Tsakos Energy Navigation 20-F 2012
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
Date of event requiring this shell company report
For the transition period from to
Commission file number 001-31236
TSAKOS ENERGY NAVIGATION LIMITED
(Exact name of Registrant as specified in its charter)
(Translation of Registrants name into English)
(Jurisdiction of incorporation or organization)
367 Syngrou Avenue
175 64 P. Faliro
(Address of principal executive offices)
367 Syngrou Avenue
175 64 P. Faliro
(Name, Address, Telephone Number, E-mail and Facsimile Number of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
As of December 31, 2011, there were 46,208,737 of the registrants Common Shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If Other has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
TABLE OF CONTENTS
All statements in this Annual Report on Form 20-F that are not statements of historical fact are forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. The disclosure and analysis set forth in this Annual Report on Form 20-F includes assumptions, expectations, projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as forward-looking statements. In some cases, predictive, future-tense or forward-looking words such as believe, intend, anticipate, estimate, project, forecast, plan, potential, may, predict, should and expect and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.
Forward-looking statements include, but are not limited to, such matters as:
We caution that the forward-looking statements included in this Annual Report on Form 20-F represent our estimates and assumptions only as of the date of this Annual Report on Form 20-F and are not intended to give any assurance as to future results. These forward-looking statements are not statements of historical fact and represent only our managements belief as of the date hereof, and involve risks and uncertainties that could cause actual results to differ materially and inversely from expectations expressed in or indicated by the forward-looking statements. Assumptions, expectations, projections, intentions and beliefs about future events may, and often do, vary from actual results and these differences can be material. There are a variety of factors, many of which are beyond our control, which affect our operations, performance, business strategy and results and could cause actual reported results and performance to differ materially from the performance and expectations expressed in these forward-looking statements. These factors include, but are not limited to, supply and demand for crude oil carriers and product tankers, charter rates and vessel values, supply and demand for crude oil and petroleum products, accidents, collisions and spills, environmental and other government regulation, the availability of debt financing, fluctuation of currency exchange and interest rates and the other risks and uncertainties that are outlined in this Annual Report on Form 20-F. As a result, the forward-looking events discussed in this Annual Report on Form 20-F might not occur and our actual results may differ materially from those anticipated in the forward-looking statements. Accordingly, you should not unduly rely on any forward-looking statements.
We undertake no obligation to update or revise any forward-looking statements contained in this Annual Report on Form 20-F, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.
Tsakos Energy Navigation Limited is a Bermuda company that is referred to in this Annual Report on Form 20-F, together with its subsidiaries, as Tsakos Energy Navigation, the Company, we, us, or our. This report should be read in conjunction with our consolidated financial statements and the accompanying notes thereto, which are included in Item 18 to this report.
Selected Consolidated Financial Data and Other Data
The following table presents selected consolidated financial and other data of Tsakos Energy Navigation Limited for each of the five years in the five-year period ended December 31, 2011. The table should be read together with Item 5. Operating and Financial Review and Prospects. The selected consolidated financial data of Tsakos Energy Navigation Limited is a summary of, is derived from and is qualified by reference to, our consolidated financial statements and notes thereto which have been prepared in accordance with U.S. generally accepted accounting principles (US GAAP).
Per share data has been adjusted to give effect to our two for one share split which became effective on November 14, 2007.
Our audited consolidated statements of income, comprehensive income, stockholders equity and cash flows for the years ended December 31, 2009, 2010 and 2011, and the consolidated balance sheets at December 31, 2010 and 2011, together with the notes thereto, are included in Item 18. Financial Statements and should be read in their entirety.
Selected Consolidated Financial and Other Data
(Dollars in thousands, except for share and per share amounts and fleet data)
Derivation of time charter equivalent per day (amounts in thousands except for days and per day amounts):
The following table sets forth our (i) cash and cash equivalents, (ii) restricted cash and (iii) consolidated capitalization as of December 31, 2011 on:
Other than these adjustments, there has been no material change in our capitalization from debt or equity issuances, re-capitalization or special dividends between December 31, 2011 and April 16, 2012.
This table should be read in conjunction with our consolidated financial statements and the notes thereto, and Item 5. Operating and Financial Review and Prospects, included elsewhere in this Annual Report.
Reasons For the Offer and Use of Proceeds
Risks Related To Our Industry
The charter markets for crude oil carriers and product tankers have deteriorated significantly since the summer of 2008, which could affect our future revenues, earnings and profitability.
After reaching highs during the summer of 2008, charter rates for crude oil carriers and product tankers fell dramatically thereafter. While the rates occasionally improved during 2009 and 2010, generally they remained significantly below the levels that contributed to our increasing revenues and profitability through 2008. A further significant decline occurred during 2011 to low levels, and, apart from possible temporary seasonal or regional rate spikes, charter rates are likely to remain at historically low levels throughout much of 2012. This decline is primarily due to the net increase in the supply of vessels which is expected to peak in 2012. Other reasons for the decline from 2008 charter rates include the fall in demand for crude oil and petroleum products in the United States, although this has been offset to an extent by growing demand in the emerging economies, the consequent rising inventories of crude oil and petroleum products in the United States and in other industrialized nations and the corresponding reduction in oil refining.
As of March 31, 2012, thirteen of our vessels were employed under spot charters that are scheduled to expire by April 22, 2012, and 13 of our vessels were employed on time charters, which, if not extended, are scheduled to expire during the period between June 2012 and March 2016. In addition, 16 of our vessels have profit sharing provisions in their time charters that are based upon prevailing market rates and six of our vessels
are employed in pool arrangements at variable rates. If the current low rates in the charter market continue for any significant period in 2012 it will affect the charter revenue we will receive from these vessels, which could have an adverse effect on our revenues, profitability and cash flows. The decline in charter rates also affects the value of our vessels, which follows the trends of charter rates and earnings on our charters.
Disruptions in world financial markets and the resulting governmental action in the United States and in other parts of the world and the sovereign debt crisis in Europe could have a further material adverse impact on our results of operations, financial condition and cash flows, and could cause the market price of our common stock to further decline.
The economic crisis that started in 2008 has affected the global economy and the shipping markets. Extraordinary steps that were taken by the governments of several leading economies to combat the financial crisis appear to have restrained the downturn; however, the long-term impact of these measures is not yet known and cannot be predicted. While there are positive indications that the global economy is improving, the sovereign debt crisis in Europe and poor liquidity of European banks and attempts to find appropriate solutions will lead to slow growth and possible recession in most of Europe in 2012. We cannot provide any assurance that the global recession will not return and tight credit markets will not continue or become more severe.
We face risks attendant to changes in economic environments, changes in interest rates, and instability in the banking, commodities and securities markets around the world, among other geopolitical factors. Major market disruptions and the current adverse changes in market conditions and regulatory climate in the United States and worldwide may adversely affect our business or impair our ability to borrow amounts under our credit facilities or any future financial arrangements. We cannot predict how long the current market conditions will last. However, these recent and developing economic, geopolitical and governmental factors, together with the concurrent decline in charter rates and vessel values, could have a material adverse effect on our results of operations, financial condition or cash flows. This has caused the price of our common shares on the New York Stock Exchange to decline and could cause the price of our common shares to decline further.
The tanker industry is highly dependent upon the crude oil and petroleum products industries.
The employment of our vessels is driven by the availability of and demand for crude oil and petroleum products, the availability of modern tanker capacity and the scrapping, conversion or loss of older vessels. Historically, the world oil and petroleum markets have been volatile and cyclical as a result of the many conditions and events that affect the supply, price, production and transport of oil, including:
The turbulence and uncertainty the world economies have encountered over the last three years has negatively affected the demand for crude oil and oil products which in turn has resulted in a decrease in freight rates and values. However, there has been some rebound in worldwide demand for oil and oil products, which industry observers forecast will continue. In the event that this rebound falters, the production of and demand for crude oil and petroleum products will again encounter pressure which could lead to a decrease in shipments of these products and consequently this would have an adverse impact on the employment of our vessels and the charter rates that they command. In particular, the charter rates that we earn from our vessels employed on spot charters, under pool arrangements and contracts of affreightment, and on time-charters with profit-share may remain at low levels for a prolonged period of time or further decline. In addition, overbuilding of tankers has, in the past, led to a decline in charter rates. If the supply of tanker capacity remains high and demand for tanker capacity does not increase proportionally, the charter rates paid for our vessels could also remain low or further decline. The resulting decline in revenues could have a material adverse effect on our revenues and profitability.
Charter hire rates are cyclical and volatile.
The crude oil and petroleum products shipping industry is cyclical with attendant volatility in charter hire rates and profitability. After reaching highs in mid-2008, charter hire rates for oil product carriers have remained poor with some short periods of relative respite. In addition, hire and spot rates for large crude carriers remained low since the middle of 2010, often resulting in rates well below break-even. The charter rates for 35 of our vessels are on variable basis or include a variable element and the time charters (whether fixed or partly variable) for 7 of our vessels may expire within six months if not extended. As a result, we will be exposed to changes in the charter rates which could affect our earnings and the value of our vessels at any given time. Because the factors affecting the supply and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.
Our operating results are subject to seasonal fluctuations.
Our tankers operate in markets that have historically exhibited seasonal variations in tanker demand, which may result in variability in our results of operations on a quarter-by-quarter basis. 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. As a result, revenues generated by the tankers in our fleet have historically been weaker during the fiscal quarters ended June 30 and September 30. However, the expected seasonal strength of the fourth quarter of 2011 and first quarter of 2012 did not materialize to the extent required to return to sustainable profitable rates due to tanker overcapacity.
An increase in the supply of vessels without an increase in demand for such vessels could cause charter rates to decline, which could have a material adverse effect on our revenues and profitability.
Historically, the marine transportation industry has been cyclical. The profitability and asset values of companies in the industry have fluctuated based on certain factors, including changes in the supply and demand of vessels. The supply of vessels generally increases with deliveries of new vessels and decreases with the scrapping of older vessels and/or the removal of vessels from the competitive fleet either for storage purposes or for utilization in offshore projects. The newbuilding order book equaled approximately 17% of the existing world tanker fleet as of mid-March 2012 and no assurance can be given that the order book will not increase further in proportion to the existing fleet. If the number of new ships delivered exceeds the number of vessels being scrapped, capacity will increase. In addition, if dry-bulk vessels are converted to oil tankers, the supply of oil
tankers will increase. If supply increases and demand does not match that increase, the charter rates for our vessels could decline significantly, as we have witnessed in the past eighteen months. In addition, any decline of trade on specific long-haul trade routes will effectively increase available capacity with a detrimental impact on rates. A decline in charter rates could have a material adverse effect on our revenues and profitability.
The global tanker industry is highly competitive.
We operate our fleet in a highly competitive market. Our competitors include owners of VLCCs, suezmax, aframax, panamax, handymax and handysize tankers. These competitors include other independent tanker companies, as well as national and independent oil companies, some of whom have greater financial strength and capital resources than we do. In addition, in the event of trade disruptions caused by hostilities in the Middle East, tanker companies that operate in Middle East trade routes may seek to employ their vessels in the trade routes that our vessels serve, which would further increase the level of competition that we face. Competition in the tanker industry is intense and depends on price, location, size, age, condition, and the acceptability of the available tankers and their operators to potential charterers.
Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our business.
Since 2009, the frequency of pirate attacks on seagoing vessels has remained high, particularly in the western part of the Indian Ocean and off the west coast of Africa. If piracy attacks result in regions in which our vessels are deployed being characterized by insurers as war risk zones, as the Gulf of Aden has been, or Joint War Committee (JWC) war and strikes listed areas, premiums payable for such insurance coverage could increase significantly and such insurance coverage may be more difficult to obtain. Crew costs, including those due to employing onboard security guards, could increase in such circumstances. In addition, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not on-hire for a certain number of days and it is therefore entitled to cancel the charter party, a claim that we would dispute. 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, results of operations and cash flows.
Terrorist attacks, international hostilities and economic and trade sanctions can affect the tanker industry, which could adversely affect our business.
An attack like that of September 11, 2001, longer-lasting wars or international hostilities, such as in Afghanistan, Iraq and Libya, or continued turmoil and hostilities in the Middle East or North Africa could damage the world economy and adversely affect the availability of and demand for crude oil and petroleum products and negatively affect our investment and our customers investment decisions over an extended period of time. If the current threat by Iran to close the Straits of Hormuz becomes an actuality, it could result in similar consequences. In addition, sanctions against oil exporting countries such as Iran, Sudan and Syria may also impact the availability of crude oil which would increase the availability of tankers thereby impacting negatively charter rates. We conduct our vessel operations internationally and despite undertaking various security measures, our vessels may become subject to terrorist acts and other acts of hostility like piracy, either at port or at sea. Such actions could adversely impact our overall business, financial condition and operations. In addition, our financial viability may also be negatively affected by changing economic, political and governmental conditions in the countries and regions where our vessels are employed. Moreover, we operate in a sector of the economy that is likely to be adversely impacted by the effects of local or international political instability, terrorist or other attacks, war or international hostilities.
Our vessels may call on ports located in countries that are subject to restrictions imposed by the U.S. government, which could negatively affect the trading price of our shares of common stock.
From time to time on charterers instructions, our vessels have called and may again call on ports located in countries subject to sanctions and embargoes imposed by the U.S. government, the UN or the EU and countries identified by the U.S. government, the UN or the EU as state sponsors of terrorism. The U.S., UN- and EU- sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. In 2010, the United States enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA, which expanded the scope of the Iran Sanctions Act (as amended, the ISA). Among other things, CISADA expands the application of the prohibitions to non-U.S. companies, such as our company, and introduces limits on the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products. On November 21, 2011, the President of the United States issued Executive Order 13590, which expands on the existing energy-related sanctions available under the ISA.
Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties and could result in some investors deciding, or being required, to divest their interest, or not to invest, in our company. Additionally, some investors may decide to divest their interest, or not to invest, in our company simply because we do business with companies that do business in sanctioned countries. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. Investor perception of the value of our common stock may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest or governmental actions in these and surrounding countries.
Taking advantage of attractive opportunities in pursuit of our growth strategy may result in financial or commercial difficulties.
Despite the economic downturn in the past three years, a key strategy of management is to continue to renew and grow the fleet by pursuing the acquisition of additional vessels or fleets or companies that are complementary to our existing operations, assuming the financial resources and debt capacity to do so remain available. The depressed charter market and credit crisis may present opportunities in the short to medium term to acquire new vessels or tanker companies or contracts to construct new vessels or even to undertake new construction contracts at prices more favorable than those seen in the recent past. If we seek to expand through acquisitions, we face numerous challenges, including:
We cannot assure you that we will be able to integrate successfully the operations, personnel, services or vessels that we might acquire in the future, and our failure to do so could adversely affect our profitability.
We are subject to regulation and liability under environmental, health and safety laws that could require significant expenditures and affect our cash flows and net income.
Our business and the operation of our vessels are subject to extensive international, national and local environmental and health and safety laws and regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. In addition, major oil companies chartering our vessels impose, from time to time, their own environmental and health and safety requirements. We have incurred significant expenses in order to comply with these regulations and requirements, including the costs of ship modifications and changes in operating procedures, additional maintenance and inspection requirements, contingency arrangements for potential spills, insurance coverage and full implementation of the new security-on-vessels requirements which came into effect on July 1, 2004.
In particular, certain international, national and local laws and regulations require, among other things, double hull construction for new tankers, as well as the retrofitting or phasing-out of single hull tankers based on each vessels date of build, gross tonnage (a unit of measurement for the total enclosed spaces within a vessel) and/or hull configuration. We have sold all our vessels which were not double hull. All of the newbuildings we have contracted to purchase are double-hulled. However, because environmental regulations may become stricter, future regulations may limit our ability to do business, increase our operating costs and/or force the early retirement of our vessels, all of which could have a material adverse effect on our financial condition and results of operations.
International, national and local laws imposing liability for oil spills are also becoming increasingly stringent. Some impose joint, several, and in some cases, unlimited liability on owners, operators and charterers regardless of fault. We could be held liable as an owner, operator or charterer under these laws. In addition, under certain circumstances, we could also be held accountable under these laws for the acts or omissions of Tsakos Shipping & Trading (Tsakos Shipping), Tsakos Columbia Shipmanagement (TCM or Tsakos Columbia Shipmanagement) or Tsakos Energy Management Limited (Tsakos Energy Management), companies that provide technical and commercial management services for our vessels and us, or others in the management or operation of our vessels. Although we currently maintain, and plan to continue to maintain, for each of our vessels pollution liability coverage in the amount of $1 billion per incident (the maximum amount available), liability for a catastrophic spill could exceed the insurance coverage we have available, and result in our having to liquidate assets to pay claims. In addition, we may be required to contribute to funds established by regulatory authorities for the compensation of oil pollution damage or provide financial assurances for oil spill liability to regulatory authorities.
Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.
International shipping is subject to various security and customs inspections and related procedures in countries of origin and destination. Inspection procedures can result in the seizure of contents of our vessels, delays in the loading, offloading or delivery and the levying of customs, duties, fines and other penalties against us.
It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo impractical. Any such changes or developments may have a material adverse effect on our business, financial condition, results of operations and our ability to pay dividends and/or principal, premium, if any, and interest on the notes.
Maritime disasters and other operational risks may adversely impact our reputation, financial condition and results of operations.
The operation of ocean-going vessels has an inherent risk of maritime disaster, environmental mishaps, cargo and property losses or damage and business interruptions caused by, among others:
Any of these circumstances could adversely affect our operations, result in loss of revenues or increased costs and adversely affect our profitability and our ability to perform our charters. Terrorist acts and regional hostilities around the world in recent years have led to increases in our insurance premium rates and the implementation of special war risk premiums for certain trading routes. Natural disasters, such as the hurricanes striking the United States and earthquake in Chile, have led to yet further increases. Such increases in insurance rates adversely affect our profitability.
Our vessels could be arrested at the request of third parties.
Under general maritime law in many jurisdictions, crew members, tort claimants, vessel mortgagees, suppliers of goods and services and other claimants may lien a vessel for unsatisfied debts, claims or damages. In many jurisdictions a maritime lien holder may enforce its lien by arresting a vessel through court process. In some jurisdictions, under the extended sister ship theory of liability, a claimant may arrest not only the vessel with respect to which the claimants maritime lien has arisen, but also any associated vessel under common ownership or control. While in some jurisdictions which have adopted this doctrine, liability for damages is limited in scope and would only extend to a company and its ship-owning subsidiaries, we cannot assure you that liability for damages caused by some other vessel determined to be under common ownership or control with our vessels would not be asserted against us.
Our vessels may be requisitioned by governments without adequate compensation.
A government could requisition or seize our vessels. Under requisition for title, a government takes control of a vessel and becomes its owner. Under requisition for hire, a government takes control of a vessel and effectively becomes its charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency. Although we would be entitled to compensation in the event of a requisition, the amount and timing of payment would be uncertain.
Risks Related To Our Business
We are not in compliance with certain financial covenants under our secured credit facilities.
The loan agreements we use to finance our ships require us not to exceed specified loan-to-asset value ratios. Our only significant assets are our ships, which are appraised each year. The appraised value of a ship fluctuates depending on a variety of factors including the age of the ship, its hull configuration, prevailing charter market conditions, supply and demand balance for ships and new and pending legislation.
Due to the decline in vessel values, we are not in compliance with certain financial covenants in our loans and credit facilities, mainly the loan-to-value ratios in certain of our loans and credit facilities and the leverage
ratio required by one of our loans. Even though none of our lenders has declared an event of default under the loan agreements, the non-compliance constitutes defaults and potential events of default and, together with the cross default provisions in the various loan and credit facility agreements, could result in the lenders requiring immediate repayment of all of the loans and credit facilities, if not waived or cured.
As of December 31, 2011, we were not in compliance with the leverage ratio required by one of our loans relating to a subsidiary in which we have a 51% interest, under which the amount of $48.1 million was outstanding as of that date. We have agreed upon the terms of a waiver of this covenant covering the period from December 31, 2011 through December 31, 2012. We have also agreed to make a prepayment of $8.1 million on the loan against the balloon installment due in 2016 and to increases in the interest rate margin during the waiver period and the remaining term of the loan. As existing cash is deducted from both assets and liabilities to calculate this leverage ratio, apart from the generation of new cash from operations or equity input, only an increase of vessel value or alternative additional security (of up to $11.3 million, with no change in vessel value) would bring the leverage ratio down to 70% upon expiration of the waiver. There can be no assurance that we will regain compliance with the original covenant when the waiver expires or be able to obtain extension upon the expiration of such waiver.
As of December 31, 2011, we were not in compliance with the loan-to-value ratios contained in certain of our loan agreements and credit facilities under which a total of $621.0 million was outstanding, out of our total outstanding indebtedness of approximately $1.5 billion as of that date. No waiver of such non-compliance has been obtained. As a result of the aforementioned non-compliance, we may be required, upon request from our lenders, to prepay indebtedness or provide additional collateral to our lenders in the form of cash or other property in the total amount of $65.4 million in order to comply with these ratios. If we do not prepay indebtedness or provide additional collateral to our lenders within the period required by our respective loan agreements, we will be considered in default. There can be no assurance that we will obtain waivers for this non-compliance. Even though none of our lenders have requested prepayment or additional collateral, nor have any declared an event of default under the applicable loan agreements, if not remedied when requested, these non-compliances would constitute events of default and could result in the lenders requiring immediate repayment of the loans. We cannot guarantee that a further deterioration of our asset values will not result in defaults in the future, nor can we guarantee that we will be able to negotiate a waiver in the event of a default.
Furthermore, the majority of our loans contain a cross-default provision that may be triggered by a default under one of our other loans. A cross-default provision means that a default on one loan would result in a default on all of our other loans. Because of the presence of cross-default provisions in our credit facilities, the refusal of any one lender to grant or extend a waiver could result in most of our indebtedness being accelerated even if our other lenders have waived covenant defaults under the respective credit facilities. If our indebtedness is accelerated, it will be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose their liens. In addition, if the value of our vessels deteriorates significantly from their currently depressed levels, we may have to record an impairment adjustment to our financial statements, which would adversely affect our financial results and further hinder our ability to raise capital.
We expect that the lenders will not demand payment of the loans before their maturity, provided that we pay loan installments and accumulated or accrued interest as they fall due under the existing credit facilities. We do not expect that cash on hand and cash generated from operations will be sufficient to repay those loans with cross-default provisions which aggregated approximately $1,373 million as of December 31, 2011, if such debt is accelerated by the lenders. In such a scenario, we would have to seek to access the capital markets to fund the mandatory payments.
If we default under any of our loan agreements, we could forfeit our rights in our vessels and their charters.
All of our vessels and related collateral are individually pledged as security to the respective lenders under our loan agreements. Default under any of these loan agreements, if not waived or modified, would permit the lenders to foreclose on the mortgages over the vessels and the related collateral, and we could lose our rights in the vessels and their charters.
Charters at attractive rates may not be available when our current time charters expire.
In 2011, we derived approximately 51% of our revenues from time charters, as compared to 59% in 2010. As our current period charters on seven of our vessels expire in the remainder of 2012, it may not be possible to re-charter these vessels on a period basis at attractive rates given the currently depressed state of the charter market. If attractive period charter opportunities are not available, we would seek to charter our vessels on the spot market. Charter rates in the spot market are currently low and are subject to significant fluctuations, and tankers traded in the spot market may experience substantial off-hire time. In the event a vessel may not find employment at economically viable rates, management may opt to lay up the vessel until such time that rates become attractive again. During the period of lay up, the vessel will continue to incur expenditure such as insurance, reduced crew wages and maintenance costs.
If our exposure to the spot market increases, our revenues could suffer and our expenses could increase.
The spot market for crude oil and petroleum product tankers is highly competitive. As a result of any increased participation in the spot market, we may experience a lower overall utilization of our fleet through waiting time or ballast voyages, leading to a decline in operating revenue. Moreover, to the extent our vessels are employed in the spot market, both our revenue from vessels and our operating costs, specifically, our voyage expenses will be more significantly impacted by increases in the cost of bunkers (fuel). See Fuel prices may adversely affect our profits. Unlike time charters in which the charterer bears all of the bunker costs, in spot market voyages we bear the bunker charges as part of our voyage costs. As a result, while historical increases in bunker charges are factored into the prospective freight rates for spot market voyages periodically announced by WorldScale Association (London) Limited and similar organizations, increases in bunker charges in any given period could have a material adverse effect on our cash flow and results of operations for the period in which the increase occurs. In addition, to the extent we employ our vessels pursuant to contracts of affreightment or under pooling arrangements, the rates that we earn from the charterers under those contracts may be subject to reduction based on market conditions, which could lead to a decline in our operating revenue.
We depend on Tsakos Energy Management, Tsakos Shipping and TCM to manage our business.
