| (Mark One) |
| [ ] | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| [ X ] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| [ ] |
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report……………………….. |
Commission file number 1- 12874
TEEKAY SHIPPING CORPORATION
(Exact name of Registrant as specified in its charter)
Republic of The Marshall Islands
(Jurisdiction of
incorporation or organization)
Bayside House, Bayside Executive Park, West Bay Street &
Blake Road, P.O. Box AP-59212, Nassau,
Commonwealth of the Bahamas
(Address of principal executive
offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|
Title of each class
Common Stock, par value of $0.001 per share |
Name of each exchange on which registered
New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
71,375,593 shares of Common Stock, par value of $0.001 per share.
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [ ] No [X]
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [X] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 [ ] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Page
PART I.
Item 1. Identity of Directors, Senior Management and Advisors....................... Not applicable
Item 2. Offer Statistics and Expected Timetable..................................... Not applicable
Item 3. Key Information............................................................. 4
Item 4. Information on the Company.................................................. 9
Item 4A. Unresolved Staff Comments................................................... Not applicable
Item 5. Operating and Financial Review and Prospects................................ 19
Item 6. Directors, Senior Management and Employees.................................. 33
Item 7. Major Shareholders and Related Party Transactions........................... 37
Item 8. Financial Information....................................................... 38
Item 9. The Offer and Listing....................................................... 38
Item 10. Additional Information...................................................... 39
Item 11. Quantitative and Qualitative Disclosures About Market Risk.................. 41
Item 12. Description of Securities Other than Equity Securities...................... Not applicable
PART II.
Item 13. Defaults, Dividend Arrearages and Delinquencies............................. 43
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. 43
Item 15. Controls and Procedures..................................................... 43
Item 16A. Audit Committee Financial Expert............................................ 43
Item 16B. Code of Ethics.............................................................. 43
Item 16C. Principal Accountant Fees and Services...................................... 43
Item 16D. Exemptions from the Listing Standards for Audit Committees.................. 44
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers...... 44
PART III.
Item 17. Financial Statements........................................................ Not applicable
Item 18. Financial Statements........................................................ 44
Item 19. Exhibits.................................................................... 45
Signature ............................................................................ 46
PART I
This Annual Report should be read in conjunction with the consolidated financial statements and accompanying notes included in this report.
In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements relate to future events and our operations, objectives, expectations, performance, financial condition and intentions. When used in this Annual Report, the words “expect,” “intend,” “plan,” “believe,” “anticipate,” “estimate” and variations of such words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, in particular, statements regarding: our future growth prospects; tanker market fundamentals, including the balance of supply and demand in the tanker market, and spot tanker charter rates; OPEC and non-OPEC oil production; restructuring charges for 2006; anticipated financial benefits from U.K. leases relating to certain LNG newbuilding carriers; future capital expenditures; delivery dates of and financing for newbuildings, and the commencement of service of newbuildings under long-term time charter contacts; future cash flow from vessel operations and strategic position; the growth prospects of the LNG shipping sector, including increased competition, and the joint venture company with the former controlling shareholder of Teekay Spain; the expected impact of IMO regulations and regulations of the European Union Parliament; the expected lifespan of a new LNG carrier; the expected impact of heightened environmental and quality concerns of insurance underwriters, regulators and charterers; and the growth of the global economy and global oil demand. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words believe, anticipate, expect, estimate, project, will be, will continue, will likely result, or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to: changes in production of or demand for oil, petroleum products and LNG, either generally or in particular regions; the cyclical nature of the tanker industry and our dependence on oil markets; greater or less than anticipated levels of tanker newbuilding orders or greater or less than anticipated rates of tanker scrapping; changes in trading patterns significantly impacting overall tanker tonnage requirements; changes in applicable industry laws and regulations and the timing of implementation of new laws and regulations; changes in typical seasonal variations in tanker charter rates; changes in the offshore production of oil; competitive factors in the markets in which we operate; our potential inability to integrate effectively the operations of any future acquisitions; the potential for early termination of long-term contracts and inability to renew or replace long-term contracts; shipyard production delays; conditions in the public equity markets; and other factors detailed from time to time in our periodic reports.
Forward-looking statements in this Annual Report are necessarily estimates reflecting the judgment of senior management and involve known and unknown risks and uncertainties. These forward-looking statements are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Accordingly, these forward-looking statements should, be considered in light of various important factors, including those set forth in this Annual Report under the heading “Factors That May Affect Future Results.”
We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may subsequently arise. You should carefully review and consider the various disclosures included in this Annual Report and in our other filings made with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
Set forth below are selected consolidated financial and other data of Teekay Shipping Corporation together with its subsidiaries (sometimes referred to as “Teekay,” the “Company,” “we” or “us”), for 2005, 2004, 2003, 2002 and 2001, which have been derived from our consolidated financial statements. The data below should be read in conjunction with the consolidated financial statements and the notes thereto and the Report of Independent Registered Public Accounting Firm therein, with respect to the consolidated financial statements for 2005, 2004 and 2003, and “Item 5. Operating and Financial Review and Prospects,” included herein.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.
2005 2004 2003 2002 2001
(in thousands, except share and per share data and ratios)
Income Statement Data:
Voyage revenues.................... $1,954,618 $2,219,238 $1,576,095 $ 783,327 $1,039,056
Total operating expenses (1)....... (1,322,842) (1,398,052) (1,283,131) (663,981) (655,593)
Income from vessel operations...... 631,776 821,186 292,964 119,346 383,463
Interest expense................... (132,428) (121,518) (80,999) (57,974) (66,249)
Interest income.................... 33,943 18,528 3,921 3,494 9,196
Equity income from joint ventures.. 11,141 13,730 6,970 4,523 17,324
Gain (loss) on sale of marketable
securities..................... - 93,175 517 (1,130) 758
Foreign exchange gain (loss)....... 59,810 (42,704) (3,855) 3,897 52
Other - net........................ (33,342) (24,957) (42,154) (18,765) (8,026)
Net income......................... 570,900 757,440 177,364 53,391 336,518
Per Share Data:
Net income-- basic (2)............. $7.30 $9.14 $2.22 $0.67 $4.24
Net income-- diluted (2)........... 6.83 8.63 2.18 0.66 4.16
Cash dividends declared (2)........ 0.62 0.51 0.45 0.43 0.43
Balance Sheet Data
(at end of year):
Cash and marketable securities..... $236,984 $427,037 $387,795 $298,255 $196,004
Restricted cash.................... 311,084 448,812 2,672 8,785 7,833
Vessels and equipment.............. 3,721,674 3,531,287 2,574,860 2,066,657 2,043,098
Total assets....................... 5,294,100 5,503,740 3,588,044 2,723,506 2,467,781
Total debt (including capital lease
obligations)................... 2,432,978 2,744,545 1,636,758 1,130,822 935,702
Capital stock...................... 471,784 534,938 492,653 470,988 467,341
Total stockholders' equity......... 2,236,542 2,237,358 1,651,827 1,421,898 1,398,200
Number of outstanding shares of
common stock (2)............... 71,375,593 82,951,275 81,222,350 79,384,120 79,100,652
Other Financial Data:
Net voyage revenues (3)............ $1,535,449 $1,786,843 $1,181,439 $543,872 $789,494
Net operating cash flow............ 609,042 814,704 455,575 179,531 500,086
Total debt to total
capitalization(4) (5).......... 49.1% 54.9% 49.5% 43.9% 39.8%
Net debt to total net
capitalization(5) (6).......... 42.8% 45.3% 44.5% 36.4% 34.3%
Capital expenditures:
Vessel and equipment
purchases, gross (7)........... $555,142 $548,587 $372,433 $135,650 $184,983
___________________________
| (1) | Total operating expenses includes vessel and equipment writedowns and (gain) loss on sale of vessels, and restructuring charges as follows: |
2005 2004 2003 2002 2001
(in thousands)
Vessel and equipment
writedowns and (gain) loss
on sale of vessels.......... $(139,184) $(79,254) $90,389 $ - $ -
Restructuring charges....... 2,882 1,002 6,383 - -
--------------- ---------------- --------------- -------------- --------------
(136,302) (78,252) 96,772 - -
=============== ================ =============== ============== ==============
| (2) | On May 17, 2004, we effected a two-for-one stock split relating to our common stock. All per share data and number of outstanding shares of common stock give effect to this stock split retroactively. |
| (3) | Consistent with general practice in the shipping industry, we use net voyage revenues (defined as voyage revenues less voyage expenses) as a measure of equating revenues generated from voyage charters to revenues generated from time charters, which assists us in making operating decisions about the deployment of our vessels and their performance. Under time charters the charterer pays the voyage expenses, whereas under voyage charter contracts the ship-owner pays these expenses. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the ship owner, pay the voyage expenses, we typically pass the approximate amount of these expenses on to our customers by charging higher rates under the contract or billing the expenses to them. As a result, although voyage revenues from different types of contracts may vary, the net revenues after subtracting voyage expenses, which we call “net voyage revenues,” are comparable across the different types of contracts. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us than voyage revenues, the most directly comparable GAAP financial measure. Net voyage revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between companies and to industry averages. The following table reconciles net voyage revenues with voyage revenues. |
2005 2004 2003 2002 2001
(in thousands)
Voyage revenues............. $1,954,618 $2,219,238 $1,576,095 $783,327 $1,039,056
Voyage expenses............. (419,169) (432,395) (394,656) (239,455) (249,562)
--------------- ---------------- --------------- -------------- --------------
Net voyage revenues......... 1,535,449 1,786,843 1,181,439 543,872 789,494
=============== ================ =============== ============== ==============
| (4) | Total capitalization represents total debt, minority interest and total stockholders’ equity. |
| (5) | As at December 31, 2005, we had $143.7 million of Premium Equity Participating Security Units due May 18, 2006 (or Equity Units) outstanding. If these Equity Units, which were issued on February 16, 2003, were presented as equity, our total debt to total capitalization would have been 46.2% as of December 31, 2005 (December 31, 2004 – 52.1% and December 31, 2003 – 45.2%) and our net debt to total capitalization would have been 39.5% as of December 31, 2005 (December 31, 2004 – 41.9% and December 31, 2003 – 39.8%). We believe that this presentation as equity for the purposes of these calculations is consistent with the requirement of each Equity Unit holder to purchase for $25 a specified fraction of a share of our common stock on February 16, 2006. Please read Item 18 – Financial Statements: Note 21(b) – Subsequent Events. |
| (6) | Net debt represents total debt less cash, cash equivalents, restricted cash and short-term marketable securities. Total net capitalization represents net debt, minority interest and total stockholders’ equity. |
| (7) | Excludes vessels purchased in connection with our acquisitions of Ugland Nordic Shipping AS in 2001, Navion AS in 2003 and Teekay Shipping Spain S.L. ( or Teekay Spain) in 2004. Please read Item 5 – Operating and Financial Review and Prospects. |
The cyclical nature of the tanker industry causes volatility in our profitability.
Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in the supply of, and demand for, tanker capacity. Increases or decreases in the supply of tankers could have a material adverse effect on our business, financial condition and results of operations. The supply of tanker capacity is influenced by the number and size of new vessels built, older vessels scrapped, converted and lost, the number of vessels that are out of service and regulations that may effectively cause early obsolescence of tonnage. The demand for tanker capacity is influenced by, among other factors: global and regional economic conditions; increases and decreases in production of and demand for crude oil and petroleum products; increases and decreases in OPEC oil production quotas; the distance crude oil and petroleum products need to be transported by sea; and developments in international trade and changes in seaborne and other transportation patterns.
Because many of the factors influencing the supply of and demand for tanker capacity are unpredictable, the nature, timing and degree of changes in tanker industry conditions are also unpredictable.
We depend upon oil markets, changes in which could result in decreased demand for our vessels and services.
Demand for our vessels and services in transporting crude oil and petroleum products depends upon world and regional oil markets. Any decrease in shipments of crude oil in those markets could have a material adverse effect on our business, financial condition and results of operations. Historically, those markets have been volatile as a result of the many conditions and events that affect the price, production and transport of oil, as well as competition from alternative energy sources. A slowdown of the United States and world economies may result in reduced consumption of crude oil and petroleum products and a decreased demand for our vessels and services.
Terrorist attacks, increased hostilities or war could lead to further economic instability, increased costs and disruption of our business.
Terrorist attacks, such as the attacks that occurred in the United States on September 11, 2001, the bombings in Spain on March 11, 2004, the current conflict in Iraq and current and future conflicts, may adversely affect our business, operating results, financial condition, ability to raise capital or future growth. Continuing hostilities in the Middle East may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in the United States, Spain or elsewhere, which may contribute further to economic instability and disruption of oil and liquefied natural gas (or LNG ) production and distribution, which could result in reduced demand for our services. In addition, oil and LNG facilities, shipyards, vessels, pipelines and oil and gas fields could be targets of future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport oil and LNG to or from certain locations. Terrorist attacks, war or other events beyond our control that adversely affect the distribution, production or transportation of oil or LNG to be shipped by us could entitle our customers to terminate our charter contracts, which could harm our cash flow and our business.
Our substantial operations outside the United States expose us to political, governmental and economic instability, which could harm our operations.
Because our operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where we are engaged in business or where our vessels are registered. Any disruption caused by these factors could harm our business. In particular, we derive a substantial portion of our revenues from shipping oil and LNG from politically unstable regions. Past political conflicts in these regions, particularly in the Arabian Gulf, have included attacks on ships, mining of waterways and other efforts to disrupt shipping in the area. In addition to acts of terrorism, vessels trading in this and other regions have also been subject, in limited circumstances, to piracy. Future hostilities or other political instability in the Arabian Gulf or other regions where we operate or may operate could have a material adverse effect on the growth of our business, results of operations and financial condition. In addition, tariffs, trade embargoes and other economic sanctions by Spain, the United States or other countries against countries in the Middle East, Southeast Asia or elsewhere as a result of terrorist attacks, hostilities or otherwise may limit trading activities with those countries, which could also harm our business.
Our dependence on spot voyages may result in significant fluctuations in the utilization of our vessels and our profitability.
During 2005 and 2004, we derived approximately 51% and 62%, respectively, of our net voyage revenues from the vessels in our spot tanker segment. Our spot tanker segment consists of conventional crude oil tankers and product carriers operating on the spot market or subject to time charters or contracts of affreightment priced on a spot-market basis or short-term fixed-rate contracts. We consider contracts that have an original term of less than three years in duration to be short-term. Part of our conventional Aframax tanker fleet and our large and small product tanker fleets, and some of our Suezmax tanker fleet are among the vessels included in our spot tanker segment. Due to our dependence on the spot charter market, declining charter rates in a given period generally will result in corresponding declines in operating results for that period. The spot charter market is highly competitive and spot charter rates are subject to significant fluctuations based on tanker and oil supply and demand. Charter rates have varied significantly in the last few years. Future spot charters may not be available at rates that will be sufficient to enable our vessels to be operated profitably or to provide sufficient cash flow to service our debt obligations.
Reduction in oil produced from offshore oil fields could harm our shuttle tanker business.
Demand for our shuttle tankers in transporting crude oil and petroleum products depends upon the amount of oil produced from offshore oil fields, especially in the North Sea, where our shuttle tankers primarily operate. As oil prices increase, the prospect of offshore oil exploration and development of offshore oil fields, which cost more to develop than land oil fields, becomes more attractive to oil companies. However, when oil prices decline, it becomes less attractive for oil companies to explore for oil offshore and develop offshore oil fields. If the amount of oil produced from offshore oil fields declines, especially in the North Sea, our shuttle tanker business could be harmed. In addition, if for environmental or other reasons there is a change in policy towards using pipelines rather than oceangoing vessels in transporting crude oil and petroleum products from offshore oil fields, our shuttle tanker business could be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations. As at December 31, 2005, we had 40 vessels (including 13 chartered-in vessels) in our shuttle tanker fleet. Most of our shuttle tanker revenues are derived from long-term contracts of affreightment. Revenue under most of these contracts depends upon the amount of oil we transport, the production of which is beyond our control and which can vary depending upon the nature of a given oil field and the field operator’s production decisions. Decreased oil production could reduce our revenue under such contracts.
Our growth partially depends on continued growth in demand for LNG and LNG shipping.
A significant portion of our growth strategy focuses on continued expansion in the LNG shipping sector, which depends on continued growth in world and regional demand for LNG and LNG shipping and the supply of LNG.
Demand for LNG and LNG shipping could be negatively affected by a number of factors, such as increases in the costs of natural gas derived from LNG relative to the cost of natural gas generally, increases in the production of natural gas in areas linked by pipelines to consuming areas, increases in the price of LNG relative to other energy sources, the availability of new energy sources, and negative global or regional economic or political conditions. Reduced demand for LNG and LNG shipping would have a material adverse effect on future growth of our LNG segment, and could harm that segment’s results.
Growth of the LNG market may be limited by infrastructure constraints and community and environmental group resistance to new LNG infrastructure over concerns about the environment, safety and terrorism. If the LNG supply chain is disrupted or does not continue to grow, or if a significant LNG explosion, spill or similar incident occurs, it could have a material adverse effect on our business, results of operations and financial condition.
The intense competition in our markets may lead to reduced profitability or expansion opportunities.
Our crude oil and product tankers operate in highly competitive markets. Competition arises primarily from other conventional Aframax and shuttle tanker owners, including major oil companies and independent companies. We also compete with owners of other size tankers. Our market share is insufficient to enforce any degree of pricing discipline in the markets in which we operate and our competitive position may erode in the future. Any new markets that we enter could include participants that have greater financial strength and capital resources than we have. We may not be successful in entering new markets.
One of our objectives is to enter into additional long-term, fixed-rate LNG time charters. The process of obtaining new long-term time charters is highly competitive and generally involves an intensive screening process and competitive bids, and often extends for several months. We expect substantial competition for providing marine transportation services for potential LNG projects from a number of experienced companies, including state-sponsored entities and major energy companies affiliated with the LNG project requiring LNG shipping services. Many of these competitors have greater experience in the LNG market and significantly greater financial resources than do we. We anticipate that an increasing number of marine transportation companies, including many with strong reputations and extensive resources and experience will enter the LNG transportation sector. This increased competition may cause greater price competition for time charters. As a result of these factors, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which would have a material adverse effect on our business, results of operations and financial condition.
The loss of any key customer could result in a significant loss of revenue in a given period.
We have derived, and believe that we will continue to derive, a significant portion of our voyage revenues from a limited number of customers. One customer accounted for 20% ($392.2 million) of our consolidated voyage revenues during 2005. The same customer accounted for 17% ($373.7 million) of our consolidated voyage revenues during 2004 and 15% ($239.5 million) during 2003. The loss of any significant customer or a substantial decline in the amount of services requested by a significant customer could have a material adverse effect on our business, financial condition and results of operations.
The oil tanker and LNG carrier industries are subject to substantial environmental and other regulations, which may significantly increase our expenses.
Our operations are affected by extensive and changing environmental protection laws and other regulations and international conventions. We have incurred, and expect to continue to incur, substantial expenses in complying with these laws and regulations, including expenses for ship modifications and changes in operating procedures. Additional laws and regulations may be adopted that could limit our ability to do business or further increase our costs. This could have a material adverse effect on our business, financial condition and results of operations.
The United States Oil Pollution Act of 1990 (or OPA 90 ) in particular has increased our expenses. OPA 90 provides for the phase-in of the exclusive use of double-hull tankers at United States ports, as well as potentially unlimited liability for owners, operators and demise or bareboat charterers for oil pollution in U.S. waters. To comply with the OPA 90, tanker owners generally incur increased costs in meeting additional maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtaining required insurance coverage. OPA 90 requires owners and operators of vessels operating in U.S. waters to establish and maintain with the United States Coast Guard evidence of insurance or of qualification as a self-insurer or other evidence of financial responsibility sufficient to meet their potential liabilities under the OPA 90.
Following the example of the OPA 90, the International Maritime Organization (or IMO ), the United Nations’ agency for maritime safety, has adopted regulations for tanker design and inspection that are designed to reduce oil pollution in international waters. In December 2003 the IMO announced regulations accelerating the phase out of single-hull tankers. The regulations impose a more rigorous inspection regime for older tankers and ban the carriage of heavy oils on single-hull tankers. As a result of changes to these regulations, we recorded a non-cash write-down of the book value of certain vessels totalling $56.9 million during the fourth quarter of 2003. We have subsequently sold all of our vessels affected by these regulations. Please read Item 4 – Information on the Company: Regulations.
Our shuttle tankers primarily operate in the North Sea. In addition to the regulations imposed by the IMO, countries having jurisdiction over North Sea areas impose regulatory requirements in connection with operations in those areas. These regulatory requirements, together with additional requirements imposed by operators of North Sea oil fields, require that we make further expenditures for sophisticated equipment, reporting and redundancy systems on our shuttle tankers and for the training of seagoing staff. Additional regulations and requirements may be adopted or imposed that could limit our ability to do business or further increase the cost of doing business in the North Sea.
We may not be able to successfully integrate future acquisitions.
A principal component of our strategy is to continue to grow by expanding our business both in the geographic areas and markets where we have historically focused as well as into new geographic areas, market segments and services. We may not be successful in expanding our operations and any expansion may not be profitable. Our strategy of growth through acquisitions involves business risks commonly encountered in acquisitions of companies, including: disruption of our ongoing business; difficulties in integrating the operations, personnel and business culture of acquired companies; difficulties of coordinating and managing geographically separate organizations; adverse effects on relationships with our existing suppliers and customers, and those of the companies acquired; difficulties entering geographic markets or new market segments in which we have no or limited experience; and loss of key officers and employees of acquired companies.
Our failure to effectively integrate businesses we may acquire in the future may harm our business and results of operations.
The process of integrating operations could also cause an interruption of, or loss of momentum in, the activities of one or more of an acquired company’s businesses and our businesses. Members of our senior management may be required to devote considerable amounts of time to this integration process, which would decrease the time they have to manage our business, service existing customers and attract new customers. If our senior management were unable to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer.
We may not realize expected benefits from acquisitions, and implementing our strategy of growth through acquisitions may harm our financial condition and performance.
Acquisitions may not be profitable to us at the time of their completion and may not generate revenues sufficient to justify our investment. In addition, our acquisition growth strategy exposes us to risks that may harm our results of operations and financial condition, including risks that we may: fail to realize anticipated benefits, such as cost-savings, revenue and cash flow enhancements and earnings accretion; decrease our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions; incur additional indebtedness, which may result in significantly increased interest expense or financial leverage, or issue additional equity securities to finance acquisitions, which may result in significant shareholder dilution; incur or assume unanticipated liabilities, losses or costs associated with the business acquired; or incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.
The strain that growth places upon our systems and management resources may harm our business.
Our growth has placed and will continue to place significant demands on our management, operational and financial resources. As we expand our operations, we must effectively manage and monitor operations, control costs and maintain quality and control in geographically dispersed markets. Our future growth and financial performance will also depend on our ability to recruit, train, manage and motivate our employees to support our expanded operations and continue to improve our customer support, financial controls and information systems.
These efforts may not be successful and may not occur in a timely or efficient manner. Failure to effectively manage our growth and the system and procedural transitions required by expansion in a cost-effective manner could have a material adverse affect on our business.
Our insurance may not be sufficient to cover losses that may occur to our property or as a result of our operations.
The operation of oil tankers and LNG carriers is inherently risky. Although we carry hull and machinery (marine and war risk) protection and indemnity insurance, all risks may not be adequately insured against, and any particular claim may not be paid. In addition, we do not carry insurance on our vessels covering the loss of revenues resulting from vessel off-hire time based on its cost compared to our off-hire experience. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage of pollution. A catastrophic oil spill or marine disaster could result in losses that exceed our insurance coverage, which could harm our business, financial condition and operating results. Any uninsured or underinsured loss could harm our business and financial condition. In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable maritime self-regulatory organizations.
Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In addition, the insurance that may be available may be significantly more expensive than our existing coverage.
An incident involving environmental damage or pollution and any of our vessels could harm our reputation and business.
Oil spills and other tanker-related environmental incidents have created increased demand for modern vessels operated by ship management companies with a reputation for safety and environmental compliance. Any event involving our tankers that results in material environmental damage or pollution could harm our reputation for safety and environmental compliance and decrease the demand for our services, which could harm our business.
Our operating results are subject to seasonal fluctuations.
We operate our tankers in markets that have historically exhibited seasonal variations in demand and, therefore, in charter rates. This seasonality may result in quarter-to-quarter volatility in our results of operations. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities in the winter months. As a result, our revenues have historically been weaker during fiscal quarters ended June 30 and September 30, and, conversely, revenues have been stronger in fiscal quarters ended December 31 and March 31.
We expend substantial sums during construction of newbuildings without earning revenue and without assurance that they will be completed.
We are typically required to expend substantial sums as progress payments during construction of a newbuilding, but we do not derive any revenue from the vessel until after its delivery. In addition, under some of our time charters if our delivery of a vessel to a customer is delayed, we may be required to pay liquidated damages in amounts equal to or, under some charters, almost double the hire rate during the delay. For prolonged delays, the customer may terminate the time charter and, in addition to the resulting loss of revenues, we may be responsible for additional substantial liquidated charges.
If we were unable to obtain financing required to complete payments on any of our newbuilding orders, we could effectively forfeit all or a portion of the progress payments previously made. As of December 31, 2005, we had 17 newbuildings on order with deliveries scheduled between 2006 and 2009. As of December 31, 2005, progress payments made towards these newbuildings, excluding payments made by our joint venture partners, totaled $397.5 million. We may order additional newbuildings in the future.
As at December 31, 2005, we had options to have constructed four LNG carriers at predetermined prices. The options for two of these carriers, which are scheduled for delivery in 2010, expire on April 15, 2006. If we exercise the options then the $6.0 million cost for the options will be applied to the first construction installment payments. The options for the other two LNG carriers expired on February 28, 2006 and have been forfeited. However, as of the date of this annual report, we were in discussions with the counterparty to the options on these two LNG carriers and were exploring various alternatives which may enable us to apply some or all of the forfeited option cost against other vessels we may order from them.
Exposure to currency exchange rate and interest rate fluctuations could result in fluctuations in our cash flows and operating results.
Substantially all of our revenues are earned in U.S. Dollars, although we are paid in Euros and Australian Dollars under some of our charters. A portion of our operating costs are incurred in currencies other than U.S. Dollars. This partial mismatch in operating revenues and expenses could lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to other currencies, in particular the Norwegian Kroner, the Australian Dollar, the Canadian Dollar, the Singapore Dollar, the Japanese Yen, the British Pound and the Euro. We also make payments under two Euro-denominated term loans. If the amount of our Euro-denominated obligations exceeds our Euro-denominated revenues, we must convert other currencies, primarily the U.S. Dollar, into Euros. An increase in the strength of the Euro relative to the U.S. Dollar would require us to convert more U.S. Dollars to Euros to satisfy those obligations.
Because we report our operating results in U.S. Dollars, changes in the value of the U.S. Dollar relative to other currencies also result in fluctuations of our reported revenues and earnings. In addition, under U.S. accounting guidelines, all foreign currency-denominated monetary assets and liabilities, such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations, are revalued and reported based on the prevailing exchange rate at the end of the period. This revaluation historically has caused us to report significant non-monetary foreign currency exchange gains or losses each period. The primary source of these gains and losses is our Euro-denominated term loans.
At December 31, 2005, approximately $1,352.2 million, or 73%, of our long-term debt bore interest at floating interest rates. To partially mitigate this interest rate exposure, we have entered into interest rate swaps that effectively change our interest rate exposure from floating LIBOR and EURIBOR rates to average fixed rates. Please read Item 11 – Quantitative and Qualitative Disclosures About Market Risk.
We may not be exempt from United States tax on our United States source income, which would reduce our net income and cash flow by the amount of the applicable tax.
If we are not exempt from tax under Section 883 of the United States Internal Revenue Code, the shipping income derived from the United States sources attributable to our subsidiaries’ transportation of cargoes to or from the United States will be subject to U.S. federal income tax. If our subsidiaries were subject to such tax, our net income and cash flow would be reduced by the amount of such tax. Currently, we have claimed an exemption under Section 883. We cannot give any assurance that future changes and shifts in ownership of our stock will not preclude us from being able to satisfy the existing exemption.
In 2005 and 2004, approximately 13.1% and 15.2%, respectively, of our gross shipping revenues were derived from U.S. sources attributable to the transportation of cargoes to or from the United States. The average U.S. federal income tax on such U.S. source income, in the absence of exemption under Section 883, would have been 4% thereof, or approximately $10.3 million and $13.7 million, respectively, for 2005 and 2004.
We are a leading provider of international crude oil and petroleum product transportation services through our spot tanker fleet, which includes the world’s largest fleet of Aframax-size oil tankers, our fixed-rate fleet, which includes the world’s largest fleet of shuttle tankers, and our LNG fleet. Our tankers and LNG carriers provide transportation services to major oil companies, oil traders and government agencies worldwide.
