Attached files
file | filename |
---|---|
EX-32 - OVERSEAS SHIPHOLDING GROUP INC | v183455_ex32.htm |
EX-10.1 - OVERSEAS SHIPHOLDING GROUP INC | v183455_ex10-1.htm |
EX-31.1 - OVERSEAS SHIPHOLDING GROUP INC | v183455_ex31-1.htm |
EX-10.2 - OVERSEAS SHIPHOLDING GROUP INC | v183455_ex10-2.htm |
EX-10.3 - OVERSEAS SHIPHOLDING GROUP INC | v183455_ex10-3.htm |
EX-31.2 - OVERSEAS SHIPHOLDING GROUP INC | v183455_ex31-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended MARCH 31,
2010
|
OR
|
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ________ to
________
|
Commission
File Number 1-6479-1
|
|
OVERSEAS
SHIPHOLDING GROUP, INC.
|
|
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
13-2637623
|
||
(State
or other jurisdiction of incorporation or
organization)
|
(IRS
Employer Identification No.)
|
666
Third Avenue, New York, New York
|
10017
|
||
(Address
of principal executive offices)
|
(Zip
Code)
|
(212)
953-4100
|
|||
Registrant's
telephone number, including area code
|
No
Change
|
|||
Former
name, former address and former fiscal year, if changed since
last report
|
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 Webs site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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”, a non-accelerated filer or a smaller reporting company. See
the definitions of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES ¨ NO x
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.
Common
Shares outstanding as of May 3, 2010 – 30,413,673
Page 2
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
DOLLARS
IN THOUSANDS
March 31,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 340,395 | $ | 474,690 | ||||
Short-term
investments
|
— | 50,000 | ||||||
Voyage
receivables, including unbilled of $127,349 and $113,694
|
171,107 | 146,311 | ||||||
Other
receivables, including federal income taxes recoverable
|
101,962 | 100,140 | ||||||
Inventories,
prepaid expenses and other current assets
|
56,442 | 46,225 | ||||||
Total
Current Assets
|
669,906 | 817,366 | ||||||
Capital
Construction Fund
|
40,708 | 40,698 | ||||||
Restricted
cash
|
— | 7,945 | ||||||
Vessels
and other property, including construction in progress of $624,691 and
$859,307, less accumulated depreciation of $709,710 and
$636,799
|
3,017,987 | 2,942,233 | ||||||
Deferred
drydock expenditures, net
|
52,106 | 58,535 | ||||||
Total
Vessels, Deferred Drydock and Other Property
|
3,070,093 | 3,000,768 | ||||||
Investments
in Affiliated Companies
|
271,470 | 189,315 | ||||||
Intangible
Assets, less accumulated amortization of $24,617 and
$22,743
|
97,214 | 99,088 | ||||||
Goodwill
|
9,589 | 9,589 | ||||||
Other
Assets
|
48,919 | 43,672 | ||||||
Total
Assets
|
$ | 4,207,899 | $ | 4,208,441 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable, accrued expenses and other current liabilities
|
$ | 139,152 | $ | 149,891 | ||||
Current
installments of long-term debt
|
33,933 | 33,202 | ||||||
Total
Current Liabilities
|
173,085 | 183,093 | ||||||
Long-term
Debt
|
1,700,303 | 1,813,289 | ||||||
Deferred
Gain on Sale and Leaseback of Vessels
|
71,887 | 82,500 | ||||||
Deferred
Federal Income Taxes ($202,544 and $205,295) and Other
Liabilities
|
263,114 | 261,704 | ||||||
Total
Liabilities
|
2,208,389 | 2,340,586 | ||||||
Equity:
|
||||||||
Overseas
Shipholding Group, Inc.’s Equity
|
1,999,510 | 1,867,855 | ||||||
Total
Equity
|
1,999,510 | 1,867,855 | ||||||
Total
Liabilities and Equity
|
$ | 4,207,899 | $ | 4,208,441 |
See notes
to condensed consolidated financial statements
Page 3
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
Three Months Ended March
31,
|
||||||||
2010
|
2009
|
|||||||
Shipping
Revenues:
|
||||||||
Pool
revenues, including $23,461 and $39,275 received from companies accounted
for by the equity method
|
$ | 108,584 | $ | 136,404 | ||||
Time
and bareboat charter revenues
|
65,546 | 87,369 | ||||||
Voyage
charter revenues
|
95,624 | 101,031 | ||||||
269,754 | 324,804 | |||||||
Operating
Expenses:
|
||||||||
Voyage
expenses
|
39,893 | 32,015 | ||||||
Vessel
expenses
|
64,074 | 73,530 | ||||||
Charter
hire expenses
|
90,614 | 111,342 | ||||||
Depreciation
and amortization
|
41,926 | 43,881 | ||||||
General
and administrative
|
26,829 | 27,300 | ||||||
Severance
and relocation costs
|
— | 2,169 | ||||||
Shipyard
contract termination costs
|
(231 | ) | 35,885 | |||||
(Gain)/Loss
on disposal of vessels, net of impairments in 2010
|
2,256 | (129,863 | ) | |||||
Total
Operating Expenses
|
265,361 | 196,259 | ||||||
Income
from Vessel Operations
|
4,393 | 128,545 | ||||||
Equity
in Income/(Loss) of Affiliated Companies
|
(2,298 | ) | 2,472 | |||||
Operating
Income
|
2,095 | 131,017 | ||||||
Other
Income/(Expense)
|
(146 | ) | 2,305 | |||||
1,949 | 133,322 | |||||||
Interest
Expense
|
(12,294 | ) | (11,372 | ) | ||||
Income/(Loss)
before Federal Income Taxes
|
(10,345 | ) | 121,950 | |||||
Credit
for Federal Income Taxes
|
992 | 1,312 | ||||||
Net
Income/(Loss)
|
(9,353 | ) | 123,262 | |||||
Less:
Net Income Attributable to the Noncontrolling Interest
|
— | (1,512 | ) | |||||
Net
Income/(Loss) Attributable to Overseas Shipholding Group,
Inc.
|
$ | (9,353 | ) | $ | 121,750 | |||
Weighted
Average Number of Common Shares Outstanding:
|
||||||||
Basic
|
27,760,420 | 26,865,843 | ||||||
Diluted
|
27,760,420 | 26,878,841 | ||||||
Per
Share Amounts:
|
||||||||
Basic
net income/(loss) attributable to Overseas Shipholding Group, Inc. common
stockholders
|
$ | (0.34 | ) | $ | 4.53 | |||
Diluted
net income/(loss) attributable to Overseas Shipholding Group, Inc. common
stockholders
|
$ | (0.34 | ) | $ | 4.53 | |||
Cash
dividends declared
|
$ | 0.4375 | $ | 0.4375 |
See notes
to condensed consolidated financial statements
Page 4
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS
IN THOUSANDS
(UNAUDITED)
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
income/(loss)
|
$ | (9,353 | ) | $ | 123,262 | |||
Items
included in net income/(loss) not affecting cash flows:
|
||||||||
Depreciation
and amortization
|
41,926 | 43,881 | ||||||
Loss
on write-down of vessels
|
3,607 | — | ||||||
Amortization
of deferred gain on sale and leasebacks
|
(10,613 | ) | (11,512 | ) | ||||
Compensation
relating to restricted stock and
|
||||||||
stock
option grants
|
2,740 | 3,081 | ||||||
Provision/(credit)
for deferred federal income taxes
|
(1,118 | ) | (1,693 | ) | ||||
Unrealized
(gains)/losses on forward freight agreements and bunker
swaps
|
(54 | ) | (1,083 | ) | ||||
Undistributed
earnings of affiliated companies
|
7,791 | 2,874 | ||||||
Other
– net
|
1,172 | 2,028 | ||||||
Items
included in net income/(loss) related to investing and financing
activities:
|
||||||||
Loss
on sale or write-down of securities – net
|
458 | 269 | ||||||
Gain
on disposal of vessels – net
|
(1,351 | ) | (129,863 | ) | ||||
Payments
for drydocking
|
(1,945 | ) | (5,920 | ) | ||||
Changes
in operating assets and liabilities
|
(47,472 | ) | 80,649 | |||||
Net
cash provided by/(used in) operating activities
|
(14,212 | ) | 105,973 | |||||
Cash
Flows from Investing Activities:
|
||||||||
Disposal
of short-term investments
|
50,000 | — | ||||||
Proceeds
from sales of investments
|
190 | — | ||||||
Expenditures
for vessels
|
(112,054 | ) | (71,992 | ) | ||||
Withdrawals
from Capital Construction Fund
|
— | 8,265 | ||||||
Proceeds
from disposal of vessels
|
— | 239,505 | ||||||
Expenditures
for other property
|
(568 | ) | (1,721 | ) | ||||
(Investments
in and advances to)/Distributions from affiliated companies –
net
|
(92,251 | ) | 12,452 | |||||
Shipyard
contract termination payments
|
(839 | ) | (17,336 | ) | ||||
Other
– net
|
1,351 | (49 | ) | |||||
Net
cash provided by/(used in) investing activities
|
(154,171 | ) | 169,124 | |||||
Cash
Flows from Financing Activities:
|
||||||||
Issuance
of common stock, net of issuance costs
|
158,155 | — | ||||||
Decrease
in restricted cash
|
7,945 | — | ||||||
Purchases
of treasury stock
|
(1,281 | ) | (980 | ) | ||||
Issuance
of debt, net of issuance costs
|
289,789 | — | ||||||
Payments
on debt and obligations under capital leases
|
(407,947 | ) | (15,373 | ) | ||||
Cash
dividends paid
|
(11,809 | ) | (11,773 | ) | ||||
Issuance
of common stock upon exercise of stock options
|
374 | 131 | ||||||
Distributions
from subsidiaries to noncontrolling interest owners
|
— | (2,627 | ) | |||||
Other
– net
|
(1,138 | ) | (17 | ) | ||||
Net
cash provided by/(used in) financing activities
|
34,088 | (30,639 | ) | |||||
Net
increase/(decrease) in cash and cash equivalents
|
(134,295 | ) | 244,458 | |||||
Cash
and cash equivalents at beginning of year
|
474,690 | 343,609 | ||||||
Cash
and cash equivalents at end of period
|
$ | 340,395 | $ | 588,067 |
See notes
to condensed consolidated financial statements
Page 5
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
DOLLARS
IN THOUSANDS
(UNAUDITED)
Overseas
Shipholding Group, Inc. Stockholders
|
||||||||||||||||||||||||||||||||||||
Common
|
Paid-in
Additional
|
Retained
|
Treasury
Stock
|
Accumulated
Other
Comprehensive
|
Total
Overseas
Shipholding
Group,
Inc.
|
Noncontrolling
|
||||||||||||||||||||||||||||||
Stock*
|
Capital
|
Earnings
|
Shares
|
Amount
|
Loss**
|
Stockholders
|
Interest
|
Total
|
||||||||||||||||||||||||||||
Balance
at January 1, 2010
|
$ | 40,791 | $ | 262,117 | $ | 2,465,949 | 13,933,435 | $ | (840,238 | ) | $ | (60,764 | ) | $ | 1,867,855 | $ | — | $ | 1,867,855 | |||||||||||||||||
Net
Income/(Loss)
|
(9,353 | ) | (9,353 | ) | (9,353 | ) | ||||||||||||||||||||||||||||||
Net
Change in Unrealized Holding Loss on Available-for-Sale
Securities
|
384 | 384 | 384 | |||||||||||||||||||||||||||||||||
Effect
of Derivative Instruments
|
(6,861 | ) | (6,861 | ) | (6,861 | ) | ||||||||||||||||||||||||||||||
Effect
of Pension and Other Postretirement Benefit Plans
|
(694 | ) | (694 | ) | (694 | ) | ||||||||||||||||||||||||||||||
Comprehensive
Income
|
(16,524 | ) | (16,524 | ) | ||||||||||||||||||||||||||||||||
Cash
Dividends Declared
|
(11,809 | ) | (11,809 | ) | (11,809 | ) | ||||||||||||||||||||||||||||||
Issuance
of Common Stock
|
3,500 | 154,655 | 158,155 | 158,155 | ||||||||||||||||||||||||||||||||
Issuance
of Restricted Stock Awards
|
(810 | ) | (70,748 | ) | 810 | — | — | |||||||||||||||||||||||||||||
Compensation
Related to Options Granted
|
994 | 994 | 994 | |||||||||||||||||||||||||||||||||
Amortization
of Restricted Stock Awards
|
1,746 | 1,746 | 1,746 | |||||||||||||||||||||||||||||||||
Options
Exercised and Employee Stock Purchase Plan
|
217 | (12,313 | ) | 157 | 374 | 374 | ||||||||||||||||||||||||||||||
Purchases
of Treasury Stock
|
25,046 | (1,281 | ) | (1,281 | ) | (1,281 | ) | |||||||||||||||||||||||||||||
Balance
at March 31, 2010
|
$ | 44,291 | $ | 418,919 | $ | 2,444,787 | 13,875,420 | $ | (840,552 | ) | $ | (67,935 | ) | $ | 1,999,510 | $ | — | $ | 1,999,510 | |||||||||||||||||
Balance
at January 1, 2009
|
$ | 40,791 | $ | 224,522 | $ | 2,442,907 | 13,898,541 | $ | (838,994 | ) | $ | (146,359 | ) | $ | 1,722,867 | $ | 101,766 | $ | 1,824,633 | |||||||||||||||||
Net
Income
|
121,750 | 121,750 | 1,512 | 123,262 | ||||||||||||||||||||||||||||||||
Net
Change in Unrealized Holding Loss on Available-for-Sale
Securities
|
(1,015 | ) | (1,015 | ) | (1,015 | ) | ||||||||||||||||||||||||||||||
Effect
of Derivative Instruments
|
35,637 | 35,637 | 35,637 | |||||||||||||||||||||||||||||||||
Effect
of Pension and Other Postretirement Benefit Plans
|
(765 | ) | (765 | ) | (765 | ) | ||||||||||||||||||||||||||||||
Comprehensive
Income
|
155,607 | 1,512 | 157,119 | |||||||||||||||||||||||||||||||||
Cash
Dividends Declared
|
(11,773 | ) | (11,773 | ) | (11,773 | ) | ||||||||||||||||||||||||||||||
Compensation
Related to Options Granted
|
1,256 | 1,256 | 1,256 | |||||||||||||||||||||||||||||||||
Amortization
of Restricted Stock Awards
|
1,825 | 1,825 | 1,825 | |||||||||||||||||||||||||||||||||
Options
Exercised and Employee Stock Purchase Plan
|
45 | (6,806 | ) | 86 | 131 | 131 | ||||||||||||||||||||||||||||||
Purchases
of Treasury Stock
|
36,368 | (980 | ) | (980 | ) | (980 | ) | |||||||||||||||||||||||||||||
Distributions
from Subsidiary to Noncontrolling Interest Owners
|
(2,627 | ) | (2,627 | ) | ||||||||||||||||||||||||||||||||
Balance
at March 31, 2009
|
$ | 40,791 | $ | 227,648 | $ | 2,552,884 | 13,928,103 | $ | (839,888 | ) | $ | (112,502 | ) | $ | 1,868,933 | $ | 100,651 | $ | 1,969,584 |
* Par
value $1 per share; 120,000,000 shares authorized; 44,290,759 shares issued
as of March 31, 2010.
** Amounts
are net of tax.
See notes
to condensed consolidated financial statements
Page 6
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements:
Note A —
Basis of Presentation:
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. They do not include all of the information and footnotes
required by generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2010 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010.
The
consolidated balance sheet as of December 31, 2009 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009.
The
Company evaluated events and transactions occurring after the balance sheet date
and through the day the financial statements were issued.