We do not have the employee infrastructure to manage our operations and have no physical assets except our vessels and the newbuildings that we have under contract. We have engaged Tsakos Energy Management to perform all of our executive functions. Tsakos Energy Management directly provides us with financial, accounting and other back-office services, including acting as our liaison with the New York Stock Exchange and the Bermuda Stock Exchange. Tsakos Energy Management, in turn, oversees and subcontracts part of commercial management (including, treasury, chartering and vessel purchase and sale functions) to Tsakos Shipping, and day-to-day fleet technical management, such as vessel operations, repairs, supplies and crewing, to TCM, one of the worlds largest independent tanker managers. As a result, we depend upon the continued services of Tsakos Energy Management and Tsakos Energy Management depends on the continued services of Tsakos Shipping and TCM.
We derive significant benefits from our relationship with the Tsakos Group, including purchasing discounts to which we otherwise would not have access. We would be materially adversely affected if either Tsakos Energy Management or Tsakos Shipping becomes unable or unwilling to continue providing services for our benefit at the level of quality they have provided such services in the past and at comparable costs as they have charged in the past. If we were required to employ a ship management company other than Tsakos Energy Management, we cannot offer any assurances that the terms of such management agreements and results of operations would be more beneficial to the Company in the long term.
If the TCM joint venture is unsuccessful, our business may be adversely affected.
In February 2010, Tsakos family interests and a private German company, the owner of Columbia Shipmanagement Ltd., formed a joint-venture ship management company. On July 1, 2010, the new entity, TCM,
assumed the technical management for most of the vessels previously managed by Tsakos Shipping. All of our vessels, apart from the LNG carrier and the VLCC Millenium, are under the technical management of TCM. TCM has so far achieved significant savings in the purchase of supplies for our fleet, but there is no guarantee that it will continue to do so in the future.
Although the TCM staff is primarily comprised of former Tsakos Shipping employees, there is no guarantee that the quality of management services that is currently provided by TCM will be equal or better than what we received from Tsakos Shipping in the past.
Tsakos Energy Management, Tsakos Shipping and TCM are privately held companies and there is little or no publicly available information about them.
The ability of Tsakos Energy Management, Tsakos Shipping and TCM to continue providing services for our benefit will depend in part on their own financial strength. Circumstances beyond our control could impair their financial strength and, because each of these companies is privately held, it is unlikely that information about their financial strength would become public. As a result, an investor in our common shares might have little or no advance warning of problems affecting Tsakos Energy Management, Tsakos Shipping or TCM, even though these problems could have a material adverse effect on us.
Tsakos Energy Management has the right to terminate its management agreement with us and Tsakos Shipping and TCM have the right to terminate their respective contracts with Tsakos Energy Management.
Tsakos Energy Management may terminate its management agreement with us at any time upon one years notice. In addition, if even one director were to be elected to our board without having been recommended by our existing board, Tsakos Energy Management would have the right to terminate the management agreement on 10 days notice. If Tsakos Energy Management terminates the agreement for this reason, we would be obligated to pay Tsakos Energy Management the present discounted value of all payments that would have otherwise become due under the management agreement until June 30 in the tenth year following the date of the termination plus the average of the incentive awards previously paid to Tsakos Energy Management multiplied by 10. A termination as of December 31, 2011 would have resulted in a payment of approximately $135 million. Tsakos Energy Managements contracts with Tsakos Shipping and with TCM may be terminated by either party upon six months notice and would terminate automatically upon termination of our management agreement with Tsakos Energy Management.
Our ability to pursue legal remedies against Tsakos Energy Management, Tsakos Shipping and TCM is very limited.
In the event Tsakos Energy Management breached its management agreement with us, we could bring a lawsuit against it. However, because we are not ourselves party to a contract with Tsakos Shipping or TCM, it may be difficult for us to sue Tsakos Shipping and TCM for breach of their obligations under their contracts with Tsakos Energy Management, and Tsakos Energy Management may have no incentive to sue Tsakos Shipping and TCM. Tsakos Energy Management is a company with no substantial assets and no income other than the income it derives under our management agreement. Therefore, it is unlikely that we would be able to obtain any meaningful recovery if we were to sue Tsakos Energy Management, Tsakos Shipping or TCM on contractual grounds.
Tsakos Shipping provides chartering services to other tankers and TCM manages other tankers and could experience conflicts of interests in performing obligations owed to us and the operators of the other tankers.
In addition to the vessels that it manages for us, TCM technically manages a fleet of privately owned vessels and seeks to acquire new third-party clients. These vessels are operated by the same group of TCM employees
that manage our vessels, and we are advised that its employees manage these vessels on an ownership neutral basis; that is, without regard to who owns them. It is possible that Tsakos Shipping, which provides chartering service for nearly all vessels technically managed by TCM, might allocate charter or spot opportunities to other TCM managed vessels when our vessels are unemployed, or could allocate more lucrative opportunities to its other vessels. It is also possible that TCM could in the future agree to manage more tankers that directly compete with us.
Clients of Tsakos Shipping have acquired and may acquire further vessels that may compete with our fleet.
Tsakos Shipping and we have an arrangement whereby it affords us a right of first refusal on any opportunity to purchase a tanker which is 10 years of age or younger or contract to construct a tanker that is referred to or developed by Tsakos Shipping. Were we to decline any opportunity offered to us, or if we do not have the resources or desire to accept it, other clients of Tsakos Shipping might decide to accept the opportunity. In this context, Tsakos Shipping clients have in the past acquired modern tankers and have ordered the construction of vessels. They may acquire or order tankers in the future, which, if we decline to buy from them, could be entered into charters in competition with our vessels. These charters and future charters of tankers by Tsakos Shipping could result in conflicts of interest between their own interests and their obligations to us.
Our chief executive officer has affiliations with Tsakos Energy Management, Tsakos Shipping and TCM which could create conflicts of interest.
Nikolas Tsakos is the president, chief executive officer and a director of our company and the director and sole shareholder of Tsakos Energy Management. Nikolas Tsakos is also the son of the founder of Tsakos Shipping. These responsibilities and relationships could create conflicts of interest that could result in our losing revenue or business opportunities or increase our expenses.
Our commercial arrangements with Tsakos Energy Management and Argosy may not always remain on a competitive basis.
We pay Tsakos Energy Management a management fee for its services pursuant to our management agreement. We also place our hull and machinery insurance, increased value insurance and loss of hire insurance through Argosy Insurance Company, Bermuda, a captive insurance company affiliated with Tsakos interests. We believe that the management fees that we pay Tsakos Energy Management compare favorably with management compensation and related costs reported by other publicly traded shipping companies and that our arrangements with Argosy are structured at arms-length market rates. Our board reviews publicly available data periodically in order to confirm this. However, we cannot assure you that the fees charged to us are or will continue to be as favorable to us as those we could negotiate with third parties and our board could determine to continue transacting business with Tsakos Energy Management and Argosy even if less expensive alternatives were available from third parties.
We depend on our key personnel.
Our future success depends particularly on the continued service of Nikolas Tsakos, our president and chief executive officer and the sole shareholder of Tsakos Energy Management. The loss of Mr. Tsakoss services or the services of any of our key personnel could have a material adverse effect on our business. We do not maintain key man life insurance on any of our executive officers.
Because the market value of our vessels may fluctuate significantly, we may incur impairment changes or losses when we sell vessels which may adversely affect our earnings.
The fair market value of tankers may increase or decrease depending on any of the following:
The global economic downturn that commenced in 2008 has resulted in a decrease in vessel values. The decrease in value accelerated during 2011 as a result of excess fleet capacity and falling freight rates. In addition, although we currently own a modern fleet, with an average age of 7.2 years as of March 31, 2012, as vessels grow older, they generally decline in value.
We have a policy of considering the disposal of tankers periodically and in particular after they reach 20 years of age. If we sell tankers at a time when tanker prices have fallen, the sale may be at less than the vessels carrying value on our financial statements, with the result that we will incur a loss.
In addition, accounting pronouncements require that we periodically review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment charge for an asset held for use should be recognized when the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount. Measurement of the impairment charge is based on the fair value of the asset as provided by third parties. In this respect, management regularly reviews the carrying amount of our vessels in connection with the estimated recoverable amount for each vessel. Such reviews may from time to time result in asset write-downs that could adversely affect our financial condition and results of operations. Such impairment charge was incurred in 2009 amounting to $19.1 million relating to the three oldest vessels of the fleet, Hesnes, Victory III and Vergina II and again in 2010, with a further impairment charge of $3.1 million on the value of the Vergina II. An impairment charge of $39.4 million was incurred in 2011 in relation to the VLCCs La Prudencia and La Madrina both approximately 20 years old following their classification as held for sale.
If TCM is unable to attract and retain skilled crew members, our reputation and ability to operate safely and efficiently may be harmed.
Our continued success depends in significant part on the continued services of the officers and seamen whom TCM provide to crew our vessels. The market for qualified, experienced officers and seamen is extremely competitive and has grown more so in recent periods as a result of the growth in world economies and other employment opportunities. Although TCM has a contract with a number of manning agencies and sponsors various marine academies in the Philippines, Greece and Russia, we cannot assure you that TCM will be successful in its efforts to recruit and retain properly skilled personnel at commercially reasonable salaries. Any failure to do so could adversely affect our ability to operate cost-effectively and our ability to increase the size of our fleet.
Labor interruptions could disrupt our operations.
Substantially all of the seafarers and land based employees of TCM are covered by industry-wide collective bargaining agreements that set basic standards. We cannot assure you that these agreements will prevent labor interruptions. In addition, some of our vessels operate under flags of convenience and may be vulnerable to unionization efforts by the International Transport Federation and other similar seafarer organizations which could be disruptive to our operations. Any labor interruption or unionization effort which is disruptive to our operations could harm our financial performance.
The contracts to purchase our newbuildings present certain economic and other risks.
As of March 31, 2012, we have contracts to construct two newbuildings that are scheduled for delivery during the first half of 2013 and are entering into a contract for the construction of an LNG carrier, with delivery in the first quarter of 2015, together with an option to construct one additional LNG carrier. We also have obtained options to acquire two suezmax tanker newbuildings, one with delivery in the second quarter of 2012 and one with delivery in the first quarter of 2013. If available, we may also order additional newbuildings. During the course of construction of a vessel, we are typically required to make progress payments. While we have refund guarantees from banks to cover defaults by the shipyards and our construction contracts would be saleable in the event of our payment default, we can still incur economic losses in the event that we or the shipyards are unable to perform our respective obligations. Shipyards periodically experience financial difficulties.
Credit conditions internationally might impact our ability to raise debt financing.
We have traditionally financed our vessel acquisitions with cash (equity) and bank debt from various reputable national and international commercial banks. In relation to newbuilding contracts, the equity portion covers all or part of the pre-delivery obligations while the debt portion covers the outstanding amount due to the shipyard on delivery. Although we have secured bank financing for our remaining obligations to the shipyard with respect to one of our two newbuilding shuttle tankers, with respect to our other newbuilding shuttle tanker, the LNG carrier for which we are entering into a construction contract or in the event of any further acquisitions, including pursuant to the options we have for three additional newbuilding vessels, terms and conditions could be different from terms obtained in the past and could result in higher cost of capital, if available at all. In addition revised covenants might be imposed that might limit our flexibility in terms of dividend payments and other operational matters and materially affect our ability to raise additional debt from the market. In addition, we cannot guarantee the financial state of the banks we deal with nor their short or long term viability as going-concerns. Any adverse development in that respect could materially alter our current and future financial planning and growth and have a potentially negative impact on our balance sheet.
We may not be able to finance all of the vessels we have on order.
We have not finalized financing arrangements to fund the balance of the purchase price due for financing one of the two newbuild DP2 suezmax shuttle tankers scheduled for delivery in the first quarter 2013 or for the LNG carrier (and the options to construct one additional LNG carrier and acquire two suezmax tanker newbuildings) that we recently ordered with scheduled delivery in the first quarter of 2015. We cannot assure you that we will be able to obtain additional financing for these newbuildings on terms that are favorable to us or at all.
If we were unable to finance further installments for the newbuildings we have on order, an alternative would be to use the available cash holdings of the Company or, if we should lack adequate cash, to attempt to sell the uncompleted vessels to a buyer who would assume the remainder of the contractual obligations. The amount we would receive from the buyer would depend on market circumstances and could result in a deficit over the advances we had paid to the date of sale plus capitalized costs. Alternatively, we may default on the contract, in which case the builder would sell the vessel and refund our advances less any amounts the builder would deduct to cover all of its own costs. We would be obliged to cover any deficiency arising in such circumstances.
Apart from the delay in receiving the refund of advances and the possible payment of any deficiencies, the direct effect on our operations of not acquiring the vessel would be to forego any revenues and related vessel operating cash flows.
The profitability of our investment in the Liquefied Natural Gas (LNG) sector is subject to market volatility.
The LNG transportation market has recently entered a highly lucrative phase which is forecast by certain market experts to last for another three years. Prior to this the LNG carrier market generated relatively poor
returns since 2007. Levels of LNG production and demand for LNG and LNG shipping are significantly affected by the overall demand for and price of natural gas, which can be volatile. Growth in LNG production and demand for LNG and LNG shipping could also be negatively impacted by material delays in the construction of new liquefaction facilities, increases in the production levels of low-cost natural gas in domestic natural gas consuming markets or in areas linked by pipelines to consuming markets, new taxes or regulations affecting LNG production or liquefaction, or any significant explosion, spill or other incident involving an LNG facility or carrier.
If we decide to exit this sector during a future down cycle for the sector, for whatever reason, we might have to sell our LNG carriers at a price below their cost and subsequently suffer an economic loss or might be forced to operate the vessel at unprofitable or breakeven levels. Our existing LNG vessel is on charter until March 2016 and we have not arranged a charter for our recently ordered LNG carrier newbuilding. If the charter market is weak on the expiration of the charter for our LNG carrier or when we are attempting to secure a charter for our new LNG carrier, we might not be able to secure new employment or be obliged to accept charters for rates materially below those originally factored into our investment evaluation.
The future performance of our LNG carriers depends on continued growth in LNG production and demand for LNG and LNG shipping.
The future performance of our LNG carriers will depend on continued growth in LNG production and the demand for LNG and LNG shipping. A complete LNG project includes production, liquefaction, storage, regasification and distribution facilities, in addition to the marine transportation of LNG. Increased infrastructure investment has led to an expansion of LNG production capacity in recent years, but material delays in the construction of new liquefaction facilities could constrain the amount of LNG available for shipping, reducing ship utilization. While global LNG demand has continued to rise, it has risen at a slower pace than previously predicted and the rate of its growth has fluctuated due to several factors, including the global economic crisis and continued economic uncertainty, fluctuations in the price of natural gas and other sources of energy, the continued acceleration in natural gas production from unconventional sources in regions such as North America and the highly complex and capital intensive nature of new or expanded LNG projects, including liquefaction projects. Continued growth in LNG production and demand for LNG and LNG shipping could be negatively affected by a number of factors, including:
Reduced demand for LNG or LNG shipping, or any reduction or limitation in LNG production capacity, could have a material adverse effect on our ability to secure future multi-year time charters for our LNG carriers, or for any new LNG carriers we acquire, which could harm our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.
Demand for LNG shipping could be significantly affected by volatile natural gas prices and the overall demand for natural gas.
Gas prices are volatile and are affected by numerous factors beyond our control, including but not limited to the following:
An oversupply of LNG carriers may lead to a reduction in the charter hire rates we are able to obtain when seeking charters in the future.
Driven in part by an increase in LNG production capacity, the market supply of LNG carriers has been increasing as a result of the construction of new ships. During the period from 2005 to 2010, the global fleet of LNG carriers grew by an average of 15% per year due to the construction and delivery of new LNG carriers. Although the global newbuilding order book dropped steeply in 2009 and 2010, orders for over 50 newbuilding LNG carriers were placed during 2011. The newbuilding order book of almost 60 ships as of December 31, 2011 amounts to 17% of global LNG carrier fleet capacity, with the majority of the newbuildings scheduled for delivery in 2013 and 2014. This and any future expansion of the global LNG carrier fleet may have a negative impact on charter hire rates, ship utilization and ship values, which impact could be amplified if the expansion of LNG production capacity does not keep pace with fleet growth.
In addition, if an active short-term or spot LNG carrier charter market continues to develop, our revenues and cash flows from our LNG carriers may become more volatile and may decline following expiration or early termination of our charters. An active short-term or spot charter market may require us to enter into charters based on changing market prices, as opposed to contracts based on fixed rates, which could affect our revenues and cash flows, including cash available for dividends to our shareholders, if we enter into charters during periods when the market price for shipping LNG is depressed. Most shipping requirements for new LNG projects continue to be provided on a multi-year basis, though the level of spot voyages and short-term time charters of less than 12 months in duration has grown in the past few years.
Our effectiveness in attaining accretive charters for our existing LNG carrier at the end of its existing charter or for newbuilding LNG carriers will be determined by the reliability and experience of third-party technical managers.
We have subcontracted all technical management aspects of our LNG operation to Hyundai Merchant Marine (HMM) for a fee. Neither Tsakos Energy Management nor TCM has the dedicated personnel for running LNG operations nor can we guarantee that they will employ an adequate number of employees in the future. As such, we are totally dependent on the reliability and effectiveness of third-party managers for whom we cannot guarantee that their employees, both onshore and at-sea are adequate in their assigned role. We cannot guarantee the quality of their services or the longevity of the management contract.
Our earnings may be adversely affected if we do not successfully employ our tankers.
We seek to employ our tankers on time charters, contracts of affreightment, tanker pools and in the spot market in a manner that will optimize our earnings. As of March 31, 2012, 36 of our tankers were contractually committed to period employment with remaining terms ranging from one month to eleven years. Although these period charters provide steady streams of revenue, our tankers committed to period charters may not be available for spot voyages during an upswing in the tanker industry cycle, when spot voyages may be more profitable. If we cannot re-charter these vessels on long-term period charters or trade them in the spot market profitably, our results of operations and operating cash flow may suffer.
Fuel prices may adversely affect our profits.
While we do not bear the cost of fuel or bunkers, under time and bareboat charters, fuel is a significant, if not the largest, expense in our shipping operations when vessels are under spot charter. Changes in the price of fuel may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the OPEC and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. Further, fuel may become much more expensive in the future, which may reduce the profitability of our business.
Our significant investment in ice-class vessels might not prove successful.
We have made significant investments in building a solid presence in the ice-class tanker market through both building and acquiring ice strengthened vessels. This type of vessel commonly commands a premium to build and/or acquire to compensate for the ice-class features of the hull and engine. The versatility of these vessels allows them to operate not only in ice-bound routes, but also in conventional tanker routes. Usually rates for ice bound trades are at a premium to conventional tanker trades for the period the vessel operates in such demanding conditions. Ice-class vessels do not commonly operate throughout the year in such harsh environments. We cannot guarantee that our vessels will operate in ice-class trades for meaningful periods and/or earn rates with premiums sufficient to compensate for the investment made. If our vessels fail to earn any material and sustained ice-class premium, their revenues would derive from conventional routes which we cannot guarantee will be adequate to financially support our ice-class investment.
If our counterparties were to fail to meet their obligations under a charter agreements we could suffer losses or our business could be otherwise adversely affected.
As of March 31, 2012, twenty-eight of our vessels were employed under time charters and one of our vessels was employed under a bareboat charter. The ability and willingness of each of our counterparties to perform its obligations under their charters with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the oil and energy industries and of the oil and oil products shipping industry as well as the overall financial condition of the counterparties and prevailing charter rates. There can be no assurance that some of our customers would not fail to pay charter hire or attempt to renegotiate charter rates. Should a counterparty fail to honor its obligations under agreements with us, it may be difficult for us to secure substitute employment for the affected vessels, and any new charter arrangements we secure in the spot market or on time charters could be at lower rates given the depressed charter rate levels as of March 31, 2012. If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends in the future.
If the charterer under our bareboat charter is unable to perform under the charter, we may lose revenues.
As of March 31 2012, we had a bareboat charter contract for the Millennium with Hyundai Merchant Marine, a member of the Hyundai group of companies. The financial difficulties that the Hyundai group has faced in the past may still affect HMMs ability to perform under these charters, which is scheduled to expire in September 2013. This could result in the loss of significant revenue. In addition, we may expand this chartering relationship with HMM to other vessels in our fleet which would ultimately increase our exposure to that particular charterer.
We will face challenges as we diversify and position our fleet to meet the needs of our customers.
We may need to diversify our fleet to accommodate the transportation of forms of energy other than crude oil and petroleum products in response to industry developments and our customers needs. Accordingly, the Company is continually exploring opportunities in other areas such as the Liquefied Petroleum Gas (LPG) market and the greater oil onshore / offshore sector, as well as expanding our presence in the LNG market. For example, on March 21, 2011, we ordered two new suezmax DP2 shuttle tankers that are expected to be delivered in the first and second quarter of 2013, respectively, and we are entering into a contract for the construction of an LNG carrier, with delivery in the first quarter of 2015, together with an option to construct one additional LNG carrier. A shuttle tanker is a specialized vessel designed to transport crude oil and condensates from offshore oil fields to onshore terminal and refineries. As the composition of our fleet continues to change, we may not have adequate experience in transporting these other forms of energy. In addition, if the cost structure of a diversified fleet that is able to transport other forms of energy differs significantly from the cost structure of our current fleet, our profitability could be adversely affected.
We may not have adequate insurance.
In the event of a casualty to a vessel or other catastrophic event, we will rely on our insurance to pay the insured value of the vessel or the damages incurred. We believe that we maintain as much insurance on our vessels, through insurance companies, including Argosy, a related party company and P&I clubs as is appropriate and consistent with industry practice. However, particularly in view of the conflicts in Afghanistan, Iraq and elsewhere, and pirate activity off the coast of Africa, we cannot assure you that this insurance will remain available at reasonable rates, and we cannot assure you that the insurance we are able to obtain will cover all foreseen liabilities that we may incur, particularly those involving oil spills and catastrophic environmental damage. In addition, we may not be able to insure certain types of losses, including loss of hire, for which insurance coverage may become unavailable.
We are subject to funding calls by our protection and indemnity clubs, and our clubs may not have enough resources to cover claims made against them.
Our subsidiaries are indemnified for legal liabilities incurred while operating our vessels through membership in P&I clubs. P&I clubs are mutual insurance clubs whose members must contribute to cover losses sustained by other club members. The objective of a P&I club is to provide mutual insurance based on the aggregate tonnage of a members vessels entered into the club. Claims are paid through the aggregate premiums of all members of the club, although members remain subject to calls for additional funds if the aggregate premiums are insufficient to cover claims submitted to the club. Claims submitted to the club may include those incurred by members of the club, as well as claims submitted to the club from other P&I clubs with which our P&I club has entered into interclub agreements. We cannot assure you that the P&I clubs to which we belong will remain viable or that we will not become subject to additional funding calls which could adversely affect our profitability.
The insolvency or financial deterioration of any of our insurers or reinsurers would negatively affect our ability to recover claims for covered losses on our vessels.
We have placed our hull and machinery, increased value and loss of hire insurance with Argosy, a captive insurance company affiliated with Tsakos family interests. Argosy reinsures the insurance it underwrites for us with various reinsurers, however, the coverage deductibles of the reinsurance policies periodically exceed the coverage deductibles of the insurance policies Argosy underwrites for us. Argosy, therefore, would be liable with respect to the difference between those deductibles in the event of a claim by us to which the deductibles apply. Although these reinsurers have a minimum credit rating of A, we do not have the ability to independently determine our insurers and reinsurers creditworthiness or their ability to pay on any claims that we may have as a result of a loss. In the event of insolvency or other financial deterioration of our insurer or its reinsurers, we cannot assure you that we would be able to recover on any claims we suffer.
Our degree of leverage and certain restrictions in our financing agreements impose constraints on us.
We incur substantial debt to finance the acquisition of our vessels. At December 31, 2011, our debt to capital ratio was 62.2 % (debt / debt plus equity), with $1.52 billion in debt outstanding. We are required to apply a substantial portion of our cash flow from operations, before interest payments, to the payment of principal and interest on this debt. In 2011, all of our cash flow derived from operations plus an amount from existing cash resources was dedicated to debt service, excluding any debt prepayment upon the sale of vessels. This limits the funds available for working capital, capital expenditures, dividends and other purposes. Our degree of leverage could have important consequences for us, including the following:
In addition, our financing arrangements, which we secured by mortgages on our ships, impose operating and financial restrictions on us that restrict our ability to:
We have a holding company structure which depends on dividends from our subsidiaries and interest income to pay our overhead expenses and otherwise fund expenditures consisting primarily of advances on newbuilding contracts and the payment of dividends to our shareholders. As a result, restrictions contained in our financing arrangements and those of our subsidiaries on the payment of dividends may restrict our ability to fund our various activities.
If the recent volatility in LIBOR continues, it could affect our profitability, earnings and cash flow.