Our spot tanker segment includes our conventional crude oil tankers and product carriers operating on the spot market or subject to time charters or contracts of affreightment priced on a spot-market basis or short-term fixed-rate contracts (contracts with an initial term of less than three years). As of December 31, 2005, our Aframax vessels, which had a total cargo capacity of approximately 4.6 million deadweight tonnes, represented approximately 7% of the total tonnage of the world Aframax fleet. Please read Item 4 – Information on the Company: Our Fleet.
Our fixed-rate tanker segment includes our shuttle tanker operations, floating storage and off-take vessels, a liquid petroleum gas carrier and certain conventional crude oil, methanol and product tankers on long-term fixed-rate time-charter contracts or contracts of affreightment, under which we carry an agreed quantity of cargo for a customer over a specified trade route within a given period of time. As of December 31, 2005, our shuttle tanker fleet, which had a total cargo capacity of approximately 4.8 million deadweight tonnes, represented approximately 65% of the total tonnage of the world shuttle tanker fleet. Please read Item 4 – Information on the Company: Our Fleet.
Our fixed-rate LNG segment includes our thirteen LNG carriers, including five newbuildings we have a 70% interest in and four newbuildings we have a 40% interest in. All of our LNG carriers are subject to long-term fixed-rate time charter contracts. As of December 31, 2005, our LNG Fleet, including newbuildings, had a total cargo carrying capacity of 2.2 million cubic meters.
The Teekay organization was founded in 1973. We are incorporated under the laws of the Republic of The Marshall Islands as Teekay Shipping Corporation and maintain our principal executive headquarters at Bayside House, Bayside Executive Park, West Bay Street & Blake Road, P.O. Box AP-59212, Nassau, The Bahamas. Our telephone number at such address is (242) 502-8820. Our principal operating office is located at Suite 2000, Bentall 5, 550 Burrard Street, Vancouver, British Columbia, Canada, V6C 2K2. Our telephone number at such address is (604) 683-3529.
Public Offerings by Teekay LNG Partners L.P.
On May 10, 2005, Teekay’s subsidiary Teekay LNG Partners L.P. (or Teekay LNG ) completed its initial public offering of 6.9 million common units and during November 2005 Teekay LNG completed a follow-on public offering of an additional 4.6 million common units. As of December 31, 2005, we owned a 67.8% interest in Teekay LNG, including our general partner interest. Please read Item 18 – Financial Statements: Note 3 – Public Offerings of Teekay LNG Partners L.P.
Teekay LNG is a Marshall Islands limited partnership formed by Teekay as part of our strategy to expand our operations in the LNG shipping sector. Teekay LNG provides LNG and crude oil marine transportation service under long-term, fixed-rate contracts with major energy and utility companies through its fleet of seven LNG carriers (including 3 newbuildings) and eight Suezmax class crude oil tankers, primarily consisting of four LNG carriers and five Suezmax tankers obtained through Teekay’s acquisition of Teekay Spain in April 2004, described in detail below.
Immediately preceding Teekay LNG’s initial public offering, Teekay and Teekay LNG entered into an omnibus agreement governing when they may compete with each other and setting forth certain rights of first offer on LNG carriers and related time charters, in favor of Teekay LNG, and Suezmax tankers and related charters, in favor of Teekay.
Acquisition of Teekay Shipping Spain S.L., formerly Naviera F. Tapias S.A.
On April 30, 2004, we acquired all of the outstanding shares of Naviera F. Tapias S.A. and its subsidiaries and renamed it Teekay Shipping Spain S.L. (or Teekay Spain ). Teekay Spain engages in the marine transportation of crude oil and LNG. We funded this acquisition with a combination of cash, cash generated from operations and borrowings under existing credit facilities. We believe the acquisition of the Teekay Spain business provided us with a strategic platform from which to expand our presence in the LNG shipping sector and immediate access to reputable LNG operations. We anticipate this will continue to benefit us when bidding on future LNG projects. In the transaction, we also entered into an agreement with an entity controlled by the former controlling shareholder of Teekay Spain to establish a 50/50 joint venture that will pursue new business in the oil and gas shipping sectors that relate only to the Spanish market or are led by Spanish entities or entities controlled by a Spanish company.
As at December 31, 2005, Teekay Spain’s LNG fleet consisted of four LNG carriers, which are all contracted under long-term fixed-rate charters to major Spanish energy companies. As at December 31, 2005, Teekay Spain’s conventional crude oil tanker fleet consisted of five Suezmax tankers, all of which are contracted under long-term fixed-rate charters with a major Spanish oil company.
Acquisition of Navion AS
In April 2003, we completed our acquisition of 100% of the issued and outstanding shares of Navion AS. Navion, based in Stavanger, Norway, operates primarily in the shuttle tanker and the conventional crude oil and product tanker markets. Its modern shuttle tanker fleet, which as of December 31, 2005, consisted of eight owned and 19 chartered-in vessels (excluding five vessels chartered-in from our shuttle tanker subsidiary, Ugland Nordic Shipping AS, and our other subsidiaries), provides logistical services to the Norwegian state-owned oil company, Statoil ASA, and other oil companies in the North Sea under fixed-rate, long-term contracts of affreightment. Subsequent to the acquisition, the operations of UNS and the shuttle tanker operations of Navion were combined into one business unit, Teekay Navion Shuttle Tankers. Navion’s modern, chartered-in, conventional tanker fleet, which as of December 31, 2005, consisted of eight crude oil tankers and 20 product tankers, operates primarily in the Atlantic region, providing services to Statoil and other oil companies. In addition, Navion owns two floating storage and off-take vessels currently trading as conventional crude oil tankers in the Atlantic region and one chartered-in methanol carrier on long-term charter to Statoil. Through Navion Chartering AS, an entity owned jointly with Statoil, Navion has a right of first refusal on Statoil’s oil transportation requirements at the prevailing market rate until December 31, 2007. In addition to tanker operations, Navion also constructs, installs, operates and leases equipment that reduces volatile organic compound emissions during loading, transportation and storage of oil and oil products.
Additional information about these acquisitions, including our financing of them, is included in Item 5 – Operating and Financial Review and Prospects.
The vessels in our spot tanker segment compete primarily in the Aframax tanker market. In the Aframax market, international seaborne oil and other petroleum products transportation services are provided by two main types of operators: captive fleets of major oil companies (both private and state-owned) and independent ship owner fleets. Many major oil companies and other oil trading companies, the primary charterers of the vessels owned or controlled by us, also operate their own vessels and transport their own oil and oil for third party charterers in direct competition with independent owners and operators. Competition for charters in the Aframax spot charter market is intense and is based upon price, location, the size, age, condition and acceptability of the vessel, and the reputation of the vessel’s manager.
We compete principally with other Aframax owners in the spot charter market through the global tanker charter market. This market is comprised of tanker broker companies that represent both charterers and ship owners in chartering transactions. Within this market, some transactions, referred to as “market cargoes,” are offered by charterers through two or more brokers simultaneously and shown to the widest possible range of owners; other transactions, referred to as “private cargoes,” are given by the charterer to only one broker and shown selectively to a limited number of owners whose tankers are most likely to be acceptable to the charterer and are in position to undertake the voyage.
As of December 31, 2005, other large operators of Aframax tonnage (including newbuildings on order) included Malaysian International Shipping Corporation (approximately 38 Aframax vessels), Aframax International Pool (approximately 36 Aframax vessels), Novorossiisk Sea Shipping Co. (approximately 25 Aframax vessels), General Maritime Corporation (approximately 19 Aframax vessels), British Petroleum (approximately 20 Aframax vessels) and Minerva (approximately 17 Aframax vessels).
Our competition in the Aframax (75,000 to 119,999 dwt) market is also affected by the availability of other size vessels that compete in our markets. Suezmax (120,000 to 199,999 dwt) size vessels and Panamax (50,000 to 74,999 dwt) size vessels can compete for many of the same charters for which our Aframax tankers compete. Because of their large size, Very Large Crude Carriers (200,000 to 319,999 dwt) (or VLCCs ) and Ultra Large Crude Carriers (320,000+ dwt) (or ULCCs ) rarely compete directly with Aframax tankers for specific charters. However, because VLCCs and ULCCs comprise a substantial portion of the total capacity of the market, movements by such vessels into Suezmax trades and of Suezmax vessels into Aframax trades would heighten the already intense competition.
We believe that we have competitive advantages in the Aframax tanker market as a result of the quality, type and dimensions of our vessels and our market share in the Indo-Pacific and Atlantic Basins. As of December 31, 2005, our Aframax tanker fleet (excluding Aframax-size shuttle tankers and newbuildings) had an average age of approximately 7 years, compared to an average age for the world oil tanker fleet, including Aframax tankers, of approximately 8.7 years and for the world Aframax tanker fleet of approximately 9.3 years.
We have chartering staff located in Vancouver, Canada; Stavanger, Norway; Tokyo, Japan; London, England; Houston, USA; and Singapore. Each office serves our clients headquartered in that office’s region. Fleet operations, vessel positions and charter market rates are monitored around the clock. We believe that monitoring such information is critical to making informed bids on competitive brokered business.
During 2005, approximately 51% of our net voyage revenues were earned by the vessels in the spot tanker segment, compared to approximately 62% in 2004 and 63% in 2003. Please read Item 5 – Operating and Financial Review and Prospects: Results of Operations.
The vessels in our fixed-rate tanker segment compete primarily in the offshore loading business. These offshore loading vessels, called “shuttle tankers”, transport oil from offshore production platforms to onshore storage and refinery facilities. Our shuttle tankers are primarily subject to long-term, fixed-rate time-charter contracts for a specific offshore oil field or under contracts of affreightment for various fields. The number of voyages performed under these contracts of affreightment normally depends upon the oil production of each field. Competition for charters is based primarily upon price, availability, the size, technical sophistication, age and condition of the vessel and the reputation of the vessel’s manager. Technical sophistication of the vessel is especially important in harsh operating environments such as the North Sea. Although the size of the world shuttle tanker fleet has been relatively unchanged in recent years, conventional tankers could be converted into shuttle tankers by adding specialized equipment to meet the requirements of the oil companies. Shuttle tanker demand may also be affected by the possible substitution of sub-sea pipelines to transport oil from offshore production platforms.
As of December 31, 2005, there were approximately 63 vessels in the world shuttle tanker fleet (including newbuildings), the majority of which operate in the North Sea. As of December 31, 2005, we owned 27 shuttle tankers and chartered-in an additional 13 shuttle tankers. Other shuttle tanker owners in the North Sea include Knutsen OAS Shipping AS, JJ Ugland Group and Penny Ugland, which as of December 31, 2005 owned approximately 17, four and two shuttle tankers, respectively. The remaining owners in the North Sea each owned three or fewer vessels as of that date. We believe that we have significant competitive advantages in the shuttle tanker market as a result of the quality, type and dimensions of our vessels combined with our market share in the North Sea.
In addition to our shuttle tankers, we have four Floating Storage & Offtake (or FSO ) units. FSO units are oil tankers that have been moored in an oil field and have been modified to store and transfer oil. Our large fleet and the secondhand market provide potential vessels for further FSO conversion.
In February 2006, we entered into an agreement with PGS Production AS, a wholly owned subsidiary of Petroleum Geo-Services ASA, to form a joint venture company called Teekay Petrojarl Offshore that will focus on pursuing opportunities involving Floating Production Storage and Offloading (or FPSO ) units. An FPSO unit is a type of floating tank system designed to process and store crude oil from a nearby offshore oil platform. An FPSO unit will typically have onboard the capability to carry out the oil separation process, obviating the need for such facilities to be located on an oil platform. The processed oil is periodically offloaded onto shuttle tankers or ocean-going barges for transport to shore. FPSOs are particularly effective in remote or deepwater locations where seabed pipelines or oil platforms are not cost effective.
During 2005, approximately 43% of our net voyage revenues were earned by the vessels in the fixed-rate tanker segment, compared to approximately 36% in 2004 and 37% in 2003. Please read Item 5 – Operating and Financial Review and Prospects: Results of Operations.
The vessels in our fixed-rate LNG segment compete in the LNG market. LNG carriers are usually chartered to carry LNG pursuant to time charter contracts, where a vessel is hired for a fixed period of time, usually between 20 and 25 years, and the charter rate is payable to the owner on a monthly basis. LNG shipping historically has been transacted with these long-term, fixed-rate time charter contracts. LNG projects require significant capital expenditures and typically involve an integrated chain of dedicated facilities and cooperative activities. Accordingly, the overall success of an LNG project depends heavily on long-range planning and coordination of project activities, including marine transportation. Although most shipping requirements for new LNG projects continue to be provided on a long-term basis, spot voyages (typically consisting of a single voyage) and short-term time charters of less than 12 months duration have grown from 1% of the market in 1992 to 12% in 2004.
In the LNG market, we compete principally with other private and state-controlled energy and utilities companies that generally operate captive fleets, and independent ship owners and operators. Many major energy companies compete directly with independent owners by transporting LNG for third parties in addition to their own LNG. Given the complex, long-term nature of LNG projects, major energy companies historically have transported LNG through their captive fleets. However, independent fleet operators have been obtaining an increasing percentage of charters for new or expanded LNG projects as major energy companies have continued to divest non-core businesses.
LNG carriers transport LNG internationally between liquefaction facilities and import terminals. After natural gas is transported by pipeline from production fields to a liquefaction facility, it is supercooled to a temperature of approximately negative 260 degrees Fahrenheit. This process reduces its volume to approximately 1 / 600 th of its volume in a gaseous state. The reduced volume facilitates economical storage and transportation by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to meet their demand for natural gas. LNG carriers include a sophisticated containment system that holds and insulates the LNG so it maintains its liquid form. The LNG is transported overseas in specially built tanks on double-hulled ships to a receiving terminal, where it is offloaded and stored in heavily insulated tanks. In regasification facilities at the receiving terminal, the LNG is returned to its gaseous state (or regasified ) and then shipped by pipeline for distribution to natural gas customers.
Most new vessels, including all of our vessels, are being built with a membrane containment system. These systems are built inside the carrier and consist of insulation between thin primary and secondary barriers and are designed to accommodate thermal expansion and contraction without overstressing the membrane. New LNG carriers are generally expected to have a lifespan of approximately 40 years. Unlike the oil tanker industry, there currently are no regulations that require the phase-out from trading of LNG carriers after they reach a certain age. As at December 31, 2005, there were approximately 194 vessels in the world LNG fleet, with an average age of approximately 13 years and an additional 127 LNG carriers under construction or on order for delivery through 2010.
Our fixed-rate LNG segment consists of LNG carriers subject to long-term, fixed-rate time-charter contracts. The acquisition of Teekay Spain on April 30, 2004 established our entry into the LNG shipping sector. Our fixed-rate LNG segment includes four LNG carriers acquired as part of the Teekay Spain acquisition. As at December 31, 2005, we had nine newbuilding LNG carriers on order, all of which will commence operations upon delivery under long-term fixed-rate time charters and in which our interests range from 40% to 70%. Please read Item 5 – Operation and Financial Review and Prospects – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Segments – Fixed-Rate LNG Segment.
During 2005, approximately 6% of our net voyage revenues were earned by the vessels in the fixed-rate LNG segment, compared to approximately 2% in 2004. We did not operate LNG carriers prior to 2004. Please read Item 5 – Operating and Financial Review and Prospects: Results of Operations.
Safety and environmental compliance are our top operational priorities. We operate our vessels in a manner intended to protect the safety and health of our employees, the general public and the environment. We actively manage the risks inherent in our business and are committed to eliminating incidents that threaten the safety and integrity of our vessels. We are also committed to reducing our emissions and waste generation.
Customers and tanker rating services have recognized us for safety, environment, quality and service. Given the emphasis by customers on quality as a result of stringent environmental regulations, and heightened concerns about liability for oil pollution, we believe that our emphasis on quality and safety provides us with a favorable competitive profile. We are one of a few companies who have fully integrated our health, safety, environment and quality management systems. This integration has increased efficiencies in operations and management by reducing redundancies and better aligns our strategies and programs in the relevant systems.
We have achieved certification under the standards reflected in International Standards Organization’s (or ISO) 9001 for Quality Assurance, ISO 14001 for Environment Management Systems, OHSAS 18001 for Occupational Health and Safety, and the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention on a fully integrated basis. As part of ISM Code compliance, all of our vessels’ safety management certificates are maintained through ongoing internal audits performed by our certified internal auditors and intermediate external audits performed by the classification society Det Norske Veritas.
In our various worldwide facilities we carry out the critical ship management functions of vessel maintenance, crewing, purchasing, shipyard supervision, insurance and financial management services for most of our fleet. These functions are supported by onboard and onshore systems for maintenance, inventory, purchasing and budget management. Teekay Marine Services AS, our wholly owned subsidiary, provides ship management services for our shuttle tankers, including crewing and maintenance. OSM Ship Management AS (or OSM), a company which is unrelated to us, provides ship management services for three of our conventional tankers. OSM is under contract to provide these services to us until October 2008.
We establish key performance indicators to facilitate regular monitoring of our operational performance. We set targets on an annual basis to drive continuous improvement, and we review performance indicators monthly to determine if remedial action is necessary to reach our targets. In 2003, we established a purchasing alliance with two other shipping companies and named it Teekay Bergesen Worldwide. This alliance leverages the purchasing power of the combined fleets, mainly in such commodity areas as lube oils, paints and other chemicals.
We believe that the generally uniform design of some of our existing and newbuilding vessels and the adoption of common equipment standards provides operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair and spare parts ordering.
Our organization is divided into four key areas: Teekay Tanker Services; Teekay Navion Shuttle Tankers; Teekay Gas & Offshore; and Teekay Marine Services. These centers of expertise work closely with customers and internally to ensure a thorough understanding of our customers’ requirements and to develop tailored solutions.
| • | Teekay Tanker Services is responsible for the commercial management of our conventional crude oil and product tanker transportation services. We offer a full range of flexible, customer-focused shipping solutions through our worldwide network of commercial offices. |
| • | Teekay Navion Shuttle Tankers offers a wide range of shuttle tanker and project services. Our expertise and partnerships allow us to create solutions for customers producing crude oil from offshore installations. |
| • | Teekay Gas & Offshore offers a diverse range of mooring, floating storage and offloading solutions, as well as gas shipping services, pursuing the LNG and compressed natural gas markets. |
| • | Teekay Marine Services provides a vast range of marine services and products across all our operations as well as to third-parties. |
We pursue an intensively customer- and operations-oriented business strategy designed to achieve superior operating results. We believe that we have four key competitive strengths:
| • | Customer Relationships. We have developed a strong network of customer relationships by providing consistent performance, innovative solutions and exceptional service to quality-sensitive customers. |
| • | Disciplined Acquisition Strategy. Our acquisition strategy has contributed significantly to our achieving a market concentration in the Aframax and the shuttle tanker markets, which is sufficient to facilitate comprehensive coverage of charterer requirements and provides a base for efficient operation and a high degree of capacity utilization in those markets. |
| • | Expertise In Marine and Business Operations. We have developed a highly-integrated global network of approximately 5,100 sea staff and shore employees, with comprehensive market intelligence and operational and technical sophistication. This includes full-service marine operations capabilities and experienced management in all functions critical to our operations, which affords a focused marketing effort, high quality and tight cost controls, improved capacity utilization and effective operations and safety monitoring. |
| • | Financial Strength. We believe our strong balance sheet allows us to take advantage of appropriate investment opportunities throughout the tanker cycle. |
As part of our growth strategy, we will continue to consider strategic opportunities, including business acquisitions, such as our acquisitions of Teekay Spain in 2004 and Navion in 2003. To the extent we enter new geographic areas or tanker market segments, there can be no assurance that we will be able to compete successfully. New markets, including the LNG market, may involve competitive factors that differ from those of the Aframax market segment in the Indo-Pacific and Atlantic Basins and the North Sea shuttle tanker market and may include participants that have greater financial strength and capital resources than we have.
Our growth strategy is to leverage our existing competitive strengths to continue to expand our business. We anticipate that the continued upgrade and expansion of our tanker business will continue to be a key component of our strategy. In addition, we believe that our full-service marine operations capabilities, reputation for safety and quality and strong customer orientation provide us with the opportunity to expand our business by providing additional value-added and innovative services, in many cases to existing customers. Finally, we intend to identify expansion opportunities in new tanker market segments, geographic areas and services to which our competitive strengths are well suited, such as our entry into the shuttle tanker market through our acquisitions of UNS and Navion and our entry into the LNG market through our acquisition of Teekay Spain, as described above. We may choose to pursue such opportunities through internal growth, joint ventures or business acquisitions.
The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters, death or injury of persons and property losses caused by adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, the transportation of crude oil and LNG is subject to the risk of spills and to business interruptions due to political circumstances in foreign countries, hostilities, labor strikes and boycotts. The occurrence of any of these events may result in loss of revenues or increased costs.
We carry hull and machinery (marine and war risks) and protection and indemnity insurance coverage to protect against most of the accident-related risks involved in the conduct of our business. Hull and machinery insurance covers loss of or damage to a vessel due to marine perils such as collisions, grounding and weather. Protection and indemnity insurance indemnifies us against liabilities incurred while operating vessels, including injury to our crew or third parties, cargo loss and pollution. The current available amount of our coverage for pollution is $1 billion per vessel per incident. We also carry insurance policies covering war risks (including piracy and terrorism). We do not carry insurance on our vessels covering the loss of revenues resulting from vessel off-hire time based on its cost compared to our off-hire experience. We believe that our current insurance coverage is adequate to protect against most of the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage. However, we cannot assure that all covered risks are adequately insured against, that any particular claim will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental regulations have resulted in increased costs for, and may result in the lack of availability of, insurance against risks of environmental damage or pollution.
We use in our operations a thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance and assessment programs, a seafarers competence training program, seafarers workshops and membership in emergency response organizations.
Because our operations are primarily conducted outside of the United States, they may be affected by currency fluctuations and by changing economic, political and governmental conditions in the countries where we engage in business or where our vessels are registered.
During 2005, we derived approximately 19% of our total net voyage revenues from our operations in the Indo-Pacific Basin, compared to approximately 23% during 2004. Past political conflicts in that region, particularly in the Arabian Gulf, have included attacks on tankers, mining of waterways and other efforts to disrupt shipping in the area. Vessels trading in the region have also been subject to, in limited instances, acts of piracy. In addition to tankers, oil pipelines, LNG facilities and offshore oil fields could also be targets of terrorist attacks. The escalation of existing or the outbreak of future hostilities or other political instability in this region or other regions where we operate could affect our trade patterns, increase insurance costs, increase tanker operational costs and otherwise adversely affect our operations and performance. In addition, tariffs, trade embargoes, and other economic sanctions by the United States or other countries against countries in the Indo-Pacific Basin or elsewhere as a result of terrorist attacks or other hostilities may limit trading activities with those countries, which could also adversely affect our operations and performance.
We have derived, and believe that we will continue to derive, a significant portion of our voyage revenues from a limited number of customers. Our customers include major oil companies, major oil traders, large oil consumers and petroleum product producers, government agencies, and various other entities that depend upon the tanker transportation trade. One customer, an international oil company, accounted for 20% ($392.2 million) of our consolidated voyage revenues during 2005. The same customer accounted for 17% ($373.7 million) of our consolidated voyage revenues during 2004 and 15% ($239.5 million) of our consolidated voyage revenues during 2003. No other customer accounted for more than 10% of our consolidated voyage revenues during 2005, 2004 or 2003. The loss of any significant customer or a substantial decline in the amount of services requested by a significant customer could have a material adverse effect on our business, financial condition and results of operations.
The following list provides additional information with respect to our vessels as at December 31, 2005.
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Number of Vessels(1)
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Chartered-in Newbuildings on
Owned Vessels Vessels Order Total
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Spot Tanker Segment:
Suezmax Tankers 1 3 2 6
Aframax Tankers 21 11 1 33
Large Product Tankers 3 10 3 16
Small Product Tankers - 11 - 11
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Total Spot Tanker Segment 25 35 6 66
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Fixed-Rate Tanker Segment:
Shuttle Tankers (2) 27 13 - 40
Conventional Tankers (3) 16 2 2 20
Floating Storage & Offtake (or FSO)
Units (4) 4 - - 4
LPG / Methanol Carriers 1 1 - 2
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Total Fixed-Rate Tanker Segment 48 16 2 66
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Fixed-Rate LNG Segment (5) 4 - 9 13
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| (1) | Excludes vessels managed for third parties. |
| (2) | Includes six shuttle tankers of which our ownership interests range from 50% to 50.5%. |
| (3) | Includes eight Suezmax tankers owned by subsidiaries of Teekay LNG. |
| (4) | Includes one FSO unit of which our ownership interest is 89%. |
| (5) | The four existing LNG carriers are owned by Teekay LNG; Teekay LNG has agreed to acquire Teekay’s 70% interest in three of the LNG newbuildings; and, in accordance with existing agreements, Teekay will offer to Teekay LNG all its interests in the remaining six LNG carrier newbuildings, which interests include a 70% interest in two vessels and a 40% interest in four vessels. |
Our vessels are of Australian, Bahamian, Canadian, Cayman Islands, Liberian, Norwegian, Norwegian International Ship and Spanish registry.
Many of our Aframax vessels and some of our shuttle tankers have been designed and constructed as substantially identical sister ships. These vessels can, in many situations, be interchanged, providing scheduling flexibility and greater capacity utilization. In addition, spare parts and technical knowledge can be applied to all the vessels in the particular series, thereby generating operating efficiencies.
As of December 31, 2005, we had 17 newbuildings on order. Please read Item 5 – Operating and Financial Review and Prospects: Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 18 – Financial Statements: Note 17(a) – Commitments and Contingencies – Vessels Under Construction.
Please read Item 18 – Financial Statements: Note 9 – Long-Term Debt for information with respect to major encumbrances against our vessels.
The hull and machinery of all of our vessels have been “classed” by one of the major classification societies: Det Norske Veritas, Lloyd’s Register of Shipping, Nippon Kaiji Kyokai or American Bureau of Shipping. The classification society certifies that the vessel has been built and maintained in accordance with the rules of that classification society. Each vessel is inspected by a classification society surveyor annually, with either the second or third annual inspection being a more detailed survey (an Intermediate Survey ) and the fourth or fifth annual inspection being the most comprehensive survey (a Special Survey ). The inspection cycle resumes after each Special Survey. Vessels also may be required to be drydocked at each Intermediate and Special Survey for inspection of the underwater parts of the vessel in addition to a more detailed inspection of hull and machinery. Many of our vessels have qualified with their respective classification societies for drydocking every four or five years in connection with the Special Survey and are no longer subject to the Intermediate Surveys. To qualify, we were required to enhance the resiliency of the underwater coatings of each vessel hull to accommodate underwater inspections by divers.
The vessel’s flag state, or the vessel’s classification if nominated by the flag state, also inspect our vessels to ensure they comply with applicable rules and regulations of the country of registry of the vessel and the international conventions of which that country is a signatory.
In addition to the classification inspections, many of our customers regularly inspect our vessels as a condition to chartering, and regular inspections are standard practice under long-term charters as well.
Port state authorities, such as the U.S. Coast Guard and the Australian Maritime Safety Authority, also inspect our vessels when they visit their ports.
We believe that our relatively new, well-maintained and high-quality vessels provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality of service.
Our vessels are also regularly inspected by our seafaring staff, who perform much of the necessary routine maintenance. Shore-based operational and technical specialists also inspect our vessels at least twice a year. Upon completion of each inspection, action plans are developed to address any items requiring improvement. All action plans are monitored until they are completed. The objectives of these inspections are to:
| • | ensure our operating standards are being adhered to; |
| • | maintain the structural integrity of the vessel; |
| • | maintain machinery and equipment to give full reliability in service; |
| • | optimize performance in terms of speed and fuel consumption; and |
| • | ensure the vessel’s appearance will support our brand and meet customer expectations. |
To achieve our vessel structural integrity objective, we use a comprehensive “Structural Integrity Management System” we developed. This system is designed to closely monitor the condition of our vessels and to ensure that structural strength and integrity are maintained throughout a vessel’s life.
We have obtained approval for our safety management system as being in compliance with the ISM Code. Our safety management system has also been certified as being compliant with ISO 9001, 14001 and OSHAS 18001 standards. To maintain compliance, the system is audited regularly by either the vessels’ flag state or, when nominated by them, a classification society. Certification is valid for five years subject to satisfactorily completing internal and external audits.
Organizational Structure
Please read Exhibit 8.1 to this Annual Report for a list of our significant subsidiaries as at December 31, 2005.