Note B —
Earnings per Common Share:
The
computation of basic earnings per share is based on the weighted average number
of common shares outstanding during the period. The computation of diluted
earnings per share assumes the exercise of all dilutive stock options and
restricted stock units using the treasury stock method. The components of the
calculation of basic earnings per share and diluted earnings per share are as
follows:
Three Months Ended
March 31,
|
||||||||
Dollars
in thousands
|
2010
|
2009
|
||||||
Net
income/(loss) attributable to Overseas Shipholding Group,
Inc.
|
$ | (9,353 | ) | $ | 121,750 | |||
Common
shares outstanding, basic:
|
||||||||
Weighted
average shares outstanding, basic
|
27,760,420 | 26,865,843 | ||||||
Common
shares outstanding, diluted:
|
||||||||
Weighted
average shares outstanding, basic
|
27,760,420 | 26,865,843 | ||||||
Dilutive
equity awards
|
— | 12,998 | ||||||
Weighted
average shares outstanding, diluted
|
27,760,420 | 26,878,841 |
Awards of
1,736,224 and 1,737,015 shares of common stock for the three months ended March
31, 2010 and 2009, respectively, were not included in the computation of diluted
earnings per share because inclusion of these awards would be
anti-dilutive.
Page 7
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note C —
Business and Segment Reporting:
The
Company has three reportable segments: International Crude Tankers,
International Product Carriers and U.S. vessels. Segment results are evaluated
based on income from vessel operations before general and administrative
expenses, severance and relocation costs, shipyard contract termination costs,
gain/(loss) on disposal of vessels and impairment charges. The accounting
policies followed by the reportable segments are the same as those followed in
the preparation of the Company’s consolidated financial statements. Information
about the Company’s reportable segments as of and for the three months ended
March 31, 2010 and 2009 follows:
International
|
||||||||||||||||||||
Crude
|
Product
|
|||||||||||||||||||
In
thousands
|
Tankers
|
Carriers
|
Other
|
U.S.
|
Totals
|
|||||||||||||||
Three
months ended March 31, 2010:
|
||||||||||||||||||||
Shipping
revenues
|
$ | 150,477 | $ | 65,422 | $ | 1,935 | $ | 51,920 | $ | 269,754 | ||||||||||
Time
charter equivalent revenues
|
132,132 | 50,121 | 1,935 | 45,673 | 229,861 | |||||||||||||||
Depreciation
and amortization
|
18,399 | 8,946 | 1,537 | 13,044 | 41,926 | |||||||||||||||
Adjustment
to shipyard contract termination costs
|
— | — | — | 231 | 231 | |||||||||||||||
Gain/(loss)
on disposal of vessels
|
(55 | ) | 63 | — | 1,343 | 1,351 | ||||||||||||||
Loss
on write-down of vessels
|
— | — | — | 3,607 | 3,607 | |||||||||||||||
Income
from vessel operations
|
36,702 | 1,314 | (137 | ) | (4,632 | ) | 33,247 | |||||||||||||
Equity in
income/(loss) of affiliated companies
|
(4,216 | ) | — | 1,633 | 285 | (2,298 | ) | |||||||||||||
Investments
in affiliated companies at March 31, 2010
|
212,011 | 1,350 | 57,782 | 327 | 271,470 | |||||||||||||||
Total
assets at March 31, 2010
|
1,917,528 | 788,554 | 66,835 | 932,838 | 3,705,755 | |||||||||||||||
Expenditures
for vessels
|
55,693 | 31,870 | — | 24,491 | 112,054 | |||||||||||||||
Payments
for drydockings
|
200 | 134 | 15 | 1,596 | 1,945 | |||||||||||||||
Three
months ended March 31, 2009:
|
||||||||||||||||||||
Shipping
revenues
|
173,009 | 82,829 | 1,935 | 67,031 | 324,804 | |||||||||||||||
Time
charter equivalent revenues
|
159,986 | 71,185 | 1,934 | 59,684 | 292,789 | |||||||||||||||
Depreciation
and amortization
|
17,877 | 11,803 | 1,616 | 12,585 | 43,881 | |||||||||||||||
Shipyard
contract termination costs
|
— | — | — | 35,885 | 35,885 | |||||||||||||||
Gain
on disposal of vessels
|
129,954 | — | (91 | ) | — | 129,863 | ||||||||||||||
Income
from vessel operations
|
43,959 | 11,516 | (210 | ) | 8,771 | 64,036 | ||||||||||||||
Equity
in income of affiliated companies
|
(335 | ) | — | 2,242 | 565 | 2,472 | ||||||||||||||
Investments
in affiliated companies at March 31, 2009
|
101,821 | 900 | 22,424 | 601 | 125,746 | |||||||||||||||
Total
assets at March 31, 2009
|
1,713,564 | 739,414 | 32,333 | 763,742 | 3,249,053 | |||||||||||||||
Expenditures
for vessels
|
2,943 | 59,772 | (226 | ) | 9,503 | 71,992 | ||||||||||||||
Payments
for drydocking
|
2,795 | 2,843 | — | 282 | 5,920 |
Page 8
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note C —
Business and Segment Reporting (continued):
Reconciliations
of time charter equivalent revenues of the segments to shipping revenues as
reported in the consolidated statements of operations follow:
Three Months Ended
March 31,
|
||||||||
In
thousands
|
2010
|
2009
|
||||||
Time
charter equivalent revenues
|
$ | 229,861 | $ | 292,789 | ||||
Add: Voyage
expenses
|
39,893 | 32,015 | ||||||
Shipping
revenues
|
$ | 269,754 | $ | 324,804 |
Consistent
with general practice in the shipping industry, the Company uses time charter
equivalent revenues, which represents shipping revenues less voyage expenses, as
a measure to compare revenue generated from a voyage charter to revenue
generated from a time charter. Time charter equivalent revenues, a non-GAAP
measure, provides additional meaningful information in conjunction with shipping
revenues, the most directly comparable GAAP measure, because it assists Company
management in making decisions regarding the deployment and use of its vessels
and in evaluating their financial performance.
Reconciliations
of income from vessel operations of the segments to income/(loss) before federal
income taxes, including net income attributable to noncontrolling interest, as
reported in the consolidated statements of operations follow:
Three Months Ended
March 31,
|
||||||||
In
thousands
|
2010
|
2009
|
||||||
Total
income from vessel operations of all segments
|
$ | 33,247 | $ | 64,036 | ||||
General
and administrative expenses
|
(26,829 | ) | (27,300 | ) | ||||
Severance
and relocation costs
|
— | (2,169 | ) | |||||
Shipyard
contract termination costs
|
231 | (35,885 | ) | |||||
Gain/(loss)
on disposal of vessels, net of impairments
|
(2,256 | ) | 129,863 | |||||
Consolidated
income from vessel operations
|
4,393 | 128,545 | ||||||
Equity
in income/(loss) of affiliated companies
|
(2,298 | ) | 2,472 | |||||
Other
income/(expense)
|
(146 | ) | 2,305 | |||||
Interest
expense
|
(12,294 | ) | (11,372 | ) | ||||
Income/(loss)
before federal income taxes
|
$ | (10,345 | ) | $ | 121,950 |
Reconciliations
of total assets of the segments to amounts included in the consolidated balance
sheets follow:
In
thousands as of March 31,
|
2010
|
2009
|
||||||
Total
assets of all segments
|
$ | 3,705,755 | $ | 3,249,053 | ||||
Corporate
cash and securities, including Capital Construction Fund
|
381,103 | 628,591 | ||||||
Other
unallocated amounts
|
121,041 | 131,223 | ||||||
Consolidated
total assets
|
$ | 4,207,899 | $ | 4,008,867 |
Page 9
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note D —
Vessels:
As of
March 31, 2010, the Company had remaining commitments for vessels to be wholly
owned by the Company of $412,662,000 on non-cancelable contracts for the
construction or purchase of 11 vessels (two VLCCs, four Panamax Product
Carriers, four Handysize Product Carriers and one ATB). These vessels are
scheduled for delivery between 2010 and 2011.
During
the third quarter of 2009, the Company recorded impairment charges aggregating
$12,500,000 to write down the carrying amount of two U.S. Flag vessels, an older
double-hulled tanker with an inefficient gas turbine engine and one of its four
single-hulled vessels, which have limited remaining useful lives, to their
estimated fair values as of September 30, 2009. During the first quarter of
2010, the Company recorded an additional impairment charge of $3,607,000 to
write down the carrying values of two of its U.S. Flag vessels, the older
double-hulled tanker referred to above and another one of its four single-hulled
vessels, to their estimated net fair values as of March 31, 2010, using
estimates of discounted future cash flows for each of the vessels.
In early
2009, OSG began negotiations with Bender Shipbuilding & Repair Co., Inc.
(“Bender”) to terminate the construction agreements covering the six ATBs and
two tug boats associated with its U.S. Flag expansion plans due to repeated
delays in vessel delivery dates from the original contract delivery dates,
Bender’s request for substantial price increases on all contracted vessels and
OSG’s concern about Bender’s ability to complete the ATBs and tug boats within
contract terms,
including Bender's lack of performance under such agreements and its
financial condition. The Company took an impairment charge of $105,111,000 in
the fourth quarter of 2008 related to four of such ATBs.
On March
13, 2009, the Company entered into a termination agreement with Bender. Under
the terms of the agreement, Bender agreed to transfer ownership of the
unfinished vessels (and all related components and equipment) to OSG in their
current state of completion in consideration for which OSG would, among other
things (1) pay and/or reimburse Bender for the costs associated with positioning
the units for transportation to the alternative shipyards and certain other
material and labor costs related to construction of the units, (2) assume
certain specified obligations related to construction of the units and (3)
render a payment of $14,000,000 to a third party for the release of priority
liens on the vessels being transferred to the Company. As of March 31, 2010, the
amounts referred to in (1), (2) and (3) above are estimated to approximate
$46,000,000 of which $26,729,000 has been charged to expense from the date of
the termination agreement through March 31, 2010. The Company completed
construction of one of the above ATBs in the first quarter of 2010 and intends
to complete one additional ATB and the two tugboats at alternative
shipyards.
During
the first quarter of 2009, the Company delivered one of its 2000-built VLCCs to
the buyer pursuant to a forward sales agreement entered in 2007. Accordingly,
OSG recognized a gain on the sale of $76,654,000 in the first quarter of 2009. A
ULCC, the TI Africa, which was wholly-owned by OSG, was sold in January 2009 to
a joint venture in which the Company has a 50% interest for conversion to an FSO
for approximately $200,000,000. The Company recorded a gain of $106,686,000, of
which $53,343,000 was recognized in the first quarter of 2009 with the balance
deferred to be amortized over the remaining life of the vessel. The gain
recognized on the transaction was equal to 50% of the excess of the sales price
over the carrying amount of the vessel. In addition, OSG sold and chartered back
one International Flag Panamax Product Carrier.
Page 10
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note E —
Equity Method Investments:
Investments
in affiliated companies include joint ventures accounted for using the equity
method. As of March 31, 2010, the Company had a 50% interest in two joint
ventures. One joint venture operates four LNG Carriers. The other joint venture
converted two ULCCs to FSOs, one of which commenced service on January 4, 2010.
In addition, the Company has a 37.5% interest in Alaska Tanker Company, LLC that
manages vessels carrying Alaskan crude for BP.
Floating
Storage and Offloading Service Vessels (“FSO”)
In
February 2008, Maersk Oil Qatar AS (“MOQ”) awarded two service contracts to a
joint venture between OSG and Euronav NV for terms of approximately eight years
ending in 2017. The service contracts provide for two ULCCs to be converted to
FSOs. The first ULCC, the TI Asia, which was wholly owned by Euronav NV, was
sold to the joint venture in October 2008 for approximately $200,000,000. The
second ULCC, the TI Africa, which was wholly owned by OSG, was sold to the joint
venture in January 2009. Conversion of both vessels to FSOs was delayed. The FSO
Asia completed conversion in November 2009 and costs incurred subsequent thereto
have been expensed. The FSO Asia experienced mechanical problems and effective
hook-up did not occur until January 5, 2010. The service contract for the FSO
Africa (formerly named the TI Africa) required that its conversion to an FSO be
completed and it begins providing FSO services to MOQ by January 19, 2010 (the
“Africa Cancellation Date”). On January 21, 2010, MOQ issued a notice of
cancellation to the joint venture partners concerning the FSO Africa service
contract due to the delayed delivery. The joint venture partners contest MOQ’s
right to terminate the contract. The FSO Africa was completed on March 14, 2010.
Commercial discussions with various parties concerning the employment of the FSO
Africa are ongoing, but no assurance can be given concerning the outcome of
these discussions. The Company reviewed the FSO Africa for impairment based upon
the information that was known to it as of December 31, 2009. This evaluation
did not result in an impairment charge being recognized as of December 31, 2009.
The assumptions used in that impairment analysis have not subsequently changed
in any material way.
The
service contracts provided for the payment of liquidated damages by the joint
ventures to MOQ for delays in delivery of the FSOs. Such liquidated damages,
which were payable either through the date of delivery of the FSO Asia or
termination of the service contract of the FSO Africa, were expensed by the
joint venture as incurred.
The joint
venture financed the purchase of the vessels through long-term secured bank
financing and partner loans. The joint venture has entered into a $500,000,000
secured credit facility to partially finance the acquisition of the two ULCCs
and the cost of the conversion. In connection with the secured bank financing,
the partners severally issued guaranties. As of March 31, 2010, the carrying
value of the Company’s guaranty, which is included in other liabilities in the
accompanying balance sheet, was $429,000. As a result of the cancellation of the
service contract of the FSO Africa, the joint venture partners were required to
post $143,000,000 in cash collateral in consideration of the banks agreeing to
waive, for a period currently ending in the second quarter of 2010, the
acceleration of amounts outstanding under the facility related to the FSO
Africa, which aggregated $143,000,000 as of January 21, 2010. The outstanding
balance applicable to the FSO Africa under the facility and the amount of
collateral posted was reduced to $133,000,000 as of March 31, 2010. The joint
venture has entered into floating-to-fixed interest rate swaps with major
financial institutions that are being accounted for as cash flow hedges as of
December 31, 2009. The interest rate swaps, covering notional amounts
aggregating $460,085,000, pay fixed rates of 3.9% and receive floating rates
based on LIBOR. These agreements commenced in the third quarter of 2009 and have
maturity dates ranging from July to September 2017. As of March 31, 2010, the
Company concluded that it was no longer probable that the forecasted transaction
applicable to the FSO Africa swaps would occur. Accordingly, in the first
quarter of 2010, the Company recognized a loss of $4,548,000, representing its
share of amounts previously included in accumulated comprehensive income/(loss)
by the joint venture for the interest rate swaps associated with the FSO Africa.
As of March 31, 2010, the joint venture has recorded a liability of $20,591,000
for the fair value of the swaps associated with the FSO Africa and FSO Asia. The
Company’s share of the effective portion of such amount ($5,022,000) is included
in accumulated other comprehensive income/(loss) in the accompanying balance
sheet and is associated with the FSO Asia swaps only, since the swaps associated
with the FSO Africa have been de-designated and deemed to be
ineffective.
Page 11
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note E —
Equity Method Investments (continued):
LNG
Joint Venture
In
November 2004, the Company formed a joint venture with Qatar Gas Transport
Company Limited (Nakilat) whereby companies in which OSG holds a 49.9% interest
ordered four 216,200 cbm LNG Carriers. Upon delivery in late 2007 and early
2008, these vessels commenced 25-year time charters to Qatar Liquefied Gas
Company Limited (II). The aggregate construction cost for such newbuildings of
$918,026,000 was financed by the joint venture through long-term bank financing
that is nonrecourse to the partners and partner contributions. The joint venture
has entered into floating-to-fixed interest rate swaps with a group of major
financial institutions that are being accounted for as cash flow hedges. The
interest rate swaps cover notional amounts aggregating $840,399,000 at March 31,
2010, pursuant to which it will pay fixed rates of approximately 4.9% and
receive a floating rate based on LIBOR. These agreements have maturity dates
ranging from July to November 2022. As of March 31, 2010, the joint venture has
recorded a liability of $77,543,000 for the effective portion of the fair value
of these swaps. The Company’s share of such amount is included in accumulated
other comprehensive income/(loss) in the accompanying balance
sheet.
