITDA from our equity 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 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 accounted investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
5,926
|
|
|
4,535
|
|
|
2,947
|
|
|
1,136
|
|
|
—
|
|
Interest expense, net of interest income
|
2,870
|
|
|
2,769
|
|
|
1,427
|
|
|
444
|
|
|
—
|
|
Realized and unrealized loss on derivative instruments
|
115
|
|
|
344
|
|
|
416
|
|
|
341
|
|
|
—
|
|
Foreign exchange loss (gain)
|
25
|
|
|
(75
|
)
|
|
226
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
—
|
|
|
(151
|
)
|
|
(37
|
)
|
|
—
|
|
Adjustments related to equity accounted investments
|
$
|
8,936
|
|
|
$
|
7,573
|
|
|
$
|
4,865
|
|
|
$
|
1,884
|
|
|
$
|
—
|
|
|
|
(9)
|
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 the High-Q joint venture 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 make 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 existing liquidity, cash from operations, incur borrowings, raise capital through the sale of assets or ownership interests in certain assets or joint venture entities, 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 interests in certain assets or joint ventures;
|
|
|
•
|
further reducing cash distributions;
|
|
|
•
|
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. The 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, operating expenses and dry 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, bank debt or other sources of financing and equity issuances.
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 declines in oil prices may adversely affect our growth prospects and results of operations.
Global crude oil prices have significantly declined since mid-2014. 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 2016 and 2015, we derived approximately 78.2% and 84.6%, respectively, of our net revenues from vessels operating in the spot tanker market, either directly or by means of participation in pooling agreements (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 up 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 arrangements could limit our earnings.
As of December 31, 2016, 14 of our Suezmax tankers, three of our owned and four of our time-chartered in Aframax tankers, and five of our owned Long Range 2 (or
LR2
) product tankers operated in, and generated revenues to us through participation in, a 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 Pool are each managed by Teekay Tanker Operations Ltd. (or
TTOL
), in which Teekay Corporation and we each have a 50% interest. Pooling arrangements are 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. 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 pool 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 economic 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 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, Canadian Dollar and British Pound. 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 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 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, two of our credit facilities contain loan-to-value financial covenants tied to the value of the vessels that collateralize these credit facilities. 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. We are required to maintain vessel value to outstanding loan principal balance ratios ranging from 105%-125%. At December 31, 2016, we were in compliance with these requirements.
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 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 to increase the size of our fleet. We intend to expand our fleet by 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 subsidiary 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 costs 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 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 or guarantee indebtedness;
|
|
|
•
|
change ownership or structure, including mergers, consolidations, liquidations and dissolutions;
|
|
|
•
|
grant liens on our assets;
|
|
|
•
|
sell, transfer, assign or convey assets;
|
|
|
•
|
make certain investments; and
|
|
|
•
|
enter into a new line of business.
|
Our ability to comply with covenants and restrictions contained in debt instruments 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. If we breach any of the restrictions, covenants, ratios or tests in the financing agreements, our obligations may become immediately due and payable, and the lenders’ commitment, if any, to make further loans may terminate. A default under one financing agreement could also result in foreclosure on any of our vessels and other assets securing related loans, or trigger a default under other financing agreements.
Our substantial debt levels may limit our flexibility in obtaining additional financing, pursuing other business opportunities and paying dividends.
As of December 31, 2016, our long-term debt was approximately $933.0 million and an additional $34.3 million was available to us under our revolving credit facilities. We will continue to have the ability to incur additional debt, subject to limitations in our revolving credit facilities. 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, 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 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, 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 vessels, is 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. Any significant 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 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 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 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 can increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which may be 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. 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. 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.
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 Syria and Sudan. The United States and the European Union (or 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 arrangements 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. 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 arrangements 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 significant loss of product or environmental contamination by any of our vessels could harm our reputation and business.
Vessels and their cargoes are at risk of being damaged or lost because of events such as:
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bad weather or natural disasters;
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mechanical or electrical failures;
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grounding, capsizing, fire, explosions and collisions;
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An accident involving any of our vessels could result in any of the following:
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death or injury to persons, loss of property or damage to the environment and natural resources;
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delays in the delivery of cargo;
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loss of revenues from charters;
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liabilities or costs to recover any spilled oil or other petroleum products and to restore the eco-system affected by the spill;
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governmental fines, penalties or restrictions on conducting business;
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higher insurance rates; and
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damage to our reputation and customer relationships generally.
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Any of these events could have a material adverse effect on our business, financial condition and operating results.
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—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. 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, in the long-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 arrangements 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 to us commercial, technical, administrative and strategic services, including vessel maintenance, crewing, purchasing, shipyard supervision, insurance and financial services. Our operational success and ability to execute our growth strategy depend significantly upon the satisfactory performance of these services by our Manager. Our business will 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:
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maximize revenues of our tankers included in the pooling arrangements;
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acquire new tankers or obtain new time charters;
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renew existing time charters upon their expiration;
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successfully interact with shipyards during periods of shipyard construction constraints;
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obtain financing on commercially acceptable terms; or
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maintain satisfactory relationships with suppliers and other third parties.
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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 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.
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 the end of the initial 15-year term. If we elect to terminate the Management Agreement at either of these points 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.
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 executive officers and directors of our Manager have conflicts of interest and limited fiduciary and contractual duties, which may permit them to favor interests of other Teekay Corporation affiliates above our interests and those of our Class A common shareholders.
Conflicts of interest may arise between Teekay Corporation, our Manager and their 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 their own interests and the interests of their affiliates over our interests and those of our shareholders. These conflicts include, among others, the following situations:
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our Chief Executive Officer and Chief Financial Officer and three of our directors 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;
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our Manager 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;
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our executive officers and those of our Manager do not spend all of their time on matters related to our business; and
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our Manager will advise us of costs incurred by it and its affiliates that it believes are reimbursable by us.
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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 three of our directors also serve as executive officers 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 director may encounter situations in which their fiduciary obligations to Teekay Corporation or our Manager or their 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 - Taxation of the Company, Item 10 - Additional Information—Material U.S. Federal Income Tax Considerations and Item 10 - Additional 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) 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). 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. 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 be subject to taxes, which could affect 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 income would become subject to taxation under Section 887 of the Code. The amount of such tax would depend upon 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.
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Information on the Company
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A.
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History and Development of the Company
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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 43 owned conventional tankers, seven in-chartered vessels and one jointly-owned Very Large Crude Carrier (or
VLCC
) as of December 31, 2016. The capacity of our conventional tanker fleet has risen from approximately 980,000 deadweight tonnes (or
dwt
) in 2007 to approximately 6,890,000 dwt as of December 31, 2016. Over the last five years, we have acquired a total of 13 conventional tankers from Teekay Corporation, 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 – Investment in Term Loans. We also sold two MR tankers in 2016 and one MR tanker in 2015. Please read Item 18 – Financial Statements: Note 21 - Vessel Sales and Vessel Acquisitions.
In July 2015 we acquired the ship-to-ship transfer business (or
TMS,
previously 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, TMS operated a fleet of seven ship-to-ship support vessels, including four 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 the assumption of existing debt, drawing on our revolving credit facility, and using our available working capital.
We are incorporated 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.
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 a 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 majority 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 that Teekay Corporation and its subsidiaries may offer to us from time to time. These tankers may include crude oil and product tankers.