Our business and the operation of our vessels are significantly affected by international conventions and national, state and local laws and regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. Because these conventions, laws, and regulations change frequently, we cannot predict the ultimate cost of compliance or their impact on the resale price or useful life of our vessels. Additional conventions, laws and regulations may be adopted that could limit our ability to do business or increase the cost of our doing business and that may materially adversely affect our operations. We are required by various governmental and quasi-governmental agencies to obtain permits, licenses and certificates with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits, licenses and certificates required for the operations of the vessels we own will depend on a number of factors, we believe that we will be able to continue to obtain all permits, licenses and certificates material to the conduct of our operations.
We believe that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will generally lead to greater inspection and safety requirements on all vessels in the oil tanker and LNG carrier markets and will accelerate the scrapping of older vessels throughout these industries.
Regulation—International Maritime Organization (or IMO ). IMO regulations relating to pollution prevention for tankers apply to many jurisdictions in which our tanker fleet operates. These regulations provide that:
| • | tankers between 25 and 30 years old must be of double-hull construction or of a mid-deck design with double-side construction, unless they have wing tanks or double-bottom spaces, not used for the carriage of oil, which cover at least 30% of the length of the cargo tank section of the hull, or are capable of hydrostatically balanced loading which ensures at least the same level of protection against oil spills in the event of collision or stranding; |
| • | tankers 30 years old or older must be of double-hull construction or mid-deck design with double-side construction; and |
| • | all tankers are subject to enhanced inspections. |
Under IMO regulations, an oil tanker must be of double-hull construction, be of mid-deck design with double-side construction or be of another approved design ensuring the same level of protection against oil pollution in the event that such tanker:
| • | is the subject of a contract for a major conversion or original construction on or after July 6, 1993; |
| • | commences a major conversion or has its keel laid on or after January 6, 1994; or |
| • | completes a major conversion or is a newbuilding delivered on or after July 6, 1996. |
In December 2003, the IMO revised its regulations relating to the prevention of pollution from oil tankers. These regulations, which became effective April 5, 2005, accelerate the mandatory phase-out of single-hull tankers and impose a more rigorous inspection regime for older tankers. As a result of these regulations, in 2003 we recorded a non-cash write-down of the book value of the affected vessels totaling $56.9 million. We subsequently sold all the vessels affected by these regulations and no longer own any single-hull vessels.
IMO regulations also include the International Convention for Safety of Life at Sea (or SOLAS ), including amendments to SOLAS implementing the International Security Code for Ports and Ships (or ISPS ), the ISM Code, the International Convention on Prevention of Pollution from Ships (the MARPOL Convention ), the International Convention on Civic Liability for Oil Pollution Damage of 1969, the International Convention on Load Lines of 1966, and, specifically with respect to LNG carriers, the International Code for Construction and Equipment of Ships Carrying Liquefied Gases in Bulk (or the IGC Code ). SOLAS provides rules for the construction of and equipment required for commercial vessels and includes regulations for safe operation. Flag states which have ratified the convention and the treaty generally employ the classification societies, which have incorporated SOLAS requirements into their class rules, to undertake surveys to confirm compliance.
SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations. Non-compliance with IMO regulations, including SOLAS, the ISM Code, ISPS and the IGC Code, may subject us to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to or detention in some ports. For example, the Coast Guard and European Union authorities have indicated that vessels not in compliance with ISM Code will be prohibited from trading in U.S. and European ports.
The ISM Code requires vessel operators to obtain a safety management certification for each vessel they manage, evidencing the shipowner’s compliance with requirements of the ISM Code relating to the development and maintenance of an extensive “Safety Management System.” Such a system includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. Each of the existing vessels in our fleet currently is ISM Code-certified, and we expect to obtain safety management for each newbuilding vessel upon delivery.
ISPS was adopted in December 2002 in the wake of heightened concern over worldwide terrorism and became effective on July 1, 2004. The objective of ISPS is to enhance maritime security by detecting security threats to ships and ports and by requiring the development of security plans and other measures designed to prevent such threats. The United States implemented ISPS with the adoption of the Maritime Transportation Security Act of 2002 (or MTSA ), which requires vessels entering U.S. waters to obtain certification of plans to respond to emergency incidents there, including identification of persons authorized to implement the plans. Each of the existing vessels in our fleet currently complies with the requirements of ISPS and MTSA, and we expect all relevant newbuildings to comply upon delivery.
LNG carriers are also subject to regulation under the IGC Code. Each LNG carrier must obtain a certificate of compliance evidencing that it meets the requirements of the IGC Code, including requirements relating to its design and construction. Each of our LNG carriers currently is in substantial compliance with the IGC Code, and each of our LNG newbuilding shipbuilding contracts requires compliance prior to delivery.
Annex VI to MARPOL, which became effective internationally on May 19, 2005, sets limits on sulfur dioxide and nitrogen oxide emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances. Annex VI also imposes a global cap on the sulfur content of fuel oil and allows for specialized areas to be established internationally with more stringent controls on sulfur emissions. For vessels over 400 gross tons, Annex VI imposes various survey and certification requirements. The United States has not yet ratified Annex VI. Vessels operated internationally, however, are subject to the requirements of Annex VI in those countries that have implemented its provisions. We believe that the cost of our complying with Annex VI will not be material.
Environmental Regulations—The United States Oil Pollution Act of 1990 (or OPA 90 ). OPA 90 established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills, including discharges of oil cargoes, fuel (or bunkers ) or lubricants. OPA 90 affects all owners and operators whose vessels trade to the United States or its territories or possessions or whose vessels operate in United States waters, which include the U.S. territorial sea and 200-mile exclusive economic zone around the United States.
Under OPA 90, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war and the responsible party reports the incident and reasonably cooperates with the appropriate authorities) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. These other damages are defined broadly to include:
| • | natural resources damages and the related assessment costs; |
| • | real and personal property damages; |
| • | net loss of taxes, royalties, rents, fees and other lost revenues; |
| • | lost profits or impairment of earning capacity due to property or natural resources damage; |
| • | net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards; and |
| • | loss of subsistence use of natural resources. |
OPA 90 limits the liability of responsible parties to the greater of $1,200 per gross ton or $10 million per tanker that is over 3,000 gross tons per incident, subject to possible adjustment for inflation. These limits of liability would not apply if the incident were proximately caused by violation of applicable U.S. federal safety, construction or operating regulations, including IMO conventions to which the United States is a signatory, or by the responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the oil removal activities. We currently plan to continue to maintain for each of our vessel's pollution liability coverage in the amount of $1 billion per incident. A catastrophic spill could exceed the coverage available, which could harm our business, financial condition and results of operations.
Under OPA 90, with limited exceptions, all newly built or converted tankers delivered after January 1, 1994 and operating in United States waters must be built with double-hulls, and existing vessels that do not comply with the double-hull requirement must be phased out over a 20-year period (1995 to 2015) based on size, age and hull construction. Vessels with double-sides and double-bottoms are granted an additional five years of service life before being phased out. Notwithstanding the phase-out period, OPA 90 currently permits existing single-hull tankers to operate until the year 2015 if their operations within United States waters are limited to discharging at the Louisiana Off-shore Oil Platform, or off-loading by means of lightering activities within authorized lightering zones more than 60 miles offshore. All of our existing tankers are, and all of our newbuildings will be, double-hulled.
In December 1994, the United States Coast Guard (or Coast Guard ) implemented regulations requiring evidence of financial responsibility in the amount of $1,500 per gross ton for tankers, coupling the OPA limitation on liability of $1,200 per gross ton with the Comprehensive Environmental Response, Compensation, and Liability Act (or CERCLA ) liability limit of $300 per gross ton. Under the regulations, such evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance, guaranty or an alternate method subject to agency approval. Under OPA 90, an owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having the greatest maximum limited liability under OPA 90 and CERCLA.
The Coast Guard’s regulations concerning certificates of financial responsibility (or COFR ) provide, in accordance with OPA 90, that claimants may bring suit directly against an insurer or guarantor that furnishes COFR. In addition, in the event that such insurer or guarantor is sued directly, it is prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. Certain organizations, which had typically provided COFR under pre-OPA 90 laws, including the major protection and indemnity organizations, have declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy defenses.
The Coast Guard’s financial responsibility regulations may also be satisfied by evidence of surety bond, guaranty or by self-insurance. Under the self-insurance provisions, the shipowner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the Coast Guard regulations by obtaining financial guaranties from a third-party. If other vessels in our fleet trade into the United States in the future, we expect to obtain additional guaranties from third-party insurers or to provide guaranties through self-insurance.
OPA 90 and CERCLA permit individual states to impose their own liability regimes with regard to oil or hazardous substance pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited strict liability for spills. We intend to comply with all applicable state regulations in the ports where our vessels call.
Owners or operators of tank vessels operating in United States waters are required to file vessel response plans with the Coast Guard, and their tank vessels are required to operate in compliance with their Coast Guard approved plans. Such response plans must, among other things:
| • | address a “worst case” scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a “worst case discharge"; |
| • | describe crew training and drills; and |
| • | identify a qualified individual with full authority to implement removal actions. |
We have filed vessel response plans with the Coast Guard for the tankers we own and have received approval of such plans for all vessels in our fleet to operate in United States waters. In addition, we conduct regular oil spill response drills in accordance with the guidelines set out in OPA 90. The Coast Guard has announced it intends to propose similar regulations requiring certain vessels to prepare response plans for the release of hazardous substances.
OPA 90 allows U.S. state legislatures to pre-empt associated regulation if the state’s regulations are equal or more stringent. Several coastal states such as California, Washington and Alaska require state specific COFR and vessel response plans.
CERCLA contains a similar liability regime to OPA 90, but applies to the discharge of “hazardous substances” rather than “oil.” Petroleum products and LNG should not be considered hazardous substances under CERCLA, but additives to oil or lubricants used on LNG carriers might fall within its scope. CERCLA imposes strict joint and several liability upon the owner, operator or bareboat charterer of a vessel for cleanup costs and damages arising from a discharge of hazardous substances.
OPA 90 and CERCLA do not preclude claimants from seeking damages for the discharge of oil and hazardous substances under other applicable law, including maritime tort law. Such claims could include attempts to characterize the transportation of LNG aboard a vessel as an ultra-hazardous activity under a doctrine that would impose strict liability for damages resulting from that activity. The application of this doctrine varies by jurisdiction. There can be no assurance that a court in a particular jurisdiction will not determine that the carriage of oil or LNG aboard a vessel is an ultra-hazardous activity, which would expose us to strict liability for damages we cause to injured parties even when we have not acted negligently.
Although the United States is not a party, many countries have ratified and follow the liability scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (or CLC ) , and the Convention for the Establishment of an International Fund for Oil Pollution of 1971, as amended. Under these conventions, which are applicable to vessels that carry persistent oil (not LNG) as cargo, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. Many of the countries that have ratified the CLC have increased the liability limits through a 1992 Protocol to the CLC. The liability limits in the countries that have ratified this Protocol are currently approximately $6.5 million plus approximately $899 per gross registered tonne above 5,000 gross tonnes with an approximate maximum of $128 million per vessel and the exact amount tied to a unit of account which varies according to a basket of currencies. The right to limit liability is forfeited under the CLC when the spill is caused by the owner’s actual fault or privity and, under the 1992 Protocol, when the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to the CLC.
In addition, the IMO, various countries and states, such as Australia, the United States and the State of California, and various regulators, such as port authorities, the U.S. Coast Guard and the U.S. Environmental Protection Agency, have either adopted legislation or regulations, or are separately considering the adoption of legislation or regulations, aimed at regulating the transmission, distribution, supply and storage of LNG, the discharge of ballast water and the discharge of bunkers as potential pollutants, and requiring the installation on ocean-going vessels of pollution prevention equipment such as oily water separators and bilge alarms.
Our shuttle tankers primarily operate in the North Sea. In addition to the regulations imposed by the IMO, countries having jurisdiction over North Sea areas impose regulatory requirements in connection with operations in those areas. These regulatory requirements, together with additional requirements imposed by operators in North Sea oil fields, require that we make further expenditures for sophisticated equipment, reporting and redundancy systems on our shuttle tankers and for the training of seagoing staff. Additional regulations and requirements may be adopted or imposed that could limit our ability to do business or further increase the cost of doing business in the North Sea.
The following discussion is a summary of the principal United States, Bahamian, Bermudian, Marshall Islands, Norwegian and Spanish tax laws applicable to us. The following discussion of tax matters, as well as the conclusions regarding certain issues of tax law that are reflected in such discussion, are based on current law. No assurance can be given that changes in or interpretation of existing laws will not occur or will not be retroactive or that anticipated future factual matters and circumstances will in fact occur. Our views have no binding effect or official status of any kind, and no assurance can be given that the conclusions discussed below would be sustained if challenged by taxing authorities.
The following discussion is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended (or the Code ), existing and proposed U.S. Treasury Department regulations, administrative rulings, pronouncements and judicial decisions, all as of the date of this Annual Report.
We have made special U.S. tax elections in respect of some of our vessel-owning or vessel-operating subsidiaries that are potentially subject to U.S. tax as a result of deriving income attributable to the transportation of cargoes to or from the United States. Our Norwegian, Canadian and Spanish subsidiaries that occasionally transport cargoes to and from the United States are eligible to claim exemption from United States tax under the United States-Norway, United States-Canada or United States-Spain Income Tax Treaties. Other subsidiaries that are considered to derive income from sources within the United States rely on our ability to claim exemption under Section 883 of the Code.
For 2005 and 2004, approximately 13.1% and 15.2%, respectively, of our gross shipping revenues were derived from U.S. sources attributable to the transportation of cargoes to or from the United States. The average U.S. federal income tax on such U.S. source income, in the absence of exemption under Section 883, would have been 4% thereof, or approximately $10.3 million and $13.7 million, respectively, for 2005 and 2004.
Under Section 883 of the Code, we will be exempt from U.S. Taxation on our U.S. source shipping income if:
| (a) | Teekay is organized in a qualified foreign country which is one that grants an equivalent exemption from tax to corporations organized in the United States in respect of the shipping income for which exemption is being claimed under Section 883 (referred to as the “country of organization requirement”); and |
| (b) | Teekay can satisfy any one of the following three stock ownership requirements: |
| • | more than 50% of Teekay's stock, in terms of value, is beneficially owned by individuals who are residents of a qualified foreign country; |
| • | Teekay is a “controlled foreign corporation” within the meaning of Section 957 of the Code and more than 50% of our shipping income is includible in the gross income of U.S. persons that own 10% or more of our stock; or |
| • | our stock is “primarily and regularly” traded on an established securities market in the United States or any qualified foreign country (referred to as the “publicly-traded requirement”). |
Final Treasury regulations interpreting Section 883 were promulgated in August 2003 and became effective for tax years beginning after September 24, 2004 (January 1, 2005 for calendar year taxpayers). For purposes of this discussion, we have assumed these regulations apply for 2005. As of the date of this report, we believe that we qualify for the Section 883 exemption from U.S. tax on U.S. source shipping income under the final Treasury Regulations on the basis that we satisfy the country of organization requirement because we are organized in the Marshall Islands and the publicly-traded requirement because our stock is primarily and regularly traded on an established securities market in the United States within the meaning of the Section 883 of the Code and the Treasury Regulations thereunder. We can give no assurance that any changes in the ownership of our stock subsequent to the date of this report will permit us to continue to qualify for the Section 883 exemption.
If we do not qualify for the Section 883 exemption, we would be subject to U.S. federal income taxation under one of two alternative tax regimes (the 4% gross basis tax or the net basis tax). We may be subject to a 4% U.S. federal income tax on the U.S. source portion of our gross income (without the benefit of deductions) attributable to shipping transportation that begins or ends in the United States. For this purpose, the U.S. source portion of such gross income is deemed to be 50% of the income attributable to transportation that begins or ends in the United States.
If we have transportation income that is deemed to be “effectively connected” with a trade or business in the U.S. and we do not qualify for the Section 883 exemption, we may be subject to corporate income tax on a net basis (currently the highest statutory rate is 35%); however, we do not expect to have any transportation income that is U.S. effectively connected income.
We believe that neither we nor our subsidiaries will be subject to taxation under the laws of the Marshall Islands, the Bahamas or Bermuda, and distributions by our subsidiaries to us also will not be subject to any taxes under the laws of such countries.
Our Norwegian subsidiaries are subject to the ordinary Norwegian corporate tax legislation, which in general charges a 28% tax on taxable income. As of December 31, 2005, the operations of our Norwegian subsidiaries consisted of:
| • | ownership and operation of four shuttle tankers (including two 50%-owned vessels); |
| • | one chartered-in shuttle tanker; |
| • | ownership and operation of two FSO vessels currently trading as conventional crude oil tankers; |
| • | commercial management services for certain of our crude oil and product tankers; |
| • | our wholly owned subsidiary, Teekay Marine Services AS; |
| • | our 50% owned subsidiary, Ugland Stena Storage; and |
| • | 12 plants installed on shuttle tankers that reduce volatile organic compound emissions during loading, transportation and storage of oil and oil products. |
We don’t expect that payment of Norwegian income taxes will have a material effect on our results.
Spain imposes income taxes on income generated by our majority owned Spanish subsidiary’s shipping related activities at a rate of 35%. Two alternative Spanish tax regimes provide incentives for Spanish companies engaged in shipping activities, the Canary Islands Special Ship Registry (or CISSR ) and the Spanish Tonnage Tax Regime (or TTR ). As at December 31, 2005, the vessels operated by our operating Spanish subsidiaries were subject to the CISSR; however, we have applied for all but two of these vessels to be taxed under the TTR commencing with the 2006 tax year.
Our Spanish subsidiary’s vessels are registered in the CISSR and are thus allowed a credit, equal to 90% of the tax payable on income from the commercial operation of the Canary Islands registered ships, against the tax otherwise payable. This effectively results in an income tax rate of approximately 3.5% on income from the operation of these vessels. Vessel sales are subject to the full 35% Spanish tax rate. A 20% reinvestment credit it available if the entire gross proceeds from the vessel sale are reinvested in a qualifying asset and if the asset disposed of has been held for a minimum period of one year.
Under the TTR, the applicable income tax is based on the weight (measured as net tonnage) of the vessel and the number of days during the taxable period that the vessel is at the company’s disposal, excluding time required for repairs. The tax base ranges from 0.20 Euros per day per 100 tonnes to 0.90 Euros per day per 100 tonnes, against which the generally applicable tax rate of 35% will apply. If the shipping company also engages in activities other than those subject to the TTR regime, income from those other activities will be subject to tax at the generally applicable rate of 35%. If a vessel is acquired and disposed of by a company while it is subject to the TTR regime, any gain on the disposition of the vessel generally is not subject to Spanish taxation. If the company acquired the vessel prior to becoming subject to the TTR regime or if the company acquires a used vessel after becoming subject to the TTR regime, the difference between the fair market value of the vessel at the time it enters into the TTR and the tax value of the vessel at that time is added to the taxable income in Spain when the vessel is disposed of and generally remains subject to Spanish taxation at the rate of 35%.
We don’t expect Spanish income taxes will have a material effect on our results.
Not applicable.
Teekay is one of the world’s leading providers of international crude oil and petroleum product transportation services. We estimate that we transported more than 10% of the world’s seaborne oil in 2005. Through our publicly listed subsidiary, Teekay LNG Partners L.P. (or Teekay LNG ), we have expanded into the liquefied natural gas (or LNG ) shipping sector. As at December 31, 2005, our fleet (excluding vessels managed for third parties) consisted of 145 vessels (including 17 newbuildings on order, 53 vessels time-chartered-in and five vessels owned through joint ventures). Our conventional oil tankers provide a total cargo-carrying capacity of approximately 13.6 million deadweight tonnes (or mdwt ), and our LNG and liquid petroleum gas carriers have total cargo-carrying capacity of approximately 2.2 million cubic meters.
Our voyage revenues are derived from:
| • | Voyage charters, which are charters for shorter intervals that are priced on a current, or “spot,” market rate; |
| • | Time charters and bareboat charters, whereby vessels are chartered to customers for a fixed period of time at rates that are generally fixed, but may contain a variable component, based on inflation, interest rates or current market rates; and |
| • | Contracts of affreightment, where we carry an agreed quantity of cargo for a customer over a specified trade route within a given period of time. |
The table below illustrates the primary distinctions among these types of charters and contracts:
Contract of
Voyage Charter(1) Time Charter Bareboat Charter Affreightment
Typical contract length...... Single voyage One year or more One year or more One year or more
Hire rate basis(2)........... Varies Daily Daily Typically daily
Voyage expenses(3) .......... We pay Customer pays Customer pays We pay
Vessel operating expenses(3). We pay We pay Customer pays We pay
Off-hire(4) ................. Customer does not pay Varies Customer typically pays Customer typically
does not pay
___________________________
| (1) | Under a consecutive voyage charter, the customer pays for idle time. |
| (2) | "Hire" rate refers to the basic payment from the charterer for the use of the vessel. |
| (3) | Defined below under "Important Financial and Operational Terms and Concepts." |
| (4) | " Off-hire " refers to the time a vessel is not available for service. |
Our fleet is divided into three main segments, the spot tanker segment, the fixed-rate tanker segment and the fixed-rate LNG segment.
Spot Tanker Segment
Our spot tanker segment consists of conventional crude oil tankers and product carriers operating on the spot market or subject to time charters or contracts of affreightment priced on a spot-market basis or short-term fixed-rate contracts. We consider contracts that have an original term of less than three years in duration to be short-term. Substantially all of our conventional Aframax, large product and small product tankers are among the vessels included in the spot tanker segment. Our spot market operations contribute to the volatility of our revenues, cash flow from operations and net income. Historically, the tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, tanker spot markets historically have exhibited seasonal variations in charter rates. Tanker spot markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling. As at December 31, 2005, we had one Aframax tanker on order in our spot tanker segment scheduled to be delivered in April 2007, three large product tanker scheduled to be delivered between November 2006 and January 2007 and two Suezmax tankers scheduled to be delivered in August and December 2008.
Fixed-Rate Tanker Segment
Our fixed-rate tanker segment includes our shuttle tanker operations, floating storage and offtake vessels, a liquid petroleum gas carrier and conventional crude oil, methanol and product tankers on long-term fixed-rate time charter contracts or contracts of affreightment. Our shuttle tanker business, which is operated through our business unit Teekay Navion Shuttle Tankers, includes the shuttle tanker operations of our subsidiaries Navion AS and Ugland Nordic Shipping AS. This business unit provides services to oil companies, primarily in the North Sea, under long-term fixed-rate contracts of affreightment or time charter contracts. Historically, the utilization of shuttle tankers in the North Sea is higher in the winter months as favorable weather conditions in the summer months provide opportunities for repairs and maintenance to the offshore oil platforms, which generally reduces oil production. As at December 31, 2005, we had on order for our fixed-rate segment two newbuilding conventional crude oil Aframax tankers. Upon their deliveries, which are scheduled for January and March 2008, the vessels will commence 10-year time charters to our Skaugen PetroTrans joint venture.
Fixed-Rate LNG Segment
Our fixed-rate LNG segment consists of LNG carriers subject to long-term, fixed-rate time charter contracts. The acquisition of Teekay Shipping Spain, S.L. (or Teekay Spain ) on April 30, 2004 established our entry into the LNG shipping sector. Our fixed-rate LNG segment includes four LNG carriers acquired as part of the Teekay Spain acquisition. Two of the LNG carriers have been included from the date of the Teekay Spain acquisition. The other two LNG carriers delivered in July and December 2004, respectively. As at December 31, 2005, we had nine newbuilding LNG carriers on order. Three of these carriers will commence service under long-term contracts with Ras Lafan Liquefied Natural Gas Co. Limited II (or RasGas II ), a joint venture company between a subsidiary of ExxonMobil Corporation and Qatar Petroleum. These charters will commence upon deliveries of the vessels, which are scheduled for the fourth quarter of 2006 and the first half of 2007. The vessels will be time-chartered to RasGas II for a period of 20 years, with a charterer’s option to extend for periods up to an additional 15 years. These LNG charter contracts are subject, in certain circumstances, to termination and vessel purchase rights in favor of RasGas II. Qatar Gas Transport Company has exercised its right to acquire a 30% interest in these vessels. In connection with the closing of its initial public offering, we transferred to Teekay LNG all of our delivered LNG carriers and agreed to sell to Teekay LNG all of our interest in the three RasGas II vessels upon delivery of the first vessel in 2006.
In July 2005, we were awarded a 70% interest in two LNG carriers and related 20-year, fixed-rate time charters to service the Tangguh LNG project in Indonesia. The customer will be The Tangguh Production Sharing Contractors, a consortium led by BP Berau, a subsidiary of BP plc. We have contracted to construct two double-hulled LNG carriers of 155,000 cubic meters each at a total delivered cost of approximately $450.0 million (including the joint venture partner’s 30% share of approximately $135.0 million). The charters will commence upon vessel deliveries, which are scheduled for late 2008 and early 2009. We will have operational responsibility for the vessels in this project. In accordance with an existing agreement, we are required to offer our ownership interest in these carriers and related charter contracts to Teekay LNG. The remaining 30% interest in the project is held by BLT LNG Tangguh Corporation, a subsidiary of PT Berlian Tanker Tbk.
In August 2005, we were awarded a 40% interest in four LNG carriers and related 25-year, fixed-rate time charters (with options to extend up to an additional 10 years) to service expansion of the LNG project in Qatar. The customer will be Ras Laffan Liquefied Natural Gas Co. Limited (3) (or RasGas 3 ), a joint venture company between Qatar Petroleum and a subsidiary of ExxonMobil Corporation. We have contracted to construct four double-hulled LNG carriers of 217,000 cubic meters each at a total delivered cost of approximately $1.1 billion (of which our 40% portion is approximately $0.4 billion). The charters will commence upon vessel deliveries, which are scheduled for the first half of 2008. The remaining 60% interest in the project will be held by Qatar Gas Transport Company Ltd. We will have operational responsibility for the vessels in this project. Under the charters, Qatar Gas Transport Company Ltd. may assume operational responsibility beginning 10 years following delivery of the vessels. In accordance with an existing agreement, we are required to offer our ownership interest in these vessels and related charter contracts to Teekay LNG.
On May 10, 2005, Teekay LNG sold, as part of an initial public offering, 6.9 million of its common units at $22.00 per unit for proceeds of $135.7 million, net of $16.1 million of commissions and other expenses associated with the offering.
In November 2005, Teekay LNG completed a follow-on public offering of 4.6 million common units at a price of $27.40 per unit. Proceeds from the follow-on offering were $120.3 million, net of an estimated $5.8 million of commissions and other expenses associated with the offering. As of December 31, 2005, we owned a 67.8% interest in Teekay LNG, including our 2% general partner interest. Please read Item 18 – Financial Statements: Note 3 – Public Offerings of Teekay LNG Partners L.P.
In November 2005, we sold to Teekay LNG three double-hulled Suezmax class crude oil tankers and related long-term, fixed-rate time charters for an aggregate price of $180.0 million. These vessels, the African Spirit , the Asian Spirit and the European Spirit , have an average age of two years and are chartered to a subsidiary of ConocoPhillips, an international, integrated energy company. Teekay LNG financed the acquisition with the net proceeds of the previously-mentioned follow-on public offering of its common units, together with borrowings under a revolving credit facility and cash balances.
On April 30, 2004, we acquired 100% of the issued and outstanding shares of Teekay Spain for $298.2 million in cash and the assumption of existing debt and then remaining newbuilding commitments. Please read Item 4 – Information on the Company: Business Acquisitions and Divestitures – Acquisition of Teekay Shipping Spain S.L., formerly Naviera F. Tapias S.A. and Item 18 – Financial Statements: Note 4 – Acquisition of Teekay Shipping Spain S.L.
In April 2003, we completed our acquisition of 100% of the issued and outstanding shares of Navion AS for approximately $774.2 million in cash, including transaction costs of approximately $7.0 million. Please read Item 4 – Information on the Company: Business Acquisitions and Divestitures – Acquisition of Navion AS and Item 18 – Financial Statements: Note 5 – Acquisition of Navion AS.
As described above under “Item 4. Information on the Company: Regulations,” in 2003 both the International Maritime Organization (or IMO ), the United Nations’ global maritime regulatory body, and the European Union Parliament adopted regulations that, among other things, accelerate the phasing-out of single-hull tankers. As a result of these regulations, which became effective April 5, 2005, we recorded a $56.9 million non-cash write-down in our spot tanker segment in 2003. We have subsequently sold all of our vessels affected by these regulations as part of our fleet renewal program. Management believes that these IMO and European Union regulations may result in further market discrimination against older single-hull vessels.
We are not aware of any other regulatory changes or environment liabilities that we anticipate will have a material impact on our current or future operations.
We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:
Voyage Revenues. Voyage revenues primarily include revenues from voyage charters, time charters and contracts of affreightment. Voyage revenues are affected by hire rates and the number of calendar-ship-days a vessel operates. Voyage revenues are also affected by the mix of business between time charters, voyage charters and contracts of affreightment. Hire rates for voyage charters are more volatile, as they are typically tied to prevailing market rates at the time of a voyage.