A condensed summary of the results of
operations of the equity method investments follows:
Three Months Ended
March 31,
|
|||||||||
In
thousands
|
2010
|
2009
|
|||||||
Shipping
revenues
|
$ | 72,103 | $ | 60,344 | |||||
Ship
operating expenses
|
(51,190 | ) | (41,912 | ) | |||||
Income
from vessel operations
|
20,913 | 18,432 | |||||||
Other
income/(expense)
|
(411 | ) | (159 | ) | |||||
Interest
expense *
|
(27,006 | ) | (12,786 | ) | |||||
Net
income/(loss)
|
$ | (6,504 | ) | $ | 5,487 |
*
Interest is net of amounts capitalized in connection with vessel construction of
$509 (2010) and $1,484 (2009).
Page 12
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note F –
Variable Interest Entities (“VIEs”):
At March
31, 2010, the Company participates in five commercial pools and three joint
ventures. Commercial pools operate a large number of vessels as an integrated
transportation system, which offers customers greater flexibility and a higher
level of service while achieving scheduling efficiencies. Participants in the
commercial pools contribute one or more vessels and generally provide an initial
contribution towards the working capital of the pool at the time they enter
their vessels. The pools finance their operations primarily through the earnings
that they generate.
The
Company enters into joint ventures to take advantage of commercial
opportunities. The Company has entered into three joint ventures with different
partners (see Note E). In each joint venture, the Company has the same relative
rights and obligations and financial risks and rewards as its partners. The
Company evaluated all eight arrangements to determine if they were variable
interest entities (“VIEs”). The Company determined that two of the pools and one
of the joint ventures met the criteria of a VIE and, therefore, the Company
reviewed its participation in these VIEs to determine if it was the primary
beneficiary of any of them.
Accounting
guidance requires a company to determine qualitatively if it is the primary
beneficiary of a VIE based on whether the entity (1) has the power to direct the
activities of the VIE that most significantly impact the entity’s economic
performance and (2) has the obligation to absorb losses of the entity that could
potentially be significant to the VIE or the right to receive benefits from the
entity that could potentially be significant to the VIE. The Company reviewed
the legal documents which govern the creation and management of the VIEs and
also analyzed its involvement to determine if the Company was a primary
beneficiary in any of the VIEs.
The
formation agreements for each of the two commercial pools are similar and state
that the board of each pool has decision making power over their significant
decisions. In addition, all such decisions must be approved unanimously by the
respective boards. Since the Company shares power to make all significant
economic decisions that affect these pools and does not control a majority of
either of the boards, the Company is not considered a primary beneficiary of
either of the pools.
The joint
venture formed to convert two ULCCs to FSOs, which was determined to be a VIE,
was formed by the Company and one other entity, each with a 50% interest. The
formation agreements state that all significant decisions must be approved by
the majority of the board. As a result, the Company shares power to make all
significant economic decisions that affect this joint venture and does not
control a majority of the board and is not considered a primary beneficiary.
Accordingly, the Company accounts for this investment under the equity method of
accounting. A VIE for which the Company is determined to be the primary
beneficiary is required to be consolidated in its financial
statements.
The joint
venture’s formation agreements require the Company and its joint venture partner
to provide financial support as needed. The Company has provided and will
continue to provide such support as described in Note E.
Page 13
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note F –
Variable Interest Entities (continued):
The
following table presents the carrying amounts of assets and liabilities in the
balance sheet related to the VIEs described above as of March 31,
2010:
In thousands
|
Consolidated Balance Sheet
|
|||
Investments
in Affiliated Companies
|
$ | 211,889 | ||
Deferred
Federal Income Taxes and Other Liabilities (1)
|
429 |
(1) Represents
the Company’s valuation of its several guarantee of a joint venture’s
outstanding debt at March 31, 2010.
In
accordance with accounting guidance, the Company evaluated its maximum exposure
to loss related to these VIEs by assuming a complete loss of the Company’s
investment in these VIEs and that it would incur an obligation to repay the full
amount of the VIE’s outstanding secured debt that exceeds the amount of cash
collateral already posted by the joint venture. The Company’s share of such cash
collateral (approximately $66,332,000) was advanced to the joint venture in the
first quarter of 2010 and is included in investments in affiliated companies.
The table below compares the Company’s liability in the consolidated balance
sheet to the maximum exposure to loss at March 31, 2010.
In thousands
|
Consolidated Balance Sheet
|
Maximum Exposure to Loss
|
||||||
Deferred
Federal Income Taxes and Other Liabilities
|
$ | 429 | $ | 334,500 |
In
addition, as of March 31, 2010, the Company had approximately $18,450,000 of
trade receivables from pools that were determined to be VIEs. These trade
receivables, which are included in voyage receivables in the accompanying
balance sheet, have been excluded from the above tables and the calculation of
OSG’s maximum exposure to loss. The
Company does not record the maximum exposure to loss as a liability because it
does not believe that such a loss is probable of occurring as of March 31, 2010.
Further, the joint venture debt is secured by the joint venture’s FSOs.
Therefore, the Company’s exposure to loss under its several guarantee would
first be reduced by the fair value of such FSOs.
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value
Disclosures:
The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
Cash and cash equivalents—The
carrying amounts reported in the consolidated balance sheet for interest-bearing
deposits approximate their fair value.
Short-term investments—The
carrying amounts reported in the consolidated balance sheet for short-term
investments, which consisted of interest-bearing time deposits approximated
their fair value.
Restricted cash—The carrying
amounts reported in the consolidated balance sheet for restricted cash, which
consisted of interest-bearing deposits approximated their fair
value.
Debt—The fair values of the
Company’s debt are estimated using discounted cash flow analyses, based on the
rates currently available for debt with similar terms and remaining
maturities.
Page 14
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
Forward freight agreements and
bunker swaps—The fair values of forward freight agreements and bunker
swaps are the estimated amounts that the Company would receive or pay to
terminate the agreements at the reporting date, which include an adjustment for
the counterparty or the Company’s credit risk, as appropriate.
Interest rate swaps—The fair
value of interest rate swaps is the estimated amount that the Company would
receive or pay to terminate the swaps at the reporting date, which include an
adjustment for the counterparty or the Company’s credit risk, as
appropriate.
Foreign Currency
Contracts—The fair value of foreign currency contracts is the estimated
amount that the Company would receive or pay to terminate the contracts at the
reporting date, which include an adjustment for the counterparty or the
Company’s credit risk, as appropriate.
The
estimated fair values of the Company’s financial instruments at March 31, 2010
and December 31, 2009, other than derivatives, follow:
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
In thousands
|
Carrying
Amount
|
Fair Value
|
Carrying
Amount
|
Fair value
|
||||||||||||
Financial
assets (liabilities)
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 340,395 | $ | 340,395 | $ | 474,690 | $ | 474,690 | ||||||||
Short-term
investments
|
— | — | 50,000 | 50,000 | ||||||||||||
Restricted
cash
|
— | — | 7,945 | 7,945 | ||||||||||||
Capital
Construction Fund
|
40,708 | 40,708 | 40,698 | 40,698 | ||||||||||||
Debt
|
(1,734,236 | ) | (1,684,682 | ) | (1,846,491 | ) | (1,760,868 | ) |
Derivatives
The
Company is exposed to certain risks relating to its ongoing business operations.
The risks, managed by using derivative instruments, are volatility with respect
to short-term charter rates, interest rates and foreign currency exchange
rates.
Spot
Market Rate Volatility Risk
The
Company enters into Forward Freight Agreements (“FFAs”) and bunker swaps with an
objective to utilize them as economic hedging instruments, some of which qualify
as cash flow hedges for accounting purposes, that reduce its exposure to changes
in the spot market rates earned by some of its vessels or protect the Company
against future increases in bunker prices in the normal course of its shipping
business. The FFAs and bunker swaps involve contracts to provide a fixed number
of theoretical voyages at fixed rates, which generally range from one month to
one year and settle monthly based on a published index. These contracts expire
on various dates through September 2010. As of March 31, 2010, those FFAs and
bunker swaps, with future settlement dates, that qualify as cash flow hedges
cover approximately one VLCC, representing aggregate volumes of 660,000 metric
tons (“mts”) and 9,600 mts, respectively.
Page 15
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
Interest
Rate Risk
The
Company uses interest rate swaps for the management of interest rate risk
exposure. The interest rate swaps effectively convert a portion of the Company’s
debt from a floating to a fixed rate and are designated and qualify as cash flow
hedges. The Company is a party to floating-to-fixed interest rate swaps with
various major financial institutions covering notional amounts aggregating
approximately
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
$402,300,000
at March 31, 2010 pursuant to which it pays fixed rates ranging from 3.2% to
4.7% and receives floating rates based on the London interbank offered rate
("LIBOR") (approximately 0.30% at March 31, 2010). These agreements contain no
leverage features and have various final maturity dates ranging from March 2011
to August 2014.
Foreign
Exchange Risk
The
Company seeks to reduce its exposure to fluctuations in foreign exchange rates
related to recurring monthly foreign currency denominated general and
administrative expenses through the use of foreign currency forward contracts
and through the purchase of bulk quantities of currencies at rates which
management considers favorable. At March 31, 2010, the notional amounts of the
foreign currency forward contracts aggregated approximately £12,000,000 and
€22,400,000 settling monthly through March 2011 and such contracts qualify as
cash flow hedges.
Tabular
disclosure of derivatives location
Derivatives
are recorded in the balance sheet on a net basis by counterparty when a legal
right of setoff exists. The following tables present information with respect to
the fair values of derivatives reflected in the balance sheet on a gross basis
by transaction. The tables also present information with respect to gains and
losses on derivative positions reflected in the statement of operations or in
the balance sheet, as a component of accumulated other comprehensive
loss.
Page 16
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
Fair
Values of Derivative Instruments:
Asset Derivatives
|
Liability Derivatives
|
||||||||||
In thousands at March 31, 2010
|
Balance Sheet Location
|
Amount
|
Balance Sheet Location
|
Amount
|
|||||||
Derivatives
designated as hedging instruments:
|
|||||||||||
FFAs
and bunker swaps:
|
|||||||||||
Current
portion
|
Inventories,
prepaid expenses and other current assets
|
$ | — |
Accounts
payable, accrued expenses and other current liabilities
|
$ | (210 | ) | ||||
Accounts
payable, accrued expenses and other current liabilities
|
2 |
Inventories,
prepaid expenses and other current assets
|
(93 | ) | |||||||
Interest
rate swaps:
|
|||||||||||
Current
portion
|
Other
receivables, including federal income taxes recoverable.
|
— |
Accounts
payable, accrued expenses and other current liabilities
|
(11,053 | ) | ||||||
Long-term
portion
|
Other
assets
|
— |
Deferred
federal income taxes and other liabilities
|
(6,009 | ) | ||||||
Foreign
currency contracts:
|
|||||||||||
Current
portion
|
Inventories,
prepaid expenses and other current assets
|
— |
Accounts
payable, accrued expenses and other current liabilities
|
(1,949 | ) | ||||||
Total
derivatives designated as hedging instruments
|
$ | 2 | $ | (19,314 | ) | ||||||
Derivatives
not designated as hedging instruments:
|
|||||||||||
FFAs
and bunker swaps:
|
|||||||||||
Current
portion
|
Inventories,
prepaid expenses and other current assets
|
$ | 115 |
Accounts
payable, accrued expenses and other current liabilities
|
$ | (201 | ) | ||||
Accounts
payable, accrued expenses and other current liabilities
|
71 |
Inventories,
prepaid expenses and other current assets
|
(6 | ) | |||||||
Long-term
portion
|
Other
assets
|
— |
Deferred
federal income taxes and other liabilities
|
— | |||||||
Deferred
federal income taxes and other liabilities
|
— |
Other
assets
|
— | ||||||||
Total
derivatives not designated as hedging instruments
|
$ | 186 | $ | (207 | ) | ||||||
Total
derivatives
|
$ | 188 | $ | (19,521 | ) |
Page 17
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
Asset Derivatives
|
Liability Derivatives
|
||||||||||
In thousands at December 31,
2009
|
Balance Sheet Location
|
Amount
|
Balance Sheet Location
|
Amount
|
|||||||
Derivatives
designated as hedging instruments:
|
|||||||||||
FFAs
and bunker swaps:
|
|||||||||||
Current
portion
|
Prepaid
expenses and other current assets
|
$ | — |
Accounts
payable, accrued expenses and other current liabilities
|
$ | — | |||||
Accounts
payable, accrued expenses and other current liabilities
|
— |
Prepaid
expenses and other current assets
|
— | ||||||||
Interest
rate swaps:
|
|||||||||||
Current
portion
|
Other
receivables
|
— |
Accounts
payable, accrued expenses and other current liabilities
|
(10,847 | ) | ||||||
Long-term
portion
|
Other
assets
|
— |
Deferred
federal income taxes and other liabilities
|
(4,484 | ) | ||||||
Foreign
currency contracts:
|
|||||||||||
Current
portion
|
Prepaid
expenses and other current assets
|
— |
Accounts
payable, accrued expenses and other current liabilities
|
(492 | ) | ||||||
Total
derivatives designated as hedging instruments
|
$ | — | $ | (15,823 | ) | ||||||
Derivatives
not designated as hedging instruments:
|
|||||||||||
FFAs
and bunker swaps:
|
|||||||||||
Current
portion
|
Prepaid
expenses and other current assets
|
$ | 394 |
Accounts
payable, accrued expenses and other current liabilities
|
$ | (457 | ) | ||||
Accounts
payable, accrued expenses and other current liabilities
|
— |
Prepaid
expenses and other current assets
|
(11 | ) | |||||||
Long-term
portion
|
Other
assets
|
— |
Deferred
federal income taxes and other liabilities
|
— | |||||||
Deferred
federal income taxes and other liabilities
|
— |
Other
assets
|
— | ||||||||
Total
derivatives not designated as hedging instruments
|
$ | 394 | $ | (468 | ) | ||||||
Total
derivatives
|
$ | 394 | $ | (16,291 | ) |
Page 18
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
The
effect of cash flow hedging relationships on the balance sheet as of March 31,
2010 and December 31, 2009 follows:
Amount of Derivative Gain or (Loss) Reclassified to
Accumulated Other Comprehensive Income/(Loss)
(Effective Portion)
|
||||||||
In thousands
|
March 31, 2010
|
December 31, 2009
|
||||||
FFAs
and bunker swaps
|
$ | (300 | ) | $ | 1,150 | |||
Interest
rate swaps
|
(57,261 | ) | (53,307 | ) | ||||
Foreign
currency contracts
|
(1,949 | ) | (492 | ) | ||||
Total
|
$ | (59,510 | ) | $ | (52,649 | ) |
The
effect of cash flow hedging relationships on the statement of operations for the
three months ended March 31, 2010 and 2009 are shown below:
Statement of Operations
|
|||||||||||
Effective Portion of Gain/(Loss)
Reclassified from Accumulated Other
Comprehensive Income/(Loss)
|
Ineffective Portion
|
||||||||||
In thousands for the
quarter ended March 31,
2010
|
Location
|
Amount of
Gain/(Loss)
|
Location
|
Amount of
Gain/(Loss)
|
|||||||
FFAs
and bunker swaps
|
Shipping
revenues
|
$ | 1,770 |
Shipping
revenues
|
$ |
─
|
|||||
Interest
rate swaps
|
Interest
expense
|
(1,377 | ) |
Interest
expense
|
─
|
||||||
Foreign
currency contracts
|
General
and administrative expenses
|
(194 | ) |
General
and administrative expenses
|
─
|
||||||
Total
|
$ | 199 | $ |
─
|
Statement of Operations
|
|||||||||||
Effective Portion of Gain/(Loss)
Reclassified from Accumulated Other
Comprehensive Income/(Loss)
|
Ineffective Portion
|
||||||||||
In thousands for the
quarter ended March 31,
2009
|
Location
|
Amount of
Gain/(Loss)
|
Location
|
Amount of
Gain/(Loss)
|
|||||||
FFAs
and bunker swaps
|
Shipping
revenues
|
$ | (3,821 | ) |
Shipping
revenues
|
$ | 147 | ||||
Interest
rate swaps
|
Interest
expense
|
(1,971 | ) |
Interest
expense
|
─
|
||||||
Foreign
currency contracts
|
General
and administrative expenses
|
(23 | ) |
General
and administrative expenses
|
(8 | ) | |||||
Total
|
$ | (5,815 | ) | $ | 139 |
Page 19
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
The
effect of the gain/(loss) recognized on derivatives not designated as hedging
instruments on the statements of operations for the three months ended March 31,
2010 and 2009 are as follows:
Three Months Ended
March 31,
|
||||||||||
In
thousands
|
Location
|
2010
|
2009
|
|||||||
FFAs
and bunker swaps
|
Other
Income/(Expense)
|
$ | (68 | ) | $ | 672 |
Fair
Value Hierarchy
The
following tables present the fair values, which are pre tax, for assets and
liabilities measured on a recurring basis (excluding investments in affiliated
companies):
In thousands
|
Fair Value
|
Level 1:
Quoted prices in
active markets for
identical assets or
liabilities
|
Level 2:
Significant other
observable inputs
|
|||||||||
Assets/(Liabilities)
at March 31, 2010:
|
||||||||||||
Available-for-sale
marketable securities
|
$ | 706 | $ | 706 | $ | — | ||||||
Derivative
Assets
|
$ | 16 | $ | 16 |
(1)
|
$ | — | |||||
Derivative
Liabilities
|
$ | (19,349 | ) | $ | (338 | )(1) | $ | (19,011 | )(2) | |||
Assets/(Liabilities)
at December 31, 2009:
|
||||||||||||
Available-for-sale
marketable securities
|
$ | 652 | $ | 652 | $ | — | ||||||
Derivative
Assets
|
$ | 383 | $ | 383 |
(1)
|
$ | — | |||||
Derivative Liabilities
|
$ | (16,280 | ) | $ | (457 | )(1) | $ | (15,823 | )(3) |
1 Forward
Freight Agreements and Bunker Swaps
2 Standard interest rate swaps (liability
of $17,062) and foreign currency contracts (liability of
$1,949)
3 Standard
interest rate swaps (liability of $15,331) and foreign currency contracts
(liability of $492)
The
following table summarizes the fair values of items measured at fair value on a
nonrecurring basis as of March 31, 2010 (in thousands):
Description
|
Level 3:
Significant
unobservable inputs
|
Fair Value
|
Total Losses
|
|||||||||
Assets:
|
||||||||||||
U.S.