Commencing in December 2015, we adopted a dividend policy under which quarterly dividends are to range from 30% to 50% of our quarterly adjusted net income, subject to the discretion of our Board of Directors, with a minimum quarterly dividend of $0.03 per share.
Adjusted net income
is a non-GAAP measure which excludes specific items affecting net 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 to our shareholders a fixed 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 managed by Teekay Tankers Management Services Ltd. (our
Manager
), a subsidiary of Teekay Corporation, that provides to us commercial, technical, administrative and strategic services. We have entered into a long-term agreement with our Manager (the
Management Agreement
) pursuant to which our Manager 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. We pay our Manager a market-based fee 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 fee 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.
We employ our chartering strategy based on the 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 of which are managed by wholly or partially owned subsidiaries of Teekay Corporation which employ vessels on the spot market. By employing some of our vessels in these pooling arrangements with Teekay Corporation, 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
:
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Owned
Vessels
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Chartered-in
Vessels
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Total
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Fixed-rate:
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Suezmax Tankers
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5
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—
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5
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Aframax Tankers
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6
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—
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6
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Long Range 2 Product Tankers
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2
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1
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3
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VLCC Tankers
(1)
|
1
|
|
|
—
|
|
|
1
|
|
Total Fixed-Rate Fleet
(2)
|
14
|
|
|
1
|
|
|
15
|
|
Spot-rate:
|
|
|
|
|
|
Suezmax Tankers
|
17
|
|
|
—
|
|
|
17
|
|
Aframax Tankers
|
8
|
|
|
6
|
|
|
14
|
|
Long Range 2 Product Tankers
|
5
|
|
|
—
|
|
|
5
|
|
Total Spot Fleet
(3)
|
30
|
|
|
6
|
|
|
36
|
|
Ship-to-Ship Support Vessels
|
4
|
|
|
3
|
|
|
7
|
|
Total Teekay Tankers Fleet
|
48
|
|
|
10
|
|
|
58
|
|
|
|
(1)
|
A VLCC that we own through a 50/50 joint venture with Wah Kwong Maritime Transport Holdings Limited (please refer to Note 8 - Investments in and advances to Equity Accounted Investments, included in Item 18 – Financial Statements in this Annual Report).
|
|
|
(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)
|
As at
December 31, 2016
, the four pooling arrangements in which we participate, and including vessels owned by other pool members, were comprised of a total of 29 Suezmax tankers, 32 modern Aframax tankers, 3 Aframax tankers over 15-year-old, and 11 LR2 product tankers.
|
The following table provides additional information about our owned Suezmax-class oil tankers as of December 31, 2016, of which 20 are Bahamian flagged and two are Malta flagged.
|
|
|
|
|
|
|
|
|
|
|
|
Vessel
|
Capacity
(dwt)
|
|
Built
|
|
Employment
|
|
Daily Rate
|
|
Expiration of
Charter
|
Ashkini Spirit
|
165,200
|
|
|
2003
|
|
Pool
|
|
—
|
|
—
|
Athens Spirit
|
158,500
|
|
|
2012
|
|
Pool
|
|
—
|
|
—
|
Atlanta Spirit
(1)
|
158,700
|
|
|
2011
|
|
Spot
|
|
—
|
|
—
|
Barcelona Spirit
|
158,500
|
|
|
2011
|
|
Pool
|
|
—
|
|
—
|
Beijing Spirit
|
156,500
|
|
|
2010
|
|
Pool
|
|
—
|
|
—
|
Ganges Spirit
(2)
|
159,500
|
|
|
2002
|
|
Spot
|
|
—
|
|
—
|
Godavari Spirit
|
159,100
|
|
|
2004
|
|
Time charter
|
|
$32,906
|
|
Aug-17
|
Iskmati Spirit
|
165,300
|
|
|
2003
|
|
Pool
|
|
—
|
|
—
|
Kaveri Spirit
|
159,100
|
|
|
2004
|
|
Pool
|
|
—
|
|
—
|
London Spirit
|
158,500
|
|
|
2011
|
|
Pool
|
|
—
|
|
—
|
Los Angeles Spirit
|
159,200
|
|
|
2007
|
|
Time charter
|
|
$22,500
|
|
Dec-17
|
Montreal Spirit
(3)
|
150,000
|
|
|
2006
|
|
Pool
|
|
—
|
|
—
|
Moscow Spirit
|
156,500
|
|
|
2010
|
|
Pool
|
|
—
|
|
—
|
Narmada Spirit
|
159,200
|
|
|
2003
|
|
Pool
|
|
—
|
|
—
|
Pinnacle Spirit
|
160,400
|
|
|
2008
|
|
Pool
|
|
—
|
|
—
|
Rio Spirit
|
158,400
|
|
|
2013
|
|
Pool
|
|
—
|
|
—
|
Seoul Spirit
|
160,000
|
|
|
2005
|
|
Pool
|
|
—
|
|
—
|
Summit Spirit
|
160,500
|
|
|
2008
|
|
Time Charter
|
|
$26,200
|
|
Aug-18
|
Sydney Spirit
|
158,500
|
|
|
2012
|
|
Pool
|
|
—
|
|
—
|
Tokyo Spirit
(4)
|
150,000
|
|
|
2006
|
|
Time charter
|
|
$18,066
|
|
Mar-17
|
Yamuna Spirit
(5)
|
159,400
|
|
|
2002
|
|
Spot
|
|
—
|
|
—
|
Zenith Spirit
|
160,500
|
|
|
2009
|
|
Time charter
|
|
$32,906
|
|
Jul-17
|
Total Capacity
|
3,491,500
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Suezmax tanker
Atlanta Spirit
joined the Teekay Suezmax Pool in February 2017.
|
|
|
(2)
|
The Suezmax tanker
Ganges Spirit
was sold and delivered to its new owner in January 2017.
|
|
|
(3)
|
The Suezmax tanker
Montreal Spirit
entered a 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.
|
The following table provides additional information about our owned Aframax-class oil tankers as of December 31, 2016, all of which are Bahamian 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
|
Donegal Spirit
|
105,600
|
|
|
2006
|
|
Time charter
|
|
$17,750
|
|
Oct-18
|
Galway Spirit
|
105,600
|
|
|
2007
|
|
Time charter
|
|
$17,000
|
|
Mar-18
|
Leyte Spirit
|
109,700
|
|
|
2011
|
|
Pool
|
|
—
|
|
—
|
Limerick Spirit
|
105,600
|
|
|
2007
|
|
Pool
|
|
—
|
|
—
|
Luzon Spirit
|
109,600
|
|
|
2011
|
|
Pool
|
|
—
|
|
—
|
Sebarok Spirit
|
109,600
|
|
|
2011
|
|
Pool
|
|
—
|
|
—
|
Seletar Spirit
|
109,000
|
|
|
2010
|
|
Pool
|
|
—
|
|
—
|
Total Capacity
|
754,700
|
|
|
|
|
|
|
|
|
|
The following table provides additional information about our VLCC-class oil tanker as of December 31, 2016, which is Hong Kong flagged.
|
|
|
|
|
|
|
|
|
|
|
|
Vessel
|
Capacity
(dwt)
|
|
Built
|
|
Employment
|
|
Daily Rate
|
|
Expiration of
Charter
|
Hong Kong Spirit
(1)
|
319,000
|
|
|
2013
|
|
Time charter
|
|
$37,500
|
|
Jul-18
|
|
|
(1)
|
The VLCC vessel, Hong Kong Spirit, is owned through a 50/50 joint venture. The charter rate on this vessel is subject to a profit sharing amount that is being calculated every six months.
|
Please read Note 10 - Long-Term Debt 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, two conventional tankers from TOO and 17 conventional tankers from third parties. 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.