Although relatively stable from 2009 to 2011, LIBOR was volatile in prior years, during which the spread between LIBOR and the prime lending rate widened, at times significantly. Because the interest rates borne by our outstanding indebtedness fluctuate with changes in LIBOR, if these rates increase significantly or become significantly volatile once again, it would affect the amount of interest payable on our debt, which in turn, could have an adverse effect on our profitability, earnings and cash flow.
Furthermore, interest in most loan agreements in our industry has been based on published LIBOR rates. Recently, however, in certain cases potential lenders have insisted on provisions that entitle the lenders, in their discretion, to replace published LIBOR as the base for the interest calculation with their cost-of-funds rate. If we are required to agree to such a provision in future loan agreements, our lending costs could increase significantly, which would have an adverse effect on our profitability, earnings and cash flow.
We selectively enter into derivative contracts, which can result in higher than market interest rates and charges against our income.
In the past eleven years we have selectively entered into derivative contracts both for investment purposes and to hedge our overall interest expense and, more recently, our bunker expenses. Our board of directors is regularly informed of the status of our derivatives in order to assess that such derivatives are within reasonable limits and reasonable in light of our particular investment strategy at the time we entered into the derivative contracts.
Loans advanced under our secured credit facilities are, generally, advanced at a floating rate based on LIBOR. Our financial condition could be materially adversely affected at any time that we have not entered into interest rate hedging arrangements to hedge our interest rate exposure and the interest rates applicable to our credit facilities and any other financing arrangements we may enter into in the future, including those we enter into to finance a portion of the amounts payable with respect to newbuildings. Moreover, even if we have entered into interest rate swaps or other derivative instruments for purposes of managing our interest rate or bunker cost exposure, our hedging strategies may not be effective and we may incur substantial loss.
We have a risk management policy and a risk committee to oversee all our derivative transactions. It is our policy to monitor our exposure to business risk, and to manage the impact of changes in interest rates, foreign exchange rate movements and bunker prices on earnings and cash flows through derivatives. Derivative contracts are executed when management believes that the action is not likely to significantly increase overall risk. Entering into swaps and derivatives transactions is inherently risky and presents various possibilities for incurring significant expenses. The derivatives strategies that we employ in the future may not be successful or effective, and we could, as a result, incur substantial additional interest costs. See Item 11. Quantitative and Qualitative Disclosures About Market Risk for a description of how our current interest rate swap arrangements have been impacted by recent events.
Our vessels may suffer damage and we may face unexpected dry-docking costs which could affect our cash flow and financial condition.
If our vessels suffer damage, they may need to be repaired at a dry-docking facility. The costs of dry-dock repairs can be both substantial and unpredictable. We may have to pay dry-docking costs that our insurance does not cover. This would result in decreased earnings.
A significant amount of our 2011 revenues was derived from five customers and a significant amount of our 2010 revenues was derived from five customers, and our revenues could decrease significantly if we lost these customers.
In 2011, 14% of our revenues came from Petrobras, 10% of our revenues came from Flopec, 8% of our revenues from BP, 7% from STBL, and 6% from HMM, certain of which were also among our largest customers in 2010. Our inability or failure to continue to employ our vessels at rates comparable to those earned from these customers, the loss of these customers or our failure to charter these vessels otherwise in a reasonable period of time or at all could adversely affect our operations and performance. Although our customers generally include leading national, major and other independent oil companies and refiners, we are unable to assure you that future economic circumstances will not render one or more of such customers unable to pay us amounts that they owe us, or that these important customers will not decide to contract with our competitors or perform their shipping functions themselves.
If we were to be subject to tax in jurisdictions in which we operate, our financial results would be adversely affected.
Our income is not presently subject to taxation in Bermuda, which has no corporate income tax. We believe that we should not be subject to tax under the laws of various countries other than the United States in which we conduct activities or in which our customers are located. However, our belief is based on our understanding of the tax laws of those countries, and our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law or interpretation. We cannot determine in advance the extent to which certain jurisdictions may require us to pay tax or to make payments in lieu of tax. In addition, payments due to us from our customers may be subject to tax claims.
Under the United States Internal Revenue Code of 1986, as amended (the Internal Revenue Code), 50% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States is characterized as United States source shipping income and such income is subject to a gross 4% United States federal income tax without allowance for deductions, unless that corporation qualifies for exemption from tax under Section 883 of the Internal Revenue Code and the Treasury Regulations thereunder.
We believe that we and our subsidiaries qualified for this exemption for 2011. There are, however, factual circumstances beyond our control that could cause us and our subsidiaries to be unable to obtain the benefit of this tax exemption in future years and thus to be subject to United States federal income tax on United States source shipping income. Due to the factual nature of the issues involved, we can give no assurances on our tax-exempt status or that of any of our subsidiaries. See Tax ConsiderationsUnited States federal income tax considerations for additional information about the requirements of this exemption.
If we or our subsidiaries are not entitled to this exemption under Section 883 for any taxable year, we or our subsidiaries would be subject for those years to a 4% United States federal income tax on our gross U.S.-source shipping revenue, without allowance for deductions, under Section 887 of the Internal Revenue Code. The imposition of such tax could have a negative effect on our business and would result in decreased earnings available for distribution to our stockholders.
If we were treated as a passive foreign investment company, a U.S. investor in our common shares would be subject to disadvantageous rules under the U.S. tax laws.
If we were treated as a passive foreign investment company (a PFIC) in any year, U.S. holders of our common shares would be subject to unfavorable U.S. federal income tax treatment. We do not believe that we will be a PFIC in 2012 or in any future year. However, PFIC classification is a factual determination made annually and we could become a PFIC if the portion of our income derived from bareboat charters or other passive sources were to increase substantially or if the portion of our assets that produce or are held for the production of passive income were to increase substantially. Moreover, the IRS may disagree with our position that time and voyage charters do not give rise to passive income for purposes of the PFIC rules. Accordingly, we can provide no assurance that we will not be treated as a PFIC for 2012 or for any future year. Please see Tax ConsiderationsUnited States federal income tax considerationsPassive Foreign Investment Company Considerations herein for a description of the PFIC rules.
Dividends we pay with respect to our common shares to United States holders would not be eligible to be taxed at reduced U.S. tax rates applicable to qualifying dividends if we were a passive foreign investment company or under other circumstances.
For taxable years beginning prior to January 1, 2013, distributions on the common shares of non-U.S. companies that are treated as dividends for U.S. federal income tax purposes and are received by individuals generally will be eligible for taxation at capital gain rates if the common shares with respect to which the dividends are paid are readily tradable on an established securities market in the United States. This treatment will not be available to dividends we pay, however, if we qualify as a PFIC for the taxable year of the dividend or the preceding taxable year, or to the extent that (i) the shareholder does not satisfy a holding period requirement that generally requires that the shareholder hold the shares on which the dividend is paid for more than 60 days during the 121-day period that begins 60 days before the date on which the shares become ex-dividend with respect to such dividend, (ii) the shareholder is under an obligation to make related payments with respect to substantially similar or related property or (iii) such dividend is taken into account as investment income under Section 163(d)(4)(B) of the Internal Revenue Code. We do not believe that we qualified as a PFIC for our last taxable year and, as described above, we do not expect to qualify as a PFIC for our current or future taxable years. Legislation has been proposed in the United States Congress which, if enacted in its current form, would likely cause dividends on our shares to be ineligible for the preferential tax rates described above. There can be no assurance regarding whether, or in what form, such legislation will be enacted.
Because some of our expenses are incurred in foreign currencies, we are exposed to exchange rate risks.
The charterers of our vessels pay us in U.S. dollars. While we incur most of our expenses in U.S. dollars, we have in the past incurred expenses in other currencies, most notably the Euro. In 2011, Euro expenses accounted for approximately 49% of our total operating expenses. Declines in the value of the U.S. dollar relative to the Euro, or the other currencies in which we incur expenses, would increase the U.S. dollar cost of paying these expenses and thus would adversely affect our results of operations.
The Tsakos Holdings Foundation and the Tsakos family can exert considerable control over us, which may limit your ability to influence our actions.
As of March 31, 2012, companies controlled by the Tsakos Holdings Foundation or affiliated with the Tsakos Group own approximately 39% of our outstanding common shares. The Tsakos Holdings Foundation is a Liechtenstein foundation whose beneficiaries include persons and entities affiliated with the Tsakos family, charitable institutions and other unaffiliated persons and entities. The council which controls the Tsakos Holdings Foundation consists of five members, two of whom are members of the Tsakos family. As long as the Tsakos Holdings Foundation and the Tsakos family beneficially own a significant percentage of our common shares, each will have the power to influence the election of the members of our board of directors and the vote on substantially all other matters, including significant corporate actions.
The Public Company Accounting Oversight Board (PCAOB) is currently unable to inspect the audit work and practices of auditors operating in Greece, including our auditor.
Auditors of U.S. public companies are required by law to undergo periodic Public Company Accounting Oversight Board (PCAOB) inspections that assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. Certain EU countries do not permit the PCAOB to conduct inspections of accounting firms established and operating in EU countries, even if they are part of major international firms. Accordingly, unlike for most U.S. public companies, the PCAOB is prevented from evaluating our auditors performance of audits and its quality control procedures, and, unlike the shareholders of most U.S. public companies, our shareholders are deprived of the possible benefits of such inspections.
Risks Related To Our Common Shares
Future sales of our common shares could cause the market price of our common shares to decline.
During 2010, we issued and sold an aggregate of almost 1.2 million common shares pursuant to an at-the-market offering, resulting in net proceeds of $19.7 million, and a further 7.6 million common shares in a follow-on offering raising an additional $85.1 million of net proceeds. Although there were no offerings in 2011, sales of a substantial number of our common shares in the public market, or the perception that these sales could occur, may depress the market price for our common shares. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future.
We may issue additional common shares in the future and our shareholders may elect to sell large numbers of shares held by them from time to time. Our authorized capital stock consists of 100,000,000 shares, par value $1.00 per share, of which 46,208,737 common shares are outstanding as of March 31, 2012.
The market price of our common shares may be unpredictable and volatile.
The market price of our common shares may fluctuate due to factors such as actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry, mergers and strategic alliances in the tanker industry, market conditions in the tanker industry, changes in government regulation, shortfalls in our operating results from levels forecast by securities analysts, announcements concerning us or our competitors, our sales of our common shares and the general state of the securities market. The tanker industry has been highly unpredictable and volatile. The market for common stock in this industry may be equally volatile. Therefore, we cannot assure you that you will be able to sell any of our common shares you may have purchased, or will purchase in the future, at a price greater than or equal to the original purchase price.
We may not be able to pay cash dividends on our common shares as intended.
During 2011, we paid dividends totaling $0.60 per common share. In February 2012 we paid a quarterly dividend of $0.15 per common share. Subject to the limitations discussed below, we currently intend to continue to pay regular quarterly cash dividends on our common shares. However, there can be no assurance that we will pay dividends or as to the amount of any dividend. The payment and the amount will be subject to the discretion of our board of directors and will depend, among other things, on available cash balances, anticipated cash needs, our results of operations, our financial condition, and any loan agreement restrictions binding us or our subsidiaries, as well as other relevant factors. For example, if we earned a capital gain on the sale of a vessel or newbuilding contract, we could determine to reinvest that gain instead of using it to pay dividends. Depending on our operating performance for that year, this could result in no dividend at all despite the existence of net income, or a dividend that represents a lower percentage of our net income. Any payment of cash dividends could slow our ability to renew and expand our fleet, and could cause delays in the completion of our current newbuilding program.
Because we are a holding company with no material assets other than the stock of our subsidiaries, our ability to pay dividends will depend on the earnings and cash flow of our subsidiaries and their ability to pay us dividends. In addition, the financing arrangements for indebtedness we incur in connection with our newbuilding program may further restrict our ability to pay dividends. In the event of any insolvency, bankruptcy or similar proceedings of a subsidiary, creditors of such subsidiary would generally be entitled to priority over us with respect to assets of the affected subsidiary. Investors in our common shares may be adversely affected if we are unable to or do not pay dividends as intended.
Provisions in our Bye-laws, our management agreement with Tsakos Energy Management and our shareholder rights plan would make it difficult for a third party to acquire us, even if such a transaction is beneficial to our shareholders.
Our Bye-laws provide for a staggered board of directors, blank check preferred stock, super majority voting requirements and other anti-takeover provisions, including restrictions on business combinations with interested persons and limitations on the voting rights of shareholders who acquire more than 15% of our common shares. In addition, Tsakos Energy Management would have the right to terminate our management agreement and seek liquidated damages if a board member were elected without having been approved by the current board. Furthermore, our shareholder rights plan authorizes issuance to existing shareholders of substantial numbers of preferred share rights and common shares in the event a third party seeks to acquire control of a substantial block of our common shares. These provisions could deter a third party from tendering for the purchase of some or all of our shares. These provisions may have the effect of delaying or preventing changes of control of the ownership and management of our company, even if such transactions would have significant benefits to our shareholders.
Our shareholder rights plan could prevent you from receiving a premium over the market price for your common shares from a potential acquirer.
Our board of directors has adopted a shareholder rights plan that authorizes issuance to our existing shareholders of substantial preferred share rights and additional common shares if any third party acquires 15% or more of our outstanding common shares or announces its intent to commence a tender offer for at least 15% of our common shares, in each case, in a transaction that our board of directors has not approved. The existence of these rights would significantly increase the cost of acquiring control of our company without the support of our board of directors because, under these limited circumstances, all of our shareholders, other than the person or group that caused the rights to become exercisable, would become entitled to purchase our common shares at a discount. The existence of the rights plan could therefore deter potential acquirers and thereby reduce the likelihood that you will receive a premium for your common shares in an acquisition. See Item 10. Additional Information Description of Capital StockShareholder Rights Plan for a description of our shareholder rights plan.
Because we are a foreign corporation, you may not have the same rights as a shareholder in a U.S. corporation.
We are a Bermuda corporation. Our Memorandum of Association and Bye-laws and the Companies Act 1981 of Bermuda, as amended (the Companies Act) govern our affairs. While many provisions of the Companies Act resemble provisions of the corporation laws of a number of states in the United States, Bermuda law may not as clearly establish your rights and the fiduciary responsibilities of our directors as do statutes and judicial precedent in some U.S. jurisdictions. In addition, apart from one non-executive director, our directors and officers are not resident in the United States and all or substantially all of our assets are located outside of the United States. As a result, investors may have more difficulty in protecting their interests and enforcing judgments in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.
In addition, you should not assume that courts in the country in which we are incorporated or where our assets are located would enforce judgments of U.S. courts obtained in actions against us based upon the civil liability provisions of applicable U.S. federal and state securities laws or would enforce, in original actions, liabilities against us based on those laws.
Tsakos Energy Navigation Limited is a leading provider of international seaborne crude oil and petroleum product transportation services. In 2007 it also started to transport liquefied natural gas. It was incorporated in 1993 as an exempted company under the laws of Bermuda under the name Maritime Investment Fund Limited. In 1996, Maritime Investment Fund Limited was renamed MIF Limited. Our common shares were listed in 1993 on the Oslo Stock Exchange (OSE) and the Bermuda Stock Exchange, although we de-listed from the OSE in March 2005 due to limited trading. The Companys shares are no longer actively traded on the Bermuda exchange. In July 2001, the Companys name was changed to Tsakos Energy Navigation Limited to enhance our brand recognition in the tanker industry, particularly among charterers. In March 2002, we completed an initial public offering of our common shares in the United States and our common shares began trading on the New York Stock Exchange under the ticker symbol TNP. Since incorporation, the Company has owned and operated 75 vessels and has sold 28 vessels (of which three had been chartered back and eventually repurchased at the end of their charters. All three have since been sold again).
Our principal offices are located at 367 Syngrou Avenue, 175 64 P. Faliro, Athens, Greece. Our telephone number at this address is 011 30 210 9407710. Our website address is http://www.tenn.gr.
For additional information on the Company, see Item 5 Operating and Financial Review and Prospects.
Tsakos Energy Navigation Limited is a leading provider of international seaborne crude oil and petroleum product transportation services and, as of March 31, 2012, operated a fleet of 48 modern crude oil carriers and petroleum product tankers that provide world-wide marine transportation services for national, major and other independent oil companies and refiners under long, medium and short-term charters. Our fleet also includes one 2007-built Liquefied Natural Gas (LNG) carrier. In addition to the vessels currently operating in our fleet as of March 31, 2012, we are building two DP2 shuttle suezmax tankers, which we expect to take delivery of in the first and second quarters of 2013 and have agreed, subject to final documentation, for the construction of a 162,000 cbm LNG carrier delivery in the first quarter of 2015. The resulting fleet (assuming no further sales or acquisitions) would comprise 51 vessels representing approximately 5.5 million dwt. We do, however, expect to sell two VLCC vessels, La Madrina and La Prudencia, in the second quarter of 2012 and the first quarter of 2013, respectively. We also have options to purchase two 158,000 dwt suezmax tanker newbuildings and an option to construct one additional 162,000 cbm LNG carrier. The first suezmax newbuilding would be delivered from a South Korean shipyard during the second quarter of 2012, the second newbuilding would be delivered in the first quarter of 2013 and the LNG carrier would be delivered in late 2015.
We believe that we have established a reputation as a safe, high quality, cost efficient operator of modern and well-maintained tankers. We also believe that these attributes, together with our strategy of proactively working towards meeting our customers chartering needs, has contributed to our ability to attract world-class energy producers charterers as customers and to our success in obtaining charter renewals generating strong fleet utilization.
Our fleet is managed by Tsakos Energy Management Limited, or Tsakos Energy Management, an affiliate company owned by our chief executive officer. Tsakos Energy Management, which performs its services exclusively for our benefit, provides us with strategic advisory, financial, accounting and back-office services, while subcontracting the commercial management of our business to Tsakos Shipping & Trading, S.A., or Tsakos Shipping. In its capacity as commercial manager, Tsakos Shipping manages vessel purchases and sales and identifies and negotiates charter opportunities for our fleet. Until June 30, 2010, Tsakos Shipping also provided technical and operational management for the majority of our vessels.
Since July 1, 2010, Tsakos Energy Management subcontracts the technical and operational management of our fleet to Tsakos Columbia Shipmanagement S.A., or TCM. TCM was formed in February 2010 by Tsakos family interests and a German private company, the owner of the ship management company Columbia Shipmanagement Ltd., or CSM, as a joint-venture ship management company on an equal partnership basis to provide technical and operational management services to owners of vessels, primarily within the Greece-based market. TCM, which formally commenced operations on July 1, 2010, now manages the technical and
operational activities of all of our vessels apart from the LNG carrier Neo Energy and VLCC Millennium which are both technically managed by a non-affiliated ship manager. TCM is based in Athens, Greece and is staffed primarily with former Tsakos Shipping personnel, in addition to certain CSM executives. TCM and CSM cooperate in the purchase of certain supplies and services on a combined basis. By leveraging the purchasing power of CSM, which currently provides full technical management services for over 150 vessels and crewing services for an additional 200 vessels, we believe TCM is able to procure services and supplies at lower prices than Tsakos Shipping could alone, thereby reducing overall operating expenses for us. We also expect to benefit from CSMs significant crewing capabilities. In its capacity as technical manager, TCM manages our day-to-day vessel operations, including provision of supplies, maintenance and repair, and crewing. Members of the Tsakos family are involved in the decision-making processes of Tsakos Energy Management, Tsakos Shipping and TCM.
Tsakos Shipping continues to provide commercial management services for our vessels, which include chartering, charterer relations, obtaining insurance and vessel sale and purchase, supervising newbuilding construction and vessel financing.
As of March 31, 2012, our fleet consisted of the following 48 vessels:
Twenty-one of the operating vessels are of ice-class specification. This fleet diversity, which includes a number of sister ships, provides us with the opportunity to be one of the more versatile operators in the market. The current fleet totals approximately 5.1 million dwt, all of which is double-hulled. As of March 31, 2012, the average age of the tankers in our current operating fleet was 7.3 years, compared with the industry average of 8.2 years.
In addition to the vessels operating in our fleet as of March 31, 2012, we are building an additional two suezmax DP2 shuttle tankers and are entering into a contract for the construction of a LNG carrier, with delivery in the first quarter of 2015, together with an option to construct one additional LNG carrier. We expect delivery of two suezmax DP2 shuttle tankers in the first and second quarters of 2013 and the LNG carrier in the first quarter of 2015.
We believe the following factors distinguish us from other public tanker companies:
As of March 31, 2012, our fleet consisted of the following 48 vessels:
Our newbuildings under construction
On March 21, 2011, the Company ordered two suezmax DP2 shuttle tankers from Sungdong Shipbuilding in South Korea with expected delivery dates in the first and second quarters of 2013, respectively. The newbuildings have a double hull design compliant with all classification requirements and prevailing environmental laws and regulations. Tsakos Shipping has worked closely with the Sungdong shipyard in South Korea in the design of the newbuildings and continues to work with the shipyard during the construction period. TCM provides supervisory personnel present during the construction.
Our newbuildings under construction as of March 31, 2012 consisted of the following:
Under the newbuilding contracts, the purchase prices for the ships are subject to deductions for delayed delivery, excessive fuel consumption and failure to meet specified deadweight tonnage requirements. We make progress payments equal to 30% or 50% of the purchase price of each vessel during the period of its construction. As of March 31, 2012, we had made progress payments of $36.8 million out of the total purchase price of approximately $185.6 million for these newbuildings. Of the remaining amount, a further $55.2 million will be paid during 2012. As of March 31, 2012, we have secured bank financing for one of our two newbuilding vessels.
We are entering into a contract for the construction by Hyundai Heavy Industries of one 162,000 cbm LNG carrier. The vessel, which will be equipped with the latest tri-fuel diesel electric propulsion technology, will be scheduled for delivery in the first quarter of 2015. We also have an option for the construction of a second LNG carrier of the same specification, whose delivery would be scheduled for the fourth quarter 2015, if we exercise the option.
We have obtained options to acquire two 158,000 dwt suezmax newbuildings, the first of which would be expected to be delivered by a South Korean shipyard in this fiscal quarter, with the second newbuilding to be delivered in the first quarter of 2013. We would have a total of 14 suezmaxes in our fleet, if we acquire these vessels.
We strive to optimize the financial performance of our fleet by deploying at least two-thirds of our vessels on either time charters or period employment with variable rates. In the past two years, this proportion has been over 75% as we took proactive steps to meet any potential impact of the expanding world fleet on freight rates. The remainder of the fleet is in the spot market. We believe that our fleet deployment strategy provides us with
the ability to benefit from increases in tanker rates while at the same time maintaining a measure of stability through cycles in the industry. The following table details the respective employment basis of our fleet during 2011, 2010 and 2009 as a percentage of operating days.
Tankers operating on time charters may be chartered for several months or years whereas tankers operating in the spot market typically are chartered for a single voyage that may last up to several weeks. Vessels on period employment at variable rates related to the market are either in a pool or operating under contract of affreightment for a specific charterer. Tankers operating in the spot market may generate increased profit margins during improvements in tanker rates, while tankers operating on time charters generally provide more predictable cash flows. Accordingly, we actively monitor macroeconomic trends and governmental rules and regulations that may affect tanker rates in an attempt to optimize the deployment of our fleet. Our fleet has 13 tankers currently operating on spot voyages.
Operations and Ship Management
Management policies regarding our fleet that are formulated by our board of directors are executed by Tsakos Energy Management under a management contract. Tsakos Energy Managements duties, which are performed exclusively for our benefit, include overseeing the purchase, sale and chartering of vessels, supervising day-to-day technical management of our vessels and providing strategic, financial, accounting and other services, including investor relations. Our fleets technical management, including crewing, maintenance and repair, and voyage operations, has been subcontracted by Tsakos Energy Management to Tsakos Columbia Shipmanagement. Tsakos Energy Management also engages Tsakos Shipping to arrange chartering of our vessels, provide sales and purchase brokerage services, procure vessel insurance and arrange bank financing. Seven vessels were sub-contracted to third-party ship managers during part or all of 2011.
The following chart illustrates the management of our fleet:
Executive and Commercial Management
Pursuant to our management agreement with Tsakos Energy Management, our operations are executed and supervised by Tsakos Energy Management, based on the strategy devised by our board of directors and subject to the approval of our board of directors as described below. In accordance with the management agreement, we pay Tsakos Energy Management monthly management fees for its management of our vessels. There is a prorated adjustment if at each year end the Euro has appreciated by 10% or more against the Dollar since January 1, 2007. In addition, there is an increase each year by a percentage figure reflecting 12 month Euribor, if both parties agree. For 2012 monthly fees for operating vessels will be $27,500 per owned vessel and $20,400 for chartered-in vessels or chartered out on a bareboat basis or under construction. The monthly fee for the LNG carrier, Neo Energy, will be $35,000 from April 2012. The management fee starts to accrue for a vessel at the point a newbuilding contract is executed. To help ensure that these fees are competitive with industry standards, our management has periodically made presentations to our board of directors in which the fees paid to Tsakos Energy Management are compared against the publicly available financial information of integrated, self-contained tanker companies. We paid Tsakos Energy Management aggregate management fees of $15.3 million in 2011, $13.8 million in 2010 and $13.0 million in 2009. From these amounts, Tsakos Energy Management paid a technical management fee to Tsakos Columbia Shipmanagement. For additional information about the management agreement, including the calculation of management fees, see Item 7. Major Shareholders and Related Party Transactions and our consolidated financial statements which are included as Item 18 to this Annual Report.