Flag impairment - Vessels held for use (1)
|
$ | 3,865 | $ | 3,865 | $ | (3,607 | ) |
|
1
|
A
pre-tax impairment charge of $3,607 was recorded in the first quarter of
2010, related to the U.S. Flag segment. The fair value measurement used to
determine the impairment was based upon the income approach, which
utilized cash flow projections consistent with the most recent projections
of the Company, and a discount rate equivalent to a market participant’s
weighted average cost of capital.
|
Page 20
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note G
—Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):
Cash
Collateral Disclosures
The
Company does not offset fair value amounts recognized for derivatives by the
right to reclaim cash collateral or the obligation to return cash collateral.
The amounts of collateral to be posted are defined in the terms of respective
master agreements executed with counterparties or exchanges and are required
when agreed upon threshold limits are exceeded. The amounts received as
collateral related to derivative fair value positions were not material at March
31, 2010.
Note H —
Debt:
On March
29, 2010, the Company issued $300,000,000 principal amount of senior unsecured
notes at a discount pursuant to a Form S-3 shelf registration filed March 22,
2010. The notes are due in March 2018 and have a coupon of 8.125%. The
Company received proceeds of approximately $289,789,000, after deducting
expenses.
As of
March 31, 2010, the Company had unused long-term credit availability of
approximately $1,415,000,000, which reflects $1,867,000 of letters of credit
issued principally in connection with collateral requirements for derivative
transactions.
Agreements
related to long-term debt provide for prepayment privileges (in certain
instances with penalties), limitations on the amount of total borrowings and
secured debt, and acceleration of payment under certain circumstances, including
failure to satisfy certain financial covenants.
As of
March 31, 2010, approximately 42.1% of the net book value of the Company’s
vessels is pledged as collateral under certain debt agreements.
Interest
paid, excluding capitalized interest, amounted to $15,051,000 and $11,752,000
for the three month periods ended March 31, 2010 and 2009,
respectively.
Page 21
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note I —
Taxes:
On
October 22, 2004, the President of the U.S. signed into law the American Jobs
Creation Act of 2004. The Jobs Creation Act reinstated tax deferral for OSG’s
foreign shipping income for years beginning after December 31, 2004. Effective
January 1, 2005, the earnings from shipping operations of the Company’s foreign
subsidiaries are not subject to U.S. income taxation as long as such earnings
are not repatriated to the U.S. The Company intends to permanently reinvest
these earnings, as well as the undistributed income of its foreign companies
accumulated through December 31, 1986, in foreign operations. Accordingly, no
provision for U.S. income taxes on the shipping income of its foreign
subsidiaries was required in 2010 and 2009. Further, no provision for U.S.
income taxes on the Company’s share of the undistributed earnings of the less
than 50% owned foreign shipping joint ventures was required as of March 31,
2010, because the Company intends to indefinitely reinvest such earnings
($85,000,000 at March 31, 2010). The unrecognized deferred U.S. income taxes
attributable thereto approximated $30,000,000.
As of
March 31, 2010, undistributed earnings on which U.S. income taxes have not been
provided aggregated approximately $2,400,000,000, including $119,000,000 earned
prior to 1976; the unrecognized deferred U.S. income tax attributable to such
undistributed earnings approximated $840,000,000.
The
components of the provision/(credit) for income taxes follow:
Three Months Ended
March 31,
|
||||||||
In
thousands
|
2010
|
2009
|
||||||
Current
|
$ | 126 | $ | 381 | ||||
Deferred
|
(1,118 | ) | (1,693 | ) | ||||
$ | (992 | ) | $ | (1,312 | ) |
At
December 31, 2009, the Company had a reserve of approximately $5,292,000 for
benefits attributable to tax positions taken during the current and prior tax
periods for which the probability of recognition is considered less than “more
likely than not.” There was no material change in the reserve during the three
months ended March 31, 2010.
Note J —
Capital Stock and Stock Compensation:
In June
2008, the Company’s Board of Directors authorized the repurchase of up to
$250,000,000 of the Company’s common stock from time-to-time. Such purchases of
the Company’s common stock will be made at the Company’s discretion and take
into account such factors as price and prevailing market conditions. As of March
31, 2010, the Company had repurchased 3,798,200 shares of its common stock under
the 2008 program (all prior to December 31, 2008).
In the
first three months of 2010, the Company awarded a total of 71,008 shares of
restricted common stock at no cost to certain of its employees, including senior
officers. Restrictions limit the sale or transfer of shares of restricted common
stock until they vest, which occurs over a four or five-year period. During the
restriction period, the shares will have voting rights and cash dividends will
be paid if declared. The weighted average fair value of the restricted stock
issued during the three months ended March 31, 2010 was $43.40 per share (the
market price at date of grant). In addition, in the first
three months of 2010, options covering 141,988 shares were granted at
the market price at the date of the grant. Such options were valued using the
Black-Scholes option pricing model and expire ten years from the grant date. The
exercise price of options granted during the three months ended March 31, 2010
was $43.40 per share (the market price at date of grant). The grant date fair
value of options granted during the three months ended March 31, 2010 was $13.53
per share.
Page 22
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note J —
Capital Stock and Stock Compensation (Continued):
In the
first three months of 2010, the Company granted a total of 44,142 performance
related restricted stock units to covered employees. The Company did not make
any performance related restricted stock unit awards during the first three
months of 2009. Each performance unit represents a contingent right to receive
shares of common stock, based on a formula, if certain market related
performance goals are met and the covered employees are continuously employed
through the end of the period over which the performance goals are measured. The
performance units have no voting rights and may not be transferred or otherwise
disposed of. The covered employees are entitled to dividends in the form of
additional performance units at the same time dividends are paid on the
Company’s common stock in an amount equal to the result obtained by dividing (i)
the product of (x) the amount of units owned by the covered employee on the
record date for the dividend times (y) the dividend per share by (ii) the
closing price of a share of the Company’s common stock on the payment date. The
performance units resulting from the reinvested dividends will convert into
shares of common stock, using the formula contained in the original grant and
will vest at the end of the performance period. At the date of grant of the
performance related restricted stock awards, the fair market value of the
Company’s stock was $43.40 per share. The estimated weighted average grant-date
fair value of the performance related restricted stock awards in the first three
months of 2010 was $52.43 per share.
Compensation
expense is recognized over the vesting period, contingent or otherwise,
applicable to each grant, using the straight-line method.
Note K —
Accumulated Other Comprehensive Income/(Loss):
The
components of accumulated other comprehensive income/(loss), net of related
taxes, in the consolidated balance sheets follow:
In thousands as of
|
March 31,
2010
|
December 31,
2009
|
||||||
Unrealized
losses on available-for-sale securities
|
$ | — | $ | (384 | ) | |||
Unrealized
losses on derivative instruments
|
(59,510 | ) | (52,649 | ) | ||||
Items
not yet recognized as a component of net periodic benefit cost (pension
and other postretirement plans)
|
(8,425 | ) | (7,731 | ) | ||||
$ | (67,935 | ) | $ | (60,764 | ) |
Included
in accumulated other comprehensive income/(loss) at March 31, 2010 are the
following amounts that have not yet been recognized in net periodic
cost: unrecognized transition obligation of $71,000 ($46,000 net of
tax), unrecognized prior service costs of $1,969,000 ($1,280,000 net of tax) and
unrecognized actuarial losses of $10,922,000 ($7,099,000 net of
tax).
Page 23
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note
L — Leases:
1.
|
Charters-in:
|
As of
March 31, 2010, the Company had commitments to charter-in 53 vessels all of
which are, or will be, accounted for as operating leases. Twenty four are
bareboat charters and 29 are time charters. The future minimum commitments and
related number of operating days under these operating leases are as
follows:
Bareboat Charters-in:
|
||||||||
Dollars in thousands at March 31, 2010
|
Amount
|
Operating Days
|
||||||
2010
|
$ | 113,688 | 6,048 | |||||
2011
|
153,241 | 7,935 | ||||||
2012
|
156,685 | 8,052 | ||||||
2013
|
156,526 | 8,030 | ||||||
2014
|
146,666 | 6,465 | ||||||
Thereafter
|
292,652 | 14,874 | ||||||
Net
minimum lease payments
|
$ | 1,019,458 | 51,404 | |||||
Time
Charters-in:
|
||||||||
Dollars
in thousands at March 31, 2010
|
Amount
|
Operating Days
|
||||||
2010
|
$ | 164,120 | 8,159 | |||||
2011
|
194,924 | 9,287 | ||||||
2012
|
135,362 | 6,551 | ||||||
2013
|
84,779 | 4,940 | ||||||
2014
|
78,510 | 4,773 | ||||||
Thereafter
|
196,709 | 12,038 | ||||||
Net
minimum lease payments
|
$ | 854,404 | 45,748 |
The
future minimum commitments for time charters-in have been reduced to reflect
estimated days that the vessels will not be available for employment due to
drydock.
During
the three months ended March 31, 2009, the Company sold and chartered back one
International Flag Panamax Product Carrier, which bareboat charter is classified
as an operating lease. The aggregate gain on the transaction of approximately
$1,018,000 was deferred and is being amortized over the approximately twelve
year term of the lease as a reduction of charter hire expenses. The lease
provides the Company with certain purchase options.
Page 24
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note L —
Leases (continued):
2.
|
Charters-out:
|
The
future minimum revenues, before reduction for brokerage commissions, expected to
be received on noncancelable time charters and the related revenue days (revenue
days represent calendar days, less days that vessels are not available for
employment due to repairs, drydock or lay-up) are as follows:
Dollars in thousands at March 31, 2010
|
Amount
|
Revenue Days
|
||||||
2010
|
$ | 193,100 | 5,671 | |||||
2011
|
217,801 | 4,922 | ||||||
2012
|
143,634 | 2,778 | ||||||
2013
|
105,051 | 1,820 | ||||||
2014
|
76,588 | 1,234 | ||||||
Thereafter
|
13,389 | 182 | ||||||
Net
minimum lease payments
|
$ | 749,563 | 16,607 |
Future
minimum revenues do not include the Company’s share of time charters entered
into by the pools in which it participates. Revenues from a time charter are not
generally received when a vessel is off-hire, including time required for normal
periodic maintenance of the vessel. In arriving at the minimum future charter
revenues, an estimated time off-hire to perform periodic maintenance on each
vessel has been deducted, although there is no assurance that such estimate will
be reflective of the actual off-hire in the future.
Note M —
Pension and Other Postretirement Benefit Plans:
The net
periodic benefit cost for the Company’s domestic defined benefit pension (for
which the benefits have been frozen), and postretirement health care and life
insurance plans was not material during the three months ended March 31, 2010
and 2009.
The
Company expects that its required contribution in 2010 with respect to its
domestic defined benefit pension plan will be approximately $2,925,000, of which
$75,000 was funded during the three months ended March 31,
2010.
Page 25
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Note N —
Other Income/(Expense):
Other
income/(expense) consists of:
Three Months Ended
March 31,
|
||||||||
In
thousands
|
2010
|
2009
|
||||||
Investment
income:
|
||||||||
Interest
and dividends
|
$ | 333 | $ | 1,199 | ||||
Loss
on sale of securities and other investments and write-down of
securities
|
(458 | ) | (269 | ) | ||||
(125 | ) | 930 | ||||||
Gain/(loss)
on derivative transactions
|
(68 | ) | 672 | |||||
Miscellaneous
— net
|
47 | 703 | ||||||
$ | (146 | ) | $ | 2,305 |
Note O —
Severance and Relocation Costs:
The
Company entered into an agreement effective February 1, 2009 in connection with
the resignation of one of its senior officers. The agreement provides for
payments aggregating approximately $1,200,000 to be made to such senior officer
in accordance with the Company’s amended and restated Severance Protection Plan,
which was effective December 31, 2008. The Company recognized the expense in the
first quarter of 2009. In addition, in the first quarter of 2009, the Company
completed a review of staffing requirements for its U.S. Flag business. In
connection therewith, six employees were terminated and certain
employees were relocated from the New York headquarters office to the Tampa
office. In connection with such staff reductions, the Company recorded $514,000
in severance costs and $600,000 in relocation costs in the first quarter of
2009. An additional $148,000 in relocation expenses was recorded in the second
quarter of 2009.
Note P —
Supplemental Schedule of Noncash Investing Activities:
In
January 2009, OSG sold the TI Africa to a joint venture between the Company and
Euronav NV in exchange for cash of $50,000,000 and advances of $150,000,000.
Euronav’s share of such advances ($75,000,000) was settled through its sale of
the TI Asia to the joint venture in the fourth quarter of 2008.
Investment
in Affiliated Companies
|
$ | 74,595,000 | ||
Liability
to Euronav NV
|
75,000,000 | |||
Carrying
Amount of Vessel and Deferred Drydock Expenditures
|
(96,252,000 | ) | ||
Gain
on Disposal of Vessel
|
(53,343,000 | ) |
Page 26
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General:
The
Company is one of the largest independent bulk shipping companies in the world.
The Company’s operating fleet as of March 31, 2010 consisted of 110 vessels
aggregating 11.7 million dwt and 864,800 cbm, including 47 vessels that have
been chartered-in under operating leases. In addition to its operating fleet of
110 vessels, charters-in for 6 vessels are scheduled to commence upon delivery
of the vessels between 2010 and 2011 and 11 newbuilds are scheduled for delivery
between 2010 and 2011, bringing the total operating and newbuild fleet to 127
vessels.