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 some of our vessels in these pooling arrangements exceeds the amount we would otherwise derive by operating these vessels outside of the pooling arrangements due to higher vessel utilization and daily revenues. We also derive pool 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 management operations and is the owner of interests in four of the pooling arrangements. 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.
|
|
|
•
|
Provide superior customer service by maintaining high reliability, safety, environmental and quality standards.
We believe that energy companies seek transportation partners that have a reputation for high reliability, safety, environmental and quality standards. We leverage our reputation for operational expertise and customer base to further expand these relationships with consistent delivery of superior customer service through our Manager.
|
Our Chartering Strategy and Participation in the Vessel Pooling 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
, a total of 30 of our owned vessels and six time-chartered in vessels operated in the spot market through participation in Teekay managed pooling arrangements or on spot voyage charters. Fourteen of our owned vessels operated in the Teekay Suezmax Pool, three of our owned vessels and four time-chartered in vessel operated in the Teekay Aframax Pools while five of our owned vessels operated in the Taurus Tankers LR2 Pool. In addition, eight of our owned vessels and two time-chartered in vessels operated in the spot market on voyage charters. As of
December 31, 2016
, 13 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 Manager 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 arrangements in which we participate may, with our approval, enter into fixed-rate time charters for vessels we include in those pooling arrangements, thereby decreasing spot-rate exposure without withdrawing the vessels from the pooling arrangements.
Vessel Pooling 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, the aggregate revenues generated by the entire applicable pools are distributed to pool 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 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 at standard intervals determined by each pool based on the weighting system. We have agreed with the respective pool managers and pool participants to include certain of our vessels trading on voyage charters into the pooling arrangements assuming the vessel meets the respective pooling 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. Likewise, Aframax tankers and LR2 tankers on voyage charters with terms of 90 days or less participate in the Teekay Aframax Pools and the Taurus Tankers LR2 Pool, 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, the vessel will have those off hire days deducted from its monthly calculation of available days for the purpose of pool 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, the customer generally is not required to pay the hire rate and the owner is responsible for all costs. “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 arrangement if it meets the standards to participate in a pooling arrangement 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. These 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-ship support services is often driven by oil market arbitrages and oil traders optimizing their USD ton/mile on cargoes. 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. 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 services.
Industry and Competition
We compete in the Suezmax (120,000 to 199,999 dwt) and Aframax (80,000 to 119,999 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 79,999 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
) 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 to 119,999 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 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, we were effectively one of three active full service lightering businesses in the USG, the largest being AET Tankers (or
AET
) (a subsidiary company of MISC)
and the smallest being OSG Lightering (a subsidiary of International Seaways Inc.)
. USG lightering trade has a steady foundation of demand due to ongoing imports into the United States, and has recently found support in reverse-lightering due to changes to U.S. policy which now permit U.S.-produced crude oil to be exported 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
),
we 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 borne on larger VLCC and Suezmax class vessels to feed the U.S. Gulf Coast refinery requirements. We also expect USG lightering will see incremental benefits resulting from the lifted ban on US crude oil exports should that oil be transported on larger size vessels, including VLCC and Suezmax vessels targeted for Asia.
As of December 31, 2016, the largest operators of 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).
Competition in both the crude and product tanker market 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-haul 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 supports 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 SPT developed from being primarily a U.S. based supplier. Through the growth of SPT we have gained market share, and now under TMS, we look to increase 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, the International Energy Agency (or
IEA
) estimated that oil consumption will increase from 96.5 million barrels per day (or
mb/d
) in 2016, to 97.8 mb/d in 2017 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 toward demand for oil tankers.
The distance over which crude oil or refined petroleum products is 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 products 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, the world Aframax crude tanker fleet consisted of 627 vessels, with an additional 89 Aframax crude oil tanker newbuildings on order for delivery through 2017; the world Suezmax crude tanker fleet consisted of 468 vessels, with an additional 80 Suezmax crude oil tanker newbuildings on order for delivery through 2018; the world LR2 product tanker fleet consisted of 314 vessels, and with an additional 44 LR2 product tanker newbuildings on order through 2018. 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 factor that affects tanker supply is the available 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 vessel 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, we 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, through certain of its subsidiaries, provides technical management services for all of our vessels. Teekay Corporation has obtained through Det Norske Veritas Germanischer Lloyd (
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’s 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’s Health Safety, Environment and Quality (or
HSEQ
) team every quarter to ensure that all ship management functions are strictly adhered to.
Teekay Tankers conducts 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.
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), Behavioral Safety (E-colors) as well as Risk Tools handbook.
Teekay Corporation provides, through certain of its subsidiaries, 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:
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vessel maintenance (including repairs and dry docking) and certification;
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crewing by competent seafarers;
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purchasing of stores, bunkers and spare parts;
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financial management services.
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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 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 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 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 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 five-year intervals. In-water inspection is carried out during the second or third annual inspection (i.e. 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:
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our vessels and operations adhere to our operating standards;
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the structural integrity of the vessel is being maintained;
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machinery and equipment is being maintained to give reliable service;
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we are optimizing performance in terms of speed and fuel consumption; and
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our vessels' appearance supports our brand and meets customer expectations.
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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)
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 (the
IGF Code
), which is a mandatory code for ships fuelled by gases or other low-flashpoint fuels. The IGF Code, which is applicable from January 1, 2017, sets 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.
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 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 (‘‘
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 to ECAs designated in the future by the IMO. In October 2016, the IMO’s MEPC approved the designation of the North Sea and the Baltic Sea as ECAs for NOx emissions. These two new NOx 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 into effect on January 1, 2021.
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 enter into force on September 8, 2017. 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, the convention will require 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. After the first IOPP renewal survey, 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, the USCG have issued Type Approval (or
TA
) for the following ballast water treatment systems (or
BWTS
):
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Alfa Laval;
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Ocean Saver; and
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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. We estimate that the installation of approved BWTS may cost between $2 million and $3 million per vessel.
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 the Polar Code and the related amendments to SOLAS 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. The Polar Code has become mandatory for new vessels built after January 1, 2017. For existing ships, this code will be applicable from the first intermediate or renewal survey 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 no discharge connection to the engine room bilge system, bilge tank or OWS except in the following cases:
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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;
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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
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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 systems are compliant. In the event that modifications are required, system drawings will be subject to approval.
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Annex I is applicable for existing vessels with a first renewal survey beginning on or after January 1, 2017. It is anticipated that most vessels constructed after December 31, 1991 already comply with Annex I as MARPOL has since provided a unified interpretation prohibiting interconnections between sludge and bilge systems.
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.
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.
European Union (or EU)
Like the IMO, the 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).
Two new regulations were introduced by the European Commission in September 2010, as part of the implementation of the Port State Control Directive. These 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. 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, on 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 require 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 LSMGO of equipment originally designed to operate on Heavy Fuel Oil (or
HFO
). In addition, LSMGO is more expensive than HFO and this will 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, authorizing 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 is to apply not later than December 31, 2018, although certain of its provisions are to apply at different stages, with some of them being applicable from December 31, 2020. Pursuant to this Regulation, the EU Commission has recently published the first version of 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.