Chartering. Our board of directors formulates our chartering strategy for all our vessels and Tsakos Shipping, under the supervision of Tsakos Energy Management, implements the strategy by:
Tsakos Shipping utilizes the services of various charter brokers to solicit, research, and propose charters for our vessels. The charter brokers role involves researching and negotiating with different charterers and proposing charters to Tsakos Shipping for cargoes to be shipped in our vessels. Tsakos Shipping negotiates the exact terms and conditions of charters, such as delivery and re-delivery dates and arranges cargo and country exclusions, bunkers, loading and discharging conditions and demurrage. Tsakos Energy Management is required to obtain our approval for charters in excess of six months and is required to obtain the written consent of the administrative agents for the lenders under our secured credit facilities for charters in excess of thirteen months. There are frequently two or more brokers involved in fixing a vessel on a charter. Brokerage fees typically amount to 2.5% of the value of the freight revenue or time charter hire derived from the charters. We pay a chartering commission of 1.25% to Tsakos Shipping for every charter involving our vessels. In addition, Tsakos Shipping may charge a brokerage commission on the sale of a vessel. In 2011, 2010 and 2009 this commission was approximately 1% of the sale price of a vessel. The total amount we paid for these chartering and sale brokerage commissions was $5.5 million in 2011. Tsakos Shipping may also charge a fee of $200,000 (or such other sum as may be agreed) on delivery of each new-building vessel in payment for the cost of design and supervision of the new-building by Tsakos Shipping. In 2011, $2.8 million has been charged for fourteen vessels delivered between 2007 and September 2011. This amount was added to the cost of the vessels concerned and is being amortized over the remaining life of the vessels.
Tsakos Shipping supervises the post fixture business of our vessels, including:
In addition, Tsakos Shipping appoints superintendents to supervise the construction of newbuildings and the loading and discharging of cargoes when necessary. Tsakos Shipping also participates in the monitoring of vessels operations that are under TCM management and TCMs performance under the management contract.
General Administration. Tsakos Energy Management provides us with general administrative, office and support services necessary for our operations and our fleet, including technical and clerical personnel, communication, accounting, and data processing services.
Sale and Purchase of Vessels. Tsakos Energy Management advises our board of directors when opportunities arise to purchase, including through newbuildings, or to sell any vessels. All decisions to purchase or sell vessels require the approval of our board of directors.
Any purchases or sales of vessels approved by our board of directors are arranged and completed by Tsakos Energy Management. This involves the appointment of superintendents to inspect and take delivery of vessels and to monitor compliance with the terms and conditions of the purchase or newbuilding contracts.
In the case of a purchase of a vessel by us, each broker involved will receive commissions from the seller generally at the industry standard rate of one percent of the purchase price, but subject to negotiation. In the case of a sale of a vessel by us, each broker involved will receive a commission from us generally at the industry standard rate of one percent of the sale price, but subject to negotiation. In accordance with the management agreement, Tsakos Energy Management is entitled to charge us for sale and purchase brokerage commission, but to date has not done so.
Pursuant to a technical management agreement, Tsakos Energy Management employs Tsakos Columbia Shipmanagement, or TCM, to manage the day-to-day aspects of vessel operations, including maintenance and repair, provisioning, and crewing of our vessels. We benefit from the economies of scale of having our vessels managed as part of the TCM managed fleet. On occasion, TCM subcontracts the technical management and manning responsibilities of our vessels to third parties. The executive and commercial management of our vessels, however, is not subcontracted to third parties. TCM, which is privately held, is one of the largest independent tanker managers with a total of 67 operating vessels under management (including our 48 vessels) at March 31, 2012, with a further four to be delivered, two of which are vessels under construction for us, totaling approximately 6.6 million dwt. TCM employs full-time superintendents, technical experts and marine engineers and has expertise in inspecting second-hand vessels for purchase and sale, and in fleet maintenance and repair. They have approximately 120 employees engaged in ship management and approximately 2,500 seafaring employees of whom half are employed at sea and the remainder is on leave at any given time. Their principal office is in Athens, Greece. The fleet managed by TCM consists mainly of tankers, but also includes feeder container vessels, dry bulk carriers and other vessels owned by affiliates and unaffiliated third parties.
Tsakos Energy Management pays TCM a fee per vessel per month for technical management of operating vessels and vessels under construction. This fee was determined by comparison to the rates charged by other major independent vessel managers. We generally pay all monthly operating requirements of our fleet in advance.
TCM performs the technical management of our vessels under the supervision of Tsakos Energy Management. Tsakos Energy Management approves the appointment of fleet supervisors and oversees the establishment of operating budgets and the review of actual operating expenses against budgeted amounts.
Maintenance and Repair. Each of our vessels is dry-docked once every five years in connection with special surveys and, after the vessel is fifteen years old, the vessel is dry-docked every two and one-half years after a special survey (referred to as an intermediate survey), or as necessary to ensure the safe and efficient operation of such vessels and their compliance with applicable regulations. TCM arranges dry-dockings and repairs under instructions and supervision from Tsakos Energy Management. We believe that the continuous maintenance program we conduct results in a reduction of the time periods during which our vessels are in dry-dock.
TCM routinely employs on each vessel additional crew members whose primary responsibility is the performance of maintenance while the vessel is in operation. Tsakos Energy Management awards and, directly or through TCM, negotiates contracts with shipyards to conduct such maintenance and repair work. They seek competitive tender bids in order to minimize charges to us, subject to the location of our vessels and any time constraints imposed by a vessels charter commitments. In addition to dry-dockings, TCM, where necessary, utilizes superintendents to conduct periodic physical inspections of our vessels.
Crewing and Employees
We do not employ the personnel to run our business on a day-to-day basis. We outsource substantially all of our executive, commercial and technical management functions.
TCM arranges employment of captains, officers, engineers and other crew who serve on our vessels. TCM ensures that all seamen have the qualifications and licenses required to comply with international regulations and shipping conventions and that experienced and competent personnel are employed for our vessels.
Several of the worlds major oil companies are among our regular customers. The table below shows the approximate percentage of revenues we earned from some of our customers in 2011.
Our business and the operation of our vessels are materially affected by government regulation in the form of international conventions and national, state and local laws and regulations in force in the jurisdictions in
which the vessels operate, as well as in the country or countries of their registration. Because these conventions, laws, and regulations are often revised, we cannot predict the ultimate cost of complying with them or their impact on the resale price and/or the useful lives of our vessels. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may have a material adverse effect on our operations. Various governmental and quasi-governmental agencies require us to obtain permits, licenses, certificates, and financial assurances with respect to our operations. We have obtained all permits, licenses, certificates and financial assurances material to the conduct of our current operations.
The heightened environmental and quality concerns of classification societies, insurance underwriters, regulators and charterers have led to the imposition of increased inspection and safety requirements on all vessels in the tanker market and the scrapping of older vessels throughout the industry has been accelerated.
IMO. The International Maritime Organization (IMO) has negotiated international conventions that impose liability for oil pollution in international waters and in a signatorys territorial waters.
On January 1, 2007 Annex I of the International Convention for the Prevention of Pollution from Ships (MARPOL) was revised to incorporate all amendments since the MARPOL Convention entered into force in 1983 and to clarify the requirements for new and existing tankers.
Regulation 12A of MARPOL Annex I , came into force on August 1, 2007 and governs oil fuel tank protection. The requirements apply to oil fuel tanks on all ships with an aggregate capacity of 600 cubic meters and above which are delivered on or after August 1, 2010 and all ships for which shipbuilding contracts are placed on or after August 1, 2007.
Since January 1, 2011 a new chapter 8 of Annex I on the prevention of pollution during transfer of oil cargo between oil tankers at sea has applied to oil tankers of 150 gross tons and above. This requires any oil tanker involved in oil cargo ship-to-ship (STS) operations to (1) carry a plan, approved by its flag state administration, prescribing the conduct of STS operations and (2) comply with notification requirements. Also, effective January 1, 2011, Annex I was amended to clarify the long-standing requirements for on board management of oil residue (sludge) and, effective August 1, 2011, the use or carriage of certain heavy oils has been banned in the Antarctic area.
In September 1997, the IMO adopted Annex VI to MARPOL to address air pollution from ships. Annex VI came into force in May 2005. It sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. Annex VI has been ratified by some, but not all IMO member states. All vessels subject to Annex VI and built after May 19, 2005 must carry an International Air Pollution Prevention Certificate evidencing compliance with Annex VI. Implementing the requirements of Annex VI may require modifications to vessel engines or the addition of post combustion emission controls, or both, as well as the use of lower sulfur fuels. In October 2008, the Marine Environment Protection Committee (MEPC) of the IMO adopted amendments to Annex VI regarding particulate matter, nitrogen oxide and sulfur oxide emissions standards. These amendments, which entered into force in July 2010, seek to reduce air pollution from vessels by establishing a series of progressive standards to further limit the sulfur content in fuel oil, which would be phased in by 2020, and by establishing new tiers of nitrogen oxide emission standards for new marine diesel engines, depending on their date of installation. Additionally, more stringent emission standards could apply in coastal areas designated as Emission Control Areas. The United States ratified the amendments in October 2008. In July 2011 the IMO adopted amendments to Annex VI to further reduce emissions from shipping by imposing mandatory technical and operational measures on new vessels of 400 gross tons or more. These requirements are expected to enter force on January 1, 2013. We have obtained International Air Pollution Prevention Certificates for all of our vessels and believe that maintaining compliance with Annex VI will not have an adverse financial impact on the operation of our vessels.
In 2001, the IMO adopted the International Convention on the Control of Harmful Anti-fouling Systems on Ships (the Anti-fouling Convention) which prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels. The Anti-fouling Convention came into force in September 2008 and applies to vessels constructed prior to January 1, 2003 that have not been in dry-dock since that date. Under the Anti-fouling Convention, exteriors of vessels must be either free of the prohibited compounds, or have had coatings applied that act as a barrier to the leaching of organotin compounds. Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and must undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. We have obtained Anti-Fouling System Certificates for all of our vessels that are subject to the Anti-Fouling Convention and do not believe that maintaining such certificates will have an adverse financial impact on the operation of our vessels.
The Companys liquefied natural gas (LNG) carrier is subject to IMO requirements for such vessels. In order to operate in the navigable waters of the IMOs member states, liquefied gas carriers must have an IMO Certificate of Fitness demonstrating compliance with construction codes for liquefied gas carriers. These codes, and similar regulations in individual member states, address fire and explosion risks posed by the transport of liquefied gases. Collectively, these standards and regulations impose detailed requirements relating to the design and arrangement of cargo tanks, vents, and pipes; construction materials and compatibility; cargo pressure; and temperature control. We have obtained an IMO Certificate of Fitness for our LNG carrier.
Liquefied gas carriers are also subject to international conventions that regulate pollution in international waters and a signatorys territorial waters. Under the IMO regulations, gas carriers that comply with the IMO construction certification requirements are deemed to satisfy the requirements of Annex II of MARPOL applicable to transportation of chemicals at sea, which would otherwise apply to certain liquefied gases. The Annex II regulations restrict discharges of noxious liquid substances during cleaning or de-ballasting operations. Effective January 2007, revisions to the Annex II regulations include significantly lower levels for discharges of noxious liquid substances for vessels constructed on or after the effective date. These more stringent discharge levels apply to the Companys LNG carrier.
The operation of our vessels is also affected by the requirements set forth in the IMOs International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code) which came into effect in relation to oil tankers in July 1998 and which was further amended on July 1, 2010. The ISM Code requires shipowners, ship managers and bareboat (or demise) charterers to develop and maintain an extensive safety management system that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a ship owner, ship manager or bareboat charterer to comply with the ISM Code may subject that party to increased liability, decrease available insurance coverage for the affected vessels or result in a denial of access to, or detention in, some ports. All of our vessels are ISM Code certified. Tsakos Columbia Shipmanagement S.A. or TCM, our technical manager, is ISO 14001 compliant. ISO 14001 requires companies to commit to the prevention of pollution as part of the normal management cycle.
We believe that under the current IMO regulations, the vessels of our existing fleet will be able to operate for substantially all of their respective economic lives. However, additional or new conventions, laws and regulations may be adopted that could adversely affect our ability to manage our ships, increase our costs, or have a material adverse effect on our operations.
OPA 90. The U.S. Oil Pollution Act of 1990 (OPA 90) established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA 90 affects all owners and operators whose vessels trade to the United States or its territories or possessions or whose vessels operate in United States waters, which include the United States territorial sea and its two hundred nautical mile exclusive economic zone.
Under OPA 90, vessel owners, operators and bareboat charterers are responsible parties and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. Tsakos Shipping and Tsakos Energy Management would not qualify as third parties because they perform under contracts with us. These other damages are defined broadly to include (1) natural resources damages and the costs of assessing them, (2) real and personal property damages, (3) net loss of taxes, royalties, rents, fees and other lost revenues, (4) lost profits or impairment of earning capacity due to property or natural resources damage, (5) net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and (6) loss of subsistence use of natural resources. OPA 90 incorporates limits on the liability of responsible parties for a spill. Since July 31, 2009, liability in respect of a double-hulled tanker over 3,000 gross tons has been limited to the greater of $2,000 per gross ton or $17,088,000 (subject to periodic adjustment by the United States Coast Guard). These limits of liability would not apply if the incident was proximately caused by violation of applicable United States federal safety, construction or operating regulations or by the responsible party (or its agents or employees or any person acting pursuant to a contractual relationship with the responsible party) or by 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.
Under OPA 90, with some limited exceptions, all newly built or converted tankers operating in United States waters must be built with double-hulls, and existing vessels which do not comply with the double-hull requirement must be phased out by 2015. Currently, all of our fleet is of double-hull construction.
OPA 90 requires owners and operators of vessels to establish and maintain with the United States Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90. Under OPA 90 regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, letter of credit, self-insurance, guaranty or other satisfactory evidence. Under the self-insurance provisions, the ship owner 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. OPA 90 requires an owner or operator of a fleet of tankers only to demonstrate evidence of financial responsibility in an amount sufficient to cover the tanker in the fleet having the greatest maximum liability under OPA 90. We maintain, for each of our vessels, pollution liability coverage in the amount of $1 billion per incident. A catastrophic spill could exceed the insurance coverage available, in which case there could be a material adverse effect on us.
The Coast Guards regulations concerning certificates of financial responsibility provide, in accordance with OPA 90, that claimants may bring suit directly against an insurer or guarantor that furnishes certificates of financial responsibility. If an insurer or guarantor is sued directly, it is prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. Some organizations, including the major protection and indemnity organizations, which had typically provided certificates of financial responsibility under pre-OPA 90 laws, have declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy defenses.
OPA 90 specifically permits individual U.S. coastal states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills.
Owners or operators of tankers operating in United States 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. These response plans must, among other things, (1) 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, (2) describe crew training and drills, and (3) identify a qualified individual with full authority to implement removal actions.
We have complied with all applicable Coast Guard and state regulations in the ports where our vessels call.
U.S. Clean Water Act: The U.S. Clean Water Act of 1972 (CWA) prohibits the discharge of oil or hazardous substances in navigable waters and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90. Under U.S. Environmental Protection Agency (EPA) regulations we are required to obtain a CWA permit to discharge ballast water and other wastewaters incidental to the normal operation of our vessels if we operate within the three mile territorial waters or inland waters of the United States. This permit, which the EPA has designated as the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP, incorporates the current U.S. Coast Guard requirements for ballast water management, as well as supplemental ballast water requirements, and includes requirements applicable to 26 specific discharge streams, such as deck runoff, bilge water and gray water. The U.S. Coast Guard and the EPA have entered into a memorandum of understanding which provides for collaboration on the enforcement of the VGP requirements. As a result, it is expected that the U.S. Coast Guard will include the VGP as part of its normal Port State Control inspections. The EPA has proposed a new draft VGP to replace the existing VGP when it expires in December 2013. We have obtained coverage under the VGP for all of our vessels operating within the territorial waters of the United States, and we do not believe that the costs associated with complying with the obligations of the VGP will have a material impact on our operations.
U.S. Clean Air Act: The U.S. Clean Air Act (CAA) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to CAA vapor control and recovery standards for cleaning fuel tanks and conducting other operations in regulated port areas and emissions standards for so-called Category 3 marine diesel engines operating in U.S. waters. The marine diesel engine emission standards are currently limited to new engines beginning with the 2004 model year. On April 30, 2010 EPA adopted final emission standards for Category 3 marine diesel engines equivalent to those adopted in the amendments to Annex VI to MARPOL. As a result, the most stringent engine emissions and marine fuel sulfur requirements of Annex VI will apply to all vessels entering U.S. ports or operating in U.S. waters, regardless of flag. The emission standards apply in two stages: near-term standards for newly-built engines, which have applied since the beginning of 2011, and long-term standards requiring an 80% reduction in nitrogen dioxides (NOx), which will apply from 2016. Compliance with these standards may result in additional incurred costs to install control equipment on our vessels.
In March 2009, the United States and Canada requested the IMO to designate specific areas of their respective coastal waters (extending to 200 nautical miles offshore) as Emission Control Areas (ECA) under the Annex VI amendments. On March 26, 2010 the IMO designated the waters off North American coasts as an ECA, meaning that vessels entering the designated ECA must use compliant fuel when operating in the area. The North American ECA will be enforceable from August 1, 2012, whereupon fuel used by all vessels operating in the ECA cannot exceed a 1.0% sulfur content, dropping to a 0.1% sulfur content in 2015. From 2016 NOx after-treatment requirements will also apply. In July 2011 the IMO established the U. S. Caribbean ECA in the waters of Puerto Rico and the U.S. Virgin Islands. The new ECA will become enforceable on January 1, 2014. California will require vessels operating within 24 nautical miles of its coast to use marine gas oil with a sulfur content of 1.0% or less, effective August 1, 2012. It is expected that the California fuel content regulations will be phased out in favor of the requirements of the North American ECA once it is in force. Compliance with the North American ECA, as well as any more stringent emissions requirements for marine diesel engines or port operations by vessels adopted by EPA or by the states could entail significant capital expenditures or otherwise increase the costs of our operations.
European Union Initiatives: In response to the 1999 oil spill from the tanker Erika, the European Union in September 2005 adopted legislation to incorporate international standards for ship-source pollution into European Community law and to establish penalties for discharge of polluting substances from ships
(irrespective of flag). Since April 1, 2007 Member States of the European Union have had to ensure that illegal discharges of polluting substances, participation in and incitement to carry out such discharges are penalized as criminal offences and that sanctions can be applied against any person, including the master, owner and/or operator of the polluting ship, found to have caused or contributed to ship-source pollution with intent, recklessly or with serious negligence (this is a lower threshold for liability than that applied by MARPOL, upon which the ship-source pollution legislation is partly based). In the most serious cases, infringements will be regarded as criminal offences (where sanctions include imprisonment) and will carry fines of up to Euro 1.5 million. On November 23, 2005 the European Commission published its Third Maritime Safety Package, commonly referred to as the Erika III proposals, and two bills (dealing with the obligation of Member States to exchange information among themselves and to check that vessels comply with international rules, and with the allocation of responsibility in the case of accident) were adopted in March 2007. The Treaty of Lisbon entered into force on December 1, 2009 following ratification by all 27 European Union member states and identifies protection and improvement of the environment as an explicit objective of the European Union. The European Union adopted its Charter of Fundamental Rights at the same time, declaring high levels of environmental protection as a fundamental right of European Union citizens. Additionally, the 2002 sinking of the Prestige has led to the adoption of other environmental regulations by certain European Union Member States. It is impossible to predict what legislation or additional regulations, if any, may be promulgated by the European Union or any other country or authority.
The EU has ECAs in place in the Baltic Sea and the North Sea and English Channel within which use of fuel with a sulfur content in excess of 1.5% is not permitted. Operators must comply with the stricter limit of 1.0% imposed by revised MARPOL Annex VI, and the European Union is now in the process of aligning its limits with MARPOL. In addition, the EU Sulphur directive provides that from January 1, 2010 inland waterway vessels and ships that berth in EU ports cannot use marine fuels with a sulfur content exceeding 0.1% by mass. The prohibition applies to use in all equipment, including main and auxiliary engines and boilers. Some EU Member States also require vessels to record the times of any fuel-changeover operations in the ships logbook.
Other Environmental Initiatives: Many countries have ratified and follow the liability scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (CLC), and the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage of 1971, as amended (Fund Convention). The United States is not a party to these conventions. Under these conventions, a vessels registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. The liability regime was increased (in limit and scope) in 1992 by the adoption of Protocols to the CLC and Fund Convention which became effective in 1996. The Fund Convention was terminated in 2002 and the Supplementary Fund Protocol entered into force in March 2005. The liability limit in the countries that have ratified the 1992 CLC Protocol is tied to a unit of account which varies according to a basket of currencies. Under an amendment to the Protocol that became effective on November 1, 2003, for vessels of 5,000 to 140,000 gross tons, liability is limited to approximately $6.99 million plus $977 for each additional gross ton over 5,000. For vessels of over 140,000 gross tons, liability is limited to approximately $139.1 million. As the Convention calculates liability in terms of IMF Special Drawing Rights, these figures are based on currency exchange rates on March 30, 2012. From May 1998, parties to the 1992 CLC Protocol ceased to be parties to the CLC due to a mechanism established in the 1992 Protocol for compulsory denunciation of the old regime; however, the two regimes will co-exist until the 1992 Protocol has been ratified by all original parties to the CLC. The right to limit liability is forfeited under the CLC where the spill is caused by the owners actual fault and under the 1992 Protocol where the spill is caused by the owners intentional or reckless conduct. The 1992 Protocol channels more of the liability to the owner by exempting other groups from this exposure. Vessels trading to states that are parties to these conventions must provide evidence of insurance covering the liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. We believe that our protection and indemnity insurance will cover the liability under the plan adopted by IMO.
The U.S. National Invasive Species Act (NISA) was enacted in 1996 in response to growing reports of harmful organisms being released into U.S. ports through ballast water taken on by ships in foreign ports. Under
NISA, the U.S. Coast Guard adopted regulations in July 2004 establishing a national mandatory ballast water management program for all vessels equipped with ballast water tanks that enter or operate in U.S. waters. These regulations require vessels to maintain a specific ballast water management plan. The requirements can be met by performing mid-ocean ballast exchange, by retaining ballast water on board the ship, or by using environmentally sound alternative ballast water management methods approved by the U.S. Coast Guard. Mid-ocean ballast exchange is the primary method for compliance with the Coast Guard regulations. On March 23, 2012, the Coast Guard adopted ballast water discharge standards, which set maximum acceptable limits for living organisms in ballast water discharge and established standards for ballast water management systems. The regulations will take effect on June 21, 2012, and will be phased in depending on a vessels ballast water tank size and its next drydocking date. The requirements of the Coast Guard regulations are consistent with those in EPAs proposed VGP. In the absence of federal standards, some states have enacted legislation or regulations to address invasive species through ballast water and hull cleaning management and permitting requirements. We could incur additional costs to comply with the new Coast Guard regulations, the proposed VGP, or additional state ballast water management regulations.
At the international level, the IMO adopted an International Convention for the Control and Management of Ships Ballast Water and Sediments in February 2004 (the BWM Convention). The Conventions implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention will not enter into force until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the worlds merchant shipping. As of February 29, 2012, the BWM Convention has not been adopted by a sufficient number of states with sufficient tonnage to enter into force. However, the MEPC passed a resolution in March 2010 calling on those countries that have already ratified the BWM Convention to encourage the installation of ballast water management systems.
If mid-ocean ballast exchange is made mandatory throughout the United States or at the international level, or if water treatment requirements or options are instituted, the cost of compliance could increase for ocean carriers. Although we do not believe that the costs of compliance with a mandatory mid-ocean ballast exchange would be material, it is difficult to predict the overall impact of such a requirement on our operations.