Forward Freight Agreements. We are exposed to freight rate risk for vessels in our spot tanker segment from changes in spot market rates for vessels. In certain cases, we use forward freight agreements (or FFAs ) to manage this risk. FFAs involve contracts to provide a fixed number of theoretical voyages at fixed-rates, thus hedging a portion of our exposure to the spot charter market. These agreements are recorded as assets or liabilities and measured at fair value. Changes in the fair value of the FFAs are recognized in other comprehensive income (loss) until the hedged item is recognized as voyage revenue in income. The ineffective portion of a change in fair value is immediately recognized into income through voyage revenues.
Voyage Expenses. Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the customer under time charters and by us under voyage charters and contracts of affreightment. When we pay voyage expenses, we typically add them to our hire rates at an approximate cost.
Net Voyage Revenues. Net voyage revenues represent voyage revenues less voyage expenses. Because the amount of voyage expenses we incur for a particular charter depends upon the form of the charter, we use net voyage revenues to improve the comparability between periods of reported revenues that are generated by the different forms of charters. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us about the deployment of our vessels and their performance than voyage revenues, the most directly comparable financial measure under accounting principles generally accepted in the United States (or GAAP ).
Vessel Operating Expenses. Under all types of charters for our vessels, except for bareboat charters, we are responsible for vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses.
Income from Vessel Operations. To assist us in evaluating our operations by segment, we analyze our income from vessel operations for each segment, which represents the income we receive from the segment after deducting operating expenses, but prior to the deduction of interest expense, income taxes, foreign currency and other income and losses.
Drydocking. We must periodically drydock each of our vessels for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. Generally, we drydock each of our vessels every two and a half to five years, depending upon the type of vessel and its age. In addition, a shipping society classification intermediate survey is performed on our LNG carriers between the second and third year of the five-year drydocking period. We capitalize a substantial portion of the costs incurred during drydocking and for the survey and amortize those costs on a straight-line basis from the completion of a drydocking or intermediate survey to the estimated completion of the next drydocking. We expense costs related to routine repairs and maintenance incurred during drydocking that do not improve or extend the useful lives of the assets. The number of drydockings undertaken in a given period and the nature of the work performed determine the level of drydocking expenditures.
Depreciation and Amortization. Our depreciation and amortization expense typically consists of:
| • | charges related to the depreciation of the historical cost of our fleet (less an estimated residual value) over the estimated useful lives of our vessels; |
| • | charges related to the amortization of drydocking expenditures over the estimated number of years to the next scheduled drydocking; and |
| • | charges related to the amortization of the fair value of the time charters, contracts of affreightment and intellectual property where amounts have been attributed to those items in acquisitions; these amounts are amortized over the period which the asset is expected to contribute to our future cash flows. |
Time Charter Equivalent (TCE) Rates. Bulk shipping industry freight rates are commonly measured in the shipping industry at the net voyage revenues level in terms of “time charter equivalent” (or TCE ) rates, which represent net voyage revenues divided by revenue days.
Revenue Days. Revenue days are the total number of calendar days our vessels were in our possession during a period, less the total number of off-hire days during the period associated with major repairs, drydockings or special or intermediate surveys. Consequently, revenue days represents the total number of days available for the vessel to earn revenue. Idle days, which are days when the vessel is available for the vessel to earn revenue, yet is not employed, are included in revenue days. We use revenue days to explain changes in our net voyage revenues between periods.
Calendar-ship-days. Calendar-ship-days are equal to the total number of calendar days that our vessels were in our possession during a period. As a result, we use calendar-ship-days primarily in explaining changes in vessel operating expenses, time charter hire expense and depreciation and amortization.
Restricted Cash Deposits. Under capital lease arrangements for two of our LNG carriers, we (a) borrowed under term loans and deposited the proceeds into restricted cash accounts and (b) entered into capital leases, or bareboat charters, for the vessels. The restricted cash deposits, together with interest earned thereon, will equal the remaining amounts we owe under the lease arrangements, including our obligation to purchase the vessels at the end of the lease terms. During vessel construction, we used the term loan borrowings to make restricted cash deposits equal to construction installment payments. We also maintain restricted cash deposits relating to certain term loans and other obligations. Please read Item 18 – Financial Statements: Note 11 – Capital Leases and Restricted Cash.
During 2005, crude tanker freight rates eased from the peaks of 2004 but remained significantly higher than historical averages. Freight rates for product tankers rose to near record levels, driven to a large extent by tightness in refinery upgrading capacity in key consuming regions and hurricane-related disruptions in the U.S. Gulf. In the aftermath of the hurricanes, U.S. Gulf crude production and refinery operations faced severe disruptions, which led to longer haul movements of crude oil and finished products, resulting in increased tonne-mile demand for tankers.
The pace of global economic growth eased from 2004 but remained robust in historical terms, driven predominantly by the United States, China and India. Growth in oil demand in 2005 compared to 2004 was dampened by high oil prices and the elimination of price subsidies in some Asian countries. The majority of growth in oil demand was met by longer-haul OPEC production, as non-OPEC output remained flat from the previous year. Overall, global oil supply rose 1.0 mb/d (or 1.2%) over 2004 to 84.1 mb/d. The increase in transportation distances helped to maintain high utilization of the world tanker fleet in spite of its growing at an above-average rate. Overall, the size of the world tanker fleet rose to 327.5 mdwt as of December 31, 2005, up 22.7 mdwt (or 7.4%) from the end of 2004. As a result, tanker freight markets remained sensitive to external disruptions which kept spot tanker rates at healthy levels.
The outlook for the tanker market during 2006 is positive based on market fundamentals and the effect of short-term events. The global economy remains strong and is expected to drive oil demand growth during the year.
As of March 2006 the International Energy Agency estimated oil demand growth of 1.5 mb/d (or 1.8%) for 2006 compared to 2005 demand, driven mainly by the United States and China. With oil prices remaining at high levels, OPEC members are not cutting back on their oil production quota limits, in spite of the seasonally weak second quarter due to ongoing geopolitical factors. OPEC is expected to increase its crude oil production capacity by approximately 0.9 mb/d during 2006 with the majority of the increase coming from Middle East producers. Non-OPEC production is also estimated to grow during 2006, led by the former Soviet Union, West Africa and Latin America.
Longer haul crude trades are likely to increase as a result of U.S. Gulf offshore crude production outages expected to persist through to the middle of the 2006 and anticipated increase in crude and fuel oil movements from the Atlantic Basin to Asia. In the product tanker sector, bottlenecks in the refining system, coupled with refinery outages and implementation of new fuel specifications in the United States, may also result in a further increase in the long haul trades.
During 2006, the growth in the tanker fleet will be dictated mainly by mandatory and voluntary scrapping levels, and the removal of vessels from the fleet for conversion and use in the offshore sector, where demand is rising. The tanker orderbook at the end of 2005 was down slightly from 2004, and it is expected that the pace of crude tanker deliveries will be slower in 2006, while product tanker deliveries in 2006 are expected to remain consistent with 2005 levels. Charterer discrimination against single-hull tonnage continues to grow, which marginalizes a portion of the world fleet.
Based on finely balanced market fundamentals, the tanker market is likely to remain above mid-cycle with short-term disruptions having the potential to stretch fleet utilization levels.
In accordance with GAAP, we report gross voyage revenues in our income statements and include voyage expenses among our operating expenses. However, shipowners base economic decisions regarding the deployment of their vessels upon anticipated TCE rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time charter contracts the customer usually pays the voyage expenses while under voyage charters and contracts of affreightment the shipowner usually pays the voyage expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net voyage revenues ( i.e. voyage revenues less voyage expenses) and TCE rates of our three reportable segments where applicable. Please read Item 18 – Financial Statements: Note 2 – Segment Reporting.
The following table compares our operating results by reportable segment for 2005, 2004 and 2003, and compares our net voyage revenues (which is a non-GAAP financial measure) by reportable segment for 2005, 2004, and 2003 to voyage revenues, the most directly comparable GAAP financial measure:
----------- ------------------------------------------- ------------------------------------------ --------------------- 2005 2004 2003 Fixed- Fixed- Fixed- Fixed- Fixed- Spot Rate Rate Spot Rate Rate Spot Rate Tanker Tanker LNG Tanker Tanker LNG Tanker Tanker Segment Segment Segment Total Segment Segment Segment Total Segment Segment Total ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ----------- -------- -------- ------- ---------- ---------- -------- ------- ---------- ---------- -------- ---------- Voyage revenues 1,122,845 734,128 97,645 1,954,618 1,450,791 725,061 43,386 2,219,238 1,081,974 494,121 1,576,095 Voyage expenses 347,043 72,078 48 419,169 355,116 77,058 221 432,395 342,928 51,728 394,656 ----------- -------- -------- ------- ---------- ---------- -------- ------- ---------- --------- -------- --------- Net voyage revenues 775,802 662,050 97,597 1,535,449 1,095,675 648,003 43,165 1,786,843 739,046 442,393 1,181,439 Vessel operating expenses 62,525 128,916 15,308 206,749 93,394 117,586 7,509 218,489 126,261 84,435 210,696 Time charter hire expense 273,730 194,260 - 467,990 263,122 194,058 - 457,180 168,344 136,279 304,623 Depreciation and amor- tization 55,105 120,064 30,360 205,529 95,570 129,074 12,854 237,498 106,374 84,863 191,237 General and administ- rative (1) 89,465 57,059 13,183 159,707 70,371 56,431 3,940 130,742 53,338 31,809 85,147 Writedown/ (gain) on sale of vessels and equipment (142,004) 2,820 - (139,184) (72,101) (7,153) - (79,254) 90,326 63 90,389 Restructuring charge 1,927 955 - 2,882 1,002 - - 1,002 4,382 2,001 6,383 -------- ------- -------- ---------- ---------- -------- ------- ---------- --------- -------- --------- Income from vessel operations 435,054 157,976 38,746 631,776 644,317 158,007 18,862 821,186 190,021 102,943 292,964 ----------- -------- ------- -------- ---------- ---------- -------- ------- ---------- --------- -------- ---------
| (1) | Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources). |
The following table outlines the TCE rates earned by the vessels in our spot tanker segment for 2005, 2004 and 2003:
------------------ -------------------------------- -------------------------------- --------------------------------
2005 2004 2003
TCE per TCE per TCE per
Net Voyage Revenue Net Voyage Revenue Net Voyage Revenue
Vessel Type Revenues Revenue Day Revenues Revenue Day Revenues Revenue Day
($000's) Days ($) ($000's) Days ($) ($000's) Days ($)
--------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
VLCC 8,347 90 92,744 67,129 876 76,631 36,891 807 45,714
Suezmax(1) 68,395 1,862 36,732 122,412 2,374 51,564 62,909 1,790 35,145
Aframax(1) 536,390 14,587 36,769 802,914 20,377 39,403 535,260 20,704 25,853
Oil/Bulk/Ore (2) - - - 3,269 150 21,793 39,849 2,389 16,680
Large Product(1) 103,802 3,480 29,828 50,221 1,962 25,597 17,331 560 30,948
Small Product 58,868 3,957 14,877 49,175 3,515 13,990 27,960 2,392 11,689
--------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Totals 775,802 23,976 32,357 1,095,120 29,254 37,435 720,200 28,642 25,145
=============== ========== ========== ========== ========== ========== ========== ========== ========== ==========
| (1) | Results for 2005 and 2004 for our Suezmax tankers include realized losses from FFAs of $3.0 million (or $1,630 per revenue day) and $11.3 million (or $4,757 per revenue day), respectively. Results for 2003 for our Suezmax tankers include realized gains from FFAs of $0.6 million (or $324 per revenue day). |
| Results for 2005, 2004 and 2003 for our Aframax tankers include realized losses from FFAs of $1.2 million (or $84 per revenue day), $10.5 million (or $513 per revenue day), and $0.3 million (or $15 per revenue day), respectively. |
| Results for 2005 for our large product tankers include realized gains from FFAs of $0.4 million (or $113 per revenue day). We did not enter into FFAs for the product tanker fleet prior to 2005. |
| (2) | The oil/bulk/ore fleet’s net voyage revenues exclude $0.5 million (2004) and $18.8 million (2003) of net voyage revenues earned by the minority pool participants in the tanker pool we operated prior to our disposition of all of our oil/bulk/ore carriers and the termination of the pool in 2004. |
We acquired Teekay Spain on April 30, 2004. Consequently, our 2004 financial results for our segments only reflect Teekay Spain’s results of operations commencing May 1, 2004.
Spot Tanker Segment
TCE rates for the vessels in our spot tanker segment primarily depend on oil production and consumption levels, the number of vessels in the worldwide tanker fleet scrapped, the number of newbuildings delivered and charterers’ preference for modern tankers. As a result of our dependence on the spot tanker market, any fluctuations in TCE rates will affect our revenues and earnings. Our average TCE rate for the vessels in our spot tanker segment decreased 13.6% to $32,357 for 2005, from $37,454 for 2004. During 2005, approximately 51% of our net voyage revenues were earned by the vessels in the spot tanker segment, compared to approximately 62% in 2004. This percentage decrease from 2004 was due primarily to our acquisition of Teekay Spain’s fixed-rate Suezmax tanker and LNG fleet, the sale of a number of older vessels from our spot tanker segment during 2005 and the decrease in spot tanker rates compared to 2004, partially offset by newbuilding deliveries and an increase in the number of chartered-in vessels in our spot tanker segment.
The following table provides a summary of the changes in calendar-ship-days by owned and chartered-in vessels for our spot tanker segment:
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2005 2004 Percentage Change
(Calendar Days) (Calendar Days) (%)
--------------------- --------------------------------- -------------------------------- ---------------------------
Owned Vessels 10,733 16,181 (33.7)
Chartered-in Vessels 13,552 13,460 0.7
--------------------- --------------------------------- -------------------------------- ----------------------------
Total 24,285 29,641 (18.1)
===================== ================================= ================================ ============================
The average fleet size of our spot tanker fleet decreased 18.1% from 29,641 calendar days in 2004 to 24,285 calendar days in 2005. This decrease was primarily the result of:
| • | the sale of 13 older Aframax tankers and one older Suezmax tanker in 2005; and |
| • | the sale of 10 older Aframax tankers and one VLCC in 2004; |
| partially offset by |
| • | the delivery of four new Aframax tankers in both 2005 and 2004. |
As at December 31, 2005, all our owned and chartered-in vessels in the spot tanker segment were double-hulled.
Net Voyage Revenues. Net voyage revenues for the spot tanker segment decreased 29.2% to $775.8 million for 2005, from $1,095.7 million for 2004. This decrease was primarily due to the decrease in our fleet size as well as the decrease in TCE rates compared to 2004. Voyage expenses decreased 2.3% to $347.0 million for 2005, from $355.1 million for 2004, primarily as a result of the decrease in fleet size, which was primarily offset by an increase in average bunker fuel prices. Port expenses also increased for 2005 compared to 2004 as a result of increased security concerns, particularly in the United States. On a per revenue day basis, voyage expenses increased to $14,475 in 2005 compared to $12,139 in 2004.
Vessel Operating Expenses. Vessel operating expenses decreased 33.1% to $62.5 million for 2005, from $93.4 million for 2004. The decrease in vessel operating expenses was primarily due to the sale of a number of older vessels in 2005 and 2004, partially offset by our newbuilding deliveries during these periods.
Time-Charter Hire Expense. Time-charter hire expense increased 4.0% to $273.7 million for 2005, from $263.1 million for 2004. This increase was due primarily to a 0.7% increase of chartered-in vessels. In addition, our average per ship per day time-charter hire expense increased 3.3% to $20,198 in 2005 compared to $19,548 in 2004.
Depreciation and Amortization. Depreciation and amortization expense decreased 42.3% to $55.1 million for 2005, from $95.6 million for 2004. The decrease was primarily attributable to the previously-mentioned vessel dispositions, partially offset by newbuilding deliveries. Depreciation and amortization expense included amortization of drydocking costs of $6.5 million for 2005, compared to $16.1 million for 2004. The decrease in drydock amortization was primarily due to the previously-mentioned sale of older vessels which required more frequent drydocks.
Gain on Sale of Vessels. Gain on sale of vessels for 2005 of $142.0 million included gains on the sale of the 14 older vessels and one newbuilding, as well as amortization of a deferred gain on the sale and leaseback of three Aframax tankers that occurred in December 2003. The gain on sale of vessels for 2004 of $72.1 million included gains on the sale of 11 older vessels, as well as the amortization of deferred gain from the 2003 sale-leaseback transactions.
Restructuring Charges. The spot tanker segment incurred restructuring charges of $1.9 million in 2005 relating to the relocation of certain operational functions from our Vancouver office to locations closer to where our customers are located and to where our ships operate, which we undertook in response to the global nature of our operations. During 2006, we expect to incur approximately $7.0 million of further restructuring charges as we complete this relocation. Restructuring charges of $1.0 million in 2004 relate to the closure of our Oslo, Norway office.
Fixed-Rate Tanker Segment
The following table provides a summary of the changes in calendar-ship-days by owned and chartered-in vessels for our fixed-rate tanker segment:
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2005 2004 Percentage Change
(Calendar Days) (Calendar Days) (%)
--------------------- --------------------------------- -------------------------------- ---------------------------
Owned Vessels 14,464 14,808 (2.3)
Chartered-in Vessels 6,157 5,905 4.3
--------------------- --------------------------------- -------------------------------- ----------------------------
Total 20,621 20,713 (0.4)
===================== ================================= ================================ ============================
The average fleet size of our fixed-rate tanker segment (including vessels chartered-in) decreased slightly in 2005 compared to 2004. This decrease was primarily the result of:
| • | the sale of two older shuttle tankers in 2005 and one older shuttle tanker in 2004; |
| partially offset by |
| • | the inclusion of two Aframax tankers, previously operating in our spot tanker segment, that became subject to fixed-rate long-term time-charters during the fourth quarter of 2004; |
| • | the inclusion of the five Suezmax tankers from our acquisition of Teekay Spain for a full year in 2005 compared to eight months in 2004; |
| • | the inclusion of a chartered-in VLCC that commenced service under a long-term charter in April 2005; and |
| • | the commencement of the Pattani Spirit FSO project in April 2004. |
Net Voyage Revenues. Net voyage revenues increased slightly by 2.2% to $662.1 million for 2005, from $648.0 million for 2004, primarily due to:
| • | an increase of $29.5 million relating to the addition of two Aframax tankers and one VLCC to our fixed-rate tanker segment; |
| • | an increase of $17.9 million relating to the Teekay Spain acquisition; and |
| • | an increase of $2.2 million relating to the commencement of the Pattani Spirit FSO project in April 2004; |
| partially offset by |
| • | a decrease of $35.8 million relating to the sale of three older shuttle tankers during 2004 and 2005. |
During 2005, approximately 43% of our net voyage revenues were earned by the vessels in the fixed-rate tanker segment, compared to approximately 36% in 2004, primarily due to the reduction in the contribution from our spot rate segment.
Vessel Operating Expenses. Vessel operating expenses increased 9.6% to $128.9 million for 2005, from $117.6 million for 2004. The increase in vessel operating expenses was primarily due to:
| • | an increase of $2.8 million relating to the addition of two Aframax tankers to our fixed-rate tanker segment; |
| • | an increase of $2.7 million due to increased repairs and maintenance relating to the older vessels in our shuttle tanker fleet; |
| • | an increase of $2.5 million relating to the Australian-crewed vessels (any increases in vessel operating expenses relating to our Australian-crewed vessels are passed back to our customers through higher time-charter rates); |
| • | an increase of $1.8 million relating to the Teekay Spain acquisition (under the terms of our time charter contracts for the Spanish-crewed Suezmax tankers, the TCE rates earned are also higher to compensate us for the higher crewing costs); and |
| • | an increase of $1.4 million relating to the commencement of the Pattani Spirit FSO project in April 2004; |
| partially offset by |
| • | decreases from the sale of three older shuttle tankers during 2004 and 2005. |
Time-Charter Hire Expense. Time-charter hire expense remained virtually unchanged at $194.3 million for 2005, compared to $194.1 million for 2004. The 4.3% increase in the number of chartered-in vessels was substantially offset by a decrease in per day time-charter rates on certain of our shuttle tankers.
Depreciation and Amortization. Depreciation and amortization expense decreased 7.0% to $120.1 million for 2005, from $129.1 million for 2004. The decrease was mainly due to:
| • | a decrease of $10.2 million relating to the sale of three older shuttle tankers during 2004 and 2005, and the sale and leaseback of one shuttle tanker in 2005; and |
| • | a decrease of $5.7 million relating to the expiration of certain contracts of affreightment and time-charter contracts that were acquired during 2003 and 2004; |
| partially offset by |
| • | an increase of $3.1 million relating to the Teekay Spain acquisition; |
| • | an increase of $1.4 million relating to the Pattani Spirit FSO project commenced in April 2004; and |
| • | an increase of $1.3 million relating to the addition of two Aframax tankers during 2004 to our fixed-rate tanker segment. |
Depreciation and amortization expense included amortization of drydocking costs of $8.4 million for 2005, compared to $7.3 million for 2004, and includes amortization of contracts of $15.3 million for 2005, compared to $21.0 million for 2004.
Vessel and Equipment Writedowns and Gain on Sale of Vessels. Vessel and equipment writedowns and gain on sale of vessels for 2005 was a net loss of $2.8 million, which was comprised of:
| • | a $12.2 million writedown of the carrying value of certain offshore equipment that was employed under a short-term contract servicing a marginal oil field that was prematurely shut down due to lower than expected oil production (we have re-deployed some of this equipment on another field commencing in October 2005); |
| partially offset by |
| • | a $9.1 million gain on the sale of two older shuttle tankers; and |
| • | a $0.3 million gain from amortization of a deferred gain, which relates to the sale and leaseback of an older shuttle tanker in the first quarter of 2005. |
Gain on sale of vessels for 2004 of $7.2 million represents gains on the sale of three older vessels.
Restructuring Charges. Restructuring charges of $1.0 million in 2005 relate to the closure of our Sandefjord, Norway office. We incurred no restructuring charges in 2004 in our fixed-rate tanker segment.
Fixed-Rate LNG Segment
The following table provides a summary of the changes in calendar-ship-days for our fixed-rate LNG tanker segment:
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2005 2004 Percentage Change
(Calendar Days) (Calendar Days) (%)
--------------------- --------------------------------- -------------------------------- ---------------------------
Owned Vessels 1,460 660 121.2
--------------------- --------------------------------- -------------------------------- ----------------------------
The results of our fixed-rate LNG segment reflect the operations of two LNG carriers acquired as part of our acquisition of Teekay Spain on April 30, 2004. We had two newbuilding LNG carriers delivered to us in July 2004 and December 2004 (collectively, the LNG Deliveries ). We had no LNG shipping operations prior to the Teekay Spain acquisition. On May 10, 2005, our subsidiary, Teekay LNG, issued 6,900,000 common units as part of its initial public offering, effectively reducing our ownership of Teekay LNG to 77.7%. In November 2005, Teekay LNG issued an additional 4,600,000 common units, further reducing our ownership of Teekay LNG to 67.8%. Please read “ — Public Offerings by Teekay LNG Partners L.P.” above. As of December 31, 2005, all of the vessels (excluding vessels under construction) in our fixed-rate LNG segment were owned by Teekay LNG. The results below reflect 100% of these vessels. The minority owners’ share of the results of these vessels is reflected as minority expense contained in other – net in our consolidated statements of income.
Net Voyage Revenues. Net voyage revenues for the fixed-rate LNG segment increased 126.1% to $97.6 million, or $66,847 per calendar-ship-day, for 2005 from $43.2 million, or $65,402 per calendar-ship-day, for 2004 primarily due to:
| • | an increase of $38.6 million from the LNG Deliveries; and |
| • | an increase of $16.6 million from the two existing LNG carriers included in the Teekay Spain acquisition as of April 2004; |
| partially offset by |
| • | a decrease of $0.8 million from 15.2 days of off-hire for one of our LNG carriers during February 2005. |
Vessel Operating Expenses. Vessel operating expenses increased 103.9% to $15.3 million, or $10,485 per calendar-ship-day, for 2005 from $7.5 million for 2004, or $11,377 per calendar-ship-day, primarily due to:
| • | an increase of $4.7 million from the LNG Deliveries; and |
| • | an increase of $2.9 million from the two existing LNG carriers included in the Teekay Spain acquisition. |
Depreciation and Amortization. Depreciation and amortization increased 136.2% to $30.4 million in 2005 from $12.9 million in 2004 primarily due to:
| • | an increase of $12.7 million from the LNG Deliveries; and |
| • | an increase of $4.8 million from the other two LNG carriers. |
Depreciation and amortization expense in the fixed-rate LNG segment included $8.9 million in 2005 and $3.6 million in 2004 of amortization of time-charter contracts acquired as part of the Teekay Spain acquisition.
Other Operating Results
General and Administrative Expenses. General and administrative expenses increased 22.2% to $159.7 million for 2005, from $130.7 million for 2004, primarily due to:
| • | an increase of $21.5 million relating to the adoption of a long-term incentive program for management during 2005 (please read Item 18 – Financial Statements: Note 17(c) – Commitments and Contingencies – Long-Term Incentive Program); |
| • | an increase of $11.6 million from the grant of 0.6 million restricted stock units to employees in March 2005 (please read Item 18 - Financial Statements: Note 13 - Capital Stock; |
| • | an increase of $7.0 million from the weakening of the U.S. Dollar for corresponding 2004 levels relative to other currencies in which we pay certain general and administrative expenses; and |
| • | an increase of $2.2 million relating to our acquisition of Teekay Spain in April 2004; |
| partially offset by |
| • | special bonuses of $12.5 million accrued during 2004 in addition to regular bonuses under the annual bonus plan. |
Interest Expense. Interest expense increased 9.0% to $132.4 million for 2005, from $121.5 million for 2004. This increase primarily reflects interest on the additional debt we incurred in connection of our acquisition of Teekay Spain.
Interest Income. Interest income increased 83.2% to $33.9 million for 2005, compared to $18.5 million for 2004. This increase was primarily due to our acquisition of Teekay Spain during April 2004. A majority of our interest income is the result of interest earned on restricted cash balances Teekay Spain is required to have on deposit relating to capital lease arrangements. Please read “ — Important Financial and Operational Terms and Concepts — Restricted Cash Deposits” above.
Equity Income From Joint Ventures. Equity income from joint ventures decreased 18.9% to $11.1 million for 2005, from $13.7 million for 2004, primarily due to a decline in earnings from our 50% share in Skaugen PetroTrans, which provides lightering services primarily in the Gulf of Mexico and was adversely affected by hurricanes Katrina and Rita.
Gain on Sale of Marketable Securities. We sold no marketable securities in 2005. During 2004 we sold all of our marketable securities for proceeds of $135.4 million, which resulted in a gain on sale of marketable securities of $93.2 million.
Foreign Exchange Gains (Losses). Foreign exchange gains were $59.8 million in 2005 compared to foreign exchange losses of $42.7 million in 2004, primarily due to the strengthening of the U.S. Dollar in 2005 and weakening of the U.S. Dollar in 2004, relative to other currencies, particularly the Euro. Most of our foreign currency gains or losses are attributable to the revaluation of our Euro-denominated term loans at the end of each period for financial reporting purposes, and substantially all of the gains or losses are unrealized. As of the date of this report, our Euro-denominated revenues generally approximate our Euro-denominated operating expenses and our Euro-denominated interest and principal repayments.
Other Income (Loss). Other loss of $33.3 million for 2005 was primarily comprised of minority interest expense of $16.6 million, a $13.3 million loss on bond redemption, a $7.8 million loss from settlement of interest rate swaps and $7.5 million writeoff of capitalized loan costs, partially offset by $2.3 million income tax recovery and leasing income from our volatile organic compound emissions equipment. The loss from settlement of interest rate swaps and the writeoff of capitalized loan costs are non-recurring items related to debt prepayments made prior to the initial public offering of Teekay LNG. The minority interest expense primarily reflects the minority owners share of the foreign exchange gains incurred by Teekay LNG. Other loss of $25.0 million for 2004 was primarily comprised of income taxes of $35.0 million, minority interest expense of $2.3 million and a $0.8 million loss on bond redemption, partially offset by dividend income and income from our volatile organic compound emissions equipment.
Net Income. As a result of the foregoing factors, net income decreased to $570.9 million for 2005, from $757.4 million for 2004.
We acquired Teekay Spain on April 30, 2004. Consequently, our 2004 financial results for our segments only reflect Teekay Spain’s results of operations commencing May 1, 2004. We completed our acquisition of Navion on April 1, 2003. Consequently, our 2003 financial results for our segments only reflect Navion’s results of operations from that date.