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:
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natural resources damages and the related assessment costs;
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real and personal property damages;
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net loss of taxes, royalties, rents, fees and other lost revenues;
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lost profits or impairment of earning capacity due to property or natural resources damage;
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net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards; and
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loss of subsistence use of natural resources.
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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
) evidence of financial responsibility in an amount at least equal to the relevant limitation amount for such vessels under the statute. The Coast Guard 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. 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 Guard 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, and their tankers are required to operate in compliance with their Coast Guard approved plans. Such response plans must, among other things:
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•
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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”;
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•
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describe crew training and drills; and
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•
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identify a qualified individual with full authority to implement removal actions.
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We have filed 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 Guard 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 Guard 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. 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 Feb
ruary 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (or the Kyoto 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 inten
ded 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 the
EEDI
), 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 enter into force on March 1, 2018. 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 in 2018 and a revised strategy to be adopted in 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
) of CO2 emissions from vessels (or the
MRV 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 starts 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 database, managed by the European Maritime Safety Agency. To comply with the EU MRV regulation, we have prepared an EU MRV monitoring plan and 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 currently considering a proposal for the inclusion of shipping in the EU Emissions Trading System as from 2021 in the absence of a comparable system operating under the IMO.
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 (or
MSCHOA
) whenever our vessels are calling in the Indian Ocean Region or West Coast of Africa (or 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.
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Organizational Structure
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As of
December 31, 2016
, Teekay Corporation (NYSE: TK), through its 100%-owned subsidiary Teekay Holdings Ltd., had a 25.4% economic interest in us through its ownership of 17.2 million of our shares of Class A common stock and 23.2 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. As such, we are controlled by Teekay Corporation. Teekay Corporation also controls its public subsidiaries 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
.
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D.
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Property, Plant and Equipment
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Other than our vessels and related equipment, we do not have any material property.
Please see “Item 4. Information on the Company: Note B–Our Fleet” for a description of our vessels and “Item 18. Financial Statements: Note 10—Long-Term Debt” for information about major encumbrances against our vessels.
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E.
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Taxation of the Company
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1.
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United States Taxation
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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-charter and bareboat-charter income.
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 will 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 be 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 The Marshall Islands. The U.S. Treasury Department has recognized the Republic of The 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 and Branch Profits Taxes.
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 currently is 35%), 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 would 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, we estimate that the U.S. federal income tax on such U.S. Source International Transportation Income would be 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. The amount of such tax for which we may be liable in any year would 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.
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Marshall Islands Taxation
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Because we and our controlled affiliates do not, and we do not expect that we and our controlled affiliates will, conduct business or operations 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 Island law, other than taxes or fees due to (i) the continued existence 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) with the Marshall Islands registrar, (iv) obtaining certificates of good standing from, or certified copies of documents filed with, the Marshall Islands registrar, or (v) compliance with Marshall Islands law concerning vessel ownership, such as tonnage tax. As a result, distributions by 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.
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Unresolved Staff Comments
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None.
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Item 5.
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Operating and Financial Review and Prospects
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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
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, we further developed our service offerings to our customers through the purchase of a 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. 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 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 new dividend policy under which quarterly dividends are expected to range from 30% to 50% of our quarterly adjusted net income, subject to the discretion of our Board of Directors, with a minimum quarterly dividend of $0.03 per share.
Adjusted net income
is a non-GAAP measure which excludes specific items affecting net 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 to our shareholders a fixed 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.
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
), 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 services of the facility. We have agreed to guarantee the performance of this contract by TMS.
New Lightering Business Contracts
In 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.
Time Charter-Out Vessels
During the year ended December 31, 2016, we entered into time charter-out contracts for two Suezmax tankers, with an 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 time charter-out contracts for two Aframax vessels, with an average daily rate of $20,000. These contracts have firm periods ranging from 12 to 24 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 contract for one Aframax tanker, which was delivered 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 also redelivered back to their respective owners seven in-chartered Aframax tankers and two in-chartered LR2 product tankers.
Vessel Sales
During the year ended December 31, 2016, we completed the sale 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 Busines
s). 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 court 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 and 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.
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:
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•
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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
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•
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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.
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The table below illustrates the primary distinctions among these types of charters and contracts:
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Voyage Charter
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Time Charter
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Typical contract length
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Single voyage
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One year or more
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Hire rate basis
(1)
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Varies
|
Daily
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Voyage expenses
(2)
|
We pay
|
Customer pays
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Vessel operating expenses
(3)
|
We pay
|
We pay
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Off hire
(4)
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Customer does not pay
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Customer does not pay
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(1)
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“Hire” rate refers to the basic payment from the charterer for the use of the vessel.
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(2)
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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.
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(3)
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Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses.
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(4)
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“Off-hire” refers to the time a vessel is not available for service.
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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, pool arrangements, full service lightering and lightering support services and interest income from investment in term loans. 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 pool arrangements. Hire rates for voyage charters are more volatile, as they are typically tied to prevailing market rates at the time of a voyage.
Voyage Expenses.
Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the ship owner under voyage charters and the customer under time charters.
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
).
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” (
or 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.
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:
|
|
•
|
Our financial results reflect the results of the interests in vessels acquired from Teekay for all periods the vessels were under common control.
The 2015 Acquired Business 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 date the interests in these vessels were actually 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 common control of Teekay and had begun operations. All financial or operational information contained herein for the periods prior to the date the interests in these vessels were actually acquired by us, and during which we and the applicable vessels were under common control of Teekay, are retroactively adjusted to include the results of these acquired vessels and are collectively 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, however weak shipping 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. In addition, factors such as 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 to 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-hire when they are being dry docked. We had two vessels drydock in
2016
, compared to 18 vessels which dry docked in
2015
and nine vessels which dry docked in
2014
. The total number of off-hire days relating to dry dockings during the years ended December 31, 2016,
2015
and
2014
were 82, 603, and 292, respectively. For our current fleet, there are nine vessels scheduled to dry dock in 2017.
|
Results of Operations
In accordance with GAAP, we report gross revenues in our consolidated statements of 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. Accordingly, the discussion of revenue below focuses on net revenues and TCE rates where applicable.
For the years ended December 31, 2016 and 2015, 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 associated with our lightering support operations.