Operations:
The
Company’s revenues are highly sensitive to patterns of supply and demand for
vessels of the size and design configurations owned and operated by the Company
and the trades in which those vessels operate. Rates for the transportation of
crude oil and refined petroleum products from which the Company earns a
substantial majority of its revenues are determined by market forces such as the
supply and demand for oil, the distance that cargoes must be transported, and
the number of vessels expected to be available at the time such cargoes need to
be transported. The demand for oil shipments is significantly affected by the
state of the global economy and level of OPEC exports. The number of vessels is
affected by newbuilding deliveries and by the removal of existing vessels from
service, principally because of storage, scrappings or conversions. The
Company’s revenues are also affected by the mix of charters between spot (Voyage
Charter) and long-term (Time or Bareboat Charter). Because shipping revenues and
voyage expenses are significantly affected by the mix between voyage charters
and time charters, the Company manages its vessels based on TCE revenues.
Management makes economic decisions based on anticipated TCE rates and evaluates
financial performance based on TCE rates achieved.
Overview
Average
spot rates for VLCCs during the first quarter of 2010 were higher than the first
quarter of 2009, bolstered by strong Asian oil demand, specifically in
China and India, where seaborne crude oil imports rose significantly. Rates
realized in the other crude oil vessel categories (Suezmaxes, Aframaxes and
Panamaxes) and in Product Carriers were, however, between 9% and 23% below rates
in the first quarter of 2009. First quarter 2010 rates improved significantly in
all tanker categories compared with the fourth quarter of 2009, albeit from
low levels.
The
strength in the VLCC market is attributable to a significant increase in
long-haul crude oil movements to China where strong oil demand growth resulted
in record high refining runs. First quarter refining runs in China were
approximately 25% (about 1.5 million b/d) greater than in the first quarter of
2009. As local production remained relatively constant, China imported
incremental crude oil volumes from such long-haul sources as West Africa, South
America and the Middle East, increasing tonne-mile demand. Refinery runs in
India also reached a record high level in the first quarter of 2010
because of new refining capacity that came on-stream during 2009 and
throughput levels at Reliance refinery that exceeded nameplate
capacity.
Page 27
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations
(continued):
Lower
comparative rates in other crude tanker categories and Product Carriers
reflected an increase in newbuilding tonnage that entered the market during
the preceding year and lower oil demand due to reductions in both clean product
inventories and Atlantic Basin refinery utilization levels. Refinery runs in the
Atlantic Basin in the first quarter of 2010 were at their lowest level in over a
decade as seaborne import demand for crude oil declined.
Approximately
60 tankers were being used to store clean products, primarily middle distillates
as of the end of March 2010, about 50% less than the number so employed at the
beginning of 2010. This sizable reduction occurred as an increase in the prompt
price for middle distillates caused the oil price contango to narrow and
resulted in an increase in the number of storage cargoes that were discharged.
This affected all tanker vessel classes.
Most of
the single hull vessels that were trading at the beginning of 2010 will likely
be scrapped this year in accordance with IMO mandates. Scrap prices over $400
per lightweight ton during the first quarter of 2010 provided shipowners an
incentive to remove approximately 46 tankers from the trading fleet, including
13 VLCCs.
First
quarter OPEC production averaged approximately 29.1 million b/d or 600,000 b/d
more than the first quarter of 2009. Over 75% of the increased production was
centered in West Africa and destined for Asia. The remaining increase was split
between Middle East and South American OPEC members and again primarily destined
for Asia. OPEC member production quota compliance stood at 55% in March 2010,
down significantly from 83% in March 2009.
World oil
demand during the first quarter of 2010 was approximately 86.3 million b/d, an
increase of 2.2%, or 1.85 million b/d, compared with the first quarter of 2009.
All of the increase in demand occurred in non-OECD countries, including Asia,
Middle East, FSU and Latin America. This increase was somewhat offset by a 1.6%
decline in demand in OECD countries, mostly accounted for by a 5.1% decline in
European demand.
Crude oil
and Product Carrier fleets increased slightly during the first quarter of 2010
as the number of single hull scrappings substantially offset additions. The
increases in fleet size ranged from less than 1% for Panamaxes to about 3% for
Suezmaxes. The increase in fleet size coupled with the decline in demand
requirements in the Atlantic Basin kept rates under pressure.
The
tables below show the daily TCE rates that prevailed in markets in which the
Company’s vessels operated for the periods indicated. It is important to note
that the spot market is quoted in Worldscale rates. The conversion of Worldscale
rates to the following TCE rates required the Company to make certain
assumptions as to brokerage commissions, port time, port costs, speed and fuel
consumption, all of which will vary in actual usage. In each case, the rates may
differ from the actual TCE rates achieved by the Company in the period indicated
because of the timing and length of voyages, waiting time and the portion of
revenue generated from long-term charters. For example, TCE rates for VLCCs are
reflected in the earnings of the Company approximately one month after such
rates are reflected in the tables below, calculated on the basis of fixture
dates.
Page 28
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations
(continued):
International
Flag VLCCs
Spot Market TCE Rates
VLCCs in the Arabian Gulf*
|
||||||||
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Average
|
$ | 45,300 | $ | 40,400 | ||||
High
|
$ | 93,900 | $ | 80,700 | ||||
Low
|
$ | 13,500 | $ | 15,500 |
* Based on 60% Arabian Gulf to
Eastern destinations and 40% Arabian Gulf to Western
destinations
Rates for
VLCCs trading out of the Arabian Gulf in the first quarter of 2010 averaged
$45,300 per day, 12% above those in the first quarter of 2009 and more than
double those in the fourth quarter of 2009. First quarter rates reflected
increased long haul movements to Asia somewhat offset by reduced crude oil
shipments to Western destinations and an increase in available
tonnage.
Rates in
the first quarter were supported by an increase in OPEC production levels,
especially in West Africa, and from additional movements of crude oil from
Brazil to China. Angolan production increased by approximately 250,000 b/d
compared with the first quarter of 2009, with this incremental production
destined for China. Exports from the Middle East to China also increased by
about 200,000 b/d with Iraq and Saudi Arabia the principal suppliers. Refinery
runs in India reached a record 3.9 million b/d, which required an increase in
crude oil imports. Additionally, shipowners have continued to slow steam their
vessels to compensate for high bunker prices, reducing tanker fleet efficiency
levels but benefiting tanker rates.
Overall
refinery utilization levels in the U.S. in the first quarter of 2010 decreased
to 80.6% from 81.7% in the same timeframe of 2009. This
represented the lowest first quarter refinery utilization level in over 20
years, reducing seaborne import requirements.
The VLCC
fleet increased in the first quarter of 2010, with 17 deliveries offset by 13
deletions. Additionally 24 VLCCs were utilized to store crude oil and clean
products during the first quarter of 2010 compared with approximately 35 VLCCs
in the first quarter of 2009.
The
number of VLCCs in service as of March 31, 2010 was 541 vessels (162.0
million dwt), including 77 single hull tankers, of which 51 are currently
trading. The VLCC orderbook totaled 195 vessels (60.7 million dwt) at
March 31, 2010, equivalent to approximately 37% of the existing VLCC fleet,
based on deadweight tons.
Page 29
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations
(continued):
International
Flag Suezmaxes
Spot Market TCE Rates
Suezmaxes in the Atlantic*
|
|||||||||
Three Months Ended March 31,
|
|||||||||
2010
|
2009
|
||||||||
Average
|
$ | 30,500 | $ | 37,500 | |||||
High
|
$ | 64,000 | $ | 49,200 | |||||
Low
|
$ | 16,400 | $ | 21,000 |
*
Based on West Africa to U.S. Gulf Coast
Average
rates for Suezmaxes during the first quarter of 2010 averaged $30,500 per day,
approximately 19% lower than the corresponding year ago quarter, but 59% higher
than the fourth quarter of 2009. Weaker rates relative to a year ago mainly
reflected an increase in the size of the Suezmax fleet and a reduction in crude
oil exports from Russian ports.
First
quarter 2010 crude oil exports by Russia from Black Sea and Baltic Sea ports
decreased by approximately 300,000 b/d compared with the first quarter of 2009.
Higher domestic demand in Russia combined with maintenance at Primorsk and
stormy weather in the Black Sea were the main factors behind the decline.
Additionally, Russia has recently been shifting its crude oil export orientation
away from its western ports toward its Pacific coast port of Kozimo to meet the
growing demand for oil in the Pacific Basin.
While
crude oil production in Angola and Nigeria increased relative to year-ago
levels, most of this additional production was transported to Asia on VLCCs.
Crude oil exports from West Africa to the U.S. East Coast declined in the first
quarter of 2010 compared with the first quarter of 2009 as U.S. East Coast
refinery runs declined by 10%.
The entry
of 17 newbuildings into the Suezmax market also put pressure on first
quarter 2010 rates, as did a significant reduction in the number of Suezmaxes
used for floating storage. The world Suezmax fleet increased during the
quarter by a net of 13 vessels to 403 vessels (61.7 million dwt) at
March 31, 2010. The Suezmax orderbook of 132 vessels (20.5 million dwt) at
March 31, 2010 represented 33% of the existing Suezmax fleet, based on
deadweight tons.
International Flag
Aframaxes
Spot Market TCE Rates
Aframaxes in the Caribbean*
|
||||||||
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Average
|
$ | 22,000 | $ | 24,200 | ||||
High
|
$ | 41,000 | $ | 73,000 | ||||
Low
|
$ | 11,300 | $ | 8,700 |
* Based on Caribbean to the U.S .Gulf
and Atlantic Coasts
Page 30
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations
(continued):
Rates for
Aframaxes operating in the Caribbean during the first quarter of 2010 averaged
$22,000 per day, a decrease of 9% from the first quarter of 2009 but an increase
of 89% from the fourth quarter of 2009.
The
reductions in refining levels during the first quarter of 2010 in both the U.S.
and Europe had a negative impact on Aframax rates. Refinery runs in Europe are
estimated to have declined from 12.6 million b/d (79.6% utilization rate) in the
first quarter of 2009 to 12.0 million b/d (76% utilization rate) during the
first quarter of 2010. Production declines in key Aframax loading areas
also contributed to a reduction in Aframax demand. North Sea crude oil
production in the first quarter declined approximately 400,000 b/d compared with
the first quarter of 2009. Crude output in the North Sea as well as crude oil
exported from Russian ports in the Black and Baltic Seas are expected to remain
below year ago levels, which could keep pressure on Aframax freight
rates.
Refinery
maintenance activities in both Europe and in the U.S. curtailed refinery runs
and reduced crude oil import requirements. U.S. refinery maintenance peaked in
March, while European maintenance is expected to peak in April following a
normal first quarter 2010 maintenance period. Refinery closures, the idling of
Total’s European refineries due to worker strikes, and unplanned refinery
outages in South America and the Caribbean also adversely impacted crude
requirements reducing tonne-mile demand for crude tonnage other than
VLCCs.
The world
Aframax fleet reached 851 vessels (89.4 million dwt) at March 31, 2010, an
increase of approximately 2% since the beginning of the year. The Aframax
orderbook was 155 vessels (16.9 million dwt) at March 31, 2010,
representing 19% of the existing Aframax fleet, based on deadweight
tons.
International
Flag Panamaxes
Spot Market TCE Rates
Panamaxes - Crude and Residual
Oil*
|
||||||||
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Average
|
$ | 16,300 | $ | 21,300 | ||||
High
|
$ | 24,900 | $ | 38,000 | ||||
Low
|
$ | 3,500 | $ | 5,000 |
*Based
on 50% Caribbean to U.S. Gulf and Atlantic Coasts and 50% Ecuador to U.S. West
Coast
Rates for
Panamaxes that move crude and residual fuel oil averaged $16,300 per day during
the first quarter of 2010, 23% lower than the first quarter of 2009 but almost
90% above the fourth quarter of 2009.
Muted
demand for crude and fuel oil on both sides of the Atlantic Basin led to an
oversupply of Panamaxes in the Caribbean. Unlike the situation in the first
quarter of last year, when higher freight rates in Europe provided the incentive
to reposition tankers into the U.K. / Mediterranean markets, rates in the
Mediterranean this year were weak. Additionally, charterers were able to
benefit from economies of scale by combining cargoes on
Aframaxes.
Page 31
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations
(continued):
Crude oil
production in Ecuador in the first quarter of 2010 approximated levels in the
first quarter of 2009 but freight rates for crude oil movements on the
Ecuador-to-U.S. routes exceeded those on Caribbean routes. An increase in
shipments of Ecuadorian crude through the Panama Canal to the U.S. Gulf Coast
and some shifting from short-haul local trades to longer-haul movements to
the U.S. West Coast contributed towards the relatively higher
rates.
Fuel oil
inventories in the U.S. stood at 39.9 million barrels at the end of the first
quarter of 2010 compared with 35.8 million barrels at the end of
December 2009, indicating weak fuel oil demand in the first
quarter. It is unlikely that fuel oil demand will increase in the near-term
since fuel oil prices currently remain above natural gas prices measured on a
BTU basis.
The world
Panamax fleet totaled 433 tankers (30.2 million dwt) at March 31, 2010, a
net increase of six tankers during the first quarter. The orderbook of 95
vessels (6.8 million dwt) at March 31, 2010 represented
approximately 22% of the existing Panamax fleet, based on deadweight
tons.
International
Flag Handysize Product Carriers
Spot Market TCE Rates
Handysize Product Carriers*
|
||||||||
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Average
|
$ | 9,600 | $ | 11,000 | ||||
High
|
$ | 17,400 | $ | 18,200 | ||||
Low
|
$ | 4,900 | $ | 3,000 |
* Based on 60%
trans-Atlantic and 40% Caribbean to U.S. Atlantic Coast
Rates for
Product Carriers operating in the Caribbean and trans-Atlantic trades averaged
$9,600 per day during the first quarter of 2010, 13% below rates in the first
quarter of 2009, but about 250% above rates in the fourth quarter of
2009.
The
decline in rates relative to the same year ago period reflected a net increase
in Product Carrier tonnage and a decline in trans-Atlantic and Caribbean-to-U.S.
East Coast movements. The shutdown of the Aruba refinery in mid-2009 resulted in
the elimination of approximately 120,000 b/d of product exports to the U.S. A
320,000 b/d refinery in Curacao was closed for the entire month of March into
April, effectively reducing the quantity of products available for shipment in
the Caribbean.
Page 32
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations
(continued):
An
increase in product imports to both Chile and Argentina in March from the U.S.
Gulf Coast provided some support for freight rates. The February earthquake in
Chile damaged its only two refineries, necessitating an increase in product
imports of approximately 70,000 b/d. While one of the damaged refineries is
expected to restart in the near future, the other, which was more heavily
damaged, may not restart operations until later this year. Additionally, strong
gasoline demand in Argentina resulted in imports of about 300,000 b/d in March
from the U.S. Gulf Coast, the first time that Argentina has imported gasoline in
30 years.
The
world Handysize fleet increased by a net of 13 vessels during the first quarter
of 2010 and reached 1,563 vessels (66.8 million dwt) at March 31, 2010. The
orderbook stood at 339 vessels (15.8 million dwt) at March 31, 2010,
equivalent to approximately 24% of the existing Handysize fleet, based on
deadweight tons.
U.S.
Flag Jones Act Product Carriers and Articulated Tug Barges (“ATBs”)
Average Spot Market TCE Rates
|
||||||||
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
45,000
dwt Tankers
|
$ | 34,300 | $ | 46,600 | ||||
30,000 dwt ATBs
|
$ | 23,300 | $ | 30,500 |
Rates for
Jones Act Product Carriers and ATBs averaged $34,300 per day and $23,300 per
day, respectively, during the first quarter of 2010. Rates for both the Tankers
and ATBs were down approximately 25% from the first quarter of 2009 and 2% from
the fourth quarter of 2009.
U.S. Gulf
Coast refinery utilization rates fell from 82.4% during the first quarter of
2009 to below 80% in the first quarter of 2010, limiting the availability of oil
product cargoes. The lack of cargoes in the spot market resulted in eight
vessels (about 12% of the fleet) being in lay-up at the end of the first quarter
of 2010.
The
Delaware Bay lightering business transported an average of 206,000 b/d during
the quarter, which was approximately 5% more than the first quarter of 2009. The
increase in lightering volumes reflected adverse weather conditions in the
Atlantic Ocean that resulted in additional lightering activities in the more
tranquil Delaware Bay.