Spot Tanker Segment
As a result of strong tanker freight rates during 2004, our average TCE rate for the vessels in our spot tanker segment increased 48.9% to $37,435 for 2004, from $25,145 for 2003. During 2004, approximately 62% of our net voyage revenues were earned by the vessels in the spot tanker segment, compared to approximately 63% in 2003. The percentage decrease from 2003 was due primarily to our acquisition of Teekay Spain and its fixed-rate Suezmax tanker and LNG fleet and the sale of 11 older spot vessels as part of our fleet renewal program, partially offset by the increase in spot tanker rates compared to 2003 and an increase in the chartered-in vessels in our spot tanker segment.
The following table provides a summary of the changes in calendar-ship-days by owned and chartered-in vessels for our spot tanker segment:
---------------------------------------------------------------------------------------------------------------------
2004 2003 Percentage Change
(Calendar Days) (Calendar Days) (%)
--------------------- --------------------------------- -------------------------------- ---------------------------
Owned Vessels 16,181 21,206 (23.7)
Chartered-in Vessels 13,460 8,370 60.8
--------------------- --------------------------------- -------------------------------- ----------------------------
Total 29,641 29,576 0.2
===================== ================================= ================================ ============================
The average fleet size of our spot tanker fleet (including vessels chartered-in) increased slightly in 2004, primarily due the delivery of four Aframax newbuildings and an increase in the number of vessels chartered-in due to the inclusion of Navion for a fully year in 2004, compared to nine months in 2003, as well as the sale and leaseback of three Aframax tankers in December 2003. These increases were substantially offset by the sale of 11 older tankers in the spot tanker segment during 2004.
Net Voyage Revenues. Net voyage revenues for the spot tanker segment increased 48.3% to $1,095.7 million for 2004, from $739.0 million for 2003. This increase was primarily due to the increases in average TCE rates from 2003.
Vessel Operating Expenses. Vessel operating expenses decreased 26.0% to $93.4 million for 2004, from $126.3 million for 2004. The decrease in vessel operating expenses was primarily due to the sale of 11 older vessels during 2004.
Time-Charter Hire Expense. Time-charter hire expense increased 56.3% to $263.1 million for 2004, from $168.3 million for 2003. This increase was due primarily to the previously-mentioned increase of chartered-in vessels.
Depreciation and Amortization. Depreciation and amortization expense decreased 10.2% to $95.6 million for 2004, from $106.4 million for 2003. The decrease was primarily attributable to the previously-mentioned vessel dispositions, partially offset by the deliveries of the four newbuilding Aframax tankers during 2004 and the increased amortization of older vessels due to the accelerated depreciation of vessels affected by IMO regulations. Depreciation and amortization expense included amortization of drydocking costs of $16.1 million for 2004, compared to $22.3 million for 2003. The decrease in drydock amortization was primarily due to the previously-mentioned sale of older vessels, which required more frequent drydocks.
Gain (Loss) on Sale of Vessels. Gain on sale of vessels for 2004 of $72.1 million included gains on the sale of the 11 older vessels, as well as amortization of a deferred gain on the sale and leaseback of the three Aframax tankers in December 2003. The write-downs and loss on sale of vessels for 2003 of $90.3 million was primarily comprised of the write-down of vessel values as a result of the previously-mentioned IMO regulations and vessels sold in 2003.
Restructuring Charges. We incurred restructuring charges of $1.0 million in 2004 relating to the closure of our Oslo, Norway office. Restructuring charges of $4.4 million in 2003 relate to the closure of our Oslo, Norway and Melbourne, Australia offices, and severance costs related to the termination of seafaring staff.
Fixed-Rate Tanker Segment
The following table provides a summary of the changes in calendar-ship-days by owned and chartered-in vessels for our fixed-rate tanker segment:
---------------------------------------------------------------------------------------------------------------------
2004 2003 Percentage Change
(Calendar Days) (Calendar Days) (%)
--------------------- --------------------------------- -------------------------------- ---------------------------
Owned Vessels 14,808 10,196 45.2
Chartered-in Vessels 5,905 4,370 35.1
--------------------- --------------------------------- -------------------------------- ----------------------------
Total 20,713 14,566 42.2
===================== ================================= ================================ ============================
The average fleet size of our fixed-rate tanker segment (including vessels chartered-in) increased significantly in 2004 compared to 2003 primarily due to our acquisition of Teekay Spain, which included four Suezmax tankers in this segment, and the delivery of four newbuildings in 2004. In addition, the results of Navion, including its fixed-rate shuttle tanker fleet, were only included for nine months in 2003, compared to a full year in 2004.
Net Voyage Revenues. Net voyage revenues increased 46.5% to $648.0 million for 2004, from $442.4 million for 2003 primarily due to the increase in fleet size. The shuttle tankers acquired as part of our acquisition of Navion generated, on average, more revenue per ship than the remaining vessels in our fixed-rate tanker segment. During 2004, approximately 36% of our net voyage revenues were earned by the vessels in the fixed-rate tanker segment, compared to approximately 37% in 2003.
Vessel Operating Expenses. Vessel operating expenses increased 39.3% to $117.6 million for 2004, from $84.4 million for 2003. The increase in vessel operating expenses was primarily due to the increase in fleet size and the appreciation of other major currencies in which we incur expenses against the U.S. Dollar. The shuttle tankers acquired as part of our acquisition of Navion incurred, on average, higher operating costs per ship than the remaining vessels in our fixed-rate tanker segment.
Time-Charter Hire Expense. Time-charter hire expense increased 42.4% to $194.1 million for 2004, from $136.3 million for 2003. The increase is due primarily to Navion’s chartered-in shuttle tankers being included for the full year in 2004, but only for nine months in 2003.
Depreciation and Amortization. Depreciation and amortization expense increased 52.1% to $129.1 million for 2004, from $84.9 million for 2003. The increase was mainly due to increased vessel cost amortization during 2004 as a result of the increase in fleet size of owned vessels in this segment, the amortization of the estimated fair market value of the time-charter contracts we acquired as part of the Teekay Spain acquisition and a full year of amortization during 2004 of the contracts of affreightment we acquired as part of the 2003 Navion acquisition. Depreciation and amortization expense included amortization of drydocking costs of $7.3 million for 2004, compared to $4.2 million for 2003.
Gain on Sale of Vessels. Gain on sale of vessels for 2004 of $7.2 million represents gains on the sale of three older vessels. Loss on sale of vessels for 2003 of $0.1 million relates to the sale of a shuttle tanker in our fixed-rate tanker segment.
Restructuring Charges. We incurred no restructuring charges in 2004 in our fixed-rate tanker segment. Restructuring charges of $2.0 million in 2003 relate to the closure of our Oslo, Norway and Melbourne, Australia offices, and severance costs related to the termination of seafaring staff.
Fixed-Rate LNG Segment
The results of our fixed-rate LNG segment reflect the operations of our four LNG carriers (including one newbuilding that delivered in July 2004, and one newbuilding that delivered in December 2004) acquired as part of our acquisition of Teekay Spain on April 30, 2004. The total number of calendar ship days of our LNG carriers during 2004 was 660. We had no LNG shipping operations prior to the Teekay Spain acquisition.
Net Voyage Revenues. Net voyage revenues totaled $43.2 million for 2004, or $65,402 per calendar-ship-day. During 2004 approximately 2% of our net voyage revenues were earned by the vessels in the fixed-rate LNG segment.
Vessel Operating Expenses. Vessel operating expenses totaled $7.5 million for 2004, or $11,377 per calendar-ship-day.
Depreciation and Amortization. Depreciation and amortization was $12.9 million in 2004, which includes $3.6 million of amortization of time-charter contracts acquired as part of the Teekay Spain acquisition.
Other Operating Results
General and Administrative Expenses. General and administrative expenses increased 53.5% to $130.7 million for 2004, from $85.1 million for 2003, primarily as a result of the Teekay Spain acquisition, the inclusion of Navion for 12 months in 2004 compared to only nine months in 2003, an increase in the accrual for performance-based bonuses in 2004, including $12.5 million authorized accrued in addition to the bonuses under our annual bonus plan, and the appreciation of several major currencies against the U.S. Dollar.
Interest Expense. Interest expense increased 50.0% to $121.5 million for 2004, from $81.0 million for 2003. This increase primarily reflects interest on the additional debt we incurred in connection of our acquisitions of Navion and Teekay Spain.
Interest Income. Interest income increased 372.5% to $18.5 million for 2004, compared to $3.9 million for 2003. This increase was primarily due to interest earned on higher average cash and restricted cash balances. Please read “Important Financial and Operational Terms and Concepts — Restricted Cash Deposits” above.
Equity Income From Joint Ventures. Equity income from 50%-owned joint ventures increased 97.0% to $13.7 million for 2004, from $7.0 million for 2003, primarily as a result of our acquisition of a 50% interest in Skaugen PetriTrans during September 2003.
Gain on Sale of Marketable Securities. We sold our investment in A/S Dampkibsselskabet Torm for a gain of $93.2 million in 2004. In 2003 we recorded a gain on sale of marketable securities of $0.5 million.
Foreign Exchange Gains (Losses). Foreign exchange losses were $42.7 million in 2004 compared to $3.9 million in 2003, primarily due to the weakening of the U.S. Dollar relative to other currencies, particularly the Euro. Most of our foreign currency gains or losses are attributable to the revaluation of our Euro-denominated term loans at the end of each period for financial reporting purposes, and substantially all of the gains or losses are unrealized. We did not have any Euro-denominated term loans prior to our acquisition of Teekay Spain in 2004.
Other Income (Loss). Other loss of $25.0 million for 2004 was primarily comprised of income taxes of $35.0 million, minority interest expense of $2.3 million and a $0.8 million loss on bond redemption partially offset by dividend income and income from our volatile organic compound emissions equipment. Other loss of $42.2 million for 2003 was primarily comprised of income taxes of $36.5 million, a $5.4 million loss on redemption of $57.9 million of our 8.32% First Preferred Ship Mortgage Notes, a write-down of marketable securities, goodwill and other assets, and minority interest expense, partially offset by dividend income from Nordic American Tanker Shipping Ltd. and leasing income from our volatile organic compound emissions equipment.
Net Income. As a result of the foregoing factors, net income increased to $757.4 million for 2004, from $177.4 million for 2003.
Liquidity and Cash Needs
As at December 31, 2005, our total cash and cash equivalents was $237.0 million, compared to $427.0 million at December 31, 2004. Our total liquidity, including cash and undrawn long-term borrowings, was $966.8 million as at December 31, 2005, down from $1,258.2 million as at December 31, 2004. The decrease in liquidity was mainly the result of long-term debt repayments, scheduled reductions of our revolving credit facilities and cash used for capital expenditures, share repurchases and payment of dividends, partially offset by cash generated by our operating activities, proceeds from the sale of vessels during 2005, and net proceeds from the public offerings of common units by our subsidiary Teekay LNG. In addition, we were amending two of our revolving credit facilities at December 31, 2005, which were completed in January 2006 and provide an additional $213.0 million of liquidity. We believe that our working capital is sufficient for our present requirements.
Cash Flows
The following table summarizes our cash and cash equivalents provided by (used for) operating, financing and investing activities for the years presented:
------------------------------------------------------------------------ -----------------------------------------------
2005 2004
($000's) ($000's)
------------------------------------------------------------------------ ------------------------ ----------------------
Net operating cash flows................................................ 609,042 814,704
Net financing cash flows................................................ (632,402) (370,403)
Net investing cash flows................................................ (166,693) (309,548)
------------------------------------------------------------------------ ------------------------ ----------------------
Operating Cash Flows
The decrease in net operating cash flow mainly reflects the decrease in aggregate calendar-ship-days for our fleet to 46,366 in 2005, compared to 51,014 in 2004, and the reduction in average spot TCE rates.
Financing Cash Flows
Scheduled debt repayments were $61.2 million during 2005, compared to $150.3 million during 2004. Debt prepayments were $2.6 billion during 2005, compared to $1.7 billion during 2004. We used cash generated from operations, proceeds from vessel sales, net proceeds from the public offerings of common units by our subsidiary Teekay LNG and longer-term financings to make these prepayments. Of our debt prepayments in 2005, $1.9 billion was used to prepay revolving credit facilities and $640.0 million was used to prepay a number of term loans. In addition, we used $99.0 million to repay a portion of the 8.875% Senior Notes due July 11, 2011 and $5.9 million to repay the 8.32% First Preferred Ship Mortgage Notes by way of a deposit held at The Bank of New York, the trustee. Occasionally we use our revolving credit facilities to temporarily finance capital expenditures until longer-term financing is obtained, at which time we typically use all or a portion of the proceeds from the longer-term financings to prepay outstanding amounts under the facilities. Please read Item 18 – Financial Statements: Note 8 – Long-Term Debt. In addition, in April 2005 we paid $143.3 million to settle interest rate swaps associated with $727.4 million of debt. Please read Item 18 – Financial Statements: Note 16 – Derivative Instruments and Hedging Activities and Item 18 – Financial Statements: Note 3 – Public Offerings of Teekay LNG Partners L.P.
As at December 31, 2005, our total long-term debt was $1.8 billion, compared to $2.1 billion as at December 31, 2004. As at December 31, 2005, our revolving credit facilities provided for borrowings of up to $1.5 billion, of which $729.8 million was undrawn. The amount available under these credit facilities reduces by $133.2 million (2006), $134.4 million (2007), $349.6 million (2008), $176.0 million (2009), $77.4 million (2010) and $628.2 million (thereafter). All of our revolving credit facilities are collateralized by first-priority mortgages granted on 44 of our vessels, together with other related collateral, and are guaranteed by Teekay or our subsidiaries. Our unsecured 8.875% Senior Notes are due July 15, 2011. Our outstanding term loans reduce in monthly or quarterly payments with varying maturities through 2023. In February 2006, our 7.25% Premium Equity Participating Security Units due May 18, 2006 settled and are no longer outstanding. Please read Item 18 – Financial Statements: Note 8 – Long-Term Debt and Note 21(b) – Subsequent Events.
Among other matters, our long-term debt agreements generally provide for the maintenance of certain vessel market value-to-loan ratios and minimum consolidated financial covenants and prepayment privileges (in some cases with penalties). Certain of the loan agreements require that we maintain a minimum level of free cash. As at December 31, 2005, this amount was $100.0 million. Certain of the loan agreements also require that we maintain a minimum level of free liquidity and undrawn revolving credit lines with at least six months to maturity. As at December 31, 2005, this amount was $110.5 million.
We conduct our funding and treasury activities within corporate policies designed to minimize borrowing costs and maximize investment returns while maintaining the safety of the funds and appropriate levels of liquidity for our purposes. We hold cash and cash equivalents primarily in U.S. Dollars, with some balances held in Japanese Yen, Singapore Dollars, Canadian Dollars, Australian Dollars, British Pounds, Euros and Norwegian Kroner.
We are exposed to market risk from foreign currency fluctuations and changes in interest rates, spot market rates for vessels and bunker fuel prices. We use forward foreign currency contracts, interest rate swaps, forward freight agreements and bunker fuel swap contracts to manage currency, interest rate, spot tanker rates and bunker fuel price risks, but we do not use these financial instruments for trading or speculative purposes. Please read Item 11 – Quantitative and Qualitative Disclosures About Market Risk.
Dividends declared during 2005 were $49.2 million, or $0.62 per share.
During the first quarter of 2005, we repurchased 1.6 million shares of our common stock for $67.6 million, or $42.27 per share, which completed a 3.0 million share repurchase program announced in November 2004 at a total cost of $128.9 million, or $42.95 per share. During the remainder of 2005, pursuant to share repurchase programs announced in April, July and December 2005 for up to $225.0 million, $250.0 million and $180.0 million, respectively, we repurchased 11.1 million shares for $470.8 million, or $42.47 per share.
Investing Cash Flows
During 2005, we:
| • | incurred capital expenditures for vessels and equipment of $555.1 million primarily for installment payments on our Aframax tankers and LNG carriers under construction; |
| • | completed the sale of 13 Aframax tankers built between 1988 and 1991, three Suezmax tankers built in 1990 and 2005 (one of which was leased back upon delivery under a capital lease arrangement), and three shuttle tankers built between 1981 and 1991 (one of which was leased back upon delivery under an operating lease arrangement); these vessels were sold for total proceeds of $534.0 million; and |
| • | contributed $82.4 million toward construction of four LNG carriers in which we hold a 40% interest. Please read Item 18 - Financial Statements: Note 17(b) - Commitments and Contingencies - Joint Ventures. |
The following table summarizes our long-term contractual obligations as at December 31, 2005:
-------------------------------------------------- ------------- ------------ ------------ ------------ -------------
(in millions of U.S. dollars) Less than 1 1 - 3 3 - 5 More than
Total year years years 5 years
-------------------------------------------------- ------------- ------------ ------------ ------------ -------------
U.S. Dollar-Denominated Obligations:
Long-term debt (1)........................... 1,467.9 150.9 379.3 155.4 782.3
Chartered-in vessels (operating leases) ..... 1,172.3 351.6 345.9 197.6 277.2
Commitments under capital leases (2) ........ 333.1 29.6 161.9 104.8 36.8
Newbuilding installments (3)................. 845.1 270.3 538.8 36.0 -
Commitment for volatile organic compound
emissions equipment..................... 22.0 22.0 - - -
------------ ------------ ------------ ------------ ------------
Total U.S. Dollar-denominated obligations 3,840.4 824.4 1,425.9 493.8 1,096.3
------------ ------------ ------------ ------------ ------------
Euro-Denominated Obligations: (4)
Long-term debt (1)........................... 377.4 8.1 18.0 20.8 330.5
Commitments under capital leases(2) (5)...... 341.5 146.0 56.4 62.3 76.8
------------ ------------ ------------ ------------ ------------
Total Euro-denominated obligations 718.9 154.1 74.4 83.1 407.3
------------ ------------ ------------ ------------ ------------
Total 4,559.3 978.5 1,500.3 576.9 1,503.6
============ ============ ============ ============ ============
______________________
| (1) | Excludes interest payments. |
| (2) | We are committed to capital leases on one Aframax tanker, five Suezmax tankers and two LNG carriers. Each capital lease requires us to purchase the vessel at the end of its respective lease term. The amounts in the table include our purchase obligations for the vessels. Please read Item 18 – Financial Statements: Note 11 – Capital Leases and Restricted Cash. |
| (3) | Represents remaining construction costs, excluding capitalized interest and miscellaneous construction costs, for three Aframax tankers, two Suezmax tankers, three product tankers and five LNG carriers. Pursuant to existing agreements, we are required to offer our ownership interest in the LNG carriers to Teekay LNG. Please read Item 18 – Financial Statements: Note 17(a) – Commitments and Contingencies – Vessels Under Construction and Note 21(d) - Subsequent Events. |
| (4) | Euro-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing exchange rate as of December 31, 2005. |
| (5) | Existing restricted cash deposits, together with the interest earned on the deposits, will equal the remaining amounts we owe under the lease arrangements, including our obligation to purchase the vessels at the end of the lease terms. |
We have entered into a joint venture agreement with our 60% partner to construct four LNG carriers. As at December 31, 2005, the remaining commitments, excluding capitalized interest and other miscellaneous construction costs, on these vessels totaled $801.3 million, of which our share is $320.5 million. Pursuant to existing agreements, we are required to offer our ownership interest and related charter contracts to Teekay LNG. Please read Item 18 – Financial Statements: Note 17(b) – Commitments and Contingencies – Joint Ventures.
As part of our growth strategy, we will continue to consider strategic opportunities, including the acquisition of additional vessels and expansion into new markets. We may choose to pursue such opportunities through internal growth, joint ventures or business acquisitions. We intend to finance any future acquisitions through various sources of capital, including internally-generated cash flow, existing credit facilities, additional debt borrowings and the issuance of additional shares of capital stock.
We and certain of our subsidiaries have guaranteed our share of the outstanding mortgage debt in five 50%-owned joint venture companies. Please read Item 18 – Financial Statements: Note 17(b) – Commitments and Contingencies – Joint Ventures. We do not believe these off-balance sheet arrangements have, and we have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
We prepare our consolidated financial statements in accordance with GAAP, which require us to make estimates in the application of our accounting policies based on our best assumptions, judgments, and opinions. Following is a discussion of the accounting policies that involve a high degree of judgment and the methods of their application. For a further description of our material accounting policies, please read Item 18 – Financial Statements: Note 1 – Summary of Significant Accounting Policies.
Revenue Recognition
We generate a majority of our revenues from spot voyages and voyages servicing contracts of affreightment. Within the shipping industry, the two methods used to account for voyage revenues and expenses are the percentage of completion and the completed voyage methods. Most shipping companies, including us, use the percentage of completion method. For each method, voyages may be calculated on either a load-to-load or discharge-to-discharge basis. In other words, revenues are recognized ratably either from the beginning of when product is loaded for one voyage to when it is loaded for another voyage, or from when product is discharged (unloaded) at the end of one voyage to when it is discharged after the next voyage.
In applying the percentage of completion method, we believe that in most cases the discharge-to-discharge basis of calculating voyages more accurately reflects voyage results than the load-to-load basis. At the time of cargo discharge, we generally have information about the next load port and expected discharge port, whereas at the time of loading we are normally less certain what the next load port will be. We use this method of revenue recognition for all spot voyages and voyages servicing contracts of affreightment, with an exception for our shuttle tankers servicing contracts of affreightment with offshore oil fields. In this case a voyage commences with tendering of notice of readiness at a field, within the agreed lifting range, and ends with tendering of notice of readiness at a field for the next lifting. However, we do not begin recognizing voyage revenue until a charter has been agreed to by the customer and us, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage.
We recognize revenues from time charters daily over the term of the charter as the applicable vessel operates under the charter. We do not recognize revenues during days that the vessel is off-hire.
Vessel Lives and Impairment
The carrying value of each of our vessels represents its original cost at the time of delivery or purchase less depreciation or impairment charges. We depreciate our vessels on a straight-line basis over a vessel’s estimated useful life, less an estimated residual value. Depreciation is calculated using an estimated useful life of 25 years for Aframax, Suezmax, VLCC and product tankers, and 35 years for LNG carriers, from the date the vessel was originally delivered from the shipyard, or a shorter period if regulations prevent us from operating the vessels to 25 years or 35 years, respectively. In the shipping industry, the use of a 25-year vessel life for Aframax, Suezmax, VLCC and product tankers has become the prevailing standard. In addition, the use of a 30 to 40 year vessel life for LNG carriers is typical. However, the actual life of a vessel may be different, with a shorter life potentially resulting in an impairment loss.
The carrying values of our vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Both charter rates and newbuilding costs tend to be cyclical in nature. We review vessels and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure the recoverability of an asset by comparing its carrying amount to future undiscounted cash flows that the asset is expected to generate over its remaining useful life. If we consider a vessel or equipment to be impaired, we recognize impairment in an amount equal to the excess of the carrying value of the asset over its fair market value.
Drydocking
Generally, we drydock each vessel every two and a half to five years. In addition, a shipping society classification intermediate survey is performed on our LNG carriers between the second and third year of the five-year drydocking period. We capitalize a substantial portion of the costs we incur during drydocking and for the survey and amortize those costs on a straight-line basis from the completion of a drydocking or intermediate survey to the estimated completion of the next drydocking. We expense costs related to routine repairs and maintenance incurred during drydocking that do not improve or extend the useful lives of the assets. When significant drydocking expenditures occur prior to the expiration of the original amortization period, the remaining unamortized balance of the original drydocking cost and any unamortized intermediate survey costs are expensed in the month of the subsequent drydocking.
Goodwill and Intangible Assets
We allocate the cost of acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Certain intangible assets, such as time charter contracts, contracts of affreightment and intellectual property are amortized over time. Our future operating performance will be affected by the future amortization of intangible assets and potential impairment charges related to goodwill. Accordingly, the allocation of the purchase price to intangible assets and goodwill has a significant impact on our future operating results. The allocation of the purchase price of the acquired companies to intangible assets and goodwill requires management to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate to value these cash flows.
Goodwill and indefinite lived intangible assets are not amortized, but reviewed for impairment annually, or more frequently if impairment indicators arise. The process of evaluating the potential impairment of goodwill and intangible assets is highly subjective and requires significant judgment at many points during the analysis. The fair value of our reporting units was estimated based on discounted expected future cash flows using a weighted average cost of capital rate. The estimates and assumptions regarding expected cash flows and the discount rate require considerable judgment and are based upon existing contracts, historical experience, financial forecasts, and industry trends and conditions.
On December 16, 2004, the Financial Accounting Standards Board (or FASB ) issued FASB Statement No. 123(R) (or SFAS 123(R) ), Share-Based Payment , which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation . SFAS 123(R) supersedes APB 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an acceptable alternative.
SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods:
| 1. | A “modified prospective” method in which compensation cost is recognized beginning with the effective date based on (a) the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. |
| 2. | A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption. |
SFAS 123(R) must be adopted at the beginning of the first fiscal year commencing after June 15, 2005, and we adopted SFAS 123(R) using the modified-prospective method on January 1, 2006. The adoption of SFAS 123(R)‘s fair value method will have a significant impact on our result of operations, although it will not affect our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123. Please read Item 18 – Financial Statements: Note 1 – Summary of Significant Accounting Policies.
Our directors and executive officers as of the date of this annual report and their ages as of December 31, 2005 are listed below:
Name Age Position
C. Sean Day 56 Director and Chair of the Board
Bjorn Moller 48 Director, President and Chief Executive Officer
Axel Karlshoej 65 Director and Chair Emeritus
Bruce C. Bell 58 Director
Dr. Ian D. Blackburne 59 Director
Peter S. Janson 58 Director
Thomas Kuo-Yuen Hsu 59 Director
Eileen A. Mercier 58 Director
Tore I. Sandvold 58 Director
Peter Antturi 47 President, Teekay Navion Shuttle Tankers, a division of
Teekay Shipping Corporation
Arthur Bensler 48 SVP, Secretary and General Counsel
Peter Evensen 47 EVP and Chief Financial Officer
David Glendinning 51 President, Teekay Gas and Offshore, a division of Teekay Shipping Corporation
Bruce Chan 33 SVP, Corporate Resources
Vincent Lok 37 SVP and Treasurer
Graham Westgarth 51 President, Teekay Marine Services, a division of Teekay Shipping Corporation
Paul Wogan 43 President, Teekay Tanker Services, a division of Teekay Shipping Corporation
Certain biographical information about each of these individuals is set forth below:
C. Sean Day has served as a Teekay director since 1998 and as our Chair of the Board since September 1999. Mr. Day has also served as Chair of Teekay GP L.L.C., a wholly owned subsidiary of Teekay and the general partner of Teekay LNG Partners L.P., a publicly traded entity controlled by Teekay, since Teekay GP L.L.C. was formed in November 2004. From 1989 to 1999, he was President and Chief Executive Officer of Navios Corporation, a large bulk shipping company based in Stamford, Connecticut. Prior to this, Mr. Day held a number of senior management positions in the shipping and finance industry. He is currently serving as a director of Kirby Corporation. Mr. Day also serves as the Chair of the Board of Resolute Investments, Inc., our largest shareholder. Please read Item 7 – Major Shareholders and Related Party Transactions.
Bjorn Moller became a Teekay director and our President and Chief Executive Officer in April 1998. Mr. Moller has also served as Vice Chair and a Director of Teekay GP L.L.C. since it was formed in November 2004. Mr. Moller has over 20 years’ experience in shipping and has served in senior management positions with Teekay for more than 15 years. He has headed our overall operations since January 1997, following his promotion to the position of Chief Operating Officer. Prior to this, Mr. Moller headed our global chartering operations and business development activities.
Axel Karlshoej has been a Teekay director since 1989 and was Chair of the Teekay Board from June 1994 to September 1999, and has been Chair Emeritus since stepping down as Chair. Mr. Karlshoej is President and serves on the compensation committee of Nordic Industries, a California general construction firm with which he has served for the past 30 years. He is the older brother of the late J. Torben Karlshoej, Teekay’s founder. Please read Item 7 – Major Shareholders and Related Party Transactions.
Bruce C. Bell is the Managing Director of Oceanic Bank and Trust Limited, a Bahamian bank and trust company, a position he has held since March 1994. In January 2005, Mr. Bell was appointed Chief Executive Officer of Oceanic Bank and Trust and in July 2005 he was appointed Chairman. Prior to joining Oceanic Bank and Trust, Mr. Bell was engaged in the private practice law in Canada, specializing in corporate and commercial banking and international business transactions. From May 2000 until May 2003, Mr. Bell served as our Corporate Secretary. Mr. Bell has served as the Secretary of Teekay GP L.L.C. since it was formed in November 2004. Mr. Bell has been a Teekay director since 2000. Please read Item 7 – Major Shareholders and Related Party Transactions.
Dr. Ian D. Blackburne has served as a Teekay director since 2000. Mr. Blackburne has over 25 years’ experience in petroleum refining and marketing, and in March 2000 he retired as Managing Director and Chief Executive Officer of Caltex Australia Limited, a large petroleum refining and marketing conglomerate based in Australia. He is currently serving as Chairman of CSR Limited and is a director of Suncorp-Metway Ltd. and Symbion Health Limited (formerly Mayne Group Limited), Australian public companies in the diversified industrial and financial sectors. Dr. Blackburne is also the Chairman of the Australian Nuclear Science and Technology Organization.