Although the Kyoto Protocol to the United Nations Framework Convention on Climate Change requires adopting countries to implement national programs to reduce emissions of greenhouse gases, emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol. No new treaty was adopted at the United Nations climate change conference in Cancun in December 2010. However, agreements were signed extending the deadline to decide on whether or not to extend the validity of the Kyoto Protocol, and requiring developed countries to raise the level of their emission reductions whilst helping developing countries to do the same. We believe there is pressure to include greenhouse gas emissions from shipping in any new treaty. In July 2011 MEPC adopted two new sets of mandatory requirements addressing greenhouse gas emissions from shipping. The Energy Efficiency Design Index establishes minimum energy efficiency levels per capacity mile and will apply to new vessels. Currently operating vessels must develop Ship Energy Efficiency Plans. These requirements will enter into force in January 2013 and could cause us to incur additional compliance costs. The IMO is also considering the development of market-based mechanisms for limiting greenhouse gas emissions from ships, but it is impossible to predict with certainty the likelihood of adoption of such a standard or its potential impact on our operations. The European Union intends to expand its emissions trading scheme to vessels. In the United States, the EPA has issued a finding that greenhouse gas emissions endanger the public health and safety and adopted greenhouse gas emissions standards for certain mobile sources and large stationary sources. Although the mobile source emissions do not apply to greenhouse gas emissions from ships, the EPA is considering a petition from the California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going vessels. The IMO, the EU or individual countries in which we operate could pass climate control legislation or implement other regulatory initiatives to control greenhouse gas emissions from vessels that could require us to limit our operations or make significant financial expenditures that we cannot predict with certainty at this time.
Trading Restrictions: The Company is aware of the restrictions applicable to it on trading with Cuba, Iran, Sudan and Syria and it has complied with those restrictions and intends to continue to so comply in all respects. The Company has not, nor does it intend to, directly provide any goods, fees or services to the referenced countries and has had no contacts with governmental entities in these countries nor does it intend to have any in the future. Its vessels are not chartered to any Cuban, Iranian, Sudanese or Syrian companies. More recent charterer-party agreements relating to the Companys vessels now preclude Iran from the vessels trading unless agreed between owner and charterer after taking into account all relevant sanctions legislation. Between January 1, 2011 and March 31, 2012, the Companys vessels made nearly 2,500 port calls around the world, of which only six involved visits, under charterers instructions, to these countries ( a quarter of 1% of total calls). One call was to Iran in February 2011, three to Syria between January and April 2011, and two to Sudan between July and September 2011. There were no calls to Cuba. None of the vessels the Company owns or operates or charters have provided, or are anticipated to provide, any U.S.-origin goods to these countries, or involve employees who are U.S. nationals in operations associated with these countries. The Company has no relationships with governmental entities in those countries, nor does it charter its vessels to companies based in those countries. The Company derives its revenue directly from the charterers.
Classification and inspection
Our vessels have been certified as being in class by their respective classification societies: Bureau Veritas, Det Norske Veritas, American Bureau of Shipping, Korean Register, Lloyds Register of Shipping or Nippon Kaiji Kyokai. Every vessels hull and machinery is classed by a classification society authorized by its country of registry. The classification society certifies that the vessel has been built and maintained in accordance with the rules of such classification society and complies with applicable rules and regulations of the country of registry of the vessel and the international conventions of which that country is a member. Each vessel is inspected by a surveyor of the classification society every year, an annual survey, every two to three years, an intermediate survey, and every four to five years, a special survey. Vessels also may be required, as part of the intermediate survey process, to be dry-docked every 24 to 30 months for inspection of the underwater parts of the vessel and for necessary repair related to such inspection.
In addition to the classification inspections, many of our customers, including the major oil companies, regularly inspect our vessels as a precondition to chartering voyages on these vessels. We believe that our well-maintained, high quality tonnage should provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality of service.
TCM, our technical manager, has a document of compliance with the ISO 9000 standards of total quality management. ISO 9000 is a series of international standards for quality systems that includes ISO 9002, the standard most commonly used in the shipping industry. Our technical manager has also completed the implementation of the ISM Code. Our technical manager has obtained documents of compliance for our offices and safety management certificates for our vessels, as required by the IMO. Our technical manager has also received ISO 14001 certification.
Risk of loss and insurance
The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters and property losses, including:
In addition, the transportation of crude oil is subject to the risk of crude oil spills, and business interruptions due to political circumstances in foreign countries, hostilities, labor strikes, and boycotts. Tsakos Shipping arranges insurance coverage to protect against most risks involved in the conduct of our business and we maintain environmental damage and pollution insurance coverage. Tsakos Shipping arranges insurance covering the loss of revenue resulting from vessel off-hire time. We believe that our current insurance coverage is adequate to protect against most of the risks involved in the conduct of our business. The terrorist attacks in the United States and various locations abroad and international hostilities have lead to increases in our insurance premium rates and the implementation of special war risk premiums for certain trading routes. See Item 5. Operating and Financial Review and Prospects for a description of how our insurance rates have been affected by recent events.
We have hull and machinery insurance, increased value (total loss or constructive total loss) insurance and loss of hire insurance with Argosy Insurance Company. Each of our ship owning subsidiaries is a named insured under our insurance policies with Argosy. Argosy provides the same full coverage as provided through London and Norwegian underwriters and reinsures its exposure, subject to customary deductibles, in the London, French, Norwegian and U.S. reinsurance markets. We were charged by Argosy aggregate premiums of $9.9 million in 2011. By placing our insurance through Argosy, we believe that we achieve cost savings over the premiums we would otherwise pay to third party insurers. Argosy reinsures most insurance it underwrites for us with various reinsurers. These reinsurers have a minimum credit rating of A.
Our subsidiaries are indemnified for legal liabilities incurred while operating our vessels by protection and indemnity insurance that we maintain through their membership in a P&I club. This protection and indemnity insurance covers legal liabilities and other related expenses of injury or death of crew members and other third parties, loss or damage to cargo, claims arising from collisions with other vessels, damage to other third party property and pollution arising from oil or other substances, including wreck removal. The object of P&I clubs is to provide mutual insurance against liability to third parties incurred by P&I club members in connection with the operation of their vessels entered into the P&I club in accordance with and subject to the rules of the P&I club and the individual members terms of participation. A members individual P&I club premium is typically based on the aggregate tonnage of the members vessels entered into the P&I club according to the risks of insuring the vessels as determined by the P&I club. P&I club claims are paid from the aggregate premiums paid by all members, although members remain subject to calls for additional funds if the aggregate insurance claims made exceed aggregate member premiums collected. P&I clubs enter into reinsurance agreements with other P&I clubs and with third party underwriters as a method of preventing large losses in any year from being assessed directly against members of the P&I club. As of March 31, 2012, applicable P&I club rules provide each of its members with more than $4 billion of liability coverage except for pollution coverage which is limited to $1 billion.
World events have in the past led to increases in our insurance premium rates and the implementation of special war risk premiums for certain trading routes. Although for 2011-2012, our P&I club insurance was renewed at an almost 2% reduction, it was renewed for 2012-2013 at an almost 2% increase. Our hull and machinery insurance premiums also decreased on average by almost 2% for 2011-12. During 2011, there were huge global catastrophe losses, including the earthquakes of New Zealand and Japan, tornadoes in the U.S., cyclones in Australia and floods in Thailand. However, although the resulting losses will eventually have to be paid for, it is expected that hull & machinery renewals for 2012-2013 will again be modest, partly due to reduced vessel values. War risk coverage for vessels operating in certain geographical areas has increased, but this type of coverage represents a relatively small portion of our total insurance premiums. P&I, hull and machinery and
war risk insurance premiums are accounted for as part of operation expenses in our financial statements. Accordingly, any change in insurance premium rates directly impacts our operating results.
We operate in markets that are highly competitive and where no owner controlled more than 5% of the world tanker fleet as of March 31, 2012. Ownership of tankers is divided among independent tanker owners and national and independent oil companies. Many oil companies and other oil trading companies, the principal charterers of our fleet, also operate their own vessels and transport oil for themselves and third party charterers in direct competition with independent owners and operators. We compete for charters based on price, vessel location, size, age, condition and acceptability of the vessel, as well as Tsakos Shippings reputation as a manager. Currently we compete primarily with owners of tankers in the ULCCs, VLCCs, suezmax, aframax, panamax, handymax and handysize class sizes, and we also compete with owners of LNG carriers.
Although we do not actively trade to a significant extent in Middle East trade routes, disruptions in those routes as a result of international hostilities, including those in Afghanistan and Iraq, economic sanctions, including those with respect to Iran, and terrorist attacks such as those made against the United States in September 2001 and various international locations since then may affect our business. We may face increased competition if tanker companies that trade in Middle East trade routes seek to employ their vessels in other trade routes in which we actively trade.
Other significant operators of multiple aframax and suezmax tankers in the Atlantic basin that compete with us include Overseas Shipholding Group Inc., Teekay Shipping Corporation and General Maritime Corporation. There are also numerous smaller tanker operators in the Atlantic basin.
We have no salaried employees. See Management ContractCrewing and Employees.
We operate out of Tsakos Energy Management offices in the building also occupied by Tsakos Shipping at Megaron Makedonia, 367 Syngrou Avenue, Athens, Greece.
We are involved in litigation from time to time in the ordinary course of business. In our opinion, the litigation in which we were involved as of March 31, 2012, individually and in the aggregate, was not material to us.
General Market OverviewWorld Oil Demand / Supply and Trade (ICAP)
All of the statistical data and other information presented in this section entitled General Market OverviewWorld Oil Demand / Supply and Trade, including the analysis of the various sectors of the oil tanker industry, has been provided by ICAP Shipping (ICAP). ICAP has advised that the statistical data and other information contained herein are drawn from its database and other sources. In connection therewith,
ICAP has advised that: (a) certain information in ICAPs database is derived from estimates or subjective judgments; (b) the information in the databases of other maritime data collection agencies may differ from the information in ICAPs database; and (c) while ICAP has taken reasonable care in the compilation of the statistical and other information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures.
Following years of tracking one another, 2011 was the year the worlds major crude oil benchmarks parted company. WTI has historically traded at a slight premium to Brent representing its superior qualityhowever by the end of 2010 the former was trading at a discount of over $3/barrel. By early September 2011 this discount had increased to over $28/barrel. The change was brought about by a number of factors, including disruptions to North Sea production and the loss of Libyan output applying upward pressure on Brent prices, but the downward pressure of WTI was the main contributing factor as rising Canadian and North Dakotan oil production began to swell the tanks of the storage hub at Cushing, Oklahoma, combined with weak domestic demand. With few export options from the landlocked delivery point for NYMEX WTI futures contracts, prices came under pressure relative to the supply-constrained Brent and Brent-priced crudes. By year-end the discount had dropped to around $8/barrel following resurgent production from Libya and the news of the Seaway pipeline reversal, which will enable 150,000 bpd of crude to flow north-south from June 2012, having previously fed the Midwest refineries with crude from the US Gulf. However the forward market believes the historical relationship is some way from returning, with WTI continuing to trade at a discount to Brent out to 2016.
Despite supply disruptions arising from the Arab Spring, prices remained relatively stable throughout the year, with Brent trading between $93/barrel and $126/barrel, which tightened to between $100/barrel and $120/barrel following the initial shock from the Libyan uprising. WTI saw a wider range, with highs following Libya at $114/barrel and lows coinciding with the record discount to Brent at $75/barrel.
Following a continued weak global economic outlook as well as supply disruptions, OPEC played its part in trying to keep the market well supplied, helping to prevent oil prices from increasing during an economically sensitive time. Lost Libyan barrels (1.6m bpd of production with exports of 1.2m bpd before the uprising) were promptly replaced by Saudi Arabia, which increased production to above 10m bpd by some estimates towards the end of 2011, the highest in 30 years. Even as Libyan production returned (with recent suggestions implying the full 1.6m bpd levels will be online in the second half of 2012) Saudi Arabian production remained high, citing strong demand from Asian buyers and that the country is happy to continue to pump at similar levels if demand is there. OPEC then made its first formal change to its oil quota since slashing output in December 2008 in the wake of the global financial crisis, setting a new target of 30m bpd (including Iraq), an increase from 24.845m bpd (excluding Iraq, which produced an average of 2.67m bpd in 2011). The new target has no country-specific quotas, and is based on a slight reduction from actual output at the end of 2011.
According to the International Energy Agency (IEA), world oil supply averaged 88.45m bpd in 2011, up 1.12m bpd (+1.3%) from 2010. Nearly 90% of the increase came from OPEC, increasing production by 0.99m bpd (+2.8%), with the remaining 130,000 bpd (+0.2%) increase coming from non-OPEC sources. The larger OPEC increase lifted the groups share of world oil production from 39.8% to 40.4%. OECD stocks fell by 55.7m bbl in 2011 to end the year at 2.61bn bbl, suggesting average effective additional supply of around 150,000 bpd. Stock levels finished 2011 lower than in July 2008 (2.63bn bbl) when oil prices were rising to above $147/bblhowever due to falling OECD demand the forward cover is around 57 days versus 53 days previously, implying stocks were not as low as the headline numbers suggests.
Supply problems have continued into 2012, with Syrian production subject to US and EU sanctions, although exports were negligible at around 150,000 bpd on production of around 380,000 bpd, the latter of which has now been cut to sub-250,000 bpd. Yemeni supply has dropped to almost zero following strikes and political issues, whilst disagreements over transit fees between the recently split Sudan and South Sudan has shut in around 300,000 bpd of production. The North Sea continues to see production problems and Iraq perennially under performs on the increased production the country promises however increasing export facilities
beginning to come on stream now (five single-point moorings, each capable of loading at 850,000 bpd) should ease the infrastructure constraints. The largest wildcard remains Iran, with the EU passing sanctions against the country in January to begin in July (to allow time for EU buyers to source alternative supplies), only then for Iran to pre-empt the ban by halting exports to some European countries. The EU had previously imported around 500,000 bpd of Iranian production, and with the US applying pressure to Asian buyers, Irans export options look set to diminish further as the year goes on. Once again Saudi Arabia has repeatedly said it will make up for a short-fall, and is able to increase production to 11.4-11.8m bpd within a number of days, and reach its full capacity of 12.5m bpd within 90 days. However with Saudi Arabia the only significant holder of spare production capacity, any further production increase leaves global oil supply increasingly vulnerable to a new supply disruption, potentially sending prices upwards and destroying demand. Production gains are expected in 2012 from Brazil, Canada and the US, Angola and Iraq, all of which will be of vital importance if Saudi Arabia does begin to increase production to offset the falling Iranian exports.
The latest (March) Oil Market Report from the IEA estimates global oil demand increased by 760,000 bpd in 2011 (+0.9%), a significant slowdown from the 2010/2009 increase of 2.75m bpd (+3.2%) as the global economy continued to stall. Non-OECD demand was estimated to have increased by 1.30m bpd (+3.1%), led by China and the Former Soviet Union, increasing by 440,000 bpd (+4.9%) and 230,000 bpd (+5.2%) respectively. Africa was the only non-OECD region to post a decline, down 50,000 bpd (-1.5%). OECD demand contracted by 530,000 bpd (-1.1%), with OECD Europe falling by 310,000 bpd (-2.1%) and OECD North America down by 260,000 bpd (-1.1%)the loss in the West was tempered by a slight gain of 40,000 bpd (+0.5%) in OECD Pacific. The difference between the initial IEA forecast for 2011 demand growth of +1.35m bpd back in July 2010 and the latest estimate is a stark reminder of the sensitivity of oil demand to the global economy.
The current estimate for demand growth in 2012 is an increase of 820,000 bpd (+0.9%), which itself has been lowered from a forecasted increase of 1.61m bpd made in August 2011. OECD demand is set to fall by 390,000 bpd (-0.9%), with 330,000 bpd (-2.3%) expected to be removed from OECD Europe and 120,000 bpd (-0.5%) from OECD North America, whilst OECD Pacific should once again offset a fraction of these declines increasing by 60,000 bpd (+0.8%). China, other Asia (including India) and Africa are set to lead the 1.21m bpd (+2.8%) non-OECD gains, increasing by 370,000 bpd (+3.9%), 250,000 bpd (+2.3%) and 170,000 bpd (+5.1%) respectively. However one important caveat hangs over the current estimate: it assumes global GDP growth of 3.3%, but the IEA warns if this drops to 2.6%, effective oil demand growth would drop to zero.
The weak state of the global economy as well as supply disruptionsboth limiting demand growth through uncertainty and higher pricesfiltered through to imply a reduced increase in trade volumes in 2011. In China, crude oil imports were up year-on-year, however only by 260,000 bpd (+5.4%), from 4.8m bpd in 2010 to 5.1m bpd in 2011. This was the lowest increase since 2005/2004, with the interim years posting gains of between 9% and 18%. Further examining the data shows this small increase had an even smaller effect on trade. Normally the increase in Chinese crude oil imports is reflected in a similar percentage increase in tonne-mile demand, however despite the 5.4% growth in imports, Chinese tonne-mile demand only managed to increase by 1.1% to 1.71 trillion. There are a number of reasons as to why tonne-mile demand growth associated to China floundered in 2011. The supply disruptions in the Atlantic basin drove up the price of Brent and related crudes versus Dubai, discouraging long-haul imports from West Africa. In turn the increased Saudi Arabian production provided a more plentiful supply closer to market, damping any increase in tonne-mile demand. West African exports to China were down 140,000 bpd (-14.6%), whilst Middle Eastern exports were up 340,000 bpd (+15.1%). Furthermore, exports from North Africa, encompassing Libya, were down 80,000 bpd (-40.7%) due to falling supply stemming from the uprising. Further downside to shipping was seen through rising Russian volumes, increasing by 70,000 bpd (+21.2%), mostly due to the new Chinese spur from the Eastern Siberia-Pacific Ocean (ESPO) pipeline commencing operations. The Russian increase accounted for nearly 25% of Chinas year-on-year increase. A 12.6% increase in supply from the Americas helped ensure there was at least some positive tonne-mile demand effect.
In the US, crude oil imports were down 290,000 bpd (-3.1%) as increasing domestic production, falling demand and a policy of reducing dependence on foreign oil took its toll. Imports from West Africa fell by
280,000 bpd (-17.5%) due to falling refinery utilization on the US Atlantic Coast due to rising West African crude prices on the back of the Libyan outage and the falling domestic demand. The Libyan outage itself reduced imports from North Africa by 190,000 bpd (-49.9%). Although imports from the Middle East actually increased by 180,000 bpd (+10.6%) as Saudi Arabia increased production, the 220,000 bpd increase (+11.0%) in imports from Canada to 2.19m bpd, equating to 24.5% of total US imports, meant US tonne-mile demand fell by 3.4% to 1.86 trillion, having peaked at 2.35 trillion in 2004. In fact in Q1 2011 Chinese tonne-mile demand was higher than that of the US, despite imports of 5.19m bpd and 8.69m bpd that quarter respectivelywhich highlights the importance of supply source as well as volume. Whilst the US spent the remainder of the year ahead of China, the gap is narrowing once more. With Chinese and US demand forecast to increase by 3.9% and fall by 0.5% respectively, China becoming the most influential economy on the crude tanker market is not far off.
The forecast 4.0% increase in Chinese demand for 2012 should lead to a larger increase in tonne-mile demand due to increasing West African and returning Libyan production reducing the premium of Brent-priced crudes, encouraging an increase in West Africa-loading voyages for Asian discharge. This should offset the likely continued decline from US tonne-miles due to increasing domestic and Canadian production and weaker demand.
Supply from Iran remains a wildcard, with 500,000 bpd of Middle East to Europe volumes being removed through to July and Asian buyers reducing imports or under pressure from the US to do so, trade has the potential to change significantly. If Saudi Arabia continues to replace production, little may change, however whilst their spare capacity could cover all Iranian exports, it would leave the market with little spare capacity, which would inevitably keep a premium on oil prices, potentially damaging demand. If Saudi Arabia does not meet the shortfall created by the Iranian sanctions there would likely be a scramble for West African and other Middle Eastern barrels, both of which could either shorten or lengthen the average voyagehowever what would be certain is it would push up prices, likely damaging demand in an already uncertain economy.
The use of crude oil tankers for floating storage declined in 2011 to become an insignificant employer of the global fleet. Whilst a number of Iranian-owned tankers remained under-employed due to difficulty in trading with Iran, the remainder of the fleet only saw up to a maximum of seven VLCCs employed in floating storage, along with some Suezmaxes. In previous years the number of VLCCs storing (excluding Iranian tonnage) had reached as high as 50 vessels (2009), providing significant support to the supply/demand balance. The Iranian-owned fleet across all crude sectors currently accounts for around 2% of the global fleet (by number).
The crude oil market remains in steep backwardation (where future prices trade at a discount to prompt prices), a scenario which does not lend itself to storing crude oil at sea (contango, whereby the prompt price trades at a discount to future prices, enables traders, oil companies and banks to buy the prompt cargoes, store at sea, and sell forward the higher priced future contracts to lock in a profit). The backwardation in the market is partly caused by the supply disruptions and, albeit small, growing demand. Unless the oil market returns to contango, large-scale use of tankers for floating storage remains unlikely. One scenario under which contango could return would be another global recession, weakening oil demand and sending prompt prices lower, with anticipation of returning demand holding up future prices, exactly what happened in 2008/9however any benefit to the tanker market through increased floating storage would likely be more than offset by a decline in trade volumes following that recession.
The oil product market is also in backwardation, which has led to a gentle decline in oil product tankers storing refined products at sea. Following a peak of 100+ vessels (all sizes) storing approximately 12m tonnes of refined products in late 2009 and early 2010, it is now estimated only a handful, primarily older vessels, continue to storemostly for strategic reasons off West Africa.
For the product tanker market, imports of gasoline, gasoil/diesel, jet fuel/kerosene and fuel oil into the US fell by 190,000 bpd (-12.2%)the largest decline since 2008from 1.57m bpd in 2010 to 1.38m bpd in 2011. However increasing export volumes, fed by weak domestic demand and high utilization rates for US Gulf
refineries (due to relatively cheap WTI crude, unlike the Atlantic Coast refineries which are more dependent on Brent-priced crude), meant the US is now a net exporter for the combined major oil products. Exports increased by 430,000 bpd (+29.5%) to 1.87m bpd, led by an increase of 183,000 bpd (+61.9%) in gasoline exports. Gasoline remains the only product for which the US continues to be a net importer. Much of the gasoline exports were destined for Central and South America, especially Brazil, which had a poor sugarcane harvest and so ethanol production, a key transportation fuel component, was disrupted. The gasoil/diesel exports contributed more to tonne mile demand with around half shipped to Europe, with the remainder staying within the Americas.
Imports of the four main oil products into OECD Europe remained broadly flat for the third consecutive year at 2.19m bpd, up just 1.4%. Gasoline imports contributed the largest increase at 26.9%, but it still only makes up 10% of total OECD Europe imports. Gasoil/diesel, the largest component of product imports with 45% of the total, decreased by 5.5%, however imports of gasoil/diesel from the US surged by 80%. In China, despite continued refinery expansion, the country remained a net importer of oil products in 2011 which is likely to continue for some years yet. However continued mismatch between refinery output and consumer demand allows for some cross-trading, primarily intra-Asia.
World Tanker Fleet
Growth in the VLCC fleet was 8.0% in 2011, significantly higher than the past five years (2006-2010 inclusive averaged 2.1%), led by a high number of deliveries and a reduced number of removals. 63 vessels were delivered from shipyards, however this was down from the 83 scheduled for delivery at the start of the year, implying a slippage rate of 24%. Following the removal of 21 vessels from trading, net fleet additions were 42 vessels. In comparison 2009 and 2010 saw net deliveries of 14 and 13 respectivelywhilst deliveries were relatively high at 53 and 54 vessels respectively, this was tempered by the removal of 39 and 41 vessels in each yeara combination of scrapping, permanent storage employment and conversion to offshore and dry cargo vessels. Whilst all three exit routes continued in 2011, reduced requirement for further permanent storage (primarily off Singapore) and fewer candidates for dry cargo conversion (plus strong fleet growth in the largest dry cargo vessel sector, for which the converted VLCCs would be joining) played a role in the falling removals. The orderbook at the start of 2012 for deliveries in the year ahead was 71 vessels, however it is expected that a number of these will not deliver on time.
Suezmax fleet growth registered 7.8% in 2011, with 44 deliveries and 12 removals. 22 of the 66 vessels scheduled for delivery at the start of the year slipped into later years. Whilst fleet growth was high with net deliveries of 32 vessels, it came in under the 9.7% seen in 2009 (net deliveries of 35 vessels). However 2009 had the support of floating storage for clean petroleum products, which saw a number of newbuilding Suezmaxes load gasoil/diesel in the Far East to then proceed to store off Europe for a number of months, effectively slowing the rate of deliveries from the shipyards. Whilst gasoil/diesel shipments east/west on newbuildings continue, they are now purely repositioning voyages with no storage element, meaning the strong fleet growth was felt more acutely in 2011. In comparison, fleet growth in 2010 was 4.3%, with 36 vessels delivered and 19 removed, however in reality, the high fleet growth of 2009 was somewhat smoothed into 2010 as vessels delivered in the former which then stored off Europe redelivered their cargo and began trading in the latter. At the start of 2012 there were 62 vessels scheduled for delivery in the coming year, however with slippage averaging 34% over the previous three years, a significant number of these will likely be delayed.