There
were no change in the Jones Act product Carrier fleet of tankers, ATBs and ITBs
(“Integrated Tug Barges”) during the first quarter of 2010 as one tanker
delivery was offset by one tanker that was scrapped. As of March 31,
2010, the total Jones Act Product Carrier fleet consisted of 66
vessels.
Page 33
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations
(continued):
The Jones
Act Product Carrier orderbook for deliveries scheduled through
2014 consisted of 15 tankers and barges in the 160,000 to 420,000 barrel
size range at March 31, 2010. During this period, a total of 11 vessels
should be retired in accordance with OPA 90 phase-out regulations and an
additional three vessels that will be over 35 years old will likely become
commercially obsolete.
Outlook
World GDP
is forecast to increase by approximately 4.2% in 2010 after declining by 0.6% in
2009. Economic recovery appears to be underway in all industrialized countries
around the world with GDP expected to grow in the U.S., Japan and Europe in 2010
following declines in 2009. GDP growth in developing countries is forecast to
reach 6.3% in 2010, led by an increase of 10% in China, compared with 2.4%
growth in 2009.
The
International Energy Agency (“IEA”) predicts that world oil demand in 2010 will
average 86.6 million b/d, an increase of 2.0%, or 1.7 million b/d, from
2009. This level would be slightly above the pre-recession 2007 demand
level of 86.5 million b/d. Quarterly demand in the second, third and
fourth quarters of 2010 is forecast to average 86.0 million b/d, 87.0 million
b/d and 87.2 million b/d, respectively, reflecting increases of 2.2%, 2.0% and
1.5%, respectively, relative to the same year ago quarters.
Refinery
runs in the U.S. and Europe in the second quarter are forecast to exceed those
of the first quarter as scheduled maintenance declines, onshore and offshore
inventory stock drawdowns subside and seasonal demand for transportation fuels
increase. Second quarter refinery runs in Asia are expected to remain at first
quarter levels as a small increase in throughput in China and other Asian
countries is expected to be offset by lower runs in Japan.
While
world oil demand is forecast to increase quarterly, consecutive declines in oil
production in non-OPEC areas is forecast to occur in both the second and third
quarters before increasing in the fourth quarter. Thus, additional OPEC
production, particularly from the Middle East, will likely be required to
compensate for this supply / demand imbalance, resulting in longer-haul
movements to meet demand growth, particularly in Asia.
Tanker
supply is forecast to grow between 3% and 5% in 2010. It is anticipated that
most, if not all, of the single hull trading fleet will be scrapped in 2010. It
is likely that tonnage slippage will occur as a number of newbuildings initially
planned for 2010 delivery could be delayed. There could also be newbuilding
cancellations as shipowners and shipyards continue to experience financing
problems.
Freight
rates remain highly sensitive to severe weather and geopolitical events.
Hurricanes in the Gulf of Mexico could have a pronounced effect on freight rates
for both crude oil and product movements depending on the extent to which
upstream and downstream facilities are affected. Geopolitical events, such as
violence in Nigeria’s oil producing Niger delta, escalating tensions with Iran
and other regional conflicts in the Middle East, could also cause changes in
supply patterns that could significantly impact rates.
Page 34
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Update on Critical
Accounting Policies:
The
Company’s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates in the application of its accounting policies based on
the best assumptions, judgments, and opinions of management. For a description
of all of the Company’s material accounting policies, see Note A to the
Company’s consolidated financial statements included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009.
Vessel
Impairment
The
carrying values of the Company’s vessels may not represent their fair market
value at any point in time since the market prices of second-hand vessels tend
to fluctuate with changes in charter rates and the cost of newbuildings.
Historically, both charter rates and vessel values tend to be cyclical. The
Company records impairment losses only when events occur that cause the Company
to believe that future cash flows for any individual vessel will be less than
its carrying value. The carrying amounts of vessels held and used by the Company
are reviewed for potential impairment whenever events or changes in
circumstances indicate that the carrying amount of a particular vessel may not
be fully recoverable. In such instances, an impairment charge would be
recognized if the estimate of the undiscounted
future cash flows expected to result from the use of the vessel and its eventual
disposition is less than the vessel’s carrying amount. This assessment is made
at the individual vessel level as separately identifiable cash flow information
for each vessel is available.
In
developing estimates of future cash flows, the Company must make assumptions
about future charter rates, ship operating expenses, and the estimated remaining
useful lives of the vessels. These assumptions are based on historical trends as
well as future expectations. Although management believes that the assumptions
used to evaluate potential impairment are reasonable and appropriate, such
assumptions are highly subjective.
During
the third quarter of 2009, the Company recorded impairment charges aggregating
$12,500,000 to write down the carrying amount of two U.S. Flag vessels, an older
double-hulled tanker with an inefficient gas turbine engine and one of its four
single-hulled vessels (scheduled to drydock in 2010), which have limited
remaining useful lives, to their estimated fair values as of September 30, 2009.
During the first quarter of 2010, the Company determined that the continued weak
conditions in the U.S. Flag markets represented an impairment indicator. The
Company reviewed future cash flows for these two U.S. Flag vessels and the other
three single-hulled vessels in its U.S. Flag fleet, all of which had an
aggregate net book value of $26,450,000 as of March 31, 2010. The Company
considered the current market values and the scheduled 2010 drydockings on two
of the single-hulled tankers in evaluating prospects for continued operation of
such vessels. The estimates of the undiscounted cash flows for the other
single-hulled vessel scheduled to drydock in 2010 and the double-hulled tanker
referred to above did not support recovery of such vessels’ carrying value.
Accordingly, the Company recorded an impairment charge of $3,607,000 to write
down their carrying values to their estimated net fair values as of March 31,
2010, using estimates of discounted future cash flows for each of the vessels.
The estimates of undiscounted cash flows for each of the remaining three
single-hulled vessels (including the vessel for which an impairment charge was
recorded in the third quarter of 2009) indicated that their carrying amounts
were recoverable.
Page 35
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Update on Critical
Accounting Policies (continued):
During
March 2010, OSG was informed by one of the major refineries along the U.S. Gulf
that it would no longer accept the Company’s two double-sided Aframaxes employed
in the International Crude Tankers segment’s lightering business, commencing
April 1, 2010. OSG has a 50% interest in the residual value of these two
Aframaxes, which are chartered-in. These double-sided Aframaxes are not subject
to the IMO phaseout until 2013. The Company considered the impact of the
resulting likely reduction in utilization on estimated future charter rates and
is in the process of considering alternate employment or use for these vessels,
which have additional features compared with standard Aframaxes. The estimates
of the undiscounted future cash flows for these two vessels indicated that their
carrying amounts ($12,698,000) at March 31, 2010 were recoverable.
It is
possible that the Company’s estimates of undiscounted cash flows may change in
the future, resulting in the need to write down one or more of the five U.S.
Flag Product Carriers or the two International Flag Aframaxes.
Income from Vessel
Operations:
During
the first quarter of 2010, TCE revenues decreased by $62,928,000, or 21%, to
$229,861,000 from $292,789,000, in the first quarter of 2009 primarily due to a
significant decrease in the daily TCE rates earned by all of the Company’s
International Flag vessel classes other than VLCCs, as well as a 1,216 day
decrease in revenue days. During the first quarter of 2010, approximately 64% of
the Company’s TCE revenues were derived from spot earnings, compared with 57% in
the first quarter of 2009. In the first quarter of 2010, approximately 36% of
TCE revenues were generated from fixed earnings, which comprise time or bareboat
charters (“term”) and synthetic time charters (which represent earnings for
certain vessels operating in pools that have been converted to synthetic time
charters through hedging with FFAs and bunker swaps that qualify as cash flow
hedges). Fixed earnings represented 43% of the Company’s TCE revenues in the
first quarter of 2009.
OSG
operates most of its crude oil tankers in commercial pooling arrangements
(“Pools”). The Pools' cargo commitments make them attractive, but such cargo
commitments limit the Pools’ ability to support any significant portfolio of
time charters. Accordingly, OSG enters into forward freight agreements (“FFAs”)
and bunker swaps seeking to create synthetic time charters. The results of
derivative positions that qualify for hedge accounting treatment and that are
effective, are reflected in TCE revenues in the periods to which such hedges
relate. The Company achieved average TCE rates for VLCCs of $49,511 per day for
338 days and $40,075 per day for 725 days covered by such effective hedges for
the first quarter of 2010 and 2009, respectively. The March 31, 2010
mark-to-market for derivative positions through 2010 that qualify for hedge
accounting treatment, which are considered to be effective, are recorded in
accumulated other comprehensive income/(loss) (equity). The actual results of
these hedge positions will be reflected in the Company's earnings in the periods
to which the positions relate. The results of derivative positions that do not
qualify for hedge accounting treatment are reflected in other income/(expense)
and resulted in a loss of $68,000 and gain of $672,000 in the first quarter of
2010 and 2009, respectively.
Page 36
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel
Operations (continued)
Reliance
on the spot market contributes to fluctuations in the Company’s revenue, cash
flow, and net income, but affords the Company greater opportunity to increase
income from vessel operations when rates rise. On the other hand, time and
bareboat charters provide the Company with a predictable level of
revenues.
During
the first quarter of 2010, income from vessel operations decreased by
$124,152,000 to $4,393,000 from $128,545,000 in the first quarter of 2009.
Income from vessel operations in the first quarter of 2009 included gains on
vessel sales of $129,863,000 and shipyard contract termination costs of
$35,885,000. See Note C to the condensed financial statements for additional
information on the Company’s segments, including equity in income of affiliated
companies and reconciliations of (i) time charter equivalent revenues to
shipping revenues and (ii) income/(loss) from vessel operations for the segments
to income before federal income taxes, including net income attributable to
noncontrolling interest, as reported in the consolidated statements of
operations.
Information
with respect to the Company’s proportionate share of revenue days for vessels
operating in companies accounted for using the equity method is shown below in
the discussion of “Equity in Income of Affiliated Companies.”
International
Crude Tankers (dollars in thousands)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
TCE
revenues
|
$ | 132,132 | $ | 159,986 | ||||
Vessel
expenses
|
(26,526 | ) | (25,538 | ) | ||||
Charter
hire expenses
|
(50,505 | ) | (72,612 | ) | ||||
Depreciation
and amortization
|
(18,399 | ) | (17,877 | ) | ||||
Income/(loss)
from vessel operations (a)
|
$ | 36,702 | $ | 43,959 | ||||
Average
daily TCE rate
|
$ | 29,395 | $ | 33,317 | ||||
Average
number of owned vessels (b)
|
25.6 | 24.2 | ||||||
Average
number of vessels chartered-in under operating leases
|
25.2 | 30.2 | ||||||
Number
of revenue days (c)
|
4,495 | 4,802 | ||||||
Number
of ship-operating days:(d)
|
||||||||
Owned
vessels
|
2,300 | 2,178 | ||||||
Vessels
bareboat chartered-in under operating leases
|
450 | 621 | ||||||
Vessels
time chartered-in under operating leases
|
1,543 | 1,909 | ||||||
Vessels
spot chartered-in under operating leases
|
272 | 186 |
(a)
|
Income/(loss)
from vessel operations by segment is before general and administrative
expenses, severance and relocation costs, shipyard contract termination
costs and gain/(loss) on disposal of vessels and impairment charges
(vessel and goodwill).
|
(b)
|
The
average is calculated to reflect the addition and disposal of vessels
during the period.
|
(c)
|
Revenue
days represent ship-operating days less days that vessels were not
available for employment due to repairs, drydock or lay-up. Revenue days
are weighted to reflect the Company’s interest in chartered-in
vessels.
|
(d)
|
Ship-operating
days represent calendar days.
|
Page 37
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel
Operations (continued):
The
following table provides a breakdown of TCE rates achieved for the three months
ended March 31, 2010 and 2009 between spot and fixed earnings and the related
revenue days. The Company has entered into FFAs and related bunker swaps as
hedges against the volatility of earnings from operating the Company’s VLCCs in
the spot market. These derivative instruments seek to create synthetic time
charters because their intended impact is to create a level of fixed TCE
earnings, which because of basis risk may vary (possibly substantially) from the
targeted rate. From the perspective of a vessel owner, such as the Company, the
results of these synthetic time charters are intended to be substantially
equivalent to results from time chartering vessels in the physical market. The
impact of these derivatives, which qualify for hedge accounting treatment, are
reported together with time charters entered in the physical market, under
“Fixed Earnings.” The information in this table is based, in part, on
information provided by the pools or commercial joint ventures in which the
segment’s vessels participate.
Three
months ended March 31,
|
2010
|
2009
|
||||||||||||||
Spot
Earnings
|
Fixed
Earnings
|
Spot
Earnings
|
Fixed
Earnings
|
|||||||||||||
VLCCs:
|
||||||||||||||||
Average rate
|
$ | 49,931 | $ | 49,511 | $ | 47,228 | $ | 40,705 | ||||||||
Revenue days
|
915 | 338 | 613 | 725 | ||||||||||||
Suezmaxes:
|
||||||||||||||||
Average rate
|
$ | 28,301 | $ | — | $ | 40,054 | $ | — | ||||||||
Revenue days
|
231 | — | 231 | — | ||||||||||||
Aframaxes:
|
||||||||||||||||
Average rate
|
$ | 20,669 | $ | 23,058 | $ | 29,669 | $ | 38,634 | ||||||||
Revenue days
|
1,934 | 177 | 1,856 | 225 | ||||||||||||
Panamaxes:
|
||||||||||||||||
Average rate
|
$ | 20,323 | $ | 18,926 | $ | 27,318 | $ | 26,896 | ||||||||
Revenue days
|
450 | 360 | 614 | 448 |
During
the first quarter of 2010, TCE revenues for the International Crude Tankers
segment decreased by $27,854,000, or 17%, to $132,132,000 from $159,986,000 in
the first quarter of 2009 reflecting significant decreases in average rates
earned on all vessel classes except VLCCs, as well as a 307 decrease in revenue
days. The decrease in revenue days reflects a reduction in chartered in
Panamaxes and Aframaxes, partially offset by increased days attributable to the
OSG Lightering business in the first quarter of 2010.
Vessel
expenses increased by $988,000 to $26,526,000 in the first quarter of 2010 from
$25,538,000 in the first quarter of 2009, principally attributable to a marginal
increase in average daily vessel expenses of $433 per day. This increase is
primarily due to the timing of fees and services and the delivery of spares and
higher repair expenses in the current period. Charter hire expenses decreased by
$22,107,000 to $50,505,000 in the first quarter of 2010 from $72,612,000 in the
first quarter of 2009, principally as a result of 537 fewer bareboat and time
chartered-in days in the current quarter as well as substantially lower profit
share due to owners, reflecting lower TCE rates achieved on the VLCC and Aframax
fleets over the relevant profit share calculation periods.
Page 38
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel
Operations (continued):
International
Product Carriers (dollars in thousands)
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
TCE
revenues
|
$ | 50,121 | $ | 71,185 | ||||
Vessel
expenses
|
(16,066 | ) | (21,848 | ) | ||||
Charter
hire expenses
|
(23,795 | ) | (26,018 | ) | ||||
Depreciation
and amortization
|
(8,946 | ) | (11,803 | ) | ||||
Income/(loss)
from vessel operations
|
$ | 1,314 | $ | 11,516 | ||||
Average
daily TCE rate
|
$ | 17,610 | $ | 20,895 | ||||
Average
number of owned vessels
|
13.4 | 15.0 | ||||||
Average
number of vessels chartered-in under operating leases
|
18.5 | 23.8 | ||||||
Number
of revenue days
|
2,846 | 3,407 | ||||||
Number
of ship-operating days:
|
||||||||
Owned
vessels
|
1,205 | 1,350 | ||||||
Vessels
bareboat chartered-in under operating leases
|
810 | 1,475 | ||||||
Vessels
time chartered-in under operating leases
|
852 | 668 |
The
following table provides a breakdown of TCE rates achieved for the three months
ended March 31, 2010 and 2009 between spot and fixed earnings and the related
revenue days. The information is based, in part, on information provided by the
commercial joint ventures in which certain of the segment’s vessels
participate.