Peter S. Janson was appointed as a Teekay director in July 2005. From 1999 to 2002, Mr. Janson was the Chief Executive Officer of Amec Inc. (formerly Agra Inc.), a publicly traded engineering and construction company. From 1986 to 1994 he served as the President and Chief Executive Officer of Canadian operations for Asea Brown Boveri Inc., a company for which he also served as Chief Executive Officer for U.S. operations from 1996 to 1999. Mr. Janson has also served as a member of the Business Round Table in the United States, and as a member of the National Advisory Board on Science and Technology in Canada. He currently serves as Vice Chairman of the Royal Ontario Museum. He is also a director of Terra Industries Inc., Tembec Inc. and ATS Automan Tooling Systems Inc.
Thomas Kuo-Yuen Hsu has served as a Teekay director since 1993. He also has served 30 years with, and is presently a director of, CNC Industries, an affiliate of the Expedo Group of Companies that manages a fleet of seven vessels ranging in size from 30,000 dwt to 70,000 dwt. He has been a Committee Director of the Britannia Steam Ship Insurance Association Limited since 1988. Please read Item 7 – Major Shareholders and Related Party Transactions.
Eileen A. Mercier has been a Teekay director since 2000. She has over 35 years’ experience in a wide variety of financial and strategic planning positions, including Senior Vice President and Chief Financial Officer for Abitibi-Price Inc. from 1990 to 1995. She formed her own management consulting company, Finvoy Management Inc. and acted as president from 1995 to 2003. She currently serves as a director for CGI Group Ltd., Hydro One Inc., ING Bank of Canada, ING Canada Inc., Winpak Limited, Shermag Inc., The University Health Network, York University and the Ontario Teachers’ Pension Plan.
Tore I. Sandvold has served as a Teekay director since 2003. He has over 30 years’ experience in the oil and energy industry. From 1973 to 1987 he served in the Norwegian Ministry of Industry, Oil & Energy in a variety of positions in the area of domestic and international energy policy. From 1987 to 1990 he served as the Counselor for Energy in the Norwegian Embassy in Washington, D.C. From 1990 to 2001 Mr. Sandvold served as Director General of the Norwegian Ministry of Oil & Energy, with overall responsibility for Norway’s national and international oil and gas policy. From 2001 to 2002 he served as Chairman of the Board of Petoro, the Norwegian state-owned oil company that is the largest oil asset manager on the Norwegian continental shelf. From 2002 to the present, Mr. Sandvold, through his company, Sandvold Energy AS, has acted as advisor to companies and advisory bodies in the energy industry. Mr. Sandvold serves on other boards, including those of Schlumberger Limited., E. on Ruhrgas Norge AS, Lambert Energy Advisory Ltd., University of Stavanger, Offshore Northern Seas, and the Energy Policy Foundation of Norway.
Peter Antturi joined Teekay in September 1991. Since then, he has held a number of finance and accounting positions, including Controller from March 1992 until his promotion to the position of Senior Vice President, Treasurer and Chief Financial Officer in October 1997. In 2003 he became President of Navion AS upon the closing of our acquisition of Navion. In November 2003 Mr. Antturi was appointed President of our Teekay Navion Shuttle Tankers division, which is responsible for the shuttle tanker activities and projects of our two wholly owned subsidiaries, Navion AS and Ugland Nordic Shipping AS. Prior to joining Teekay, Mr. Antturi held various accounting and finance roles in the shipping industry since 1985.
Arthur Bensler joined Teekay in September 1998 as General Counsel. He was promoted to the position of Vice President in March 2002 and became our Corporate Secretary in May 2003. He was appointed Senior Vice President in February 2004 and Executive Vice President in January 2006. Prior to joining Teekay, Mr. Bensler was a partner in a large Vancouver, Canada law firm, where he practiced corporate, commercial and maritime law from 1986 until joining Teekay.
Peter Evensen joined Teekay in May 2003 as Senior Vice President, Treasurer and Chief Financial Officer. He was appointed Executive Vice President and Chief Financial Officer in February 2004. Mr. Evensen has served as the Chief Executive Officer and Chief Financial Officer of Teekay GP L.L.C. since it was formed in November 2004 and as Director of Teekay GP L.L.C. since January 2005. Mr. Evensen has over 20 years’ experience in banking and shipping finance. Prior to joining Teekay, Mr. Evensen was Managing Director and Head of Global Shipping at J.P. Morgan Securities Inc. and worked in other senior positions for its predecessor firms. His international industry experience includes positions in New York, London and Oslo.
David Glendinning joined Teekay in January 1987. Since then, he has held a number of senior positions, including service as Vice President, Marine and Commercial Operations from January 1995 until his promotion to Senior Vice President, Customer Relations and Marine Project Development in February 1999. In November 2003 Mr. Glendinning was appointed President of our Teekay Gas and Offshore division, which is responsible for our initiatives in the LNG business and other areas of gas activity as well as building on our international presence in the floating storage and offtake business and related offshore activities. Prior to joining Teekay, Mr. Glendinning, who is a Master Mariner, had 18 years’ sea service on oil tankers of various types and sizes.
Bruce Chan joined Teekay in September 1995. Since then, in addition to spending a year in Teekay’s London office, Mr. Chan has held a number of finance and accounting positions with the Company, including Vice President, Strategic Development from February 2004 until his promotion to the position of Senior Vice President, Corporate Resources in September 2005. Prior to joining Teekay, Mr. Chan worked as a Chartered Accountant in the Vancouver, Canada office of Ernst & Young.
Vincent Lok joined Teekay in June 1993. Since then, he has held a number of finance and accounting positions, including Controller from 1997 until his promotion to the position of Vice President, Finance in March 2002. He was appointed Senior Vice President and Treasurer in February 2004. Prior to joining Teekay, Mr. Lok worked in the Vancouver, Canada audit practice of Deloitte & Touche.
Graham Westgarth joined Teekay in February 1999 as Vice President, Marine Operations. He was promoted to the position of Senior Vice President, Marine Operations in December 1999. In November 2003 Mr. Westgarth was appointed President of our Teekay Marine Services division, which is responsible for all of our marine and technical operations as well as marketing a range of services and products to third parties, such as marine consulting services and computer-based marine training software. He has extensive shipping industry experience. Prior to joining Teekay, Mr. Westgarth was General Manager of Maersk Company (UK), where he joined as Master in 1987. His international industry experience includes 18 years’ sea service, with five years in a command position.
Paul Wogan joined Teekay in November 2000 as the Managing Director of the London office. He was promoted to the position of Vice President, Business Development in March 2002. In November 2003 Mr. Wogan was appointed President of our Teekay Tanker Services division, which is responsible for the commercial management of our conventional crude oil and product tanker transportation services. Prior to joining Teekay, Mr. Wogan was with the chartering arm of a major crude oil and product carrier fleet controlled by the Ceres Hellenic Group (Livanos), which subsequently founded Seachem Tankers Ltd., a chemical tanker company, where he served as the Chief Executive Officer from 1997 until joining Teekay.
Director Compensation
During 2005, the eight non-employee directors received, in the aggregate, $695,000 in cash fees for their services as directors, plus reimbursement of their out-of-pocket expenses. Each non-employee director receives an annual cash retainer of $50,000. Members of the Audit Committee, Compensation and Human Resources Committee, and Nominating and Governance Committee receive an additional annual cash retainer of $8,000, $5,000 and $5,000, respectively. The Chair of the Board and the Chair of the Audit Committee receive an additional annual cash retainer of $228,000 and $16,000, respectively.
In addition, each non-employee director received a $70,000 annual retainer to be paid by way of a grant of restricted stock or stock options under our 2003 Equity Incentive Plan, at the director’s election. In addition to the $70,000 annual retainer, the Chair of the Board received a further $319,000 retainer in the form of a grant of restricted stock and stock options under our 2003 Equity Incentive Plan. Certain of the directors elected to receive this annual retainer in the form of stock options to purchase an aggregate of 6,600 shares of our common stock at an exercise price of $46.80 per share, 3,000 shares of our common stock at an exercise price of $42.33 per share, 3,500 shares of our common stock at an exercise price of $47.13 per share, and 11,000 shares of our common stock at an exercise price of $38.94 per share. These options expire March 10, 2015, June 2, 2015, July 15, 2015 and March 6, 2016, respectively, ten years after the date of their grant. These options vest as to one third of the shares on each of the first three anniversaries of their respective grant date, with the exception of the 11,000 stock option grant which vests as to one third of the shares immediately and one third on each of the first two anniversaries of the grant date. Certain other directors elected to receive this annual retainer in the form of 13,640 shares of restricted stock (11,290 shares of restricted stock on March 10, 2005 and 2,350 shares of restricted stock on June 2, 2005), which also vest with respect to one third of the shares on each of the first three anniversaries of their grant date.
Annual Executive Compensation
The aggregate compensation earned by Teekay’s nine executive officers listed above ( or the Executive Officers) for 2005 was $7.2 million. This is comprised of base salary ($3.1 million), annual bonus ($3.2 million) and pension and other benefits ($0.9 million). These amounts were paid primarily in Canadian Dollars, but are reported here in U.S. Dollars using an exchange rate of 1.16 Canadian Dollars for each U.S. Dollar, the exchange rate on December 31, 2005. Teekay’s annual bonus plan considers both company performance, through comparison to established targets and financial performance of peer companies, and individual performance.
Long-Term Incentive Program
Teekay’s long-term incentive program provides focus on the returns realized by the shareholders and acknowledges and retains those executives who can influence our long-term performance. The long-term incentive plan provides a balance against short-term decisions and encourages a longer time horizon for decisions. This program consists of stock option grants, stock appreciation rights (or SARs) and restricted stock awards. All grants in 2005 have been made under our 2003 Equity Incentive Plan.
During 2005, we granted stock options to purchase an aggregate of 189,000 shares of our common stock, 303,291 restricted stock units and SARs with respect to 25,900 shares of common stock to the Executive Officers under our 2003 Equity Incentive Plan. The weighted-average exercise price of these stock options and SARs is $46.80 per share. These options and SARs, which vest equally over three years, expire March 9, 2015, ten years after the date of the grant. The restricted stock units vest in three equal amounts on March 31, 2006, March 31, 2007 and November 30, 2007. Upon vesting, the restricted stock units will be paid to each grantee in the form of cash or shares of Teekay’s common stock, (purchased on the open market) at the election of the grantee. Based on the December 31, 2005 share price of $39.90 per share, the restricted stock units had a notional value of $12.1 million.
Vision Incentive Plan
The Vision Incentive Plan (or the VIP ) rewards exceptional corporate performance and shareholder return over the long term and the successful implementation of innovative plans to continue the transformation of Teekay. This is a discrete plan that expires after 2010 and is not a permanent element of our Executive Compensation Program. Under the terms of the VIP, awards may only be made to VIP participants in 2008 and 2011. The VIP will result in an award pool for senior management based on two measures: (a) economic profit from 2005 to 2010; and (b) the increase in market value added from 2001 to 2010. Please read Item 19 - Exhibits: Exhibit 4.6 for further information on the VIP.
During 2005, we accrued $17.0 million of Economic Profit contributions which represents the addition to the award pool for 2005. As of March 15, 2006, 43.8% of this award pool was allocable to the Executive Officers. However, our Board of Directors may, at any time prior to the expiration of the VIP, change the allocation of the award pool between its participants to reflect a change in their relative contribution.
During 2005, we accrued $4.5 million of Market Value contributions which represents a notional contribution to the award pool. These notional contributions assume the following two threshold requirements will be met: (a) shares of our common stock have an average market value, for the 18 months prior to December 31, 2010, that is at least 120% of its average book value for the same period and (b) our cumulative total shareholder return (or TSR ) for the period from 2001 to 2010 must be above the 25th percentile relative to the TSR of the S&P 500 (as calculated in accordance with U.S. securities regulations) during the same period. If both threshold requirements are not met, there will be no Market Value contributions to the award pool. As of March 15, 2006, 54.7% of this award pool was allocable to the Executive Officers. However, our Board of Directors may, at any time prior to the expiration of the VIP, change the allocation of the award pool between its participants to reflect a change in their relative contribution.
As at December 31, 2005, we had reserved pursuant to our 1995 Stock Option Plan, which was terminated with respect to new grants effective September 10, 2003, and our 2003 Equity Incentive Plan, which was adopted effective on the same date (together, the Plans ), 5,618,518 shares of common stock for issuance upon exercise of options granted or to be granted. During 2005, 2004, and 2003 we granted options under the Plans to acquire up to 620,700, 833,840 and 2,119,160 shares of common stock, respectively, to eligible officers, employees and directors. The options under the Plans have a 10-year term and vest equally over three years from the grant date, except for one grant of 50,000 options which will fully vest on December 31, 2006. The outstanding options under the Plans are exercisable at prices ranging from $8.44 to $47.13 per share, with a weighted-average exercise price of $24.81 per share, and expire between May 28, 2006 and July 15, 2015.
The Board of Directors consists of nine members. The Board of Directors is divided into three classes, with members of each class elected to hold office for a term of three years in accordance with the classification indicated below or until his or her successor is elected and qualifies. Directors Bruce C. Bell, C. Sean Day and Dr. Ian D. Blackburne have terms expiring in 2005. Mr. Day and Dr. Blackburne have been nominated by the Board of Directors for re-election, and James R. Clark has been nominated by the Board of Directors for election at the 2006 Annual Meeting of Shareholders. Directors Peter S. Janson, Eileen A. Mercier and Tore I. Sandvold have terms expiring in 2007. Directors Thomas Kuo-Yuen Hsu, Axel Karlshoej and Bjorn Moller have terms expiring in 2008.
There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
The Board has determined that each of the current members of the Board, other than Bjorn Moller, our President and Chief Executive Officer, and C. Sean Day, our Chair of the Board, has no material relationship with Teekay (either directly or as a partner, shareholder or officer of an organization that has a relationship with Teekay), and is independent within the meaning of our director independence standards, which reflect the NYSE director independence standards as currently in effect and as they may be changed from time to time. In making this determination the Board considered the relationships of Thomas Kuo-Yuen Hsu and Axel Karlshoej with our largest shareholder and concluded these relationships do not materially affect their independence as current directors.
The Board has the following three committees: Audit Committee, Compensation and Human Resources Committee, and Nominating and Governance Committee. The membership of these committees during 2005 and the function of each of the committees are described below. Each of the committees is currently comprised of independent members and operates under a written charter adopted by the Board. All of the committee charters are available under “Corporate Governance” in the Investor Centre of our Web site at www.teekay.com. During 2005, the Board held seven meetings. Each director attended all Board meetings, except for two Board meetings at each of which one director each was absent from each. Each director attended all applicable committee meetings.
Our Audit Committee is composed entirely of directors who satisfy applicable NYSE and SEC audit committee independence standards. Our Audit Committee includes Eileen A. Mercier (Chair), Peter S. Janson and Tore I. Sandvold. All members of the committee are financially literate and the Board has determined that Ms. Mercier qualifies as an audit committee financial expert.
The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of:
| • | the integrity of our financial statements; |
| • | our compliance with legal and regulatory requirements; |
| • | the independent auditors’ qualifications and independence; and |
| • | the performance of our internal audit function and independent auditors. |
During 2005, our Compensation and Human Resources Committee included Axel Karlshoej (Chair), Ian D. Blackburne and Thomas Kuo-Yuen Hsu. C. Sean Day was also a member of this committee until March 2005.
The Compensation and Human Resources Committee:
| • | reviews and approves corporate goals and objectives relevant to the Chief Executive Officer’s compensation, evaluates the Chief Executive Officer’s performance in light of these goals and objectives and determines the Chief Executive Officer’s compensation; |
| • | reviews and approves the evaluation process and compensation structure for executives, other than the Chief Executive Officer, evaluates their performance and sets their compensation based on this evaluation; |
| • | reviews and makes recommendations to the Board regarding compensation for directors; |
| • | establishes and administers long-term incentive compensation and equity-based plans; and |
| • | oversees our other compensation plans, policies and programs. |
During 2005, our Nominating and Governance Committee included Ian D. Blackburne (Chair) (effective March 2005), Bruce C. Bell, Eileen A. Mercier and Thomas Kuo-Yuen Hsu (effective March 2005). C. Sean Day was a member (Chair) of this committee until March 2005.
The Nominating and Governance Committee:
| • | identifies individuals qualified to become Board members; |
| • | selects and recommends to the Board director and committee member candidates; |
| • | develops and recommends to the Board corporate governance principles and policies applicable to us, monitors compliance with these principles and policies and recommends to the Board appropriate changes; and |
| • | oversees the evaluation of the Board and management. |
As at December 31, 2005, we employed approximately 4,400 seagoing and 700 shore-based personnel, compared to approximately 4,800 seagoing and 700 shore-based personnel in 2004, and 4,000 seagoing and 700 shore-based personnel as at December 31, 2003. The decrease in seagoing personnel from December 31, 2004 to December 31, 2005 was primarily due to the decrease in the size of our fleet. The increase in personnel from December 31, 2003 to December 31, 2004 was primarily due to our acquisition of Teekay Spain in 2004.
We regard attracting and retaining motivated seagoing personnel as a top priority. Through our global manning organization comprised of offices in Glasgow, Scotland, Grimstad, Norway, Riga, Latvia, Manila, Philippines, Mumbai, India, Sydney, Australia, and Madrid, Spain, we offer seafarers competitive employment packages and comprehensive benefits. We also provide excellent opportunities for personal and career development, which relate to our philosophy of promoting internally.
During fiscal 1996, we entered into a Collective Bargaining Agreement with the Philippine Seafarers’ Union, an affiliate of the International Transport Workers’ Federation (or ITF ), and a Special Agreement with ITF London that cover substantially all of our junior officers and seamen. We are also party to Enterprise Bargaining Agreements with various Australian maritime unions that covers officers and seamen employed through our Australian operations. Our officers and seamen for our Spanish-flagged vessels are covered by a collective bargaining agreement with Spain’s Union General de Trabajdores and Comisiones Obreras. We believe our relationships with these labor unions are good.
We see our commitment to training as fundamental to the development of the highest caliber seafarers for our marine operations. Our cadet training program is designed to balance academic learning with hands-on training at sea. We have relationships with training institutions in Canada, Croatia, India, Latvia, Norway, Philippines, Turkey and the United Kingdom. After receiving formal instruction at one of these institutions, the cadets’ training continues on board a Teekay vessel. We also have a career development plan that is designed to ensure a continuous flow of qualified officers who are trained on our vessels and are familiar with our operational standards, systems and policies. We believe that high-quality manning and training policies will play an increasingly important role in distinguishing larger independent tanker companies that have in-house, or affiliate, capabilities from smaller companies that must rely on outside ship managers and crewing agents.
The following table sets forth certain information regarding beneficial ownership, as of March 15, 2006, of our common stock by the directors and Executive Officers as a group. The information is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person or entity beneficially owns any shares that the person or entity has the right to acquire as of May 14, 2006 (60 days after March 15, 2006) through the exercise of any stock option or other right. Unless otherwise indicated, each person or entity has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares set forth in the following table. Information for certain holders is based on information delivered to us.
Identity of Person or Group Shares Owned Percent of Class All directors and Executive Officers (17 persons) 1,287,634 (1) (3) 1.7% (2)
| (1) | Includes 1,135,762 shares of common stock subject to stock options exercisable by May 14, 2006 under the Plans with a weighted-average exercise price of $19.64 that expire between May 13, 2008 and March 6, 2016. Excludes (a) 752,132 shares of common stock subject to stock options exercisable after May 14, 2006 under the Plans with a weighted average exercise price of $39.40, that expire between March 9, 2014 and March 6, 2016 (b) shares owned by Resolute Investments, Inc. (please read Item 7 – Major Shareholders and Related Party Transactions) and (c) 303,291 restricted stock units which will be paid to each grantee in the form of cash or shares of Teekay’s common stock (purchased on the open market), at the election of the grantee. |
| (2) | Based on a total of 74.2 million outstanding shares of our common stock as of March 15, 2006. Each director and Executive Officer beneficially owns less than one percent of the outstanding shares of common stock. |
| (3) | Each director is expected to acquire at least 10,000 shares of Teekay’s common stock by the later of May 14, 2008 or the fifth anniversary of the date on which the director joined the Board. In addition, each Executive Officer is expected to acquire shares of Teekay’s common stock equivalent in value to one to three times their annual base salary by 2010. |
The following table sets forth information regarding beneficial ownership, as of March 15, 2006, of Teekay’s common stock by each person we know to beneficially own more than 5% of the common stock. Information for certain holders is based on their latest filings with the SEC or information delivered to us. The number of shares beneficially owned by each person or entity is determined under SEC rules and the information is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person or entity beneficially owns any shares as to which the person or entity has or shares voting or investment power. In addition, a person or entity beneficially owns any shares that the person or entity has the right to acquire as of May 14, 2006 (60 days after March 15, 2006) through the exercise of any stock option or other right. Unless otherwise indicated, each person or entity has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares set forth in the following table.
Identity of Person or Group Shares Owned Percent of Class(5) Resolute Investments, Inc.(1)............................................ 32,631,380 44.0% FMR Corp., Edward C. Johnson 3rd and Abigail P. Johnson, as a group(2)... 11,485,580 15.5% Neuberger Berman, Inc. and Neuberger Berman, LLC, as a group(3) ......... 5,078,407 6.8% Iridian Asset Management, LLC(4) ........................................ 5,053,415 6.8%___________________________
| (1) | One of our directors is a director and the Chair of Resolute Investments, Inc. Two additional Teekay directors are directors of the entity that ultimately controls Resolute. Please read “ — Related Party Transactions.” |
| (2) | Includes sole voting power as to 192,400 shares and sole dispositive power as to 11,485,580 shares. This information is based on the Schedule 13G/A filed by this group with the SEC on February 14, 2006. Based on prior information filed with the SEC, FMR Corp.‘s beneficial ownership in Teekay was 13.9% on March 15, 2005 and 11.4% on March 15, 2004. |
| (3) | Includes sole voting power as to 2,644,213 shares, shared voting power as to 1,444,500 shares and shared dispositive power as to 5,078,407 shares. Neuberger Berman, LLC and Neuberger Berman Management Inc. both have shared voting and dispositive power. Neuberger Berman, LLC and Neuberger Berman Management Inc. serve as sub-adviser and investment manager, respectively, of Neuberger Berman Inc.‘s mutual funds. This information is based on the Schedule 13G/A filed by this group with the SEC on February 15, 2006. Based on prior information filed with the SEC, Neuberger Berman Inc’s beneficial ownership in Teekay was 10.1% on March 15, 2005 and less than 7.0% on March 15, 2004. |
| (4) | Includes shared voting power and shared dispositive power as to 5,053,415 shares. This information is based on the Schedule 13G filed by this investor with the SEC on February 3, 2006. Iridian Asset Management’s beneficial ownership was less than 5% on March 15, 2005 and 2004. |
| (5) | Based on a total of 74.2 million outstanding shares of our common stock as of March 15, 2006. |
Our major shareholders have the same voting rights as our other shareholders. No corporation or foreign government or other natural or legal person owns more than 50% of our outstanding common stock. We are not aware of any arrangements, the operation of which may at a subsequent date result in a change in control of Teekay.
As at December 31, 2005, Resolute Investments, Inc. (or Resolute ) owned 45.7 % (December 31, 2004 – 39.3% and December 31, 2003 – 40.2%) of our outstanding Common Stock. The Chair of our board, C. Sean Day, is a director and the Chairman of Resolute. Two additional directors, Thomas Kuo-Yuen Hsu and Axel Karlshoej, are among the Managing Directors of The Kattegat Trust Company Limited, which is the trustee of the trust that owns all of Resolute’s outstanding equity.
Another of our directors, Bruce Bell, is Manager Director, Chief Executive Officer and Chairman of Oceanic Bank and Trust Limited. Payments made by us to Oceanic Bank and Trust Limited in respect of corporate administration fees and shared office costs for 2005, 2004 and 2003, totaled approximately $0.5 million in each of these years.
Please read Item 18 below.
From time to time we have been, and we expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business, principally personal injury and property casualty claims. Such claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our financial condition or results of operations.
Commencing with the quarter ended September 30, 1995, we declared and paid quarterly cash dividends in the amount of $0.1075 per share on our common stock. We increased our quarterly dividend from $0.1075 to $0.125 per share on our common stock in the fourth quarter of 2003, from $0.125 to $0.1375 per share during the fourth quarter of 2004 and from $0.1375 to $0.2075 per share in the fourth quarter of 2005. Subject to financial results and declaration by the Board of Directors, we currently intend to continue to declare and pay a regular quarterly dividend in such amount per share on our common stock. Pursuant to our dividend reinvestment program, holders of common stock are permitted to choose, in lieu of receiving cash dividends, to reinvest any dividends in additional shares of common stock at then prevailing market prices, but without brokerage commissions or service charges. On May 17, 2004, we effected a two-for-one stock split relating to our common stock. All per share data give effect to this stock split retroactively.
The timing and amount of dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements, restrictions in financing agreements and other factors deemed relevant by our Board of Directors. Because we are a holding company with no material assets other than the stock of our subsidiaries, our ability to pay dividends on the common stock depends on the earnings and cash flow of our subsidiaries.
Please read Item 18 – Financial Statements: Note 21 – Subsequent Events.
Our common stock is traded on the New York Stock Exchange (or NYSE) under the symbol "TK". The following table sets forth the high and low closing sales prices for our common stock on the NYSE for each of the periods indicated.(1)
Years Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
High $50.0100 $54.4500 $28.6750 $20.8500 $26.3050
Low 37.2500 27.9500 17.8550 13.1750 12.7450
Quarters Ended Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2005 2005 2005 2005 2004 2004 2004 2004
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
High $43.5600 $47.3000 $46.6500 $50.0100 $54.4500 $43.3800 $37.6500 $34.9350
Low 37.2500 42.7300 41.6400 40.1200 41.1400 34.5600 29.4100 27.9500
Months Ended Feb. 28, Jan. 31, Dec. 31, Nov. 30, Oct. 31, Sept. 30,
2006 2006 2005 2005 2005 2005
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
High $39.6500 $40.9000 $43.5600 $42.9200 $42.5000 $45.8400
Low 37.2900 38.7600 39.6500 39.4400 37.2500 42.7300
| (1) | On May 17, 2004, we effected a two-for-one stock split relating to our common stock; applicable per share information above gives effect to this stock split retroactively. |
Our Premium Equity Participating Security Units due May 18, 2006 (or Equity Units) traded on the NYSE under the symbol “TK PR” until they were settled in February 2006. The following table sets forth the high and low closing sales prices for our Equity Units on the NYSE for each of the periods indicated.
Years Ended Dec. 31, Dec. 31, Dec. 31,
2005 2004 2003 (1)
----------- ----------- ----------- ----------- ----------- ----------- ---------- ----------
High $57.3300 $63.3400 $36.1400
Low 46.5400 35.2400 24.8600
Quarters Ended Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2005 2005 2005 2005 2004 2004 2004 2004
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
High $49.6000 $54.9700 $53.8000 $57.3300 $63.3400 $50.3800 $44.6900 $42.9300
Low 42.7300 48.7100 47.8800 42.7300 48.1900 41.2500 36.3900 35.2400
Months Ended Feb. 28, Jan. 31, Dec. 31, Nov. 30, Oct. 31, Sept. 30,
2006 (2) 2006 2005 2005 2005 2005
----------- ----------- ----------- ----------- ----------- ---------- ---------- ---------
High $44.3100 $46.3600 $49.6000 $48.8100 $48.7800 $52.5800
Low 42.3700 44.0200 45.2800 44.8100 42.7300 48.7100
___________________________
| (1) | Period beginning February 11, 2003. |
| (2) | On February 16, 2006, we settled the purchase contracts associated with the Equity Units by issuing 6,534,300 shares of our common stock. The Equity Units were issued in February 2003 and each consisted of a share purchase contract and a $25 principal amount subordinated note due May 18, 2006. On February 16, 2006, we repurchased the notes for net proceeds equal to 100% of their aggregate principal amount. The net proceeds were applied to satisfy the obligations of the holders of the Equity Units to purchase shares of our common stock under the related purchase contracts. The notes were subsequently cancelled and are no longer outstanding. The Equity Units are no longer outstanding. |
Our Articles of Incorporation and Bylaws have previously been filed as exhibits 2.1, 2.2, and 2.3 to our Annual Report on Form 20-F (File No. 1-12874), filed with the SEC on March 30, 2000, and are hereby incorporated by reference into this Annual Report.