Fleet growth for the Aframax sector was just 3.7% in 2011, the lowest since 2002. 59 vessels were delivered from shipyards, down 16 from the 75 listed, implying 21% slippage, whilst 26 were removed from the fleet, giving net deliveries of 33 vessels. This is significantly down from the highs of 2009, which saw net deliveries of 75 vessels (96 deliveries and 21 removals), and 40 in 2010 (70 deliveries and 30 removals). Just 64 vessels were listed for 2012 delivery at the start of the yearwith some slippage, the number of deliveries could be the lowest in a number of years.
The number of deliveries in the Panamax sector continues to fall year-on-year, the sixth year of declines, with just 27 vessels added to the fleet in 2011, down 25% on the 36 listed at the start of 2011. However with only
six vessels removed in 2011, net deliveries of 21 vessels was the highest since 2008 (net deliveries of 27 vessels), giving fleet growth of 5.3%. There were 32 vessels listed for 2012 delivery at the start of the year, if historical slippage continues a seventh year of falling deliveries is possible, but a stronger showing on removals will be needed to slow the fleet growth.
The MR products tanker sector (45,000 dwt55,000 dwt) saw its lowest fleet growth in ten years in 2011, despite just two removals. The 68 vessels delivered from the 103 listed (34% slippage), giving net deliveries of 66 vessels meant fleet growth of 7.5%, a marked decline from the highs seen in 2008 and 2009 at 20.8% and 17.2%. The modern fleet means fleet growth is much more sensitive to deliveries as there is a relatively small number of candidates for removal (although as the years progress this stock will increase), and with 73 listed for delivery in 2012, after slippage, fleet growth looks set to slow further. For the smaller Handy product tanker sector (27,000 dwt45,000 dwt) fleet growth once again came in negative, just, at -0.1% following 28 deliveries from 37 originally listed (24% slippage), with 29 removalsthis follows a decline of 2.3% in 2010. The orderbook for 2012 is just 20 vessels and with an aging fleet removals should continue to outpace deliveries, seeing the fleet size reduce further.
Price assessments were suspended in late 2008 and early 2009 due to a lack of liquidity in the tanker sale and purchase markets
Following the 52 VLCC orders seen in 2010, just 14 were placed in 2011 as oversupply in the existing fleet and continued finance constraints kept owners away from the shipyards. Of the 14, Chinese yards received 10 of the orders, with South Korea the remainder. As well as prices being lower, another reason for the strong showing in China was because South Korea has been actively seeking higher value orders, especially in the gas and offshore sectors as it looks to secure business at a time of excess yard capacity. Japanese yards continue to be priced out due to the strong yen. Prices softened slightly through the year as orders failed to materialize, moving from $105m in January 2011 to $100m by the year-end.
After the strong contracting of 2010 with 57 orders, 2011 saw a similar decline to the Suezmaxes, with orders totaling just 18 vessels. Of these, 12 were specialist shuttle tankers, reflecting the potential future shortfall in vessels able to serve the growing offshore oil industry. Whilst these 12 shuttle tankers could trade in the international market, the majority have been ordered against long-term time charters and it is unlikely they will affect the trading fleet, therefore effective orders totaled just six vessels for 2011. Prices remained flat around $62m from February 2011 to January 2012, down from $68m in 2010, from when prices were pushed higher on the heavy ordering activity that year. The shuttle tanker orders were priced between $95 and $105m, reflecting their superior specification. Five of the six conventional Suezmaxes were ordered at Chinese yards, whilst the remainder, and all the shuttle tankers, were ordered at South Korean yards.
Just 11 orders were placed for Aframax vessels during 2011, however only eight have been ordered for international trading due to one order being a shuttle tanker and two ordered by a US major for domestic trading (at a cost of $200mthe US Jones Act stipulates tankers that will trade port-to-port in the US must be US built, flagged and crewed. The price highlights the huge gulf in costs between Far Eastern shipyards and western shipyards, however the vessels are likely to have been ordered to a very high specification relative to a standard conventional Aframax). The shuttle tanker and three conventional vessels have been ordered at South Korean shipyards, one at a Chinese shipyard and four in Japan. Similarly to other sectors, prices softened through the year as ordering remain subdued, falling from $57m in January 2011 to $52m a year later.
There was a strong showing of contracting in the MR product tanker sector, with 55 orders placed, primarily in South Korean shipyards. The sector has often been selected as the one with the best prospects going forward, and this has not been ignored as owners try to order at the bottom of the cycle. Prices held up throughout the year, fluctuating between $36m and $37m.
Shipyard capacity continues to exceed demand, suggesting downward pressure on prices, however yards appear to have little room to adjust prices further due to the high-cost (raw materials and labor) environment. This has the benefit of slowing ordering, however yards eventually may drop prices below breakeven (if they are not already) in order to ensure cash flow. Once a sustained freight rate recovery is underway, prices look likely to increase as ordering activity picks up ahead of a new cycle, however with a number of owners struggling financially, the orders will come from fewer owners, which may keep any price increases relatively small.
Price assessments were suspended in late 2008 and early 2009 due to a lack of liquidity in the tanker sale and purchase markets.
Second-hand prices for the larger crude tankers were holding up relatively well during the first half of 2011 following the rebound and subsequent decline in 2010, however by the second half of 2011, prices succumbed to the continued weak market, with a number of large owners beginning to offload their older vessels, which had a knock-on effect on the younger second-hand tonnage. 5-year old VLCCs dropped from $80m in July 2011 to $55m by November 2011, with 5-year old Suezmaxes dropping from $52m to $43m over the same period. 5-year old Aframax prices have been in a slow continuous decline from a peak in Q4 2010 at $45m to $32m by the start of 2012. MR product tankers saw prices for 5-year old vessels rise from $26m in January 2011 to $30.5m by early summer, reflecting strong interest in the prospects for the sector, however the remainder of the year saw prices edge back down to $25m as interest switched to newbuilding ordering for MRs with economical engines.
Following the increase in 2010 from the lows of 2009, freight rates quickly reversed in 2011, with all three crude tanker sectors recording their lowest annual averages in the modern era. Continued uncertainty in the global economy, strong fleet growth and no support from floating storage, as well as geopolitical events dampening tonne-mile demand growth were all part of the cause. The MR product tanker market broke the trend and saw rates remain broadly flat year-on-year, as increasing volumes on growing routes, such as exports out of the US and imports into Brazil and Africa helped absorb some of the over-supply, further supported by falling fleet growth. Although headline numbers were generally weak, this reflects vessels steaming at 14.5kts, the historical standard, when in reality, the high cost of bunker fuel and weak market have led owners to slow-steam. This has the benefit of reducing bunker fuel consumption and so saving costs, but it also tightens the supply/demand balance as vessels take longer to complete a voyage, buoying rates. Once slow-steaming is factored in, the decline in rates from 2010 levels are less dramatic, but nonetheless still weak.
Benchmark VLCC spot earnings had a relatively strong start to 2011, posting an average of nearly $23,000/day in Q1, higher than Q4 2010however Q1 and Q4 are typically the strongest (due to the northern
hemisphere winter when shipping demand tends to increase)and given Q1 2011 was down on the $55,000/day seen in Q1 2010 and $44,500 seen in Q1 2009, the outlook for the year was possibly set early on. Continued downward revisions to 2011 demand estimates due to the global economic uncertainty, the loss of Libyan output altering tonne-mile demand into China, and the heavy delivery schedule took their toll into Q2 and Q3, with rates averaging just $9,500/day and $1,500/day respectively, with long-periods of negative earnings, whereby freight rates did not completely cover bunker fuel costs (assuming normal speeding) and port costs. By Q4, traditionally the strongest quarter, only a very lackluster rebound ensued, seeing rates average $11,000/day as the full force of the 8.0% fleet growth and no support from floating storage (as seen in previous years) was felt, bringing the annual average to $11,000/day, enough to cover daily operating costs (crewing, communications, maintenance and so on), but not enough to cover finance costs. The first part of 2012 has seen rates continue to increase from Q4 2011, helped by continued momentum in removals carried over from 2011, however the average for Q1 2012 is currently lower than that of Q1 2011, suggesting the removals will need to continue at pace to ensure a recovery in freight rates.
The Suezmax composite (basis 70% of the West Africa/USAC rate and 30% of the Black Sea/Med. rate, reflecting the fixture split) slid from Q4 2010 into Q1 2011 at $23,000/day and $19,000/day respectively. Turkish straits delays, typically a support for the Suezmaxes and Aframaxes trading in the Black Sea and Med. saw their typical spike (vessels over 200m in length cannot transit the strait during darkness, therefore in wintertime, with fewer daylight hours, delays build up either side), however the loose supply/demand balance meant this had a dampened effect on rates. As with the VLCCs, Q2 and Q3 weakened further, with rates at $8,500/day and $3,500/day, with a particularly weak showing from the Black Sea/Med. market, before picking up on winter demand to $16,000/day in Q4 2011. Further upside was prevented from the declining volumes of West African crude exported to the US Atlantic Coast as a number of refineries began to shut down due to poor refining economics with high Brent prices. The annual average was therefore $11,000/day, under half the previous year. Despite falling volumes into the US from West Africa, the Q1 2012 average is currently around the level of a year ago at $19,000/day, however going forward, as well as further refinery shutdowns already announced, Russia looks set to continue to divert crude oil from its export terminals in the Black Sea to the Baltic as it starts up its new Baltic Pipeline System (BPS-2), further cutting Suezmax supply volumes. It is therefore expected the Suezmaxes will be forced to trade on an increasing number of alternative routes, predominantly West Africa to the Far East.
The Aframax composite (a straight average of six worldwide voyages) saw Q1 2011 continue where Q4 2010 left off, with rates averaging $13,000/day and $13,500/day respectively. By far the best performer was Aframaxes lifting 100,000t from the Baltic to NW Europe, due to ice restrictions, helping increase the average significantly. By Q2 and Q3, with the ice no longer a support, and a similarly poor Black Sea/Med. market as seen by the Suezmaxes, the widespread weak rates across the sector were revealed in the Aframax composite, averaging $7,000/day and $3,500/day respectively. Q4 managed a slight increase to $8,500/day, with cross-Med. Aframaxes the best performer, although by no large margin as seen by the Baltic/NW Europe voyage in Q1 2011. The annual average for 2011 was therefore just $8,000/day, a 50% decline on 2010. The current average for Q1 2012 is marginally up on Q4 2011, but significantly down on Q1 2011 at $10,000/day, primarily due to the ice season being far less severe this winter compared with previous years.
The MR composite (a straight average of six worldwide voyages) has seen freight rates remain broadly flat in 2010 and 2011, and this is replicated within the quarters, with the range of quarterly earnings between Q1 2010 and Q4 2011 remaining between $9,500/day and $12,500/day. The cross-Med. voyage continued to be the most lucrative, helping lift the average slightlyhowever Q3 freight rates were relatively weak due to a shortage of Libyan exports and an inability to import into the country due to the unrest. The Q3 average was further
dampened by falling gasoline imports into the US, lowering freight rates on the NW Europe to US Atlantic Coast voyage. This combined effect saw Q3 2011 record the lowest quarterly earnings for the MR composite since 2009. The annual average for 2011 was just shy of $11,500/day$100 or so lower than 2010. The current average for Q1 2012 continues to fall within the recent range at just over $10,000/day.
The natural gas market has remained in the spotlight over the past year, with continued production growth from shale gas in North America, which has kept prices low and encouraged duel-fire power stations to switch from expensive fuel oil and end-consumers to switch to more natural gas consumption where possible. The devastating earthquake and tsunami off Japan in March 2011 further increased demand for natural gas, as well as coal, fuel oil and crude oil, as the country looks to lower its dependence on nuclear power.
The abundant supply of shale gas (although much of it is not in production) and the relatively low emissions in comparison to other fossil fuels (despite questions over the environmental impact of extraction of shale gas) suggests natural gas has a significant role to play meeting future global energy needs, with demand set to grow from 300 billion cubic feet per day (Bcf/day) in 2010 to almost 470 Bcf/day by 2030.
This potential demand growth has led to strong investment in the LNG infrastructure to cater for the inevitable trade growth, with new liquefaction and re-gasification plants as well as LNG vessels. 2009 and 2010 saw just two and 12 LNG vessel orders respectively, whereas in 2011 this had risen to 47, all placed at South Korean yards, which have been diversifying into higher value orders in the face of falling orders for tankers and dry cargo vessels.
Given the investment required in the LNG sector, and the relative complexity of the sector, the recent ordering has been confined to established shipowners, either with a history in the sector, or a large shipowner with experience in the tanker sector looking to diversify. The tanker sector has seen a number of new entrants on the orderbook looking to enter at the bottom of the market having seen the potential returns from historical freight rates. This perhaps puts the LNG sector at an advantagekeeping it within established traditional shipownershowever as with all shipping sectors it is paramount ordering is balanced to future demand to prevent over-ordering of capital-intense assets.
As of March 31, 2012, we operated a fleet of 48 modern double-hull tankers providing world-wide marine transportation services for national, major and other independent oil companies and refiners under long, medium and short-term charters and one LNG carrier. Our current fleet consists of three VLCCs (of which two are expected to be sold within 2012), ten suezmaxes, eleven aframaxes, nine panamaxes, six handymaxes, eight handysizes and one LNG carrier. All vessels are owned by our subsidiaries. The charter rates that we obtain for these services are determined in a highly competitive global tanker charter market. We operate our tankers in markets that have historically exhibited both cyclical and seasonal variations in demand and corresponding fluctuations in charter rates. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere. In addition, unpredictable weather conditions in the winter months tend to disrupt vessel scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities. Changes in available tanker capacity have also had a strong impact on tanker charter markets over the past 20 years and especially in 2011.
Results from Operations2011
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under Risk Factors and elsewhere in this Annual Report our actual results may differ materially from those anticipated in these forward-looking statements.
The world economy remained in a weak and uncertain state throughout 2011, particularly in the West. The national debt and deficit problems of Europe coupled with the extreme austerity measures required in several countries, continued to cause considerable concern, further threatening global financial stability. In such an environment, expected demand for oil was inevitably affected negatively, the actual increase in global demand for oil in 2011 (740 thousand barrels per day) now reckoned to be about half of what was being forecast even in mid-2011. Demand in Europe and North America actually fell, but was compensated by increasing demand in non-OECD countries, primarily China and India. While demand for oil was stalling, the supply of crude-carrying vessels continued to increase substantially despite some slippage from originally forecast delivery numbers. In addition, the supply, distribution and distillation of oil suffered various disruptions throughout the world during 2011 including the consequences of the earthquake in Japan which impacted refinery operations, the closure of U.S. refineries on the Atlantic coast affecting imports from West Africa and the civil war in Libya and political strife elsewhere in the Middle East which dislocated production and exports. The mild winter in North America was also a factor in reducing oil consumption. Although there was some reduction in oil inventories it was not significant enough impact trade. Opportunities for storage at sea were also limited by the continued expectation that future oil prices would remain at a discount to prompt oil prices. As a result of all these factors, overall fleet utilization remained historically poor, freight rates for the crude carriers saw their lowest average levels for over a decade, exacerbated by high bunker (fuel) costs, and valuations of vessels fell substantially worsened by distress sales by financially troubled owners. Product carrier rates did not see such a dramatic fall due to a more favorable vessel supply situation. Although there was some modest improvement in certain classes and locations, in general they remained flat.
Our fleet achieved voyage revenues of $395.2 million in 2011, a decrease of 3.1% from $408.0 million in 2010. The average size of the fleet increased in 2011 to 47.8 from 46.1 in 2010, and fleet utilization decreased only from 97.6% to 97.1% over the same period. The decrease in revenue was primarily due to the decline in rates in a softer market caused by the oversupply of vessels mentioned above. The average daily time charter rate per vessel after deducting voyage expenses, decreased to $16,047 compared to $19,825 in 2010. Voyage expenses increased, despite a minor increase in operating days on voyages incurring such expenses, because of higher bunker (fuel) prices caused by rising oil prices. Operating expenses increased by 3.1% to $129.9 million, while average daily costs per vessel fell by 0.5% due to the acquisition of two new vessels and the disposal of two older ones. In addition, better pricing obtained by our new technical managers for purchases of spares, stores and lubricants and reduced crew costs derived from actions taken since 2009 and a stronger dollar which impacted primarily crew expenses.
Depreciation was $101.0 million in 2011 compared to $92.9 million in 2010 due to the disposal of vessels in the earlier part of 2011 offset by new additions in the latter part of the year. Management fees totaled $15.6 million for 2011 compared to $14.1 million for 2010, an increase of 10.3%, mainly due to an increase in monthly fees from January 1, 2011. General and administrative expenses were $4.3 million during 2011 compared to $3.6 million during 2010.
The net gain on the sale of two vessels in 2011 amounted to $5.0 million, compared to the sale of five vessels in 2010 with a net gain of $19.7 million. The Company incurred an impairment charge in 2011, relating to two VLCC vessels in the fleet, amounting to $39.4 million, compared to impairment charge on one vessel in 2010 amounting to $3.1 million. There was an operating loss of $37.7 million in 2011, including the impairment charge, compared to operating income of $80.7 million income in 2010, including the impairment charge. Interest and finance costs, net decreased by 14.1% in 2011 to $51.2 million, due mainly to positive valuation movements on non-hedging interest rate and $6.4 million cash received on bunker swaps. Net loss was $89.5 million compared to $19.8 million income in 2010. Diluted losses per share were $1.94 in 2011 based on 46.12 million diluted weighted average shares outstanding compared to diluted earnings per share of $0.50 in 2010 based on 39.60 million diluted weighted average shares outstanding.
Some of the more significant developments for the Company during 2011 were:
The Company operated the following types of vessels during, and at the end of 2011:
We believe that the key factors which determined our financial performance in 2011, within the given freight rate environment in which we operated, were:
We believe that the above factors will also be those that will be behind our future financial performance and will play an especially significant role in the current world economic climate as we proceed through 2012 and into 2013. To these may be added:
Considerable economic and political uncertainty remains in the world as we approach the second quarter of 2012. There are positive signs emanating from the U.S. in terms of the economy and growing confidence of sustainable recovery. Recent measures in Europe to stabilize the financial situation of certain countries have also provided some confidence that feared dangers (sovereign debt default, Eurozone collapse) are now under control, or at least policies and instruments exist to minimize any potential impact of those dangers. Many of the developing countries still have surging economies albeit with the occasional readjustment or correction in speed. Two significant dampers to expectations for the near future are increasing oil prices and potential conflict over Iran. The combination of rising demand for oil and supply limitations (including fear of future limitations) is leading to higher prices which will clearly lead to GDP growth inhibitions and therefore be detrimental to tanker demand. A conflict in the Arabian/Persian Gulf, while possibly resulting in a variation from current tanker trading routes which may or may not be beneficial for the tanker sector, will likely lead to higher oil prices.
We believe it likely, therefore, that 2012 will be another difficult year, but could well see further occasional spikes in rates as we have seen so far this year. There is reserved optimism for the tanker sector that in 2012 on average, if we do not at least see a rebound from the depths of the trough in terms of rates, at least the trough should not deepen as far as crude oil transportation is concerned. On the product trade there is increased optimism as the supply of new product carriers is considerably muted compared to the supply of crude tankers. In addition, new or upgraded refineries in the Middle East and Asia are forecast to lead to the expansion of new and longer trade routes for product carriers. In addition, LNG carriers will continue to enjoy an extremely lucrative year given the high demand for natural gas and limited number of liquefied natural gas carriers. A further related area which may enjoy respectable returns is in the off-shore support area, which would include storage and shuttle services to off-shore production units. The new fields off Brazil and West Africa are becoming increasingly attractive for development, especially in the light of supply constraints from existing sources and rising oil prices.
On January 17, 2012, the Company drew down $28.4 million, the available unused amount of an existing credit facility. On January 25, 2012, the Company announced a quarterly dividend of $0.15 per share, which was paid on February 14, 2012 to shareholders of record on February 9, 2012. On January 31, 2012, the Company agreed to the terms of a bank loan for an amount of $73.6 million relating to the financing of its first DP2 suezmax shuttle tanker, expected to be delivered in the first quarter of 2013.
We are entering into a contract for the construction by Hyundai Heavy Industries of one 162,000 cbm LNG carrier. The vessel, which will be equipped with the latest tri-fuel diesel electric propulsion technology, will be scheduled for delivery in the first quarter of 2015. We also have an option for the construction of a second LNG carrier of the same specification, whose delivery would be scheduled for the fourth quarter 2015, if we exercise the option.
We have obtained options to acquire two 158,000 dwt suezmax newbuildings, the first of which would be expected to be delivered by Sungdong Shipbuilding in South Korea in this fiscal quarter, with the second newbuilding to be delivered in the first quarter of 2013. We would have a total of 14 suezmaxes in our fleet, if we acquire these vessels.
We typically charter our vessels to third parties in any of five basic types of charter. First are voyage charters or spot voyages, under which a shipowner is paid freight on the basis of moving cargo from a loading port to a discharging port at a given rate per ton or other unit of cargo. Port charges, bunkers and other voyage expenses (in addition to normal vessel operating expenses) are the responsibility of the shipowner.
Second are time charters, under which a shipowner is paid hire on a per day basis for a given period of time. Normal vessel operating expenses, such as stores, spares, repair and maintenance, crew wages and insurance premiums, are incurred by the shipowner, while voyage expenses, including bunkers and port charges, are the responsibility of the charterer. The time charterer decides the destination and types of cargoes to be transported, subject to the terms of the charter. Time charters can be for periods of time ranging from one or two months to more than three years. The agreed hire may be for a fixed daily rate throughout the period or may be at a guaranteed minimum fixed daily rate plus a share of a determined daily rate above the minimum, based on a given variable charter index or on a decision by an independent brokers panel for a defined period. Many of our charters have been renewed on this time charter with profit share basis over the past three years. Time charters can also be evergreen, which means that they automatically renew for successive terms unless the shipowner or the charterer gives notice to the other party to terminate the charter.
Third are bareboat charters under which the shipowner is paid a fixed amount of hire for a given period of time. The charterer is responsible for substantially all the costs of operating the vessel including voyage expenses, vessel operating expenses, dry-docking costs and technical and commercial management. Longer-term time charters and bareboat charters are sometimes known as period charters.
Fourth are contracts of affreightment which are contracts for multiple employments that provide for periodic market related adjustments, sometimes within prescribed ranges, to the charter rates.
Fifth are pools. At various stages during 2011, six of our vessels also operated within a pool of similar vessels whereby all income (less voyage expenses) is earned on a market basis and shared between pool participants on the basis of a formula which takes into account the vessels age, size and technical features.
Our chartering strategy continues to be one of fixing the greater portion of our fleet on medium to long-term employment in order to secure a stable income flow, but one which also ensures a satisfactory return. This strategy has enabled us to level the effects of the cyclical nature of the tanker industry, achieving almost optimal utilization of the fleet. In order to capitalize on possible upturns in rates, we have chartered out several of our vessels on a basis related to market rates for either spot or time charter. As of March 31, 2012, we have 35 of our 48 vessels on time charter or other form of period employment, resulting in at least 65% of the remaining days of 2012 and 48% of the available days of 2013 already being fixed.
Our Board of Directors, through its Chartering Committee, formulates our chartering strategy and our commercial manager Tsakos Energy Management implements this strategy through the Chartering Department of Tsakos Shipping. They evaluate the opportunities for each type of vessel, taking into account the strategic preference for medium and long-term charters and ensure optimal positioning to take account of redelivery opportunities at advantageous rates.
The cooperation with Tsakos Shipping, who still provide the Company with chartering services, enables us to take advantage of the long-established relationships they have built with many of the worlds major oil companies and refiners over 39 years of existence and high quality commercial and technical service.
Since July 1, 2010, through our cooperation with TCM, the new technical managers, we are able to take advantage of the inherent economies of scale associated with two large fleet operators working together and its commitment to contain running costs without jeopardizing the vessels operations. TCM provides top grade officers and crew for our vessels and first class superintendent engineers and port captains to ensure that the vessels are in prime condition.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 1 of the consolidated financial statements included elsewhere in this annual report. The application of such policies may require management to make
estimates and assumptions. We believe that the following are the more critical accounting estimates used in the preparation of our consolidated financial statements that involve a higher degree of judgment and could have a significant impact on our future consolidated results of operations and financial position:
Revenue recognition. Our vessels are employed under a variety of charter contracts, including time, bareboat and voyage charters, contracts of affreightment and pool arrangements. Time and bareboat charter revenues are recorded over the term of the charter as the service is provided. Revenues from voyage charters on the spot market or under contract of affreightment are recognized ratably from when a vessel becomes available for loading (discharge of the previous charterers cargo) to when the next charterers cargo is discharged, provided an agreed non-cancelable charter between the Company and the charterer is in existence, the charter rate is fixed or determinable and collectivity is reasonably assured. Vessel voyage and operating expenses and charter hire expense are expensed when incurred. The operating revenues and voyage expenses of vessels operating under a tanker pool are pooled and are allocated to the pool participants on a time charter equivalent basis, according to an agreed formula. Revenues from variable hire arrangements are recognized to the extent the variable amounts earned beyond an agreed fixed minimum hire at the reporting date and all other revenue recognition criteria are met.