Three months ended March 31,
|
2010
|
2009
|
||||||||||||||
Spot
Earnings
|
Fixed
Earnings
|
Spot
Earnings
|
Fixed
Earnings
|
|||||||||||||
Panamax
Product Carriers:
|
||||||||||||||||
Average rate
|
$ | 18,914 | $ | — | $ | 25,860 | $ | 18,699 | ||||||||
Revenue days
|
351 | — | 283 | 179 | ||||||||||||
Handysize
Product Carriers:
|
||||||||||||||||
Average rate
|
$ | 15,157 | $ | 21,217 | $ | 22,359 | $ | 19,435 | ||||||||
Revenue days
|
1,423 | 982 | 1,122 | 1,728 |
During
the first quarter of 2010, TCE revenues for the International Product Carriers
segment decreased by $21,064,000, or 30%, to $50,121,000 from $71,185,000 in the
first quarter of 2009. This decrease in TCE revenues reflected a decrease in
average rates earned on the Handysize Product Carriers and Panamax Product
Carriers operating in the spot market. In addition, revenue days decreased by
561 days. By the end of August 2009, all 13 of the segment’s older, single-hull
Handysize Product Carriers had redelivered to the owners at the expiry of their
respective charters. In addition, two Panamax Product Carriers that were
operating on time charters-out were sold during the second quarter of 2009.
These redeliveries and sales were partially offset by an increase in
chartered-in and owned modern Handysize Product Carriers.
Page 39
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel
Operations (continued):
Vessel
expenses decreased by $5,782,000 to $16,066,000 in the first quarter of 2010
from $21,848,000 in the first quarter of 2009 principally due to a decrease of
810 owned and bareboat chartered-in days. Charter hire expenses decreased by
$2,223,000 to $23,795,000 in the first quarter of 2010 from $26,018,000 in the
first quarter of 2009. These decreases were principally driven by the fleet
changes discussed above. Depreciation and amortization decreased by $2,857,000
to $8,946,000 in the first quarter of 2010 from $11,803,000 in the first quarter
of 2009 principally due to the expiration of the bareboat charters on the older
Handysize Product Carriers.
During
the second half of 2005 the Company reflagged two Handysize Product Carriers
(the Overseas Maremar and the Overseas Luxmar) under the U.S. Flag and entered
them in the U.S. Maritime Security Program (the "Program"). Each of the vessel
owning companies receives a subsidy, which was increased to $2,900,000 in 2009
that is intended to offset the increased cost incurred by such vessels from
operating under the U.S. Flag. Since these vessels trade primarily in the
international market, they continue to be reflected in the International Product
Carrier segment.
Other
International (dollars in thousands)
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
TCE
revenues
|
$ | 1,935 | $ | 1,934 | ||||
Vessel
expenses
|
(535 | ) | (528 | ) | ||||
Charter
hire expenses
|
— | — | ||||||
Depreciation
and amortization
|
(1,537 | ) | (1,616 | ) | ||||
Income/(loss)
from vessel operations
|
$ | (137 | ) | $ | (210 | ) | ||
Average
daily TCE rate
|
$ | 21,500 | $ | 21,500 | ||||
Average
number of owned vessels
|
1.0 | 1.0 | ||||||
Number
of revenue days
|
90 | 90 | ||||||
Number
of ship-operating days:
|
||||||||
Owned
vessels
|
90 | 90 |
As of
March 31, 2010, the Company operated one Other International Flag vessel, a Pure
Car Carrier. The vessel was employed on a long-term
charter.
Page 40
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income from Vessel
Operations (continued):
U.
S. Segment (dollars in thousands)
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
TCE
revenues
|
$ | 45,673 | $ | 59,684 | ||||
Vessel
expenses
|
(20,947 | ) | (25,616 | ) | ||||
Charter
hire expenses
|
(16,314 | ) | (12,712 | ) | ||||
Depreciation
and amortization
|
(13,044 | ) | (12,585 | ) | ||||
Income/(loss)
from vessel operations
|
$ | (4,632 | ) | $ | 8,771 | |||
Average
daily TCE rate
|
$ | 34,039 | $ | 35,319 | ||||
Average
number of owned vessels
|
14.9 | 16.0 | ||||||
Average
number of vessels chartered in under operating leases
|
7.0 | 5.5 | ||||||
Number
of revenue days
|
1,342 | 1,690 | ||||||
Number
of ship-operating days:
|
||||||||
Owned
vessels
|
1,363 | 1,440 | ||||||
Vessels
bareboat chartered-in under operating leases
|
630 | 497 |
During
the first quarter of 2010, TCE revenues for the U.S. segment decreased by
$14,011,000, or 23%, to $45,673,000 from $59,684,000 in the first quarter of
2009. The decrease was primarily attributable to six vessels being in lay up for
a total of 520 days during the quarter due to the continued weak market
conditions in the U.S. Flag markets, which is a 311 day increase over the first
quarter of 2009. Additionally, there was a 98 day increase in dry-dock
days during the current quarter.
Vessel
expenses decreased by $4,669,000 to $20,947,000 in the first quarter of 2010
from $25,616,000 in the first quarter of 2009 principally due to six vessels
being in lay-up for the majority of the first quarter. Charter hire expenses
increased by $3,602,000 to $16,314,000 in the first quarter of 2010 from
$12,712,000 in the first quarter of 2009 principally due to the delivery of two
additional bareboat chartered-in Jones Act Product Carriers in the first half of
2009. Depreciation and amortization increased by $459,000 to $13,044,000 in the
first three months of 2010 from $12,585,000 in the first three months of
2009. The increase is primarily related to the delivery of the Overseas
Cascade in December 2009. This vessel completed conversion to a shuttle tanker
in late-March 2010 and then commenced a five-year time charter in April
2010.
Page 41
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
General and Administrative
Expenses
During
the first quarter of 2010, general and administrative expenses decreased by
$471,000 to $26,829,000 from $27,300,000 in the first quarter of 2009
principally because of the following:
|
·
|
lower
legal and consulting costs of $421,000;
and
|
|
·
|
reductions
in other discretionary expenditures of
$1,011,000.
|
These
decreases were offset by:
|
·
|
an increase
in payroll taxes and benefits for shore-based staff of $738,000,
principally related to a change in the timing of the payment of
annual incentive compensation; and
|
|
·
|
a
reduction in foreign exchange gains of $396,000.
|
Equity in Income of
Affiliated Companies:
During
the first quarter of 2010, equity in income of affiliated companies decreased by
$4,770,000 to a loss of $2,298,000 from income of $2,472,000 in the first
quarter of 2009. The decrease was the result of the Company’s share of costs
incurred in 2010 as a result of delays in the completion of the conversion of
two ULCCs by the FSO joint venture. As a result of delays in the completion of
the conversion of the TI Asia to an FSO, the joint venture chartered-in the TI
Oceania, a ULCC wholly-owned by the Company, as a temporary replacement floating
storage unit. Charter hire received from MOQ from early August 2009 through the
vessel’s redelivery in January 2010 was substantially offset by liquidated
damages payable by the joint venture to MOQ under the service contracts. The FSO
Africa completed conversion in March 2010 and costs incurred subsequent thereto
have been reflected in profit and loss. The FSO Africa was idle as of March 31,
2010. Because of MOQ’s notification that it was cancelling the service contract
for the FSO Africa, the joint venture recorded a charge attributable to the
de-designation of interest rate swaps that were being accounted for as cash flow
hedges, the Company’s share of which aggregated $4,548,000. For more information
with respect to the conversion of the two ULCCs to FSOs see below in the
discussion of “Liquidity and Sources of Capital.”
Additionally,
the Company has a 37.5% interest in ATC, a company that operates U.S. Flag
tankers to transport Alaskan crude oil for BP. ATC earns additional income (in
the form of incentive hire paid by BP) based on meeting certain predetermined
performance standards. Such income is included in the U.S. segment.
The
following table summarizes the Company’s interest in its vessel owning equity
method investments, excluding ATC, and OSG’s proportionate share of the revenue
days for the respective vessels. Revenue days are adjusted for OSG’s percentage
ownership in order to state the revenue days on a basis comparable to that of a
wholly-owned vessel. The ownership percentages reflected below are the Company’s
actual ownership percentages as of March 31, 2010 and 2009.
Page 42
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Equity in Income of
Affiliated Companies (continued):
Three months ended March 31,
|
2010
|
2009
|
||||||||||||||
Revenue
Days
|
% of
Ownership
|
Revenue
Days
|
% of
Ownership
|
|||||||||||||
LNG
Carriers operating on long-term charters
|
180 | 49.9 | % | 180 | 49.9 | % | ||||||||||
FSO
operating on long-term charters
|
43 | 50.0 | % | — | 0.0 | % | ||||||||||
ULCC
operating as temporary FSO
|
11 | 50.0 | % | — | 0.0 | % | ||||||||||
234 | 180 |
Interest
Expense:
The
components of interest expense are as follows (in thousands):
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Interest
before impact of swaps and capitalized interest
|
$ | 11,675 | $ | 12,278 | ||||
Impact
of swaps
|
3,361 | 1,971 | ||||||
Capitalized
interest
|
(2,742 | ) | (2,877 | ) | ||||
Interest
expense
|
$ | 12,294 | $ | 11,372 |
Interest
expense increased by $922,000 to $12,294,000 in the first quarter of 2010 from
$11,372,000 in the first quarter of 2009 as a result of increases in the average
amount of debt outstanding of $411,000,000 and the impact from interest rate
swaps resulting from the decline in LIBOR rates for the 2010 period compared
with the first quarter of 2009. These increases were partially offset by a
decrease in the average rate paid on floating rate debt of 70 basis points to
1.3% from 2.0% in 2009. For information with respect to the future impact of the
Company’s issuance of common stock and 8.125% senior unsecured notes in March
2010, see below in the discussion of “Liquidity and Sources of
Capital.”
Provision/(Credit) for
Federal Income Taxes:
The
income tax benefits for the three months ended March 31, 2010 and 2009 were
based on the pre-tax results of the Company’s U.S. subsidiaries, adjusted to
include non-shipping income of the Company’s foreign subsidiaries and reflect
the reversal of previously established deferred tax liabilities.
On
October 22, 2004, the President of the U.S. signed into law the American Jobs
Creation Act of 2004. The Jobs Creation Act reinstated tax deferral for OSG’s
foreign shipping income for years beginning after December 31, 2004. Effective
January 1, 2005, the earnings from shipping operations of the Company’s foreign
subsidiaries are not subject to U.S. income taxation as long as such earnings
are not repatriated to the U.S. Because the Company intends to permanently
reinvest these earnings in foreign operations, no provision for U.S. income
taxes on such earnings of its foreign subsidiaries is required after December
31, 2004.
Page 43
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
EBITDA:
EBITDA
represents operating earnings excluding net income/(loss) attributable to the
noncontrolling interest, which is before interest expense and income taxes, plus
other income and depreciation and amortization expense. EBITDA is presented to
provide investors with meaningful additional information that management uses to
monitor ongoing operating results and evaluate trends over comparative periods.
EBITDA should not be considered a substitute for net income/(loss) attributable
to the Company or cash flow from operating activities prepared in accordance
with accounting principles generally accepted in the United States or as a
measure of profitability or liquidity. While EBITDA is frequently used as a
measure of operating results and performance, it is not necessarily comparable
to other similarly titled captions of other companies due to differences in
methods of calculation. The following table reconciles net income/(loss)
attributable to the Company, as reflected in the condensed consolidated
statements of operations, to EBITDA (in thousands):
Three Months Ended March 31
|
||||||||
2010
|
2009
|
|||||||
Net
income/(loss) attributable to Overseas Shipholding Group,
Inc.
|
$ | (9,353 | ) | $ | 121,750 | |||
(Credit)
for income taxes
|
(992 | ) | (1,312 | ) | ||||
Interest
expense
|
12,294 | 11,372 | ||||||
Depreciation
and amortization
|
41,926 | 43,881 | ||||||
EBITDA
|
$ | 43,875 | $ | 175,691 |
Liquidity and Sources of
Capital:
Working
capital at March 31, 2010 was approximately $497,000,000 compared with
$634,000,000 at December 31, 2009. Current assets are highly liquid, consisting
principally of cash, interest-bearing deposits and receivables. In addition, the
Company maintains a Capital Construction Fund with a market value of $41,000,000
at March 31, 2010. The Company expects to use substantially all of the balance
in the Capital Construction Fund during 2010 to fund remaining payments towards
the construction contracts for two U.S. Flag ATBs.
Net cash
used by operating activities in the first three months of 2010 approximated
$14,000,000 (which is not necessarily indicative of the cash to be provided by
operating activities for the year ending December 31, 2010) compared with
$106,000,000 provided by operating activities in the first three months of 2009.
Current financial resources, together with cash anticipated to be generated from
operations, are expected to be adequate to meet requirements in the next
year.
The
Company’s reliance on the spot market contributes to fluctuations in cash flows
from operating activities. Any decrease in the average TCE rates earned by the
Company’s vessels in quarters subsequent to March 31, 2010, compared with the
actual TCE rates achieved during the first three months of 2010, will have a
negative comparative impact on the amount of cash provided by operating
activities. The Company enters into forward freight agreements to hedge a
portion of the results of its VLCC fleet, recognizing that such contracts have
basis risk. Most of these contracts are exchange-based, which significantly
reduces counterparty risk.
Page 44
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of
Capital (continued):
In order
to increase liquidity, the Company periodically evaluates transactions which may
result in either the sale or the sale and leaseback of certain vessels in its
fleet. The Company continues to monitor and evaluate the timing of repurchases
of stock under its share buyback program. Because of weakness in the financial
and credit markets there is greater focus on maintaining cash balances. The
Company continually reviews the amount of its regular quarterly dividend to
determine whether it is sustainable at current levels as part of its strategy to
provide growth in returns to stockholders while maintaining a strong balance
sheet. Future dividends, similar to the stock repurchase program, will be
evaluated as part of managing the balance sheet and cash.
On March
9, 2010, pursuant to a Form S-3 shelf registration, the Company sold 3,500,000
shares of its common stock at a price of $45.33 per share. The Company received
net proceeds of $158,155,000, after deducting estimated expenses. OSG used the
net proceeds from this offering for working capital purposes and the repayment
of outstanding indebtedness under its unsecured revolving credit
facility.
On March
29, 2010, pursuant to a Form S-3 shelf registration filed on March 4, 2010, the
Company issued $300,000,000 principal amount of senior unsecured notes. The
notes are due in March 2018 and have a coupon of 8.125%. The Company received
net proceeds of approximately $289,789,000, after deducting underwriting
discounts and commissions and estimated expenses. OSG used the net proceeds from
the offering to reduce outstanding indebtedness under its unsecured revolving
credit facility.
The
indentures pursuant to which the Company’s senior unsecured notes were issued
require the Company to secure its senior unsecured notes equally and comparably
with any other unsecured indebtedness in the event OSG is required to secure
such debt.
As of
March 31, 2010, OSG had $1,800,000,000 of long-term unsecured credit
availability and $200,000,000 of long-term secured credit availability, of which
approximately $583,000,000 had been borrowed and an additional $1,867,000 had
been used for letters of credit. The Company’s two long-term revolving credit
facilities mature as follows: $150,000,000 (2011), $350,000,000 (2012) and
$1,500,000,000 (2013). The current financial resources available under the
unsecured credit facilities are significant and remain a stable source of funds
for the Company especially in the current weak financial and tight credit
markets. The availability under the unsecured credit facility plus cash on hand
and cash expected to be generated from operations should be sufficient to allow
the Company to meet both its operating and capital requirements for vessels
under construction in the short and medium term.
In March
2010, Moody’s Investors Service (“Moody’s”) affirmed the Ba2 corporate family
rating of the Company. In addition, Moody’s downgraded the rating for the
Company’s senior unsecured debt to Ba3 from Ba2 and changed the ratings outlook
to negative. Moody’s downgrade of the senior unsecured rating is a consequence
of a shift in the composition of the Company’s debt capital, to one with a
higher proportion of senior secured debt. Further increases in debt, either from
share repurchases, acquisitions or additional charter-in commitments could
result in additional downgrades as could a protracted downturn in freight rates.