The rights, preferences and restrictions attaching to each class of our capital stock are described in the section entitled "Description of Capital Stock" of our Rule 424(b) prospectus (File No. 1-12874), filed with the SEC on June 10, 1998, and hereby incorporated by reference into this Annual Report, provided that since the date of such prospectus (1) the par value of our capital stock has been changed to $0.001 per share, (2) our authorized capital stock has been increased to 725,000,000 shares of common stock and 25,000,000 shares of Preferred Stock, (3) we have been domesticated in the Republic of the Marshall Islands and (4) we have adopted a staggered Board of Directors, with directors serving three-year terms.
The necessary actions required to change the rights of holders of the stock and the conditions governing the manner in which annual general meetings and special meetings of shareholders are convoked are described in our Bylaws filed as exhibit 2.3 to our Annual Report on Form 20-F (File No. 1-12874), filed with the SEC on March 30, 2000, and hereby incorporated by reference into this Annual Report.
We have in place a rights agreement that would have the effect of delaying, deferring or preventing a change in control of Teekay. The rights agreement has been filed as part of our Form 8-A (File No. 1-12874), filed with the SEC on September 11, 2000, and hereby incorporated by reference into this Annual Report.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by the laws of the Republic of the Marshall Islands or by our Articles of Incorporation or Bylaws.
The following is a summary of each material contract, other than material contracts entered into in the ordinary course of business, to which we or any of our subsidiaries is a party, for the two years immediately preceding the date of this Annual Report:
| (a) | Indenture dated June 22, 2001 among Teekay Shipping Corporation and The Bank of New York Trust Company of Florida (formerly U.S. Trust Company of Texas, N.A.) for U.S. $250,000,000 8.875% Senior Notes due 2011. |
| (b) | First Supplemental Indenture dated as of December 6, 2001, among Teekay Shipping Corporation and The Bank of New York Trust Company of Florida, N.A. for U.S. $100,000,000 8.875% Senior Notes due 2011. |
| (c) | Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan Facility between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks. |
| (d) | Agreement, dated September 1, 2004 for a U.S. $500,000,000 Credit Facility Agreement to be made available to Teekay Nordic Holdings Incorporated by Nordea Bank Finland PLC, New York Branch. |
| (e) | Amendment dated September 30, 2004 to Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan Facility between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks. |
| (f) | Agreement, dated May 26, 2005 for a U.S. $550,000,000 Credit Facility Agreement to be made available to Avalon Spirit LLC et al by Nordea Bank Finland PLC and others. |
| (g) | Annual Executive Bonus Plan. |
| (h) | Vision Incentive Plan. |
| (i) | 2003 Equity Incentive Plan. |
| (j) | Amended 1995 Stock Option Plan. |
| (k) | Rights agreement, dated as of September 8, 2000, between Teekay Shipping Corporation and The Bank of New York, as Rights Agent |
We are not aware of any governmental laws, decrees or regulations, including foreign exchange controls, in the Republic of The Marshall Islands that restrict the export or import of capital or that affect the remittance of dividends, interest or other payments to non-resident holders of our securities.
We are not aware of any limitations on the right of non-resident or foreign owners to hold or vote our securities imposed by the laws of the Republic of the Marshall Islands or our Articles of Incorporation and Bylaws.
Teekay Shipping Corporation was incorporated in the Republic of Liberia on February 9, 1979 and was domesticated in the Republic of The Marshall Islands on December 20, 1999. Its principal executive headquarters are located in The Bahamas.
Marshall Islands Tax Consequences. Because Teekay and our subsidiaries do not, and do not expect that we or they will, conduct business or operations in the Republic of The Marshall Islands, and because all documentation related issuances of shares of our common stock was executed outside of the Republic of The Marshall Islands, under current Marshall Islands law, no taxes or withholdings will be imposed by the Republic of The Marshall Islands on distributions made to holders of shares of our common stock, so long as such persons do not reside in, maintain offices in, or engage in business in the Republic of The Marshall Islands. Furthermore, no stamp, capital gains or other taxes will be imposed by the Republic of The Marshall Islands on the purchase, ownership or disposition by such persons of shares of our common stock.
Bahamian Tax Consequences . Under current Bahamian law, no taxes or withholdings will be imposed by the Commonwealth of the Bahamas on distributions made in respect of the shares of our common stock, and no stamp, capital gains or other taxes will be imposed by the Commonwealth of the Bahamas on the ownership or disposition of the shares of our common stock, as there are no personal income or corporation taxes, capital gains taxes or death duties in the Commonwealth of the Bahamas.
Documents concerning us that are referred to herein may be inspected at our principal executive headquarters at Bayside House, Bayside Executive Park, West Bay Street & Blake Road, P.O. Box AP-59212, Nassau, The Bahamas. Those documents electronically filed via the Electronic Data Gathering, Analysis, and Retrieval (or EDGAR ) system may also be obtained from the SEC’s website at www.sec.gov , free of charge, or from the Public Reference Section of the SEC at 100F Street, NE, Washington, D.C. 20549, at prescribed rates. Further information on the operation of the SEC public reference rooms may be obtained by calling the SEC at 1-800-SEC-0330.
We are exposed to market risk from foreign currency fluctuations and changes in interest rates, bunker fuel prices and spot market rates for vessels. We use foreign currency forward contracts, interest rate swaps, bunker fuel swap contracts and forward freight agreements to manage currency, interest rate, bunker fuel price and spot market rate risks but do not use these financial instruments for trading or speculative purposes.
Our primary economic environment is the international shipping market. This market utilizes the U.S. Dollar as its functional currency. Consequently, virtually all of our revenues and most of our operating costs are in U.S. Dollars. We incur certain voyage expenses, vessel operating expenses, drydocking and overhead costs in foreign currencies, the most significant of which are Japanese Yen, Singapore Dollar, Canadian Dollar, Australian Dollar, British Pound, Euro and Norwegian Kroner. During 2005, approximately 29 % of vessel and voyage costs, overhead and drydock expenditures were denominated in these currencies. However, we have some ability to shift the purchase of goods and services from one country to another and, thus, from one currency to another, on relatively short notice.
We enter into forward contracts as a hedge against changes in certain foreign exchange rates. As at December 31, 2005, we had the following foreign currency forward contracts:
Expected Maturity Date
(contract amounts in millions of U.S. Dollars) 2006
Norwegian Kroner:
Contract amount $93.2
Average contractual exchange rate 6.56
Euro:
Contract amount $10.8
Average contractual exchange rate 0.83
Canadian Dollar:
Contract amount $10.7
Average contractual exchange rate 1.23
Australian Dollar:
Contract amount $4.5
Average contractual exchange rate 1.35
To the extent the hedge is effective, changes in the fair value of the forward contract are either offset against the fair value of assets or liabilities through income, or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a forward contract’s change in fair value will be immediately recognized in income.
Although the majority of our transactions, assets and liabilities are denominated in U.S. Dollars, certain of our subsidiaries have foreign currency denominated liabilities. There is a risk that currency fluctuations will have a negative effect on the value of our cash flows. We have not entered into any forward contracts to protect against the translation risk of our foreign currency denominated liabilities. As at December 31, 2005, we had Euro-denominated term loans of 318.5 million Euros ($377.4 million) included in long-term debt, and Norwegian Kroner-denominated deferred income taxes of approximately 360.4 million NOK ($57.7 million) included in other long-term liabilities. We have not hedged our Euro-denominated term loans as the revenue we receive from certain of our time charters is denominated in Euros and is used to pay the interest and principal payments on these loans.
We invest our cash and marketable securities in financial instruments with maturities of less than six months within the parameters of our investment policy and guidelines.
We use interest rate swaps to manage the impact of interest rate changes on earnings and cash flows. Changes in the fair value of our interest rate swaps are either offset against the fair value of assets or liabilities through income, or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of an interest rate swap change in fair value is immediately recognized in income. Premiums and receipts, if any, are recognized as adjustments to interest expense over the lives of the individual contracts.
The table below provides information about our financial instruments at December 31, 2005, which are sensitive to changes in interest rates, including our debt and capital lease obligations and interest rate swaps. For long-term debt and capital lease obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected contractual maturity dates.
Expected Maturity Date
(in millions of U.S. dollars, except percentages) 2006 2007 2008 2009 2010 There-after Rate (1)
Long-Term Debt:
Fixed-Rate Debt 151.0 7.2 7.2 7.2 7.2 346.7 7.4%
Average Interest Rate 7.1% 4.1% 4.1% 4.1% 4.1% 7.7%
Variable Rate Debt
U.S. Dollar-Denominated (2) - 33.9 331.0 85.0 56.0 468.9 5.2%
Euro-Denominated (3) (4) 8.1 8.7 9.3 10.0 10.7 330.6 3.6%
Capital Lease Obligations: (5)
Fixed-Rate Obligations (6) 10.0 132.2 5.3 5.5 85.9 26.2 7.6%
Average Interest Rate (7) 7.6% 8.8% 6.3% 6.3% 5.5% 8.3%
Interest Rate Swaps: (8)
Contract Amount (U.S. Dollar-denominated) (9) 500.0 2.2 4.5 211.2 17.8 1,308.3 4.5%
Average Fixed Pay Rate (2) 2.8% 6.2% 6.2% 4.3% 5.5% 5.2%
Contract Amount (Euro-Denominated) (4) 8.1 8.7 9.3 10.0 10.7 330.6 3.8%
Average Fixed Pay Rate (3) 3.8% 3.8% 3.8% 3.8% 3.8% 3.8%
___________________________
| (1) | Rate refers to the weighted-average effective interest rate for our debt, including the margin we pay on our floating-rate debt as at December 31, 2005, and the average fixed pay rate for our swap agreements, as applicable. The average fixed pay rate on our interest rate swaps excludes the margin we pay on our floating-rate debt. |
| (2) | Interest payments on U.S. Dollar-denominated debt and interest rate swaps are based on LIBOR. |
| (3) | Interest payments on Euro-denominated debt and interest rate swaps are based on EURIBOR. |
| (4) | Euro-denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of December 31, 2005. |
| (5) | Excludes capital lease obligations (present value of minimum lease payments) of 244.0 million Euros ($289.2 million) on two of our LNG carriers. Under the terms of these lease obligations, we are required to have on deposit with financial institutions an amount of cash that, together with the interest earned thereon, will fully fund the amount owing under the capital lease obligations, including purchase obligations. Consequently, we are not subject to interest rate risk from these obligations. |
| (6) | The amount of capital lease obligations represents the present value of minimum lease payments together with our purchase obligation. |
| (7) | The average interest rate is the weighted-average interest rate implicit in the capital lease obligations at the inception of the leases. |
| (8) | The average variable receive rate for our interest rate swaps is set monthly at the 1-month LIBOR or EURIBOR, quarterly at the 3-month LIBOR or EURIBOR or semi-annually at the 6-month LIBOR or EURIBOR. |
| (9) | Includes interest rate swaps of $438.0 million, $256.0 million and $650.0 million that have inception dates of 2006, 2007 and 2009, respectively. |
From time to time we use bunker fuel swap contracts as a hedge to protect against the change in the cost of forecasted bunker fuel costs for certain vessels being time-chartered-out and for vessels servicing certain contracts of affreightment. To the extent the hedge is effective, changes in the fair value of the forward contract are either offset against the fair value of assets or liabilities through income, or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a forward contract’s change in fair value is immediately recognized in income. As at December 31, 2005, we were not committed to any bunker fuel swap contracts.
We use written forward freight agreements as a hedge to protect against the change in spot market rates earned by some of our vessels. As at December 31, 2005, we were committed to forward freight agreements totaling 4.9 million metric tonnes with a notional principal amount of $35.4 million, which expire between January and December 2006.
The following table sets forth further information on the magnitude of these foreign currency forward contracts, interest rate swap agreements, bunker fuel swap contracts and forward freight agreements:
Contract Carrying Amount Fair
(in millions of U.S. dollars) Amount Asset Liability Value
December 31, 2005
Foreign Currency Forward Contracts $ 119.1 $ $ 1.2 $ (1.2)
Interest Rate Swap Agreements 2,421.4 33.5 (33.5)
Forward Freight Agreements 35.4 0.2 (0.2)
Debt (including capital lease obligations) 2,433.0 2,433.0 (2,466.2)
December 31, 2004
Foreign Currency Forward Contracts $ 104.2 $ 16.6 $ $ 16.6
Interest Rate Swap Agreements 2,304.9 158.5 (158.5)
Bunker Fuel Swap Contracts 3.6 0.1 0.1
Forward Freight Agreements 40.0 3.3 (3.3)
Debt (including capital lease obligations) 2,744.5 2,744.5 (2,801.6)
Not applicable.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
We conducted an evaluation of our disclosure controls and procedures under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2005 to ensure that information required to be disclosed by Teekay in the reports we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to Teekay’s management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
During 2005 there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Teekay have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
The Board has determined that director and Chair of the Audit Committee, Eileen A. Mercier, qualifies as an audit committee financial expert and is independent under applicable NYSE and SEC standards.
We have adopted Standards for Business Conduct that include a Code of Ethics for all employees and directors. This document is available under “Corporate Governance” in the Investor Centre of our web site (www.teekay.com). We also intend to disclose under “Corporate Governance” in the Investor Centre of our web site any waivers to or amendments of our Standards of Business Conduct or Code of Ethics for the benefit of our directors and executive officers.
Our principal accountant for 2005 and 2004 was Ernst & Young LLP, Chartered Accountants. The following table shows the fees Teekay Shipping Corporation and our subsidiaries paid or accrued for audit and other services provided by Ernst & Young LLP for 2005 and 2004.
Fees 2005 2004
------------------------ ---------------------
Audit Fees (1) $ 973,975 $ 907,777
Audit-Related Fees (2) 215,131 395,176
Tax Fees (3) 212,509 232,640
All Other Fees (4) 2,167 1,900
------------------------ ---------------------
Total $1,403,782 $1,537,493
======================== =====================
___________________________
| (1) | Audit fees represent fees for professional services provided in connection with the audit of our consolidated financial statements and review of our quarterly consolidated financial statements and audit services provided in connection with other statutory or regulatory filings. The audit fees for 2005 include $293,225 of fees paid to Ernst & Young LLP by our subsidiary, Teekay LNG, that were approved by the Audit Committee of Teekay LNG. |
| (2) | Audit-related fees consisted primarily of accounting consultations, employee benefit plan audits, services related to business acquisitions, services related to the regulatory filings for the initial and follow-on public offerings of Teekay LNG and divestitures and other attestation services. The audit-related fees for 2005 include $86,350 ($252,545 in 2004) of fees related to the public offerings of Teekay LNG paid to Ernst & Young LLP by our subsidiary, Teekay LNG, that were approved by the Audit Committee of Teekay LNG. |
| (3) | For 2005 and 2004, respectively, tax fees principally included international tax planning fees of $2,100 and $62,455, corporate tax compliance fees of $52,600 and $38,849, and personal and expatriate tax services fees of $157,809 and $131,336. |
| (4) | All other fees principally include subscription fees to an internet database of accounting information. |
The Audit Committee has the authority to pre-approve permissible audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees. Engagements for proposed services either may be separately pre-approved by the Audit Committee or entered into pursuant to detailed pre-approval policies and procedures established by the Audit Committee, as long as the Audit Committee is informed on a timely basis of any engagement entered into on that basis. The Audit Committee separately pre-approved all engagements and fees paid to our principal accountant in 2005.
Not applicable.
In November 2004, we announced that our Board of Directors had authorized the repurchase of up to 3,000,000 shares of our Common Stock in the open market. The following table shows the monthly stock repurchase activity related to this program:
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Month of Repurchase Part of Publicly Be Purchased
Total Number of Average Price Paid Announced Plans or Under the
Shares Purchased per Share Program Plans or Program
December 2004................. 1,400,200 $43.73 1,400,200 1,599,800
January 2005.................. 1,599,800 42.27 1,599,800 0
------------------ ------------------- -------------------- -------------------
3,000,000 41.82 3,000,000
================== =================== ==================== ===================
In April, July and December 2005, we announced that its Board of Directors had authorized the repurchase of up to $225 million, $250 million and $180 million, respectively, of shares of our Common Stock in the open market. The following table shows the monthly stock repurchase activity related to these programs:
Total Number of Maximum Dollar
Shares Purchased as Value of Shares that
Month of Repurchase Part of Publicly May Yet Be
Total Number of Average Price Paid Announced Plans or Purchased Under the
Shares Purchased per Share Program Plans or Program
April 2005.................... 10,000 $42.15 10,000 $ 654,579,000
May 2005...................... 1,430,400 42.54 1,430,400 593,729,000
June 2005..................... 2,163,700 43.72 2,163,700 499,132,000
July 2005..................... 409,300 44.79 409,300 480,800,000
August 2005................... 2,034,000 44.43 2,034,000 390,429,000
September 2005................ 850,000 43.37 850,000 353,565,000
October 2005.................. 1,827,300 39.18 1,827,300 281,971,000
November 2005................. 1,116,600 41.48 1,116,600 235,654,000
December 2005................. 1,242,200 41.39 1,242,200 184,240,000
January 2006.................. 1,715,000 39.59 1,715,000 116,343,000
February 2006................. 1,875,000 38.43 1,875,000 44,287,000
March 2006.................... 200,000 39.33 200,000 36,421,000
------------------ ------------------- -------------------- -------------------
14,873,500 41.82 14,873,500
================== =================== ==================== ===================
Not applicable.
The following financial statements and schedule, together with the related report of Ernst & Young LLP, Chartered Accountants thereon, are filed as part of this Annual Report:
Page
Report of Independent Registered Public Accounting Firm................................................ F-1
Consolidated Financial Statements
Consolidated Statements of Income...................................................................... F-2
Consolidated Balance Sheets............................................................................ F-3
Consolidated Statements of Cash Flows.................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity............................................. F-5
Notes to the Consolidated Financial Statements......................................................... F-6
| All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required, are inapplicable or have been disclosed in the Notes to the Consolidated Financial Statements and therefore have been omitted. |
The following exhibits are filed as part of this Annual Report:
1.1 Amended and Restated Articles of Incorporation of Teekay Shipping Corporation. (1)
1.2 Articles of Amendment of Articles of Incorporation of Teekay Shipping Corporation. (1)
1.3 Amended and Restated Bylaws of Teekay Shipping Corporation. (1)
2.1 Registration Rights Agreement among Teekay Shipping Corporation, Tradewinds Trust Co. Ltd., as
Trustee for the Cirrus Trust, and Worldwide Trust Services Ltd., as Trustee for the JTK Trust. (2)
2.2 Specimen of Teekay Shipping Corporation Common Stock Certificate. (2)
2.3 Indenture dated June 22, 2001 among Teekay Shipping Corporation and The Bank of New York Trust
Company of Florida (formerly U.S. Trust Company of Texas, N.A.). for U.S. $250,000,000 8.875%
Senior Notes due 2011. (3)
2.4 First Supplemental Indenture dated as of December 6, 2001, among Teekay Shipping Corporation and
The Bank of New York Trust Company of Florida, N.A. for U.S. $100,000,000 8.875% Senior
Notes due 2011. (4)
2.5 Exchange and Registration Rights Agreement dated June 22, 2001 among Teekay Shipping Corporation
and Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, Salomon Smith Barney
Inc., Deutsche Banc Alex. Brown Inc. and Scotia Capital (USA) Inc. (3)
2.6 Exchange and Registration Rights Agreement dated December 6, 2001 between Teekay Shipping
Corporation and Goldman, Sachs & Co. (4)
2.7 Specimen of Teekay Shipping Corporation's 8.875% Senior Notes due 2011. (3)
4.1 1995 Stock Option Plan. (2)
4.2 Amendment to 1995 Stock Option Plan. (5)
4.3 Amended 1995 Stock Option Plan. (6)
4.4 2003 Equity Incentive Plan. (7)
4.5 Annual Executive Bonus Plan. (8)
4.6 Vision Incentive Plan.
4.7 Form of Indemnification Agreement between Teekay and each of its officers and directors. (2)
4.8 Rights agreement, dated as of September 8, 2000, between Teekay Shipping Corporation and The Bank
of New York, as Rights Agent. (9)
4.9 Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan Facility
between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks. (10)
4.10 Agreement, dated September 1, 2004 for a U.S. $500,000,000 Credit Facility Agreement to be
made available to Teekay Nordic Holdings Incorporated by Nordea Bank Finland PLC. (8)
4.11 Amendment dated September 30, 2004 to Agreement, dated June 26, 2003, for a
U.S. $550,000,000 Secured Reducing Revolving Loan
Facility between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks. (8)
4.12 Agreement dated May 26, 2005 for a U.S. $550,000,000 Credit Facility Agreement to be made
available to Avalon Spirit LLC et al by Nordea Bank Finland PLC and others.
8.1 List of Significant Subsidiaries.
12.1 Rule 13a-14(a)/15d-14(a) Certification of Teekay's Chief Executive Officer.
12.2 Rule 13a-14(a)/15d-14(a) Certification of Teekay's Chief Financial Officer.
13.1 Teekay Shipping Corporation Certification of Bjorn Moller, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
13.2 Teekay Shipping Corporation Certification of Peter Evensen, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
15.1 Letter from Ernst & Young LLP, as independent chartered accountants, dated April 3, 2006,
regarding audited financial information.
| (1) | Previously filed as an exhibit to the Company’s Annual Report on Form 20-F (File No.1-12874), filed with the SEC on March 30, 2000, and hereby incorporated by reference to such Annual Report. |
| (2) | Previously filed as an exhibit to the Company’s Registration Statement on Form F-1 (Registration No. 33-7573-4), filed with the SEC on July 14, 1995, and hereby incorporated by reference to such Registration Statement. |
| (3) | Previously filed as an exhibit to the Company’s Registration Statement on Form F-4 (Registration No. 333-64928), filed with the SEC on July 11, 2001, and hereby incorporated by reference to such Registration Statement. |
| (4) | Previously filed as an exhibit to the Company’s Registration Statement on Form F-4 (Registration No. 333-76922), filed with the SEC on January 17, 2002, and hereby incorporated by reference to such Registration Statement. |
| (5) | Previously filed as an exhibit to the Company’s Form 6-K (File No.1-12874), filed with the SEC on May 2, 2000, and hereby incorporated by reference to such Report. |
| (6) | Previously filed as an exhibit to the Company’s Annual Report on Form 20-F (File No.1-12874), filed with the SEC on April 2, 2001, and hereby incorporated by reference to such Annual Report. |
| (7) | Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (File No. 333-119564), filed with the SEC on October 6, 2004, and hereby incorporated by reference to such Registration Statement. |
| (8) | Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 7, 2005, and hereby incorporated by reference to such Report. |
| (9) | Previously filed as an exhibit to the Company’s Form 8-A (File No.1-12874), filed with the SEC on September 11, 2000, and hereby incorporated by reference to such Annual Report. |
| (10) | Previously filed as an exhibit to the Company’s Report on Form 6-K (File No. 1-12874), filed with the SEC on August 14, 2003, and hereby incorporated by reference to such Report. |
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
TEEKAY SHIPPING CORPORATION
By: /s/ Peter Evensen Peter Evensen Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
| Dated: April 7, 2006 |
|
To the Board of Directors and
Stockholders of
TEEKAY SHIPPING CORPORATION
We have audited the accompanying consolidated balance sheets of Teekay Shipping Corporation and subsidiaries at December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teekay Shipping Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.
|
Vancouver, Canada,
February 21, 2006 |
/s/ ERNST & YOUNG LLP
Chartered Accountants |
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
$ $ $
---------------- ---------------- ----------------
VOYAGE REVENUES 1,954,618 2,219,238 1,576,095
---------------------------------------------------------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Voyage expenses 419,169 432,395 394,656
Vessel operating expenses 206,749 218,489 210,696
Time-charter hire expense 467,990 457,180 304,623
Depreciation and amortization 205,529 237,498 191,237
General and administrative 159,707 130,742 85,147
Vessel and equipment writedowns and (gain) loss on sale
of vessels (note 19) (139,184) (79,254) 90,389
Restructuring charge (note 15) 2,882 1,002 6,383
---------------------------------------------------------------- ---------------- ---------------- ----------------
Total operating expenses 1,322,842 1,398,052 1,283,131
---------------------------------------------------------------- ---------------- ---------------- ----------------
Income from vessel operations 631,776 821,186 292,964
---------------------------------------------------------------- ---------------- ---------------- ----------------
OTHER ITEMS
Interest expense (132,428) (121,518) (80,999)
Interest income 33,943 18,528 3,921
Equity income from joint ventures 11,141 13,730 6,970
Gain on sale of marketable securities - 93,175 517
Foreign exchange gain (loss) (note 8) 59,810 (42,704) (3,855)
Other - net (note 15) (33,342) (24,957) (42,154)
---------------------------------------------------------------- ---------------- ---------------- ----------------
Total other items (60,876) (63,746) (115,600)
---------------------------------------------------------------- ---------------- ---------------- ----------------
Net income 570,900 757,440 177,364
---------------------------------------------------------------- ---------------- ---------------- ----------------
Earnings per common share (note 20)
•Basic 7.30 9.14 2.22
•Diluted 6.83 8.63 2.18
Weighted average number of common shares
•Basic 78,201,996 82,829,336 79,986,746
•Diluted 83,547,686 87,729,037 81,466,294
================================================================ ================ ================ ================
The accompanying notes are an integral part of the consolidated financial statements.
As at As at December 31, December 31, 2005 2004 $ $ ------------------ ------------------- ASSETS Current Cash and cash equivalents (note 8) 236,984 427,037 Restricted cash (note 11) 152,286 96,087 Accounts receivable 151,732 210,089 Vessels held for sale - 129,952 Net investment in direct financing leases - current 20,240 - Prepaid expenses and other assets 69,175 54,717 ------------------------------------------------------------------------------ ------------------ ------------------- Total current assets 630,417 917,882 ------------------------------------------------------------------------------ ------------------ ------------------- Restricted cash (note 11) 158,798 352,725 Vessels and equipment (note 8) At cost, less accumulated depreciation of $766,696 (2004 - $960,597) 2,536,002 2,613,379 Vessels under capital leases, at cost, less accumulated depreciation of $35,574 (2004 - $11,047) (note 11) 712,120 665,331 Advances on newbuilding contracts (note 17) 473,552 252,577 ------------------------------------------------------------------------------ ------------------ ------------------- Total vessels and equipment 3,721,674 3,531,287 ------------------------------------------------------------------------------ ------------------ ------------------- Net investment in direct financing leases (note 5) 100,996 109,215 Investment in joint ventures (note 17) 145,448 59,637 Other assets 113,590 85,893 Intangible assets - net (note 6) 252,280 277,511 Goodwill (note 6) 170,897 169,590 ------------------------------------------------------------------------------- ------------------ ------------------- Total assets 5,294,100 5,503,740 ============================================================================== ================== ===================
The accompanying notes are an integral part of the consolidated financial statements.
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2005 2004 2003 $ $ $ --------------- ------------ ------------- Cash and cash equivalents provided by (used for) OPERATING ACTIVITIES Net income 570,900 757,440 177,364 Non-cash items: Depreciation and amortization 205,529 237,498 191,237 Gain on sale of vessels (151,427) (79,254) (1,188) Gain on sale of marketable securities - (93,175) (517) Loss on writedown of vessels and equipment 12,243 - 91,577 Loss on writedown of marketable securities - - 4,910 Loss on repurchase of bonds (note 15) 13,255 769 5,385 Equity income (net of dividends received: December 31, 2005 - $9,227; December 31, 2004 - $12,576; December 31, 2003 - $7,420) (1,914) (1,154) 450 Income taxes (note 15) (2,340) 35,048 36,501 Loss from settlement of interest rate swaps (note 15) 7,820 - - Writeoff of capitalized loan costs (note 15) 7,462 - - Unrealized foreign exchange (gain) loss and other - net (23,174) 16,971 (3,191) Change in non-cash working capital items related to operating activities (note 18) (8,644) (26,550) (4,256) Expenditures for drydocking (20,668) (32,889) (42,697) ------------------------------------------------------------------------- --------------- ------------- ------------- Net operating cash flow 609,042 814,704 455,575 ------------------------------------------------------------------------- --------------- ------------- ------------- FINANCING ACTIVITIES Proceeds from long-term debt 2,472,316 1,631,181 1,993,270 Capitalized loan costs (8,495) (9,960) (12,442) Loan from joint venture partner (note 9) 33,500 - - Scheduled repayments of long-term debt (61,242) (150,314) (62,240) Prepayments of long-term debt (2,629,624) (1,731,223) (1,466,815) Repayments of capital lease obligations (78,919) (66,109) (345) Decrease in restricted cash 81,304 8,341 6,113 Settlement of interest rate swaps (143,295) - - Net proceeds from sale of Teekay LNG Partners L.P. units (note 3) 257,986 - - Investment in subsidiaries from minority owners (note 17) 25,329 - - Distribution from subsidiaries to minority owners (note 17) (14,093) - - Issuance of Common Stock upon exercise of stock options 20,359 51,280 25,015 Repurchase of Common Stock (note 13) (538,377) (61,237) - Cash dividends paid (49,151) (42,362) (35,719) ------------------------------------------------------------------------- --------------- ------------- ------------- Net financing cash flow (632,402) (370,403) 446,837 ------------------------------------------------------------------------- --------------- ------------- ------------- INVESTING ACTIVITIES Expenditures for vessels and equipment (555,142) (548,587) (372,433) Proceeds from sale of vessels and equipment 534,007 440,556 242,111 Proceeds from sale of marketable securities - 135,357 9,642 Purchase of Teekay Shipping Spain S.L., net of cash acquired of $11,191 (note 4) - (286,993) - Purchase of Navion AS (note 5) - - (704,734) Purchase of intangible assets - - (7,250) Investment in joint ventures (note 17) (82,399) (4,369) 25,500 Loan to joint venture partner (13,000) - - Purchase of PetroTrans Holdings Ltd. - (357) (25,050) Investment in direct financing leases (note 5) (23,708) (53,273) (25,202) Repayment of direct financing leases (note 5) 12,440 9,381 4,880 Other (38,891) (1,263) (42,217) ------------------------------------------------------------------------- --------------- ------------- ------------- Net investing cash flow (166,693) (309,548) (894,753) ------------------------------------------------------------------------- --------------- ------------- ------------- (Decrease) increase in cash and cash equivalents (190,053) 134,753 7,659 Cash and cash equivalents, beginning of the period 427,037 292,284 284,625 ------------------------------------------------------------------------- --------------- ------------- ------------- Cash and cash equivalents, end of the period 236,984 427,037 292,284 ------------------------------------------------------------------------- --------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements.