Depreciation. We depreciate our vessels on a straight-line basis over their estimated useful lives, after considering their estimated residual values, based on the assumed value of the scrap steel available for recycling after demolition, calculated at $300 per lightweight ton since January 1, 2008 (previously calculated at $180 per lightweight ton). The impact of the increase in the scrap price used in the estimation of residual values was to reduce the depreciation charge for 2008 by $5.3 million. We revised our estimate of scrap prices, as prices in the past five years had reached historically high levels, significantly in excess of $300. Scrap prices currently approximate $500. While there remains overcapacity within the tanker sector and scrap prices remain at these levels we would expect scrapping to remain a viable alternative to trading older vessels. We also expect commodity prices to remain at buoyant levels as the economic recovery continues to gather pace. Given the historical volatility of scrap prices, management will monitor prices going forward and where a distinctive trend is observed over a given length of time, management may consider revising the scrap price accordingly. In assessing the useful lives of vessels, we have adopted the industry-wide accepted practice of assuming a vessel has a useful life of 25 years (40 years for the LNG carrier), given that all classification society rules have been adhered to concerning survey certification and statutory regulations are followed.
Impairment. The carrying value of the Companys vessels includes the original cost of the vessels plus capitalized expenses since acquisition relating to improvements and upgrading of the vessel, less accumulated depreciation. Carrying value also includes the unamortized portion of deferred special survey and dry-docking costs. The carrying value of vessels usually differs from the fair market value applicable to any vessel, as market values fluctuate continuously depending on the market supply and demand conditions for vessels, as determined primarily by prevailing freight rates and newbuilding costs.
The Company reviews vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of a vessel may not be recoverable, such as during severe disruptions in global economic and market conditions. When such indicators are present, a vessel to be held and used is tested for recoverability by comparing the estimate of future undiscounted net operating cash flows expected to be generated by the use of the vessel over its remaining useful life and its eventual disposition to its carrying amount. Future undiscounted net operating cash flows are determined by applying various assumptions regarding future revenues net of commissions, operating expenses, scheduled dry-dockings, expected off-hire and scrap values, and taking into account historical revenue data and published forecasts on future world economic growth and inflation.
These estimates are based on historical industry freight rate averages for each category of vessel taking into account the age, specifications and likely trading pattern of each vessel and the likely condition and operating costs of each vessel. Economic forecasts of world growth and inflation are also taken into account. Such estimations are inevitably subjective and actual freight rates may be volatile. As a consequence, estimations may differ considerably from actual results.
The estimations also take into account new regulations regarding the permissible trading of tankers depending on their structure and age. As a consequence of new European Union regulations effective from October 2003, the IMO adopted new regulations in December 2003 regarding early phase out of non-double hull tankers. Since April 2007, the Company has owned only double-hulled vessels.
While management, therefore, is of the opinion that the assumptions it has used in assessing whether there are grounds for impairment are justifiable and reasonable, the possibility remains that conditions in future periods may vary significantly from current assumptions, which may result in a material impairment loss. If the current economic recovery stalls or if oil prices continue to trend upwards, oil demand over an extended period of time could be negatively impacted. This will exacerbate the consequences of overcapacity in the tanker sector. In such circumstances, the possibility will increase that both the market value of the older vessels of our fleet and the future cash flow they are likely to earn over their remaining lives will be less than their carrying value and an impairment loss will occur. Management tests the value and future cash flows for the possibility of impairment on a quarterly basis.
Should the carrying value of the vessel exceed its estimated undiscounted cash flows, impairment is measured based on the excess of the carrying amount over the fair value of the asset. As vessel values are also volatile, the actual market value of a vessel may differ significantly from estimated values within a short period of time.
During the latter part 2011, the overcapacity in the crude tanker sector and the lack of viable alternative employment for the older VLCCs led to a further fall in the values and earnings capacity of two older VLCCs owned by the Company, La Prudencia and La Madrina. We determined that both vessels, at December 31, 2011, met the criteria to be classified as held for sale. Therefore, we revalued them at fair value less cost to sell. As a result, an impairment loss of $39.4 million was incurred. During the latter part of 2010, when the tanker market remained exceptionally weak despite seasonal expectations, it was apparent that overcapacity in tanker supply was having a profound impact on rates and that the aframax Vergina II would suffer from age discrimination for the remainder of its life (five years). Taking this into account, it was determined that the carrying value of the vessel was further impaired and an impairment loss of $3.1 million was incurred in 2010. At December 31, 2011, the market value of the fleet, as determined based on management estimates and assumptions and by making use of available market data and taking into consideration third party valuations was $2.0 billion, compared to a total carrying value of $2.2 billion. While the future cash flow expected to be generated by all the vessels of the fleet, apart from La Prudencia and La Madrina, was comfortably in excess of their carrying value, there were 31 further vessels in our fleet that had an aggregate carrying value of $396.7 million in excess of their combined market value as determined at December 31, 2011. These vessels were:
Allowance for doubtful accounts. Revenue is based on contracted charter parties and although our business is with customers whom we believe to be of the highest standard, there is always the possibility of dispute over terms and payment of freight and demurrage. In particular, disagreements may arise as to the responsibility for lost time and demurrage revenue due to the Company as a result. As such, we periodically assess the recoverability of amounts outstanding and we estimate a provision if there is a possibility of non-recoverability. Although we believe any provision that we might record to be based on fair judgment at the time of its creation, it is possible that an amount under dispute is not ultimately recovered and the estimated provision for doubtful recoverability is inadequate.
Amortization of deferred charges. In accordance with Classification Society requirements, a special survey is performed on our vessels every five years. A special survey requires a dry-docking. In between special surveys, a further intermediate survey takes place, for which a dry-docking is obligatory for vessels over ten years. During a dry-docking, work is undertaken to bring the vessel up to the condition required for the vessel to be given its classification certificate. The costs include the yard charges for labor, materials and services, possible new equipment and parts where required, plus part of the participating crew costs incurred during the survey period. We defer these charges and amortize them over the period up to the vessels next scheduled dry-docking.
Fair value of financial instruments. Management reviews the fair values of financial assets and liabilities included in the balance sheet on a quarterly basis as part of the process of preparing financial statements. The carrying amounts of financial assets and accounts payable are considered to approximate their respective fair values due to the short maturity of these instruments. The fair value of long-term bank loans with variable interest rates approximate the recorded values, generally due to their variable interest rates. The present value of the future cash flows of the portion of any long-term bank loan with a fixed interest rate is estimated and compared to its carrying amount. The fair value of the investments equates to the amounts that would be received by the Company in the event of sale of those investments, and any shortfall from carrying value is treated as an impairment of the value of that investment. The fair value of the interest rate swap and bunker swap agreements held by the Company are determined through Level 2 of the fair value hierarchy as defined in FASB guidance and are derived principally from or corroborated by observable market data, interest rates, yield curves and other items that allow value to be determined. The fair values of impaired vessels are determined through Level 3 of the fair value hierarchy based on management estimates and assumptions and by making use of available market data and taking into consideration third party valuations.
Basis of Presentation and General Information
Voyage revenues. Revenues are generated from freight billings and time charters. Time and bareboat charter revenues are recorded over the term of the charter as the service is provided. Revenues from voyage charters on the spot market or under contract of affreightment are recognized ratably from when a vessel becomes available for loading (discharge of the previous charterers cargo) to when the next charterers cargo is discharged, provided an agreed non-cancelable charter between the Company and the charterer is in existence, the charter rate is fixed or determinable and collectivity is reasonably assured. The operating revenues of vessels operating under a tanker pool are pooled and are allocated to the pool participants on a time charter equivalent basis according to an agreed upon formula. Revenues from variable hire arrangements are recognized to the extent the variable amounts earned beyond an agreed fixed minimum hire at the reporting date and all other revenue recognition criteria are met. Unearned revenue represents cash received prior to the year end and is related to revenue applicable to periods after December 31 of each year.
Time Charter Equivalent (TCE) allows vessel operators to compare the revenues of vessels that are on voyage charters with those on time charters. For vessels on voyage charters, we calculate TCE by taking revenues earned on the voyage and deducting the voyage costs and dividing by the actual number of net earning days, which does not take into account off-hire days. For vessels on bareboat charters, for which we do not incur either voyage or operating costs, we calculate TCE by taking revenues earned on the charter and adding a representative amount for the vessels operating expenses. TCE differs from average daily revenue earned in that TCE is based on revenues before commissions less voyage expenses and does not take into account off-hire days.
Commissions. We pay commissions on all chartering arrangements to Tsakos Shipping, as our broker, and to any other broker we employ. Each of these commissions generally amounts to 1.25% of the daily charter hire or lump sum amount payable under the charter. In addition, on some trade routes, certain charterers may include in the charter agreement an address commission which is a payment due to the charterer, usually ranging from 1.25% to 3.75% of the daily charter hire or freight payable under the relevant charter. These commissions, as well as changes in prevailing charter rates, will cause our commission expenses to fluctuate from period to period.
Voyage expenses. Voyage expenses include all our costs, other than vessel operating expenses, that are related to a voyage, including port charges, canal dues and bunker fuel costs.
Charter hire expense. We hire certain vessels from third-party owners or operators for a contracted period and rate in order to charter the vessels to our customers. These vessels may be hired when an appropriate market opportunity arises or as part of a sale and lease back transaction or on a short-term basis to cover the time-charter obligations of one of our vessels in dry-dock. During 2010, we sold the Decathlon while it was on time-charter and in order to fulfill our obligations under that time-charter we chartered the vessel back on market terms from the buyers for 103 days under its new name Nordic Passat. Another vessel was chartered-in during 2010 to cover for the product carrier Didimon while it was in dry-dock. As of December 31, 2011 and 2010, the Company had no vessel under hire from a third-party.
Vessel operating expenses. These expenses consist primarily of manning, hull and machinery insurance, P&I and other vessel insurance, repairs and maintenance, stores and lubricant costs.
Management fees. These are the fixed fees we pay to Tsakos Energy Management under our management agreement with them. For 2012, monthly fees for operating vessels will be $27,500 per owned vessel and to $20,400 for chartered-in vessels or chartered out on a bareboat basis or vessels under construction. The monthly fee for the LNG carrier will be $35,000 from April 2012.
Depreciation. We depreciate our vessels on a straight-line basis over their estimated useful lives, after considering their estimated scrap values, calculated at $300 per lightweight ton. In assessing the useful lives of vessels, we have estimated them to be 25 years (40 years for the LNG carrier), which is in line with the industry wide accepted practice, assuming that all classification society rules have been adhered to concerning survey certification and statutory regulations are followed. Useful life is ultimately dependent on customer demand and if customers were to reject our vessels, either because of new regulations or internal specifications, then the useful life of the vessel will require revision.
Amortization of deferred charges. We amortize the costs of dry-docking and special surveys of each of our ships over the period up to the ships next scheduled dry-docking (generally every 5 years for vessels aged up to 10 years and every 2.5 years thereafter). These charges are part of the normal costs we incur in connection with the operation of our fleet.
Impairment loss. An impairment loss for an asset held for use should be recognized when indicators of impairment exist and when the estimate of undiscounted cash flows, expected to be generated by the use of the asset is less than its carrying amount (the vessels net book value plus any unamortized deferred dry-docking charges). Measurement of the impairment loss is based on the fair value of the asset as provided by third parties. An impairment loss for an asset held for sale should be recognized when its fair value less cost to sell is lower than its carrying value at the date it meets the held for sale criteria. In this respect, management reviews regularly the carrying amount of the vessels in connection with the estimated recoverable amount for each of the Companys vessels. As a result of such reviews it was determined in 2011, 2010 and 2009 that an impairment loss had been incurred with respect to the carrying values of two older vessels in 2011, one older vessel in 2010 and three older vessels in 2009.
General and administrative expenses. These expenses consist primarily of professional fees, office supplies, investor relations, advertising costs, directors liability insurance, and reimbursement of our directors and officers travel-related expenses.
Insurance claim proceeds. In the event of an incident involving one of our vessels, where the repair costs or loss of hire is insurable, we immediately initiate an insurance claim and account for such claim when it is determined that recovery of such costs or loss of hire is probable and collectability is reasonably assured within the terms of the relevant policy. Depending on the complexity of the claim, we would generally expect to receive
the proceeds from claims within a twelve month period. During 2011, we received approximately $5.6 million in net proceeds from hull and machinery and loss of hire claims arising from incidents with or damage incurred on our vessels. Such settlements were generally received as credit-notes from our insurers, Argosy Insurance Company Limited, and used as a set off against insurance premiums due to that company. Within the consolidated statements of cash flows therefore, these proceeds are included in decreases in receivables and in decreases in accounts payable. There is no material impact on reported earnings arising from these settlements.
(Percentage calculations are based on the actual amounts shown in the accompanying consolidated financial statements)
Year ended December 31, 2011 versus year ended December 31, 2010
Voyage revenues earned in 2011 and 2010 per charter category were as follows:
Revenue from vessels was $395.2 million during the year ended December 31, 2011 compared to $408.0 million during the year ended December 31, 2010, a 3.1% decrease. There was an average of 47.8 vessels in 2011 compared to an average of 46.1 in 2010. During the course of 2011, two tankers were sold and two tankers were acquired. Based on the total days that the vessels were actually employed as a percentage that we owned or controlled the vessels, the fleet had 97.1% employment compared to 97.6% in the previous year, the lost time being mainly off-hire of the two VLCCs La Madrina and La Prudencia, and due to dry-docking activity. In 2011, seven vessels undertook dry-docking and another seven vessels undertook dry-dock in 2010 (discussed further below).
Due to poorer market conditions in 2011 as a result primarily of excess capacity within the tanker sector, the increased bunker prices by 38%, coupled with the fact that we had more vessels on spot in 2011, the average time charter equivalent rate per vessel achieved for the year 2011 was $16,047 per day compared to $19,825 per day for the previous year. Only the smaller Handysize and Handymax tankers saw marginally better rates in 2011 than in 2010. Panamax tankers, which were under fixed employment throughout the year achieved lower TCE by 12%, compared to 2010, still earning more than the TCE that they would achieve trading in the spot market. Aframax tankers were trading on spot for more than half their available days in the year achieving a TCE 34% lower than in 2010. Suezmax rates achieved were 17% less on average in 2011 than in 2010. Suezmaxes were under profit sharing arrangements for most of their available days in both years earning only the minimum in 2011. The two VLCCs La Madrina and La Prudencia after a long period of profitable fixed employment were trading on spot, earning substantially lower TCE compared to 2010, due to high bunker prices. The third VLCC Millennium is under bareboat charter for both years. The LNG carrier was under time charter during 2011 and 2010 achieving a TCE below the breakeven levels.
Commissions during 2011 amounted to $14.3 million compared to $13.8 million in 2010, a 3.3% increase. Commissions were 3.6% of revenue from vessels in 2011 compared to 3.4% in 2010. The increase in commission charges relates to changes in employment on several vessels, where commission rates were higher, especially in vessels employed in the spot market.
Voyage expenses include all our costs, other than vessel operating expenses and commissions that are related to a voyage, including port charges, agents fees, canal dues and bunker (fuel) costs. Voyage expenses were $127.2 million during 2011 compared to $85.8 million during the prior year, a 48.2% increase. The total operating days on spot charter and contract of affreightment totaled 4,556 days in 2011 compared to 4,110 days in 2010. Although voyage expenses are highly dependent on the voyage patterns followed and size of vessels employed on spot, much of the increase can be partly explained by the average cost of bunkers (fuel) purchased for the fleet increasing by 38% from 2010 to 2011, contributing to a $37.0 million increase in the overall expenditure on bunkers between the two years.
Charter hire expense
There was no charter hire expense in 2011. In 2010, charter hire expense amounted to $1.9 million. The charter hire expense in 2010 related primarily to the vessel Decathlon, which was sold to a third-party, but immediately re-chartered at market rate in order that the vessel fulfill its obligations relating to the charter that the vessel was employed on at the time of sale.
Vessel operating expenses
Vessel operating expenses include crew costs, insurances, repairs and maintenance, spares, stores, lubricants, quality and safety costs and other expenses such as tonnage tax, registration fees and communication costs. Total operating costs were $129.9 million during 2011, compared to $126.0 million during 2010, an increase of 3.1%, primarily due to the increase in earnings capacity days by 3.6%. As a percentage of voyage revenues, vessel operating expenses were 32.9% in 2011 and 30.9% in 2010.
Operating expenses per ship per day for the fleet decreased to $7,606 for 2011 from $7,647 in 2010. This was mostly due to cost reduction efforts and disposal of older vessels. The creation of TCM in 2010 which took over the technical management of the fleet, and the cooperation which existed between Tsakos Shipping and Columbia Shipmanagement Ltd. prior to July 1, 2010, the formal start date of TCM, resulted in a purchasing power based on the combined fleets managed by Tsakos Shipping and Columbia. This provided considerable savings in the purchase of stores, spares and lubricants both in 2011 and 2010. Approximately 49% of operating expenses (26% of total costs) incurred are in Euro, mainly relating to vessel officers (losing approximately $2.6 million due to the weakening of the US dollar by 5% during 2011), and also to various parts, supplies and repairs acquired or undertaken in Euro zone countries. Despite a weakening of the US dollar against the Euro during 2011, which negatively affected costs, operating expenses per ship per day remained stable due to the cost reduction efforts by our technical managers.
Depreciation was $101.1 million during 2011 compared to $92.9 million during 2010, an increase of $8.2 million, or 8.8%. This was partly due to the addition of six vessels acquired in 2010, and two vessels in 2011. All those additions are high-value new vessels which contribute in the increase of depreciation expense. In 2010 five vessels were sold, but they had all been accounted for as held for sale from the end of 2009 and, therefore, had no impact on depreciation expense during 2010 and 2011. In addition, the aframax tanker Opal Queen bore no depreciation during 2011 as it was accounted as held for sale from the end of 2010.
We amortize the cost of dry-dockings related to classification society surveys over the period to the next dry-docking, and this amortization is included as part of the normal costs we incur in connection with the operation of our vessels. During 2011, amortization of deferred dry-docking charges was $4.9 million compared to $4.6 million during 2010, an increase of 7.1%. The increase is due to the completion of six new dry-dockings within 2011. The relatively small increase in amortization given the number of vessels dry-docked in 2011, was due to younger and smaller vessels that underwent their first dry-dockings in 2011, the costs of which were lower than dry-dockings of older and larger vessels. The next dry-docking of these vessels would be in five years, and, therefore, the amortization would be spread over this extended period resulting in a relatively lower annual charge, whereas older vessels would be amortized over 30 months.
The Company pays to Tsakos Energy Management fixed fees per vessel under a management agreement between the companies. The fee pays for services that cover both the management of the individual vessels and of the enterprise as a whole. According to the amended management agreement (from January 2007), there is a prorated adjustment if at beginning of the year the Euro has appreciated by 10% or more against the U.S. Dollar since January 1, 2007, and an increase each year by a percentage figure reflecting 12 month Euribor, if both parties agree.
As a consequence, from January 1, 2010, monthly fees for owned operating vessels were $24,000 and for operating vessels chartered-in or chartered out on a bareboat basis or for vessels under construction, $17,700. From July 1, 2010, most of the fleet is managed by TCM, apart from four vessels which continued to be managed by Columbia Shipmanagement Ltd. until early 2011 and three by other third-party ship managers. Vessel
monthly fees were increased to $27,000 for owned operating vessels or approximately $99 per day per vessel, substantially less than the savings achieved from the creation of the new ship management company. The monthly fee relating chartered-in or chartered out on a bareboat basis or for vessels under construction increased to $20,000 and for the LNG carrier to $32,000. Management fees totaled $15.6 million during the year ended December 31, 2011, compared to $14.1 million for the year ended December 31, 2010, a 10.3% increase over the year ended December 31, 2010 due to increased management fees. Total fees include fees paid directly to a third-party ship manager in the case of the LNG carrier. Fees paid relating to vessels under construction are capitalized as part of the vessels costs. From January 1, 2012 monthly fees for operating vessels are $27,500 for vessels chartered out or on a bare-boat basis are $20,400 and from April 1, 2012 for the LNG carrier $35,000 of which $10,000 is paid to the Management company and $25,000 to a third party manager.
General and administrative expenses
General and administrative expenses consist primarily of professional fees, investor relations, office supplies, advertising costs, directors liability insurance, directors fees and reimbursement of our directors and officers travel-related expenses. General and administrative expenses were $4.3 million during 2011 compared to $3.6 million during 2010, an increase of 18.3 %. The increase is mainly due to new XBRL reporting system installed, costs and travelling expenses incurred on various new projects that were evaluated during the year and increased directors fees.
Total general and administrative expenses plus management fees paid to Tsakos Energy Management, the incentive award and stock compensation expense, together represent the overhead of the Company. On a per vessel basis, daily overhead costs were $1,188 in 2011 compared to $1,144 in 2010, the increase being mainly due to increases in management fees, general and administrative expenses described above, offset partly by the lack of an incentive award in 2011, and decrease in the stock compensation expense described below.
Management incentive award
There was no management incentive award in 2011. An amount of $0.4 million was awarded to Tsakos Energy Management for 2010.
Stock compensation expense
The compensation expense in 2011 of $0.8 million represents the 2011 portion of the total amortization of the value of restricted share units (RSUs). In 2010, an amount of $1.1 million was amortized. At the beginning of 2011, there were 199,750 RSUs granted, but unvested. A further 12,000 RSUs were awarded in the year, none forfeited, with 127,250 grants vesting in the year. Almost half of the RSUs outstanding had been issued to staff of the commercial and technical managers who are considered as non-employees. In the case of RSUs issued to non-employees, amortization is based on the share price on vesting with quarterly adjustments until vesting. As the average share price in 2011 was lower than in 2010, the amortization charge per outstanding RSU fell accordingly. Furthermore the average number of RSUs was lower in 2011 than 2010.
Gain on sale of vessels
During 2011, we sold the aframax tankers Opal Queen, which was held for sale at December 31, 2010, for net proceeds of $32.8 million resulting in a gain of $5.8 million and the aframax tanker Vergina II for net proceeds of $9.7 million resulting in a loss of $0.8 million. During 2010, we sold the suezmax tanker Decathlon, the aframax tankers Parthenon and Marathon and the panamax tankers Hesnes and Victory III for total net proceeds of $140.5 million with total net gains of $19.7 million.
Vessel impairment charge
There was an impairment charge in 2011 of $39.4 million relating to the 1993 built VLCC La Prudencia and the 1994 built VLCC La Madrina. An impairment charge relating to the 1991 built aframax tanker Vergina II totaled $3.1 million in 2010. The negative market forces existing in most of 2009 impacted the ability to charter older vessels at accretive rates. In the case of these three vessels, the total weighted average cash flow expected to be generated over the future remaining lives of the vessels under various possible scenarios, was less than the current carrying values of the vessels in our books and consequently the amount of carrying value in excess of the fair market value of these vessels was written-off as an impairment charge. The poor market for crude carriers continued through much of 2011 and especially in the fourth quarter when the expected usual seasonal uplift in rates did not occur because of the large increase in the supply of larger crude tankers which surpassed the demand for sea-transported crude oil. As these two VLCCs were amongst the oldest of double-hulled VLCCs, they were amongst the last to be considered for employment by charterers. Expectations for alternative employment for storage or conversion for off-shore projects also diminished towards the end of the year. As a consequence, the revised scenarios for our more recent cash flow tests gave greater probability to disposing of the La Prudencia and La Madrina. As such, both vessels were classified as held for sale and therefore the carrying values have been reduced to their fair value less cost to sell at December 31, 2011. In 2010, with respect to Vergina II, our tests indicated that the vessel would not generate adequate cash flows in excess of her carrying value and therefore, at December 31, 2010, the carrying value has been reduced to the fair value.
At December 31, 2011, as vessel values continued to decline in the year, 31 of our vessels had carrying values in excess of market values. Apart from the two VLCCs mentioned above, the remainder of our fleet is for the most part young and in all these cases the vessels are expected to generate considerably more cash during their remaining expected lives than the carrying values as at December 31, 2011.
The loss from vessel operations was $37.7 million for 2011, including the impairment charge of $39.4 million, versus $80.7 million operating income for 2010, including an impairment charge of $3.1 million.