Year Ended
December 31, 2016
versus Year Ended
December 31, 2015
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, 2016
and
2015
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)
|
2016
|
|
2015
|
|
% Change
|
Revenues
|
488,961
|
|
|
496,455
|
|
|
(2
|
)%
|
Less: voyage expenses
(1)
|
(58,442
|
)
|
|
(19,468
|
)
|
|
200
|
%
|
Net revenues
|
430,519
|
|
|
476,987
|
|
|
(10
|
)%
|
Vessel operating expenses
(2)
|
(150,100
|
)
|
|
(123,572
|
)
|
|
21
|
%
|
Time-charter hire expense
|
(57,368
|
)
|
|
(74,860
|
)
|
|
(23
|
)%
|
Depreciation and amortization
|
(99,024
|
)
|
|
(72,118
|
)
|
|
37
|
%
|
General and administrative expenses
|
(14,444
|
)
|
|
(15,369
|
)
|
|
(6
|
)%
|
(Loss) gain on sale of vessels
|
(20,926
|
)
|
|
771
|
|
|
(2,814
|
)%
|
Restructuring charges
|
—
|
|
|
(4,445
|
)
|
|
(100
|
)%
|
Income from vessel operations
|
88,657
|
|
|
187,394
|
|
|
(53
|
)%
|
Equity income
|
13,101
|
|
|
14,411
|
|
|
(9
|
)%
|
|
|
(1)
|
Includes
$3.2 million
of voyage expenses for the year ended
December 31, 2016
relating to lightering support services which the ship-to-ship transfer segment provided to the conventional tanker segment for full service lightering 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
, we owned 43 double-hulled conventional oil tankers, time-chartered in six 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 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 – 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
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional Tanker Segment
|
|
Year Ended December 31, 2016
|
|
Revenues
(1)
|
Voyage Expenses
(2)
|
Adjustments
(3)
|
Net Revenues
|
Revenue Days
|
Average TCE per Revenue Day
(3)
|
|
(in thousands)
|
(in thousands)
|
(in thousands)
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Voyage-charter contracts - Suezmax
|
|
$179,438
|
|
|
($5,214
|
)
|
|
$5,614
|
|
|
$179,838
|
|
6,705
|
|
|
$26,820
|
|
Voyage-charter contracts - Aframax
(4)
|
|
$155,499
|
|
|
($50,693
|
)
|
|
$3,673
|
|
|
$108,479
|
|
5,145
|
|
|
$21,086
|
|
Voyage-charter contracts - LR2
|
|
$47,086
|
|
|
$53
|
|
|
$1,477
|
|
|
$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
|
|
|
($1,108
|
)
|
|
$476
|
|
|
$29,965
|
|
1,029
|
|
|
$29,124
|
|
Time-charter out contracts - Aframax
|
|
$54,594
|
|
|
($1,017
|
)
|
|
$718
|
|
|
$54,295
|
|
2,327
|
|
|
$23,332
|
|
Time-charter out contracts - LR2
|
|
$12,201
|
|
|
($433
|
)
|
|
$130
|
|
|
$11,898
|
|
526
|
|
|
$22,629
|
|
Total
(1)
|
|
$487,720
|
|
|
($58,442
|
)
|
|
$12,390
|
|
|
$441,668
|
|
18,839
|
|
|
$23,445
|
|
|
|
(1)
|
Excludes $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-ship transfer segment.
|
|
|
(3)
|
Average TCE per Revenue Day excludes a total of $12.0 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 lightering business, which includes $3.2 million 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.
|
Net Revenues.
Net revenues
decreased
to
$430.5 million
for
2016
from
$477.0 million
for
2015
primarily due to:
|
|
•
|
a decrease of $99.8 million due to lower average realized spot tanker rates earned by our Suezmax, Aframax, LR2 and MR tankers in 2016 compared to 2015;
|
|
|
•
|
a net decrease of $16.2 million due to various vessels changing employment between fixed-rate charters and spot voyage charters;
|
|
|
•
|
a decrease of $4.4 million due to redundancy cost for the Australian seafarers that we recovered from the customer upon expiration of a time-charter out contract of a MR product tanker in the first quarter of 2015; and
|
|
|
•
|
a decrease of $3.5 million of in-process revenue contract amortization we recognized in revenue in 2016 compared to 2015;
|
partially offset by
|
|
•
|
a net 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 million due to fewer off-hire days in 2016 compared to 2015;
|
|
|
•
|
an increase of $10.5 million due 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 expenses in 2016 compared to 2015 due primarily to lower average TCE rates; and
|
|
|
•
|
an increase of $1.1 million for 2016 due to one additional calendar day as 2016 was a leap year.
|
Vessel Operating Expenses.
Vessel operating expenses
increased
to
$150.1 million
for
2016
from
$123.6 million
for
2015
primarily due to:
|
|
•
|
an increase of $27.0 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 sold in the fourth quarter of 2015;
|
|
|
•
|
an increase of $1.7 million due to higher ship management fees resulting from the 17 vessels acquired in 2015; and
|
|
|
•
|
an increase of $0.6 million due to inflationary increases and higher crew and manning expenses related to performance-based compensation paid to seafarers which were recognized in 2016;
|
partially offset by
|
|
•
|
a decrease of $0.9 million due to lower 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.
|
Time-charter Hire Expense.
Time-charter hire expense
decreased
to
$57.4 million
for
2016
from
$74.9 million
for
2015
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.
Depreciation and Amortization
.
Depreciation and amortization
increased
to
$99.0 million
for
2016
from
$72.1 million
for
2015
. The increase 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 sale of two MR tankers in the second half of 2016 and the sale of one MR tanker in the fourth quarter of 2015.
General and Administrative Expenses.
General and administrative expenses
decreased
to
$14.4 million
for
2016
compared to
$15.4 million
for
2015
, primarily due to $0.5 million 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.
(Loss) Gain on Sale of Vessels
. Loss on sale of vessels of
$20.9 million
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 sale of vessels of
$0.8 million
for the year ended December 31, 2015 related to the sale of one MR tanker. Please refer to Item 18 - Financial Statements: Note 21 - Vessel Sales and Vessel Acquisitions.
Restructuring Charges.
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 income for 2016 and 2015,
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands of U.S. dollars)
|
2016
|
|
2015
|
High-Q Joint Venture
|
4,359
|
|
|
3,218
|
|
Tanker Investments Ltd.
|
3,515
|
|
|
7,280
|
|
Teekay Tanker Operations Ltd.
|
5,227
|
|
|
3,913
|
|
Total equity income
|
13,101
|
|
|
14,411
|
|
Equity income
decreased
to
$13.1 million
in
2016
from
$14.4 million
for
2015
primarily due to:
|
|
•
|
a decrease of $3.8 million due to lower equity earnings from Tanker Investments Ltd. (or
TIL
) resulting from overall lower realized average spot rates earned in 2016 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;
|
partially offset by
|
|
•
|
an increase of $1.3 million due to higher equity earnings from our 50% interest in Teekay Tankers Operations 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-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 – 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, 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-ship 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, 2016
and
2015
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)
|
2016
|
|
2015
|
|
% Change
|
Revenues
(1)
|
41,136
|
|
|
18,587
|
|
|
121
|
%
|
Less: voyage expenses
|
—
|
|
|
(348
|
)
|
|
(100
|
)%
|
Net revenues
|
41,136
|
|
|
18,239
|
|
|
126
|
%
|
Vessel operating expenses
|
(32,498
|
)
|
|
(14,441
|
)
|
|
125
|
%
|
Time-charter hire expense
|
(2,279
|
)
|
|
(38
|
)
|
|
5,897
|
%
|
Depreciation and amortization
|
(5,125
|
)
|
|
(1,642
|
)
|
|
212
|
%
|
General and administrative expenses
|
(3,767
|
)
|
|
(1,985
|
)
|
|
90
|
%
|
Gain on sale of vessels
|
332
|
|
|
—
|
|
|
100
|
%
|
Restructuring charge
|
—
|
|
|
(327
|
)
|
|
(100
|
)%
|
Loss from vessel operations
|
(2,201
|
)
|
|
(194
|
)
|
|
1,035
|
%
|
|
|
(1)
|
Includes
$3.2 million
of revenues for the year ended
December 31, 2016
(2015 -
$0.8 million
) relating to lightering support services which the ship-to-ship transfer segment provided to the conventional tanker segment for full service lightering operations.
|
Loss from vessel operations.
Loss from vessel operations increased for 2016 compared to 2015 primarily due to a full operating year of TMS, which was acquired in the latter half of 2015. The increase in the number of lightering support operations in 2016 resulted in higher revenues and expenses; however, a majority of this additional volume was in support of the conventional tanker segment’s full service lightering operations or other areas which generated lower margins.