The Company’s debt agreements do not contain downgrade
triggers.
Page 45
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of
Capital (continued):
The
Company was in compliance with all of the financial covenants contained in the
Company’s debt agreements as of March 31, 2010 and projects continued compliance
over the next twelve months. Certain of the Company’s debt agreements contain
loan-to-value clauses, which could require OSG, at its option, to post
additional collateral or prepay a portion of the outstanding borrowings should
the value of the vessels securing borrowings under each of such agreements
decrease below their current valuations.
The
financing agreements impose operating restrictions and establish minimum
financial covenants. Failure to comply with any of the covenants in the
financing agreements could result in a default under those agreements and under
other agreements containing cross-default provisions. A default would permit
lenders to accelerate the maturity of the debt under these agreements and to
foreclose upon any collateral securing that debt. Under those circumstances, the
Company might not have sufficient funds or other resources to satisfy its
obligations.
Off-Balance
Sheet Arrangements
As of
March 31, 2010, the affiliated companies in which OSG held an equity interest
had total bank debt outstanding of $1,238,295,000 of which $866,176,000 was
nonrecourse to the Company.
In
February 2008, MOQ awarded two service contracts to a joint venture between OSG
and Euronav NV for terms of approximately eight years, ending in the second half
of 2017, to provide to MOQ two vessels, the FSO Asia and the FSO Africa,
respectively, to perform Floating, Storage and Offloading (“FSO”) services in
the Al Shaheen field off shore Qatar after each vessel has been converted to an
FSO. The Company has a 50% interest in this joint venture. The first ULCC, the
TI Asia, which was wholly owned by Euronav NV, was sold to the joint venture in
October 2008 for approximately $200,000,000. The second ULCC, the TI Africa,
which was wholly owned by OSG, was sold to the joint venture in January 2009 for
approximately $200,000,000. The joint venture financed the purchase of the
vessels through long-term secured bank financing and partner loans. The joint
venture entered into a $500,000,000 credit facility secured by the service
contracts to partially finance the acquisition of the two ULCCs and the cost of
conversion. Approximately $372,000,000 was outstanding under this facility on
March 31, 2010, with the outstanding amount of this facility being subject to
acceleration, in whole or in part, on termination of one or both of such service
contracts. In connection with the secured bank financing, the partners severally
issued 50% guaranties. The joint venture has entered into floating-to-fixed
interest rate swaps with major financial institutions covering notional amounts
aggregating $460,085,000, which pay fixed rates of 3.9% and receive floating
rates based on LIBOR. These agreements commenced in the third quarter of 2009
and have maturity dates ranging from July to September 2017.
Page 46
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of
Capital (continued):
After
experiencing construction delays, effective hook-up of the FSO Asia was
completed on January 5, 2010, and commenced a commissioning period of 120 days.
The conversion of the TI Africa to an FSO also experienced construction delays.
On January 21, 2010, MOQ notified the joint venture partners that it was
canceling the service contract for the FSO Africa due to the delayed delivery.
The joint venture partners contest MOQ’s right to terminate the contract. The
conversion of the FSO Africa was completed on March 14, 2010.
As a
result of the cancellation of the service contract of the FSO Africa,
the joint venture partners were required to post $143,000,000 in cash collateral
in consideration of the banks agreeing to waive, for a period currently ending
in the second quarter of 2010, the acceleration of amounts outstanding under the
facility related to the FSO Africa, which aggregated $143,000,000 as of January
21, 2010. The outstanding balance under the facility applicable to the FSO
Africa and the amount of collateral posted was reduced to $133,000,000 as of
March 31, 2010. As of March 31, 2010, the Company concluded that it was no
longer probable that the forecasted transaction applicable to the FSO Africa
swaps would occur. Accordingly, in the first quarter of 2010, the Company
recognized a loss of $4,548,000, representing its share of amounts previously
included in accumulated other comprehensive income/(loss) by the joint
venture.
In
November 2004, the Company formed a joint venture with Qatar Gas Transport
Company Limited (Nakilat) whereby companies in which OSG holds a 49.9% interest
ordered four 216,000 cbm LNG Carriers. Upon delivery in 2007 and 2008, these
vessels commenced 25-year time charters to Qatar Liquefied Gas Company Limited
(II). The aggregate construction cost for such newbuildings of $918,026,000 was
financed by the joint venture through long-term bank financing that is
nonrecourse to the partners and partner contributions. The joint venture has
entered into floating-to-fixed interest rate swaps with a group of major
financial institutions that are being accounted for as cash flow hedges. The
interest rate swaps cover notional amounts aggregating approximately
$840,399,000, pursuant to which it will pay fixed rates of approximately 4.9%
and receive a floating rate based on LIBOR. These agreements have maturity dates
ranging from July to November 2022.
Aggregate
Contractual Obligations
A summary
of the Company’s long-term contractual obligations, excluding operating lease
obligations for office space, as of March 31, 2010 follows (in
thousands):
Page 47
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of
Capital (continued):
Balance
of 2010
|
2011
|
2012
|
2013
|
2014
|
Beyond
2014
|
Total
|
||||||||||||||||||||||
Debt (1)
|
$ | 71,069 | $ | 109,154 | $ | 145,089 | $ | 743,886 | $ | 117,572 | $ | 1,064,257 | $ | 2,251,027 | ||||||||||||||
Operating lease obligations (chartered-in
vessels)(2)
|
277,808 | 348,165 | 292,047 | 241,305 | 225,176 | 489,361 | 1,873,862 | |||||||||||||||||||||
Construction contracts (3)
|
235,200 | 177,462 |
─
|
─
|
─
|
─
|
412,662 | |||||||||||||||||||||
Advances to joint ventures (4)
|
47,000 |
─
|
─
|
─
|
─
|
─
|
47,000 |
1 Amounts
shown include contractual interest obligations. The interest obligations for
floating rate debt of $1,147,820 as of March 31, 2010, have been
estimated based on the fixed rates stated in related floating-to-fixed interest
rate swaps, where applicable, or the LIBOR rate at March 31, 2010 of 0.30%. The
Company is a party to floating-to-fixed interest rate swaps covering notional
amounts aggregating $402,300 at March 31, 2010 that effectively convert the
Company’s interest rate exposure from a floating rate based on LIBOR to an
average fixed rate of 4.0%.
2 As
of March 31, 2010, the Company had charter-in commitments for 53 vessels on
leases that are, or will be, accounted for as operating leases. Certain of these
leases provide the Company with various renewal and purchase
options.
3 Represents
remaining commitments under shipyard construction contracts or estimates
thereof, excluding capitalized interest and other construction
costs.
4 The
Company expects to be required to contribute a minimum of approximately
$47,000,000 to a joint venture, representing its share of increases in the costs
of converting the two ULCCs to FSOs.
OSG has
used interest rate swaps to convert a portion of its debt from a floating rate
to a fixed rate based on management’s interest-rate outlook at various times.
These agreements contain no leverage features and have various final maturity
dates from March 2011 to August 2014.
OSG
expects to finance vessel commitments from working capital, the Capital
Construction Fund, cash anticipated to be generated from operations, existing
long-term credit facilities, and additional long-term debt, as required. The
amounts of working capital and cash generated from operations that may, in the
future, be utilized to finance vessel commitments are dependent on the rates at
which the Company can charter its vessels. Such charter rates are
volatile.
Risk
Management:
The
Company is exposed to market risk from changes in interest rates, which could
impact its results of operations and financial condition. The Company manages
this exposure to market risk through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. The Company manages its ratio of fixed-to-floating rate debt with
the objective of achieving a mix that reflects management's interest rate
outlook at various times. To manage this mix in a cost-effective manner, the
Company, from time-to-time, enters into interest rate swap agreements, in which
it agrees to exchange various combinations of fixed and variable interest rates
based on agreed upon notional amounts. The Company uses such derivative
financial instruments as risk management tools and not for speculative or
trading purposes. In addition, derivative financial instruments are entered into
with a diversified group of major financial institutions in order to manage
exposure to nonperformance on such instruments by the
counterparties.
Page 48
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Risk Management
(continued):
The
Company seeks to reduce its exposure to fluctuations in foreign exchange rates
through the use of foreign currency forward contracts and through the purchase
of bulk quantities of currencies at rates that management considers favorable.
For these contracts, which qualify as cash flow hedges for accounting purposes,
hedge effectiveness is assessed based on changes in foreign exchange spot rates
with the change in fair value of the effective portions being recorded in
accumulated other comprehensive loss. As of March 31, 2010, the Company has
recorded a liability of $1,949,000 related to the fair values of these
contracts, which settle monthly between April 2010 and March 2011 and cover
approximately ₤1,000,000 and €1,867,000 per month.
OSG's
management regularly reviews the strategic decision with respect to the
appropriate ratio of spot charter revenues to fixed rate charter revenues taking
into account its expectations about spot and time charter forward rates.
Decisions to modify fixed rate coverage are implemented in either the physical
markets through changes in time charters or in the FFA markets, thus managing
the desired strategic position while maintaining flexibility of ship
availability to customers. OSG enters into Forward Freight Agreements and bunker
swaps with an objective of economically hedging risk. The Company enters into
FFAs and bunker swaps as economic hedges, some of which qualify as cash flow
hedges for accounting purposes, seeking to reduce its exposure to changes in the
spot market rates earned by some of its vessels in the normal course of its
shipping business. By using FFAs and bunker swaps, OSG manages the financial
risk associated with fluctuating market conditions. FFAs and bunker swaps
generally cover periods ranging from one month to one year and involve contracts
entered into at various rates with the intention of offsetting the variability
of the TCE earnings from certain of the pools in which it participates. FFAs and
bunker swaps are executed predominantly through NOS ASA, a Norwegian clearing
house or LCH, London Clearing House. NOS ASA and LCH require the posting of
collateral by all participants. The use of a clearing house reduces the
Company’s exposure to counterparty credit risk. The effective portion of the
changes in fair value of these positions are recorded in accumulated other
comprehensive loss. Outstanding contracts settle between April and September
2010.
The
Company’s VLCCs are deployed and earn revenue through commercial pools that
operate on multiple routes on voyages of varying durations, which differs from
the standard routes associated with the
related hedging instruments. Therefore, the FFA and bunker hedges that qualify
as cash flow hedges for accounting purposes have basis risk. The TCE rates for
the pools are computed from the results of actual voyages performed during the
period whereas the rates used for settling FFA and bunker hedges are calculated
as simple averages of the daily rates for standard routes reported with each
daily rate weighted equally. High volatility tends to weaken the statistical
relationship between pool performance and the FFA market results.
The
second half of 2008 experienced extremely high volatility both in freight rates
and bunker prices. The Tankers International pool's VLCC earnings do not
fluctuate as much as TD-3 since the pool’s cargo system with longer Arabian Gulf
to Western destination and West Africa to Eastern destination combination
voyages smoothes out the pool’s earnings. The historical difference in
volatility between TD-3 and Tankers International pool's earnings has been
analyzed and the volume of the hedge position optimized to maximize correlation.
For the first quarter of 2010, the synthetic TCE rate achieved
for
Page 49
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Risk Management
(continued):
VLCCs was
approximately $49,511 per day. In addition, the Company's derivative positions
seek to achieve synthetic time charters for 214 days for VLCCs spread ratably
over the period from April 1, 2010 to October 31, 2010. However, due to the
above mentioned basis risk, price volatility and other factors, the actual TCE
rates achieved for the synthetic time charters may differ, possibly
substantially, from expected rates.
The
shipping industry's functional currency is the U.S. dollar. All of the Company's
revenues and most of its operating costs are in U.S. dollars.
Available
Information
The
Company makes available free of charge through its internet website, www.osg.com, its
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as
amended, as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the Securities and Exchange
Commission.
The
Company also makes available on its website, its corporate governance
guidelines, its code of business conduct, and charters of the Audit Committee,
Compensation Committee and Corporate Governance and Nominating Committee of the
Board of Directors.
Controls and
Procedures
As of the
end of the period covered by this Quarterly Report on Form 10-Q, an evaluation
was performed under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”), of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based
on that evaluation, the Company’s management, including the CEO and CFO,
concluded that the Company’s current disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
the reports the Company files or submits under the Exchange Act is (i) recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission’s rules and forms and (ii) accumulated and
communicated to the Company’s management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. There have
been no changes in the Company’s internal control over financial reporting
during the period covered by this Quarterly Report which have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Page 50
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
PART II – OTHER
INFORMATION
Item
1A.
|
Risk
Factors
|
There
have been no material changes in the Company’s risk factors from those disclosed
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2009, other than to the risk factor shown below.
Termination
of the contracts with Bender Shipbuilding & Repair Co., Inc.’s (“Bender”)
has, and may continue to, adversely affect OSG
In March
2009, OSG and Bender terminated the construction agreements pursuant to which
Bender was building six ATBs and two tugs for OSG. These agreements were
terminated because of Bender’s lack of performance under such agreements and its
lack of liquidity and poor financial condition. OSG is completing construction
of two of the six ATBs at alternative yards and intends to finish building the
two tugs. OSG took delivery of the first of the ATBs during the first quarter of
2010.
In June
2009, certain unsecured creditors of Bender filed an involuntary Chapter 7
bankruptcy petition against Bender claiming that Bender was insolvent and
raising questions about Bender’s pre-petition transfer of assets, specifically
transfers of the partially constructed vessels to OSG in connection with the
termination of contracts. Bender subsequently converted the involuntary
proceeding into a voluntary chapter 11 reorganization.
In
connection with the bankruptcy proceeding, to date the Company has received
separate letters on behalf of the Creditors Committee (“Committee”) and on
behalf of Bender, as the debtor-in-possession (the “Debtor”), that raise
questions and challenge the validity of the termination transaction. In
the case of the letter on behalf of the Committee, the Committee threatened to
seek standing, on behalf of the Debtor’s estate, to bring various alleged claims
directly against OSG, including alleged preference and fraudulent conveyance
claims, which the Committee asserted may have a potential value in excess of
$130,000,000. In the case of the letter on behalf of the Debtor, the
Debtor also purports to have preference and fraudulent conveyance claims against
OSG. OSG has separately advised each of the Committee and the Debtor
that it disputes the assertions and claims and reserves all of its rights,
claims and defenses.
To date,
no motions or actions have been filed against OSG. The Company believes that the
claims and assertions raised by the Debtor and the Committee are meritless and
that it has strong and meritorious defenses against such claims. OSG intends to
vigorously defend any actions brought by the Committee, the Debtor or any other
party; however there can be no assurance that an adverse ruling will not be
rendered. If the bankruptcy court were to sustain a challenge to the
transaction, OSG could be required to pay Bender additional sums for the
partially completed ATBs and tugs and related equipment that was transferred to
OSG in connection with the termination agreement transaction. In such case, the
payment of additional amounts could have an adverse effect on OSG.
Item
6.
|
Exhibits
|
See
Exhibit Index on page 52.
Page 51
OVERSEAS
SHIPHOLDING GROUP, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
OVERSEAS SHIPHOLDING GROUP,
INC.
|
|
(Registrant)
|
|
Date: May
6, 2010
|
/s/ Morten Arntzen
|
Morten
Arntzen
|
|
Chief
Executive Officer and President
|
|
Date: May
6, 2010
|
/s/ Myles R. Itkin
|
Myles
R. Itkin
|
|
Executive
Vice President, Chief Financial Officer
and Treasurer |
Page 52
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
EXHIBIT
INDEX
10.1
|
Notice
of Eligibility effective as of January 27, 2006 in favor of an executive
officer.
|
10.2
|
Agreement
dated September 11, 2006 with an executive officer.
|
10.3
|
Amended
and Restated Change of Control Agreement dated as of December 31, 2008
with an executive officer.
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a),
as amended.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a),
as amended.
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
NOTE:
|
Instruments
authorizing long-term debt of the Registrant and its subsidiaries, where
the amounts authorized thereunder do not exceed 10% of total assets of the
Registrant on a consolidated basis, are not being filed herewith. The
Registrant agrees to furnish a copy of each such instrument to the
Commission upon request.
|