Interest and finance costs, net
Interest and finance costs, net were $53.6 million for 2011 compared to $62.3 million for 2010, a 14.0% decrease. Loan interest, excluding payment of swap interest, increased to $25.9 million from $24.5 million, a 5.7% increase. Total weighted average bank loans outstanding were approximately $1,539 million for 2011
compared to $1,495 million for 2010. However, cash settlements on both hedging and non-hedging interest rate swaps, based on the difference between fixed payments and variable 6-month LIBOR, decreased to $34.8 million from $35.7 million as LIBOR increased slightly during 2011. The average loan financing cost in 2011, including the impact of all interest rate swap cash settlements, was 3.89% compared to 3.98% for 2010. Capitalized interest in 2011 was $2.5 million in both years as there were four vessels under construction in each year, and average accumulated installments and average interest in the two years being approximately the same.
There was a positive movement in the fair value (mark-to-market) of the non-hedging interest rate swaps in 2011 of $3.6 million compared to a negative movement of $1.3 million in 2010. During 2010, the panamax tankers Hesnes and Victory III were sold. As a consequence, the interest rate swap relating to the loan which included the part financing of these vessels became ineligible for special hedge accounting and was de-designated. As a result, a part of the accumulated negative valuation relating to this swap amounting to $0.8 million was transferred from other comprehensive income to the income statement in 2010. In addition, the remaining part of the accumulated negative valuation relating to this interest rate swap is being amortized to earnings over the term of the original hedge. $1.5 million was amortized within 2011 and $1.3 million in 2010. In 2011, the aframax tanker Vergina II, which was financed by the same loan, was also sold, and a further lump-sum of $0.5 million was transferred from the unamortized negative valuation directly to the income statement.
In 2009, the Company entered into swap arrangements relating to bunker (fuel) costs, which do not qualify as hedging instruments. In 2011, the Company received $6.4 million on these swaps in realized gains compared to $2.9 million in 2010. However, unrealized mark-to-market valuation losses were $2.1 million in 2011 and $2.6 million in 2010.
Amortization of loan expenses was $1.0 million in 2011 and approximately $1.1 million in 2010. Other loan charges, including commitment fees, amounted to $0.3 million in 2011 and 2010.
Interest and investment income
For 2011, interest and investment income amounted to $2.7 million almost unchanged from $2.6 million in 2010. In both years the income related to bank deposit interest. In 2011, the average total cash balances were lower than in 2010, but due to effective cash management and slightly better interest rates on deposits, investment income remained at the same levels as in 2010.
The amount earned by the non-controlling interest (49%) shareholding of the subsidiary which owns the owning companies of the vessels Maya and Inca was $0.5 million in 2011 compared to $1.3 million in 2010. Although revenue earned per day was at the same level in 2011 and 2010, the difference was due to reduced operating expenses in 2010.
As a result of the foregoing, net loss for 2011 was $89.5 million or $1.94 per diluted share versus net income of $19.8 million or $0.50 per diluted share for 2010.
Year ended December 31, 2010 versus year ended December 31, 2009
Voyage revenues earned in 2010 and 2009 per charter category were as follows:
Revenue from vessels was $408.0 million during the year ended December 31, 2010 compared to $444.9 million during the year ended December 31, 2009, an 8.3% decrease. There was an average of 46.1 vessels in 2010 compared to an average of 46.6 in 2009. During the course of 2010, five tankers were sold, mostly in the earlier part of 2010 and six vessels were acquired, mostly in the latter part of the year. Based on the total days that the vessels were actually employed as a percentage that we owned or controlled the vessels, the fleet had 97.6% employment compared to 97.7% in the previous year, the lost time being mainly due to dry-docking activity. In 2010, seven vessels undertook dry-docking and eight vessels underwent dry-dock in 2009 (discussed further below).
Due to poorer market conditions in 2010 as a result primarily of excess capacity within the tanker sector and also to a slow recovery in oil demand and high oil inventories, the average time charter equivalent rate per vessel achieved for the year 2010 was $19,825 per day compared to $22,329 for the previous year. Only the VLCC and aframax categories saw marginally better rates in 2010 than in 2009. Suezmax rates achieved were 5% less on average than in 2009. The product carriers saw a significant decline in rates, with little profit-share being earned during 2010 and eight relatively lucrative time-charters ending during late 2009 and 2010 and new charters being fixed at lower rates. Nevertheless, these lower product carrier minimum time-charter rates were still higher than rates these vessels would have been able to earn in the spot market. The LNG carrier also ended a profitable charter in 2010 and was re-fixed for a year at a lower rate.
Commissions during 2010 amounted to $13.8 million compared to $16.1 million in 2009, a 14.0% decrease compared to an 8.3% decrease in voyage revenues. Commissions were 3.4% of revenue from vessels in 2010 compared to 3.6% in 2009. The reduction in commission charges relates to changes in employment on several vessels where commission rates were less and to reduced rates by specific brokers on existing charters.
Voyage expenses include all our costs, other than vessel operating expenses and commissions that are related to a voyage, including port charges, agents fees, canal dues and bunker (fuel) costs. Voyage expenses were $85.8 million during 2010 compared to $77.2 million during the prior year, an 11.1% increase, despite the fact that the total operating days on spot charter and contract of affreightment totaled 4,110 days in 2010 compared to 4,250 days in 2009. Although voyage expenses are highly dependent on the voyage patterns followed and size of vessels employed on spot, much of the increase can be partly explained by the average cost of bunkers (fuel) purchased for the fleet increasing by 32% from 2009 to 2010, contributing to a $6.7 million increase in the overall expenditure on bunkers between the two years.
Charter hire expense
Charter hire expense amounted to $1.9 million in 2010. There was no charter hire expense in 2009. The charter hire expense in 2010 related primarily to the vessel Decathlon, which was sold to a third-party, but immediately re-chartered at market rate in order that the vessel fulfill its obligations relating to the charter that the vessel was employed on at the time of sale.
Vessel operating expenses
Vessel operating expenses include crew costs, insurances, repairs and maintenance, spares, stores, lubricants, quality and safety costs and other expenses such as tonnage tax, registration fees and communication costs. Total operating costs were $126.0 million during 2010, compared to $144.6 million during 2009, a decrease of 12.8%. As a percentage of voyage revenues, vessel operating expenses were 30.9% in 2010 and 32.5% in 2009.
Operating expenses per ship per day for the fleet decreased to $7,647 for 2010 from $8,677 in 2009, an 11.9% decrease. This decrease was in part due to reductions in crew expenses resulting from actions taken in 2009 and 2010 to cut costs by reducing the number of Greek officers on certain vessels. The creation of TCM in order to take over the technical management of the fleet, and the cooperation which existed between Tsakos Shipping and Columbia Shipmanagement Ltd. prior to July 1, 2010, the formal start date of TCM, resulted in a purchasing power based on the combined fleets managed by Tsakos Shipping and Columbia. This provided considerable savings in the purchase of stores, spares and lubricants. A reduction in P&I Club back calls contributed to the decrease in insurance costs. A 5% appreciation of the US dollar against the Euro during 2010 also benefited costs, as approximately 46% of operating expenses (26% of total costs) incurred are in Euro, mainly relating to vessel officers (saving approximately $2.3 million), but also to various parts, supplies and repairs acquired or undertaken in Euro zone countries.
Depreciation was $92.9 million during 2010 compared to $94.3 million during 2009, a decrease of $1.4 million, or 1.5%. This was partly due to the sale of one vessel in the fourth quarter of 2009 and five vessels during 2010. The five vessels sold in 2010 had all been accounted for as held for sale from the end of 2009 and, therefore, bore no depreciation during 2010. In addition, the depreciation charge relating to the aframax Vergina II was reduced following the impairment of its carrying value at the end of 2009. The impact of these vessels sold or impaired was to reduce the total depreciation charge for 2010 compared to 2009 by $9.7 million, offset by $8.3 million extra depreciation in 2010 over 2009 incurred by the addition of two new high-value vessels in 2009 and a further six in 2010.
We amortize the cost of dry-dockings related to classification society surveys over the period to the next dry-docking, and this amortization is included as part of the normal costs we incur in connection with the operation of our vessels. During 2010, amortization of deferred dry-docking charges was $4.6 million compared to $7.2 million during 2009, a decrease of 37.1%. The decrease was mainly due to the sale of four vessels in 2010 that had dry-docking amortization amounting to $3.3 million in 2009, but no new amortization in 2010 due to their held for sale categorization as from the end of 2009. There were fourteen dry-dockings in the two years 2009 and 2010, which explains most of the net increase of approximately $2.7 million amortization in 2010 over 2009, after taking account of the amortization reduction due to sale of vessels. Ten of the dry-dockings in these two years related to younger and smaller vessels that underwent their first dry-dockings, the costs of which were lower than dry-dockings of older and larger vessels. The next dry-docking of these vessels would be in five years, and, therefore, the amortization would be spread over this extended period resulting in a relatively lower annual charge, whereas older vessels would be amortized over 30 months.
The Company pays to Tsakos Energy Management fixed fees per vessel under a management agreement between the companies. The fee pays for services that cover both the management of the individual vessels and of the enterprise as a whole. According to the amended management agreement (from January 2007), there is a prorated adjustment if at beginning of the year the Euro has appreciated by 10% or more against the U.S. Dollar since January 1, 2007, and an increase each year by a percentage figure reflecting 12 month Euribor, if both parties agree.
As a consequence, from January 1, 2009 monthly fees for owned operating vessels increased from $23,000 to $23,700 and for operating vessels chartered-in or chartered out on a bareboat basis or for vessels under construction, from $17,000 to $17,500. From January 1, 2010, monthly fees for owned operating vessels increased from $23,700 to $24,000 and for operating vessels chartered-in or chartered out on a bareboat basis or for vessels under construction, from $17,500 to $17,700. From July 1, 2010, most of the fleet is managed by TCM, apart from four vessels which continued to be managed by Columbia Shipmanagement Ltd. until early 2011 and three by other third-party ship managers. Vessel monthly fees have been increased by $3,000 for owned operating vessels or approximately $99 per day per vessel, substantially less than the savings achieved from the creation of the new ship management company. The monthly fee relating chartered-in or chartered out on a bareboat basis or for vessels under construction increased to $20,000 and for the LNG carrier to $32,000. Management fees totaled $14.1 million during the year ended December 31, 2010, compared to $13.3 million for the year ended December 31, 2009, a 6.6% increase over the year ended December 31, 2009 due to increased management fees, offset by a slightly reduced fleet. Total fees include fees paid directly to a third-party ship manager in the case of the LNG carrier. Fees paid relating to vessels under construction are capitalized as part of the vessels costs.
General and administrative expenses
General and administrative expenses consist primarily of professional fees, investor relations, office supplies, advertising costs, directors liability insurance, directors fees and reimbursement of our directors and officers travel-related expenses. General and administrative expenses were $3.6 million during 2010 compared to $4.1 million during 2009, a decrease of 10.9 %. Apart from the result of a general effort to keep administrative costs down, there were significant reductions in legal fees, in advertising costs, in expenses associated with the issuance of the annual general meeting proxy statement and in costs related to project evaluations.
Total general and administrative expenses plus management fees paid to Tsakos Energy Management, the incentive award and stock compensation expense, together represent the overhead of the Company. On a per vessel basis, daily overhead costs were $1,144 in 2010 compared to $1,083 in 2009, the increase being mainly due to increases in management fees and the incentive award, offset partly by the reduction in general and administrative expenses described above, and decrease in the stock compensation expense described below.
Management incentive award
An amount of $0.4 million was awarded to Tsakos Energy Management for 2010. There was no management incentive award in 2009. The 2008 award amounted to $4.75 million and was paid in 2009.
Stock compensation expense
The compensation expense in 2010 of $1.1 million represents the 2010 portion of the total amortization of the value of restricted share units (RSUs). In 2009, a similar amount of $1.1 million was amortized. At the beginning of 2010, there were 399,500 RSUs granted, but unvested. A further 145,000 RSUs were awarded in the year and 3,100 forfeited, with 341,650 grants vesting in the year. The average number of RSUs was actually higher in 2010 than 2009. However, over half of the RSUs outstanding had been issued to staff of the commercial and technical managers who are considered as non-employees. In the case of RSUs issued to non-employees, amortization is based on the share price on vesting with quarterly adjustments until vesting. As the average share price in 2010 was lower than in 2009, the amortization charge per outstanding RSU fell accordingly.
Gain on sale of vessels
During 2010, we sold the suezmax tanker Decathlon for sales proceeds of $51.5 million resulting in a gain of approximately $5.9 million, the aframax tankers Parthenon and Marathon for sales proceed of $39.5 million and $38.5 million, respectively, giving rise to gains of $8.4 million and $5.8 million, respectively, and the panamax tankers Hesnes and Victory III for sales proceeds of $7.4 million and $7.2 million, respectively, with a gain of $0.1 million and a loss of $0.5 million, respectively. During 2009, the suezmax Pentathlon was sold for sales proceeds of $50.5 million and a capital gain of $5.1 million.
Vessel impairment charge
There was an impairment charge in 2010 of $3.1 million relating to the 1991 built aframax tanker Vergina II. The vessel had previously incurred an impairment charge in 2009 together with the first generation 1990 built double-hull panamax tankers Hesnes and Victory III. An impairment charge relating to these three vessels totaled $19.1 million in 2009. The negative market forces existing in most of 2009 impacted the ability to charter older vessels at accretive rates. In the case of these three vessels, the total weighted average cash flow expected to be generated over the future remaining life of the vessels under various possible scenarios, was less than the current carrying value of the vessels in our books and consequently the amount of carrying value in excess of the fair market value of these vessels was written-off as an impairment charge. The market continued to be poor in 2010 and especially in the fourth quarter when the expected usual seasonal uplift in rates did not occur and the probability of Vergina II finding new extended profitable employment after the end of its current charter
diminished in an environment of increasing discrimination against older vessels. As a consequence, the revised scenarios for our more recent cash flow tests gave greater probability to disposing of the vessels well before the end of 25 years. As such, the vessel would not generate adequate cash flow in excess of their carrying value and therefore the carrying value, has been reduced to fair market at December 31, 2010.
At December 31, 2010, following a decline in vessel values in the latter part of the year, apart from the Vergina II, a further 26 of our vessels had carrying values in excess of market values. The remainder of our fleet is, for the most part young and in all cases the vessels are expected to generate considerably more cash than the carrying values.
Income from vessel operations was $80.7 million during 2010 versus $72.4 million during 2009, an 11.4% increase.
Interest and finance costs, net
Interest and finance costs, net were $62.3 million for 2010 compared to $45.9 million for 2009, a 35.8% increase. Loan interest, excluding payment of swap interest, decreased to $24.5 million from $41.1 million, a 40.3% decrease. Total weighted average bank loans outstanding were approximately $1,495 million for 2010 compared to $1,503 million for 2009. However, interest rate payments on interest swaps, based on the difference between fixed payments and variable 6-month LIBOR, increased to $35.7 million from $19.9 million as LIBOR fell during 2010. The average loan financing cost in 2010, including the impact of swap interest, was 3.98% compared to 4.00% for 2009. Capitalized interest in 2010 was $2.5 million and $2.1 million in the previous year. The increase is due primarily to the payments made on the new suezmaxes under construction based on contracts placed in late 2009.
There was a negative movement in the fair value (mark-to-market) of the non-hedging interest rate swaps in 2010 compared to a positive movement of $6.1 million in 2009. At the end of the first quarter, an agreement was made to sell the panamax tanker Hesnes which eventually was sold in the second quarter of 2010, and in the third quarter the panamax tanker Victory III was also sold. As a consequence, the interest rate swap relating to the loan which included the part financing of Hesnes and Victory III became ineligible for special hedge accounting and was de-designated. As a result, a part of the accumulated negative valuation relating to this swap amounting to $0.8 million was transferred from other comprehensive income to the income statement. In addition, the remaining part of the accumulated negative valuation relating to this interest rate swap is being amortized to earnings over the term of the original hedge. The total amount amortized in 2010 was $1.3 million.
In 2009, the Company entered into swap arrangements relating to bunker (fuel) costs, which do not qualify as hedging instruments. In 2010, the Company received $2.9 million on these swaps in realized gains compared to $1.7 million in 2009. However, unrealized mark-to-market valuation losses were $2.6 million in 2010, whereas mark-to-market valuation gains amounted to nearly $6.5 million in 2009.
Amortization of loan expenses was $1.1 million in 2010 and approximately $1.0 million in 2009. Other loan charges, including commitment fees, amounted to $0.4 million in 2010 and $0.3 million in 2009.
Interest and investment income
For 2010, interest and investment income amounted to $2.6 million compared to $3.6 million in 2009. In both years the income related to bank deposit interest. In 2010, although the average total cash balances were slightly higher than in 2009, and interest rates on deposits were lower.
The amount earned by the minority (49%) shareholding of the subsidiary which owns the owning companies of the vessels Maya and Inca was $1.3 million in 2010 compared to $1.5 million in 2009. Although these vessels earned less revenue per day in 2010 compared to 2009, the difference was more than offset by reductions in operating expenses.
As a result of the foregoing, net income for 2010 was $19.8 million or $0.50 per diluted share versus $28.7 million or $0.77 per diluted share for 2009.
Liquidity and Capital Resources
Our liquidity requirements relate to servicing our debt, funding the equity portion of investments in vessels, funding working capital and controlling fluctuations in cash flow. In addition, our newbuilding commitments, other expected capital expenditure on dry-dockings and vessel acquisitions, which in total equaled $113.8 million in 2011, $386.7 million in 2010 and $130.4 million in 2009, will again require us to expend cash in 2012 and in future years. Net cash flow generated by operations is our main source of liquidity. Apart from the possibility of issuing further equity, additional sources of cash include proceeds from asset sales and borrowings, although all borrowing arrangements to date have specifically related to the acquisition of vessels.
We believe, given our current cash holdings and the number of vessels we have on time charter, that even if there is a further major and sustained downturn in market conditions, our financial resources, including the cash expected to be generated within the year, will be sufficient to meet our liquidity and working capital needs through January 1, 2013, taking into account our existing capital commitments and debt service requirements.
Working capital (non-restricted net current assets) amounted to approximately $1.9 million at December 31, 2011 compared to $143.9 million at December 31, 2010. Current assets decreased to $287.6 million at December 31, 2011 from $367.5 million at December 31, 2010 mainly due to decreased cash in non-restricted cash holdings by $100.9 million for the reasons described in the following paragraphs and the fact there were two vessels which were accounted for at December 31, 2011 as Held for sale in the Consolidated balance sheet with an aggregate net value of $41.4 million, compared to only one vessel held for sale at December 31, 2010 with a value of $27.0 million. Current liabilities increased to $279.7 million at December 31, 2011 from $217.2 million at December 31, 2010, due mainly to an increase in the current portion of long-term debt by $63.2 million relating mainly to the potential prepayments of debt on vessels held for sale.
Net cash provided by operating activities was $45.6 million during 2011 compared to $83.3 million in the previous year, a 45.3% decrease. The decrease is mainly due to the fall in revenue (net of voyage expenses) generated by operations as described in the section on voyage revenue above. Expenditure for dry-dockings is deducted from cash generated by operating activities. Total expenditure during 2011 on dry-dockings amounted to $4.6million compared to $6.1 million in 2010. In 2011, dry-docking work was performed on Archangel, Alaska, Promitheas, Proteas, Amphitrite, Andromeda and Arion. In 2010, dry-docking work was performed on the vessels Didimon, Ariadne, Propontis, Euronike, Eurochampion 2004, La Prudencia and La Madrina. Expenditure was lower in 2011 as all the vessels undertaking dry-dock were undertaking their first 5-year special survey while the vessels undertaking dry-dock in 2010 included La Prudencia and La Madrina (both VLCCs) which are older and larger vessels requiring more work.
Net cash used in investing activities was $69.2 million for the year 2011, compared to $240.1 million for 2010. In 2011, we took delivery of and paid the final installments on the two suezmaxes Spyros K and Dimitris P. Total expenditure on these two vessels in 2011 amounted to $66.6 million. Capitalized expenditure on improvements to existing vessels in 2011 amounted to $4.6 million. In 2010, we took delivery of two aframaxes Sapporo Princess and Uraga Princess for a total cost of $94.2 million, acquired four 2009-built panamaxes for a total of $218.0 million and undertook certain improvements on several existing vessels amounting to $1.4 million. Installments and capitalized expenditure amounting to $37.9 million in 2011 were also paid on vessels which are under construction compared to $67.0 million paid in 2010. At December 31, 2011, we had two DP2 suezmax shuttle tankers on order with total remaining payments totaling $148.7 million, all of which we expect to be covered by new debt (see below). Delivery of the vessels is expected in the first and second quarters of 2013, respectively. The anticipated payment schedule for the two vessels under construction, which is subject to change for delays or advanced work, is as follows (in $ millions) as at March 31, 2012:
In 2011, net sale proceeds from the sale of the aframax tanker Opal Queen amounted to $32.8 million and from the sale of the aframax tanker Vergina II to $9.7 million. In 2010, total net sale proceeds from the sale of the suezmax Decathlon, the aframax tankers Parthenon and Marathon and the panamax tankers Hesnes and Victory III, amounted to $140.5 million.
Net cash used in financing activities in 2011 amounted to $77.3 million compared to net cash used in financing activities of $137.2 million in 2010. Proceeds from new bank loans in 2011 amounted to $96.7 million compared to $235.0 million in the previous year. Scheduled repayments of debt amounted to $119.2 million in 2011 compared to $106.2 million of repayments in 2010. Prepayments of debt as a result of vessel sales amounted to $24.2 million in 2011 compared to prepayments of $68.9 million in 2010. Although the Company announced, in August 2011, the authorization by the Board of Directors of a new share buyback program of up to $20.0 million, there were no repurchases of common shares during 2011 and 2010, nor have there been in the first quarter of 2012. During 2010, 1,199,833 shares were sold for net proceeds $19.9 million under an at-the-market share issuance program for the sale of up to 3,000,000 common shares that the Company had initiated in December 2009. The program was closed in September 2010. On November 1, 2010, a follow-on offering the Company had initiated, closed with the sale of 6,726,457 common shares for $75.0 million, plus a further 896,861 common shares sold to Tsakos family interests for $10.1 million. Offering expenses amounted to $0.5 million.
In June 2010, the Company decided to change the dividend policy from a semi-annual payment basis to a quarterly payment basis, the first quarterly dividend of $0.15 being paid in July 2010. In 2011, a quarterly dividend of $0.15 per share was paid in February, April, August and November. Total dividend payments in 2011 amounting to $27.7 million. In 2012, a quarterly dividend of $0.15 per share was paid on February 14, amounting to $6.9 million. In 2010, total dividends amounted to $0.60 per common share and payments totaled $22.8 million. The dividend policy of the Company is to pay a dividend on a quarterly basis. The payment and the amount are subject to the discretion of our board of directors and depend, among other things, on available cash balances, anticipated cash needs, our results of operations, our financial condition, and any loan agreement restrictions binding us or our subsidiaries, as well as other relevant factors.
Investment in Fleet and Related Expenses
We operate in a capital-intensive industry requiring extensive investment in revenue-producing assets. As discussed previously in the section Our Fleet, we continue to have an active fleet development program resulting in a fleet of modern and young vessels with an average age of 7.3 years at March 31, 2012. We raise the funds for such investments in newbuildings mainly from borrowings and partly out of internally generated funds. Newbuilding contracts generally provide for multiple staged payments of 5% to 10%, with the balance of the vessel purchase price paid upon delivery. In the case of one the shuttle tankers currently under construction pre-delivery financing has been arranged for the part of the installment payments to the shipbuilding yard, and is being negotiated for the sister vessel under construction. Otherwise, for the equity portion of an investment in a newbuilding or a second-hand vessel, we generally pay from our own cash approximately 30% of the contract price. Repayment of the debt incurred to purchase the vessel is made from vessel operating cash flow, typically over seven to twelve years, compared to the vessels asset life of approximately 25 years (LNG carrier 40 years).
As of December 31, 2011, we were committed to two newbuilding contracts totaling approximately $185.5 million (including extras), of which $36.8 million had been paid by December 31, 2011. As mentioned above, we expect all of the remaining payments in 2012 and 2013 to be financed by bank debt.
As is customary in our industry, we anticipate financing the majority of our commitments on the newbuildings with bank debt. Generally we raise at least 70% of the vessel purchase price with bank debt for a period of between seven and twelve years (while the expected life of a tanker is 25 years and an LNG carrier is 40 years). For vessels for which we have secured long-term charters with first-class charterers, we would expect to raise up to 80% of the vessel purchase price with bank debt. As of December 31, 2011, we had available unused loan amounts under an existing credit facility totaling $28.4 million, which was drawn down in full in January 2012. Financing amounting to $73.6 million has been arranged in January 2012 for the first DP2 suezmax shuttle tanker (80% of purchase price), under construction at December 31, 2011 with expected delivery in February 2013. Negotiations for debt financing for the second suezmax, scheduled to be delivered in April 2013, are currently in progress and are expected to be concluded shortly.
Summary of Loan Movements Throughout 2011 (in $ millions):