Other Operating Results
The following table compares our other operating results for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands of U.S. dollars)
|
2016
|
|
2015
|
Interest expense
|
(29,784
|
)
|
|
(17,389
|
)
|
Interest income
|
117
|
|
|
107
|
|
Realized and unrealized loss on derivative instruments
|
(964
|
)
|
|
(1,597
|
)
|
Other expense
|
(6,071
|
)
|
|
(3,097
|
)
|
Interest Expense.
Interest expense
increased
to
$29.8 million
for
2016
from
$17.4 million
for
2015
, primarily due to additional interest incurred to finance the acquisition of the 12 modern Suezmax tankers which were acquired in the latter part of 2015.
Realized and Unrealized Loss on Derivative Instruments
. Realized and unrealized loss on derivative instruments
decreased
to
$1.0 million
for
2016
from
$1.6 million
for
2015
. 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.
As at December 31, 2016, we had interest rate swap agreements with aggregate outstanding notional amounts of $400.0 million with a weighted-average fixed rate of 1.46%. Realized losses on the interest rate swaps increased from $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 million and $7.7 million for the years ended December 31, 2016 and 2015, respectively, and were primarily due to an increase in our long-term benchmark interest rates, partially offset by the termination of an existing interest rate swap in early 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 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. As at December 31, 2016, the time-charter swap had a fair value 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.
In addition, 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 $0.3 million as at December 31, 2016 and we recognized unrealized losses of $4.9 million in 2016 compared to an unrealized gain of $0.5 million in 2015.
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 Expense.
Other expense was
$6.1 million
in
2016
, compared to
$3.1 million
in
2015
. The
increase
is primarily due to an increase in our estimate of freight tax expense as a result of the trading patterns of our fleet, partially offset by changes in foreign exchange rates.
Net Income.
As a result of the foregoing factors, we recorded net income of
$62.9 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:
|
|
•
|
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
, our total cash and cash equivalents were
$68.1 million
, compared to
$96.4 million
at
December 31, 2015
. Our cash balance at
December 31, 2016
had decreased primarily as a result of repayments of our long-term debt (described below) and dividends paid on our shares of common stock, which were partially offset by cash flow from our operations, by proceeds received from the sale of two MR tankers and two lightering support vessels and distributions we received from our equity accounted investments.
Our total liquidity, including cash, cash equivalents and undrawn credit facilities, was $102.4 million as at
December 31, 2016
, compared to $111.0 million as at
December 31, 2015
. We anticipate that our primary sources of funds for our short-term liquidity needs will be cash flows from operations, existing cash and cash equivalents and undrawn long-term borrowings, refinancing existing loans and new financings or equity issuances, which we believe will be sufficient to meet our existing liquidity needs for at least the next 12 months.
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, 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 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.
From the first quarter of 2013 to the dividend paid in the fourth quarter of 2015, we distributed a portion of our cash flow to shareholders through a fixed quarterly dividend of $0.03 per share on our common shares. Commencing with the 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 the discretion of our Board of Directors, with a minimum quarterly dividend of $0.03 per share.
Adjusted net income
is a non-GAAP measure which excludes specific items affecting net income that are typically excluded by securities analysts in their published estimates of our financial results. Specific items affecting net income include foreign exchange gain or losses, unrealized gains or losses on derivative instruments, gain 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.
Our long-term capital needs are primarily for capital expenditures and debt repayment. Generally, we expect that our long-term sources of funds will be cash balances, long-term bank borrowings and other debt or equity financings, which includes equity issuances from our COP. 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.
In October 2016, we agreed to sell two Suezmax tankers for an aggregate sales price of $33.8 million. The sale of one Suezmax tanker was completed in January 2017 and the sale of the other Suezmax tanker was completed in March 2017. We used the proceeds from these sales to repay a portion 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.
Our revolving credit facilities and term loans are described in Item 18 – Financial Statements: Note 10 - Long-Term Debt to our consolidated financial statements included in this Annual Report. Our revolving credit facilities and term loans contain covenants and other restrictions we believe are typical of debt financing collateralized by vessels, including those that restrict the relevant subsidiaries from incurring or guaranteeing additional indebtedness, making certain negative pledges or granting certain liens, and selling, transferring, assigning or conveying assets. 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 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. 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, we and Teekay were in compliance with all covenants relating to our revolving credit facilities and term loans.
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
|
|
Operating Cash Flows
Changes in net cash flow from operating activities primarily reflect fluctuations in spot tanker rates, change 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 as a result of highly cyclical spot tanker rates.
Net cash flow provided by operating activities increased to
$210.0 million
in 2016, compared to
$166.8 million
in 2015, primarily as a result of the following:
|
|
•
|
a net increase of $70.4 million in operating cash flows in 2016 due to the timing of the settlement of operating assets and liabilities primarily as a result of the decrease in pool receivables due to lower TCE rates in late 2016 compared to the prior year; and
|
|
|
•
|
an increase of $31.0 million in operating cash flows in 2016 relating to lower expenditures on dry-docking activities. In 2016, we dry docked two Suezmax tankers, whereas in 2015 we dry docked seven Suezmax tankers, seven LR2 product tankers, two Aframax tankers, and two MR tankers.
|
partially offset by
|
|
•
|
a net decrease of $58.2 million in operating earnings primarily as a result of lower average realized TCE rates, partially offset by the increase in fleet size in 2016 as 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:
|
|
•
|
a net increase 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 million in operating cash flows due to the timing of the settlement of operating assets and liabilities;
|
partially offset by
|
|
•
|
a decrease of $22.5 million in operating cash flows relating to higher expenditures on dry-docking activities in 2015. In 2015, we dry docked seven Suezmax tankers, seven LR2 product tankers, two Aframax tankers, and two MR tankers, whereas in 2014, we dry docked seven Aframax tankers, one MR and one Suezmax tanker.
|
Financing Cash Flows
Net cash used for financing activities was
$275.1 million
in 2016, compared to net cash provided by financing activities of
$648.8 million
in 2015, primarily as a result of the following:
|
|
•
|
an increase of $692.9 million in cash outflows primarily due to an increase in repayments and prepayments on our term loans and revolving credit facilities compared to 2015;
|
|
|
•
|
a net decrease of $202.8 million in cash inflows due to lower proceeds 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 COP, and proceeds from the underwriters' exercise of their over-allotment option in January 2015 for an additional 3.0 million shares of Class A common stock; and
|
|
|
•
|
an increase of $31.7 million in cash outflows related to additional cash dividends paid during 2016 due to the change in our dividend policy and the increase in the number of shares of outstanding Class A and B common stock from our 2015 issuances;
|
partially offset by
|
|
•
|
a decrease of $3.5 million in cash used for financing activities from the Entities under Common Control.
|
Net cash provided by financing activities increased to $648.8 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 in proceeds related to equity offerings, including an additional 19.7 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;
|
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 million in cash outflows related to additional cash dividends paid during 2015 due to an increase 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.
|
Investing Cash Flows
Net cash provided by investing activities was
$36.8 million
in 2016, compared to net cash used for investing activities of
$882.0 million
in the prior year, primarily as a result of the following:
|
|
•
|
a decrease 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;
|
|
|
•
|
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, net of working capital adjustments, related to the acquisition of TMS in 2015;
|
|
|
•
|
an increase of cash inflows of $16.5 million related to gross proceeds received from the sale of two MR tankers and two lightering support vessels which were sold in the second half of 2016;
|
|
|
•
|
an increase of 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 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 6 – Investment in Term Loans and Note 8 - Investments in and advances to equity accounted investments for specific details on our investment in term loans and 50/50 joint venture activities included in the notes to our consolidated financial statements attached in this Annual Report.
Commitments and Contingencies
The following table summarizes our long-term contractual obligations as at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
(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
|
|
Repayments at maturity of revolving facilities, term loans and other debt
(1)
|
486.7
|
|
|
49.1
|
|
|
65.5
|
|
|
—
|
|
|
—
|
|
|
372.1
|
|
Chartered-in vessels (operating leases)
(2)
|
53.1
|
|
|
26.8
|
|
|
8.3
|
|
|
8.3
|
|
|
8.3
|
|
|
1.4
|
|
Total
|
994.8
|
|
|
198.2
|
|
|
183.9
|
|
|
118.3
|
|
|
118.3
|
|
|
376.1
|
|
|
|
(1)
|
Excludes all expected interest payments of $22.6 million (2017), $18.7 million (2018), $15.2 million (2019), $12.2 million (2020) and $5.3 million (2021). Expected interest payments are based on the existing interest rates for variable-rate loans at LIBOR plus margins that range from 0.30% to 2.00% at
|
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 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, we would expect to be obligated to additional total payments of $43.1 million (2017), $17.7 million (2018), $8.3 million (2019), $8.3 million (2020), and $1.4 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-load or discharge-to-discharge basis. This means that voyage 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, or from when product is discharged (unloaded) at the end of one voyage to when it is discharged after the next voyage. A portion of our revenues is also generated from the offshore ship-to-ship 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 applying the proportionate performance method, 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 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.
Effect if Actual Results Differ from Assumptions.
If actual results are not consistent with our estimates in applying the proportionate performance method, 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. 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 following table 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. While the market values of these vessels are below their carrying values, no
impairment has been recognized on any of these vessels in 2016 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. 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 would 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.
|
|
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|
|
|
|
|
|
|
|
Aframax, Suezmax and Product Tankers
(in thousands of U.S. dollars, except number of vessels)
|
# Vessels
|
|
Market
Values
(1)
|
|
Carrying
Values
|
Conventional Tankers
(2)
|
12
|
|
|
$
|
160,200
|
|
|
$
|
278,159
|
|
Conventional Tankers
(3)
|
29
|
|
|
$
|
798,200
|
|
|
$
|
1,315,415
|
|
Total
|
41
|
|
|
958,400
|
|
|
1,593,574
|
|
|
|
(1)
|
Market values are determined using reference to second-hand market comparables. Since vessel values can be volatile, our estimates of market value 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 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.
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 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.
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 income.
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Item 6.
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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 Lok 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. The amount of time Messrs. Mackay and Lok 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 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: Related Party Transactions.
Directors and Executive Officers of Teekay Tankers Ltd.
The following table provides information about the directors and executive officers of Teekay Tankers Ltd. 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
|
Arthur Bensler
|
|
59
|
|
Chairman of the Board of Directors
|
Richard J.F. Bronks
|
|
51
|
|
Director
(1)
|
Richard T. du Moulin
|
|
70
|
|
Director
(1)
|
Kenneth Hvid
|
|
48
|
|
Director
(2)
|
William Lawes
|
|
73
|
|
Director
(1)
|
Vincent Lok
|
|
48
|
|
Chief Financial Officer
|
Kevin Mackay
|
|
48
|
|
President and Chief Executive Officer
|
Bjorn Moller
|
|
59
|
|
Director
|
|
|
(1)
|
Member of Audit Committee, Conflicts Committee, and Nominating and Governance Committee.
|
|
|
(2)
|
Appointed February 22, 2017.
|
Certain biographical information about each of these individuals is set forth below.
Arthur Bensler
joined the Board of Directors as Chairman 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. Bensler 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 15 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 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 our Board of Directors 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 Chairman and Chief Executive Officer of Marine Transport Corporation. Mr. du Moulin is a member of the Board of Trustees and Chairman of the Seamens Church Institute of New York and New Jersey. Mr. du Moulin currently serves as a Director of Tidewater Inc. and is on the board of Pangaea Logistics Solutions, Ltd., a dry bulk shipping company. Mr. du Moulin served as Chairman 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.
Kenneth Hvid
joined our Board of Directors on February 22, 2017. He was appointed President and Chief Executive Officer of Teekay Corporation on February 1, 2017 and has served as a director of Teekay Offshore GP LLC, the general partner of Teekay Offshore Partners L.P. since 2011. 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 the Teekay Navion Shuttle Tankers and Offshore division. In that role he was responsible for the 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 board 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 Lok
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 one of the world’s leading tanker companies. 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 to 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 establish AET Inc. Limited (AET) in Houston, where he rose through various roles, ultimately to Regional Director - Americas, Senior Vice President, responsible for AET’s business in the Americas. Mr. Mackay holds a B.Sc. (Econ) Honors 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 our 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 Chairman and Director of Teekay GP L.L.C. from when it was formed in November 2004, and Vice Chairman and Director of Teekay Offshore GP L.L.C. 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 Chairman 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.
Compensation of Directors and Senior Management
Executive Compensation
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, the aggregate amount of such reimbursement excluding any long-term incentive plan awards issued directly by us was $0.9 million (2015: $1.4 million; and 2014: $1.1 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 and an annual award of $70,000 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 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 for serving in that role. The chair of the
Nominating and Governance Committee receives a fee of $5,000 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, our four non-employee directors received an aggregate of $260,000 in cash fees for their services as directors (2015: $260,000; 2014: $260,000). In addition, each non-employee director received a $70,000 annual award for 2016 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, we granted 284,693 options (2015: nil; 2014: 152,346) and 9,358 restricted stock units (2015: 51,948; 2014: 17,073) to non-employee directors. The stock options and restricted stock units vest immediately.
Long-Term Incentive Program
In the year ended December 31, 2016, we granted under our 2007 Long-Term Incentive Plan options to acquire up to 216,043 shares of Class A common stock (2015: 58,434; 2014: 110,829) and 279,980 restricted stock units (2015: 192,387; 2014: 586,014) to certain employees of Teekay’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 common shares 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
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.
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, 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. (either directly or as a partner, shareholder or officer of an organization that has a relationship with Teekay Tankers Ltd.) and is independent within the meaning of Teekay Tankers Ltd.’s 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 the “About Us—Corporate Governance” section of our website (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, the 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 Governance” in the Investor Centre of our Web site at
www.teekay.com
. During 2016, the Board held four meetings. Directors attended all board meetings. There was one committee member absent for one committee meeting in 2016.
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 Lawes (Chair), Richard J.F. Bronks and Richard du Moulin. All members of the committee are financially literate and the Board has determined that Mr. Lawes 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. The Conflicts Committee reviews 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) material related-party transactions, including transactions between us and our or Teekay Corporation’s officers or directors or their affiliates. 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.
The Nominating and Governance Committee:
|
|
•
|
identifies individuals qualified to become Board members;
|
|
|
•
|
selects and recommends to the Board director and committee member candidates;
|
|
|
•
|
maintain oversight of the operation and effectiveness of the Board of Directors and the corporate governance of the Company;
|
|
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•
|
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’s compensation; and
|
|
|
•
|
oversees the evaluation of the Board and its committees.
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Crewing and Staff
Our Manager provides us with all of our staff other than our Chief Executive Officer and Chief Financial Officer. Our executive officers have the authority to hire additional staff as they deem necessary.
As of December 31, 2016, approximately 1,700 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. 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 seamen 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 onboard 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
, 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, 2017 (60 days after
December 31, 2016
) 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.
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Identity of Person or Group
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Class A
Common
Stock
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Percent of Class A
Common Stock
Owned
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Percent of Total
Class A and Class B
Common Stock
Owned
(1)
|
All directors and executive officers as a group (8 persons)
(1)
|
1,220,526
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0.9
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%
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|
0.8
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%
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_______________________________
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(1)
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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.
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Major Shareholders and Related Party Transactions
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The following table sets forth information regarding the beneficial ownership, as of March 1, 2017, 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, 2017 (60 days after March 1, 2017) 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.
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Identity of Person or Group
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Class A
Common
Stock
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Percent of Class A
Common Stock
Owned
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Class B
Common
Stock
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Percent of Class B
Common Stock
Owned
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|
Percent of
Total Class A
and Class B
Common
Stock Owned
|
Teekay Corporation
(1)
|
19,309,646
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13.6
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%
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23,232,757
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100.0
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%
|
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25.7
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%
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Huber Capital Management, LLC
(2)
|
19,539,671
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13.8
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%
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—
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—
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11.8
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%
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_______________________________
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(1)
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The voting power represented by shares beneficially owned by Teekay Corporation is 7.5% for Class A common stock, 45.0% for Class B common stock and 52.5% for total Class A and Class B common stock.
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(2)
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According to the Schedule 13G/A filed with the SEC on February 13, 2017, Huber Capital Management, LLC has sole voting power and sole dispositive power as to 8,301,070 and 19,539,671 of the shares, respectively. The voting power represented by shares 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.
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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 19,309,646 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 stock
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.
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Related Party Transactions
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Please read Item 18 – Financial statements: Note 15 – Related Party Transactions for a description of our various 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:
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•
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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;
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•
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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) neither Teekay Corporation, our Manager nor any of such 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
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•
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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.
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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)
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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)
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providing ship management services relating to conventional oil or product tankers; or
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(c)
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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.
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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, our Chief Financial Officer, is also the Chief Financial Officer of our Manager and the Executive Vice President and Chief Financial Officer of Teekay Corporation.
Arthur Bensler, our Chairman of the Board, is also Executive Vice President and General Counsel of Teekay Corporation and Director and President of Teekay Shipping (Canada) Ltd.
Kenneth Hvid, a member of our Board of Directors, is President and Chief Executive Officer of Teekay Corporation and is a Director of Teekay Offshore GP L.L.C.
Because our executive officers are employees of Teekay Corporation or other of its subsidiaries, 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.
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.
Management Agreement
In connection with our initial public offering in December 2007, we entered into the long-term Management Agreement with our Manager, Teekay Tankers Management Services Ltd., a subsidiary of Teekay Corporation. Pursuant to the Management Agreement, the Manager provides 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 of these services with other entities, primarily other Teekay Corporation subsidiaries. Under the Management Agreement, our Manager remains responsible for any subcontracted services. We will indemnify our Manager for any losses it incurs in connection with providing services to us, excluding losses caused by the recklessness, gross negligence or willful misconduct of our Manager or its employees or agents, for which losses our Manager will indemnify us.
Compensation of the Manager
Management Fee.
In return for services under the Management Agreement, we pay our Manager a management fee based on the following components:
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•
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Commercial services fee
. We pay a fee to our Manager for commercial services it provides to us currently equal to 1.25% of the gross revenue attributable to the vessels, on time charter, our Manager commercially manages for us (excluding vessels participating in the Teekay Suezmax Pool, Teekay Aframax Pools or the Taurus Tankers LR2 Pool). We paid commercial service fees of $1.9 million for 2016, $1.2 million for 2015, and $1.1 million for 2014 excluding the commercial management fees of $0.2 million for 2015 and $0.2 million for 2014 attributable to the Entities under Common Control.
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•
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Technical services fee
. We pay a fee to our Manager for technical services, and we paid technical services fees of $9.2 million for 2016, $7.0 million for 2015, 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.
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•
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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 such services and which includes 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.
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•
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For additional information about these services and fee, please see Item 18 – Financial Statements: Note 3 – Acquisition of Entities under Common Control and Item 18 – Financial Statements: Note 15f – Related Party Transactions – Management fee - Related and Other, in our consolidated financial statements included in this Annual Report.
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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 maintained 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). 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 be reset to zero. We paid no performance fees to our Manager in 2016, 2015, or 2014.
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 terminate the Management Agreement in certain circumstances, including, among others, if:
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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;
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•
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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
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•
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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.
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If we elect to terminate the Management Agreement under either of the last two bullet points described above, 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 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:
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•
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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
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•
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if we materially breach the agreement and the matter is unresolved after a 90-day dispute resolution period.
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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:
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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
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•
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the Management Agreement terminates for any reason.
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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:
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•
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after December 18, 2012 with 12 months’ notice;
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•
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if we materially breach the Teekay Pooling Agreement and the matter is unresolved after a 90-day dispute resolution period; or
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•
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if the Management Agreement terminates for any reason.
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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 the Manager provides 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.
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.
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Financial Information
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Consolidated Financial Statements and Notes
Please see Item 18 – Financial Statements 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 paid 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 of our Board of Directors, with a minimum quarterly dividend of $0.03 per share.
Adjusted net income
is a non-GAAP measure which excludes specific items affecting net income that are typically excluded by securities analysts in their published estimates of our financial results.
The timing and amount of dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements, the requirements of Marshall Islands law, restrictions in financing agreements and other factors deemed relevant by our Board of Directors.
Significant Changes
Please read Item 5 – Operating and Financial Review and Prospects: Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Developments in 2016 and Early 2017.
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Item 9.
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The Offer and Listing
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Our Class A common stock is listed on the New York Stock Exchange (or
NYSE
) under the symbol “TNK”. The following table sets forth the high and low prices for our Class A common stock on the NYSE for each of the periods indicated.
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Years Ended
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Dec 31,
2016
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Dec 31, 2015
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Dec 31, 2014
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Dec 31, 2013
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Dec 31, 2012
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High
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$
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6.89
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$
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8.53
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$
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5.95
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$
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4.02
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$
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6.33
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Low
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$
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1.90
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$
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4.82
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$
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3.18
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$
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2.38
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$
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2.38
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Quarters Ended
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Mar 31,
2017
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Dec 31,
2016
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Sept 30,
2016
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Jun 30,
2016
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Mar 31,
2016
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Dec 31, 2015
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Sept 30,
2015
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Jun 30, 2015
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Mar 31, 2015
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High
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$
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2.70
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$
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2.85
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$
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3.28
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$
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4.16
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$
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6.89
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$
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8.53
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$
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7.88
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$
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7.88
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$
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7.05
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Low
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$
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1.96
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$
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1.90
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$
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2.42
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$
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2.87
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$
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3.26
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$
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6.31
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$
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4.88
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$
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5.70
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$
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4.82
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Months Ended
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Mar 31, 2017
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Feb 28,
2017
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Jan 31,
2017
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Dec 31,
2016
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Nov 30,
2016
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Oct 31,
2016
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High
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$
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2.40
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$
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2.70
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$
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2.51
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$
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2.78
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$
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2.64
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$
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2.85
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Low
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$
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1.96
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$
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2.26
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$
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2.21
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$
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2.21
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$
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1.90
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$
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2.10
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