Accumulated Other Compre- Thousands hensive Compre- Total of Common Common Retained Income hensive Stockholders' Shares Stock Earnings (Loss) Income Equity # $ $ $ $ $ ------------------------------------------------- --------- --------- ---------- --------- --------- ---------- Balance as at December 31, 2002 79,384 470,988 954,005 (3,095) 1,421,898 ------------------------------------------------- --------- --------- ---------- --------- --------- ---------- Net income 177,364 177,364 177,364 Other comprehensive income: Unrealized gain on marketable securities 53,540 53,540 53,540 Reclassification adjustment for loss on marketable securities included in net income 4,899 4,899 4,899 Unrealized gain on derivative instruments (note 16) 8,639 8,639 8,639 Reclassification adjustment for gain on derivative instruments (note 16) (459) (459) (459) --------- Comprehensive income 243,983 --------- Dividends declared (35,719) (35,719) Reinvested dividends 2 3 3 Exercise of stock options 1,764 25,015 25,015 7.25% Premium Equity Participating Security Units contract adjustment fee (4,803) (4,803) Issuance of Common Stock (note 13) 72 1,450 1,450 ------------------------------------------------- --------- --------- ---------- --------- --------- ---------- Balance as at December 31, 2003 81,222 492,653 1,095,650 63,524 1,651,827 ------------------------------------------------- --------- --------- ---------- --------- --------- ---------- Net income 757,440 757,440 757,440 Other comprehensive income: Unrealized gain on marketable securities 39,369 39,369 39,369 Reclassification adjustment for gain on marketable securities included in net income (92,539) (92,539) (92,539) Unrealized loss on derivative instruments (note 16) (94,822) (94,822) (94,822) Reclassification adjustment for loss on derivative instruments (note 16) 28,336 28,336 28,336 --------- Comprehensive income 637,784 --------- Dividends declared (42,366) (42,366) Reinvested dividends 1 3 3 100% Stock dividend 41 (41) - Exercise of stock options 3,125 51,280 51,280 Issuance of Common Stock (note 13) 3 67 67 Repurchase of Common Stock (note 13) (1,400) (9,106) (52,131) (61,237) ------------------------------------------------- --------- --------- ---------- --------- --------- ---------- Balance as at December 31, 2004 82,951 534,938 1,758,552 (56,132) 2,237,358 ------------------------------------------------- --------- --------- ---------- --------- --------- ---------- Net income 570,900 570,900 570,900 Other comprehensive income: Unrealized loss on marketable securities (1,348) (1,348) (1,348) Unrealized loss on derivative instruments (note 16) (25,370) (25,370) (25,370) Reclassification adjustment for loss on derivative instruments (note 16) 14,020 14,020 14,020 --------- Comprehensive income 558,202 --------- Dividends declared (49,155) (49,155) Reinvested dividends 1 4 4 Exercise of stock options 1,098 20,359 20,359 Issuance of Common Stock (note 13) 9 297 297 Repurchase of Common Stock (note 13) (12,683) (83,814) (454,563) (538,377) Gain on public offerings of Teekay LNG (note 3) 7,854 7,854 ------------------------------------------------- --------- --------- ---------- --------- --------- ---------- Balance as at December 31, 2005 71,376 471,784 1,833,588 (68,830) 2,236,542 ------------------------------------------------- --------- --------- ---------- --------- --------- ----------
The accompanying notes are an integral part of the consolidated financial statements.
| 1. | Summary of Significant Accounting Policies |
| Basis of presentation |
| The consolidated financial statements have been prepared in conformity with generally accepted U.S accounting principles. They include the accounts of Teekay Shipping Corporation (or Teekay ), which is incorporated under the laws of the Republic of the Marshall Islands, and its wholly owned or controlled subsidiaries (collectively, the Company ). Significant intercompany balances and transactions have been eliminated upon consolidation. |
| The preparation of financial statements in conformity with generally accepted U.S. accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. |
| Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period. |
| Reporting currency |
| The consolidated financial statements are stated in U.S. Dollars because the Company operates in international shipping markets, the Company’s primary economic environment, which typically utilize the U.S. Dollar as the functional currency. Transactions involving other currencies during the year are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. At the balance sheet date, monetary assets and liabilities that are denominated in currencies other than the U.S. Dollar are translated to reflect the year-end exchange rates. Resulting gains or losses are reflected separately in the accompanying consolidated statements of income. |
| Operating revenues and expenses |
| The Company recognizes revenues from time charters and bareboat charters daily over the term of the charter as the applicable vessel operates under the charter. The Company does not recognize revenue during days that the vessel is off-hire. All voyage revenues from voyage charters are recognized on a percentage of completion method. The Company uses a discharge-to-discharge basis in determining percentage of completion for all spot voyages, and voyages servicing contracts of affreightment (or COAs) whereby it recognizes revenue ratably from when product is discharged (unloaded) at the end of one voyage to when it is discharged after the next voyage. The Company does not begin recognizing voyage revenue until a charter has been agreed to by the customer and the Company, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. Shuttle tanker voyages servicing COAs with offshore oil fields commence with tendering of notice of readiness at a field, within the agreed lifting range, and ends with tendering of notice of readiness at a field for the next lifting. The consolidated balance sheets reflect the deferred portion of revenues and expenses, which will be earned in subsequent periods. |
| Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Vessel operating expenses include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses. Voyage expenses are recognized ratably over the duration of the voyage, and vessel operating expenses are recognized when incurred. |
| Cash and cash equivalents |
| The Company classifies all highly-liquid investments with a maturity date of three months or less when purchased as cash and cash equivalents. |
| Cash interest paid during the years ended December 31, 2005, 2004 and 2003 totaled $148.9 million, $130.1 million, and $81.9 million, respectively. |
| Marketable securities |
| The Company’s investments in marketable securities are classified as available-for-sale securities and are carried at fair value. Net unrealized gains and losses on available-for-sale securities are reported as a component of accumulated other comprehensive income (loss). |
| Vessels and equipment |
| All pre-delivery costs incurred during the construction of newbuildings, including interest, supervision and technical costs, are capitalized. The acquisition cost and all costs incurred to restore used vessel purchases to the standard required to properly service the Company’s customers are capitalized. |
| Depreciation is calculated on a straight-line basis over a vessel’s estimated useful life, less an estimated residual value. Depreciation is calculated using an estimated useful life of 25 years for crude oil tankers and 35 years for liquefied natural gas (or LNG ) carriers from the date the vessel is delivered from the shipyard, or a shorter period if regulations prevent us from operating the vessels for 25 years or 35 years, respectively. Depreciation of vessels and equipment for the years ended December 31, 2005, 2004 and 2003 aggregated $166.5 million, $189.4 million and $152.4 million, respectively. Depreciation and amortization includes depreciation on all owned vessels and vessels accounted for as capital leases. (see Note 19). |
| Interest costs capitalized to vessels and equipment for the years ended December 31, 2005, 2004 and 2003 aggregated $16.6 million, $9.9 million and $8.5 million, respectively. |
| Gains on vessels sold and leased back under capital leases are deferred and amortized over the remaining estimated useful life of the vessel. Losses on vessels sold and leased back under capital leases are recognized immediately when the fair value of the vessel at the time of sale-leaseback is less than its book value. In such case, the Company would recognize a loss in the amount by which book value exceeds fair value. |
| Generally, the Company drydocks each vessel every two and a half to five years. In addition, a shipping society classification intermediate survey is performed on the Company’s LNG carriers between the second and third year of the five-year drydocking period. The Company capitalizes a substantial portion of the costs incurred during drydocking and for the survey and amortizes those costs on a straight-line basis from the completion of a drydocking or intermediate survey to the estimated completion of the next drydocking. The Company expenses costs related to routine repairs and maintenance incurred during drydocking that do not improve or extend the useful lives of the assets. When significant drydocking expenditures occur prior to the expiration of the original amortization period, the remaining unamortized balance of the original drydocking cost and any unamortized intermediate survey costs are expensed in the month of the subsequent drydocking. Amortization of drydocking expenditures for the years ended December 31, 2005, 2004 and 2003 aggregated $14.9 million, $23.5 million and $26.4 million, respectively. |
| The Company reviews vessels and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate over their remaining useful lives. If vessels and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value (see Note 19). |
| Direct financing leases |
| The Company assembles, installs, operates and leases equipment that reduces volatile organic compound emissions (or VOC Equipment ) during loading, transportation and storage of oil and oil products. Leasing of the VOC Equipment is accounted for as a direct financing lease, with lease payments received being allocated between the net investment in the lease and other income using the effective interest method so as to produce a constant periodic rate of return over the lease term. |
| Investment in joint ventures |
| The Company has a 50% participating interest in eight joint venture companies (2004 — eight). Five of these joint ventures each own one shuttle tanker. One of the joint ventures, which was formed on April 30, 2004, will pursue new business in the oil and gas shipping sectors that relate only to the Spanish market or are led by Spanish entities or entities controlled by a Spanish company (see Note 4). One joint venture has a first right of refusal on Statoil ASA’s oil transportation requirements at the prevailing market rate until December 31, 2007 (see Note 5). One joint venture is a lightering company acquired on September 30, 2003. The Company has a 40% participating interest in one joint venture company that has contracted to construct and charter four LNG carriers under long-term fixed-rate contracts to Ras Laffan Liquefied Natural Gas Co. Limited (3) (see Note 17). The joint ventures are accounted for using the equity method, whereby the investment is carried at the Company’s original cost plus its proportionate share of undistributed earnings. |
| Investment in the Panamax OBO Pool |
| All Panamax oil/bulk/ore carriers (or OBOs ) owned by the Company were operated through a pool that was managed by the Company until its termination in 2003, when the Company sold all of its OBO carriers. The participants in the pool were the companies contributing vessel capacity to it. The voyage revenues and expenses of these vessels have been included on a 100% basis in the consolidated financial statements. The minority pool participants’ share of the results has been deducted as time charter hire expense prior to termination of the pool. |
| Loan costs |
| Loan costs, including fees, commissions and legal expenses, which are presented as other assets are capitalized and amortized on a straight-line basis over the term of the relevant loan. Amortization of loan costs is included in interest expense. |
| Derivative instruments |
| The Company utilizes derivative financial instruments to reduce risk from foreign currency fluctuations, changes in interest rates, changes in spot market rates for vessels and changes in bunker fuel prices and does not use them for trading purposes. Statement of Financial Accounting Standards No. 133 (or SFAS 133 ) “Accounting for Derivative Instruments and Hedging Activities,” which was amended in June 2000 by SFAS No. 138 and in May 2003 by SFAS No. 149, establishes accounting and reporting standards for derivatives instruments and hedging activities. |
| Derivative instruments are recorded as other assets or other long-term liabilities, measured at fair value. Derivatives that are not hedges or are not designated as hedges are adjusted to fair value through income. If the derivative is a hedge, depending upon the nature of the hedge, changes in the fair value of the derivatives are either offset against the fair value of assets, liabilities or firm commitments through income, or recognized in other comprehensive income (loss) until the hedged item is recognized in income. The ineffective portion of a derivative’s change in fair value is immediately recognized in income (see Note 16). |
| Goodwill and intangible assets |
| Goodwill and indefinite lived intangible assets are not amortized, but reviewed for impairment annually, or more frequently if impairment indicators arise. Intangible assets with finite lives are amortized over their useful lives. |
| The Company’s intangible assets consist primarily of time charter contracts acquired as part of the purchase of Teekay Shipping Spain S.L (or Teekay Spain ) and COAs acquired as part of the purchase of Navion AS (or Navion ). The time charter contracts are being amortized on a straight line basis over the life of the contracts. The COAs are being amortized over their respective lives, with the amount amortized each year being weighted based on the projected revenue to be earned under the contracts. |
| Income taxes |
| The legal jurisdictions in which Teekay and the majority of its subsidiaries are incorporated do not impose income taxes upon shipping-related activities. The Company’s Australian shipowning subsidiaries, its Canadian subsidiary Teekay Canadian Tankers Ltd., its Norwegian subsidiaries UNS and Navion and its Spanish subsidiary Teekay Spain are subject to income taxes (see Note 15). Included in other long-term liabilities are deferred income taxes of $67.3 million at December 31, 2005, $121.4 million at December 31, 2004, and $78.2 million at December 31, 2003. The Company accounts for such taxes using the liability method pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” |
| Issuance of shares or units by subsidiaries |
| The Company accounts for gains or losses from the issuance of shares or units by its subsidiaries as an adjustment to stockholders’ equity. |
| Accounting for stock-based compensation |
| Under Statement of Financial Accounting Standards No. 123 (or SFAS 123 ), “Accounting for Stock-Based Compensation,” disclosures of stock-based compensation arrangements with employees are required and companies are encouraged (but not required) to record compensation costs associated with employee stock option awards, based on estimated fair values at the grant dates (see also “Recent Accounting Pronouncements” below). The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (or APB 25 ), “Accounting for Stock Issued to Employees.” As the exercise price of the Company’s employee stock options equals the market price of underlying stock on the date of grant, no compensation expense is recognized under APB 25. |
| The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (see Note 13). |
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
$ $ $
---------------- ---------------- ----------------
Net income - as reported............................... 570,900 757,440 177,364
Less: Total stock-based compensation expense........... 8,077 8,996 8,243
---------------- ---------------- ----------------
Net income - pro forma................................. 562,823 748,444 169,121
================ ================ ================
Basic earnings per common share:
As reported.......................................... 7.30 9.14 2.22
Pro forma............................................ 7.20 9.04 2.11
Diluted earnings per common share:
As reported.......................................... 6.83 8.63 2.18
Pro forma............................................ 6.74 8.53 2.08
| For the purpose of the above pro forma calculations, the fair value of each option granted was estimated on the date of the grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used in computing the fair value of the options granted: risk-free average interest rates of 4.1% for the year ended December 31, 2005; 2.7% for the year ended December 31, 2004 and 2.8% for the year ended December 31, 2003, respectively; dividend yield of 1.5%; expected volatility of 35%; and expected lives of five years. |
| Comprehensive income |
| The Company follows Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. |
| Recent accounting pronouncements |
| On December 16, 2004, the Financial Accounting Standards Board (or FASB ) issued FASB Statement of Financial Accounting Standards No. 123(R) (or SFAS 123(R) ), “Share-Based Payment”, which is a revision of SFAS 123 and supersedes APB 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an acceptable alternative. |
| SFAS 123(R) must be adopted at the beginning of the first fiscal year commencing after June 15, 2005, and the Company will adopt SFAS 123(R) on January 1, 2006. |
| SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods: |
| 1. | A “modified prospective” method in which compensation cost is recognized beginning with the effective date based on (a) the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date; or |
| 2. | A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. |
| The Company plans to adopt SFAS 123(R) using the modified prospective method. |
| The adoption of SFAS 123(R)‘s fair value method will have a significant impact on our result of operations, although it will not affect our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in the above table. |
| 2. | Segment Reporting |
| The Company is engaged in the international marine transportation of crude oil, clean petroleum products and LNG through the operation of its tankers and LNG carriers. The Company’s revenues are earned in international markets. |
| One customer, an international oil company, accounted for 20% ($392.2 million) of the Company’s consolidated voyage revenues during the year ended December 31, 2005. The same customer accounted for 17% ($373.7 million) of the Company’s consolidated voyage revenues during 2004 and 15% ($239.5 million) during 2003. No other customer accounted for over 10% of the Company’s consolidated voyage revenues during any of those years. |
| The Company has three reportable segments: its spot tanker segment, its fixed-rate tanker segment, and its fixed-rate LNG segment. The Company’s spot tanker segment consists of conventional crude oil tankers and product carriers operating in the spot market or subject to time charters or contracts of affreightment priced on a spot-market basis or on short-term fixed-rate contracts. The Company considers contracts that have an original term of less than three years in duration to be short-term. The Company’s fixed-rate tanker segment consists of shuttle tankers, floating storage and offtake vessels, liquid petroleum gas carriers and conventional crude oil and product tankers subject to long-term, fixed-rate time-charter contracts or contracts of affreightment. The Company’s fixed-rate LNG segment consists of LNG carriers subject to long-term, fixed-rate time-charter contracts. The Company had no LNG operations prior to the acquisition of Teekay Spain on April 30, 2004 (see Note 4). Segment results are evaluated based on income from vessel operations. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Company’s consolidated financial statements. |
| The following tables present results for these segments for the years ended December 31, 2005, 2004 and 2003. |
----------------------------------------------------- --------------- -------------- ------------ -------------
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Year ended December 31, 2005 Segment Segment Segment Total
$ $ $ $
----------------------------------------------------- --------------- -------------- ------------ -------------
Voyage revenues - external.......................... 1,122,845 734,128 97,645 1,954,618
Voyage expenses..................................... 347,043 72,078 48 419,169
Vessel operating expenses........................... 62,525 128,916 15,308 206,749
Time-charter hire expense........................... 273,730 194,260 - 467,990
Depreciation and amortization....................... 55,105 120,064 30,360 205,529
General and administrative (1) ..................... 89,465 57,059 13,183 159,707
Vessel writedowns/(gain) loss on sale of vessels.... (142,004) 2,820 - (139,184)
Restructuring charge................................ 1,927 955 - 2,882
--------------- -------------- ------------ -------------
Income from vessel operations....................... 435,054 157,976 38,746 631,776
=============== ============== ============ =============
Voyage revenues - intersegment...................... - 4,607 - 4,607
Equity income....................................... 5,233 5,908 - 11,141
Investments in joint ventures at December 31, 2005.. 29,142 33,907 82,399 145,448
Total assets at December 31, 2005................... 906,028 2,050,122 1,753,289 4,709,439
Expenditures for vessels and equipment (2) ......... 174,128 60,653 320,361 555,142
---------------------------------------------------- --------------- -------------- ------------ -------------
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Year ended December 31, 2004 Segment Segment Segment Total
$ $ $ $
---------------------------------------------------- --------------- -------------- ------------ -------------
Voyage revenues - external......................... 1,450,791 725,061 43,386 2,219,238
Voyage expenses.................................... 355,116 77,058 221 432,395
Vessel operating expenses.......................... 93,394 117,586 7,509 218,489
Time-charter hire expense.......................... 263,122 194,058 - 457,180
Depreciation and amortization...................... 95,570 129,074 12,854 237,498
General and administrative (1) .................... 70,371 56,431 3,940 130,742
Vessel writedowns/(gain) loss on sale of vessels... (72,101) (7,153) - (79,254)
Restructuring charge............................... 1,002 - - 1,002
-------------- -------------- -------------- -------------
Income from vessel operations...................... 644,317 158,007 18,862 821,186
============== ============== ============== =============
Voyage revenues - intersegment..................... - 4,607 - 4,607
Equity income...................................... 7,040 6,690 - 13,730
Investments in joint ventures at December 31, 2004. 29,034 30,603 - 59,637
Total assets at December 31, 2004.................. 1,119,302 2,080,855 1,517,027 4,717,184
Expenditures for vessels and equipment (2) ........ 214,572 191,085 142,930 548,587
---------------------------------------------------- --------------- -------------- ------------ -------------
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Year ended December 31, 2003 Segment Segment Segment Total
$ $ $ $
---------------------------------------------------- --------------- -------------- ------------ -------------
Voyage revenues - external......................... 1,081,974 494,121 - 1,576,095
Voyage expenses.................................... 342,928 51,728 - 394,656
Vessel operating expenses.......................... 126,261 84,435 - 210,696
Time-charter hire expense.......................... 168,344 136,279 - 304,623
Depreciation and amortization...................... 106,374 84,863 - 191,237
General and administrative (1) .................... 53,338 31,809 - 85,147
Vessel writedowns/(gain) loss on sale of vessels... 90,326 63 - 90,389
Restructuring charge............................... 4,382 2,001 - 6,383
-------------- -------------- -------------- -------------
Income from vessel operations...................... 190,021 102,943 - 292,964
============== ============== ============== =============
Voyage revenues - intersegment..................... - 8,499 - 8,499
Equity income...................................... 1,441 5,529 - 6,970
Investments in joint ventures at December 31, 2003. 26,345 28,047 - 54,392
Total assets at December 31, 2003.................. 1,144,087 1,798,617 - 2,942,704
Expenditures for vessels and equipment (2) ........ 28,684 343,749 - 372,433
| (1) | Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources). |
| (2) | Excludes vessels purchased as part of the Company’s acquisition of Teekay Spain in April 2004, and Navion AS in April 2003. |
| A reconciliation of total segment assets to amounts presented in the consolidated balance sheets is as follows: |
December 31, December 31,
2005 2004
$ $
--------------------- --------------------
Total assets of all segments........................................ 4,709,439 4,717,184
Cash and restricted cash............................................ 244,510 428,437
Accounts receivable and other assets................................ 340,151 358,119
--------------------- --------------------
Consolidated total assets........................................ 5,294,100 5,503,740
===================== ====================
| 3. | Public Offerings of Teekay LNG Partners L.P. |
| On May 10, 2005, the Company’s subsidiary Teekay LNG Partners L.P. (or Teekay LNG ) completed its initial public offering (or the Offering ) of 6.9 million common units at a price of $22.00 per unit. During November 2006, Teekay LNG issued an additional 4.6 million common units at a price of $27.40 per unit (or the Follow-on Offering ). As a result of these transactions, the Company recorded a $7.9 million increase to stockholders’ equity which represents the Company’s gain from the issuance of units for the Offering and Follow-on Offering. |
| The proceeds received from the public offerings and the use of those proceeds are summarized as follows: |
Proceeds received: Offering Follow-On Offering Total
$ $ $
----------------- ---------------- ---------------
Sale of 6,900,000 common units at $22.00 per unit........... 151,800 - 151,800
Sale of 4,600,000 common units at $27.40 per unit........... - 126,040 126,040
----------------- ---------------- ---------------
151,800 126,040 277,840
----------------- ---------------- ---------------
Use of proceeds from sale of common units:
Underwriting and structuring fees........................... 10,473 5,042 15,515
Professional fees and other offering expenses to third
parties................................................... 5,614 790 6,404
Repayment of loans from Teekay Shipping Corporation......... 129,400 - 129,400
Purchase of three Suezmax tankers from Teekay Shipping
Corporation............................................... - 120,208 120,208
Working capital............................................. 6,313 - 6,313
----------------- ---------------- ---------------
151,800 126,040 277,840
----------------- ---------------- ---------------
| Teekay LNG is a Marshall Islands limited partnership formed by the Company as part of its strategy to expand its operations in the LNG shipping sector. Teekay LNG provides LNG and crude oil marine transportation service under long-term, fixed-rate contracts with major energy and utility companies through its fleet of LNG carriers and Suezmax class crude oil tankers, primarily consisting of vessels obtained through the Company’s acquisition of Teekay Spain in April 2004. |
| Immediately preceding the Offering, the Company entered into an omnibus agreement with Teekay LNG governing, among other things, when the Company and Teekay LNG may compete with each other and certain rights of first offering on LNG carriers and Suezmax tankers. Under the agreement, Teekay LNG has granted to the Company a 30-day right of first offering on any proposed (a) sale, transfer or other disposition of any of Teekay LNG’s Suezmax tankers or (b) re-chartering of any of Teekay LNG’s Suezmax tankers pursuant to a time-charter with a term of at least three years if the existing charter expires or is terminated early. Likewise, the Company has granted a similar right of first offer to Teekay LNG for any LNG carriers it might own. |
| Concurrently with Teekay LNG’s Follow-On Offering, the Company sold to Teekay LNG three double-hulled Suezmax tankers and related long-term, fixed-rate time charters for an aggregate price of $180 million. These vessels, the African Spirit , Asian Spirit and European Spirit , have an average age of two years and are chartered to a subsidiary of ConocoPhillips, an international, integrated energy company. Teekay LNG financed the acquisition with the net proceeds of the public offering, together with borrowings under its revolving credit facility and cash balances. |
| 4. | Acquisition of Teekay Shipping Spain S.L. |
| On April 30, 2004, the Company acquired all of the outstanding shares of Naviera F. Tapias S.A. and its subsidiaries and renamed it Teekay Shipping Spain, S.L. Teekay Spain engages in the marine transportation of crude oil and LNG. The Company acquired Teekay Spain for $298.2 million in cash, plus the assumption of debt and remaining newbuilding commitments. The recognition of goodwill was supported by managements’ belief that the acquisition of the Teekay Spain business has provided the Company with a strategic platform from which to expand its presence in the LNG shipping sector and immediate access to reputable LNG operations. The Company anticipates this will benefit it when bidding on future LNG projects. In the transaction, Teekay also entered into an agreement with an entity controlled by the former controlling shareholder of Teekay Spain to establish a 50/50 joint venture that will pursue new business in the oil and gas shipping sectors that relate only to the Spanish market or are led by Spanish entities or entities controlled by a Spanish company. Teekay Spain’s results of operations have been consolidated with the Company’s results commencing May 1, 2004. |
| As at December 31, 2005, Teekay Spain’s LNG fleet consisted of four LNG vessels. Teekay Spain’s vessels are contracted under long-term, fixed-rate time charters to major Spanish energy companies. As at December 31, 2005, Teekay Spain’s conventional crude oil tanker fleet consisted of five Suezmax tankers. All five Suezmax tankers are contracted under long-term, fixed-rate time charters with a major Spanish oil company. |
| The following table summarizes the fair value of the assets acquired and liabilities assumed by the Company at April 30, 2004, the date of the Teekay Spain acquisition. |
At April 30, 2004
$
-------------------
ASSETS
Cash, cash equivalents and short-term restricted cash.................................. 85,092
Other current assets................................................................... 7,415
Vessels and equipment.................................................................. 821,939
Restricted cash - long term............................................................ 311,664
Other assets - long-term............................................................... 15,355
Intangible assets subject to amortization: Time-charter contracts (weighted-average
useful life of 19.2 years)......................................................... 183,052
Goodwill ($3.6 million fixed-rate tanker segment and $35.7 million fixed-rate LNG
segment)........................................................................... 39,279
--------------------------------------------------------------------------------------- -------------------
Total assets acquired.................................................................. 1,463,796
======================================================================================= ===================
LIABILITIES
Current liabilities.................................................................... 98,428
Long-term debt ........................................................................ 668,733
Obligations under capital leases....................................................... 311,011
Other long-term liabilities............................................................ 87,439
--------------------------------------------------------------------------------------- -------------------
Total liabilities assumed.............................................................. 1,165,611
======================================================================================= ===================
Net assets acquired (cash consideration) .............................................. 298,185
======================================================================================= ===================
| (1) | The following table shows comparative summarized consolidated pro forma financial information for the Company for the years ended December 31, 2004 and 2003, giving effect to the acquisition of 100% of the outstanding shares in Teekay Spain as if it had taken place on January 1 of each of the periods presented: |
Pro Forma
Year Ended December 31,
2004 2003
(unaudited) (unaudited)
$ $
--------------------- ---------------------
Voyage revenues................................................... 2,259,956 1,662,804
Net income (1).................................................... 769,240 104,820
Earnings per share
- Basic........................................................... 9.29 1.31
- Diluted......................................................... 8.77 1.29
| (1) | The results of Teekay Spain for the four months ended April 30, 2004 and the year ended December 31, 2003 included a foreign exchange gain of $18.0 million and a foreign exchange loss of $71.5 million, respectively. Substantially all of the foreign exchange gain and loss were unrealized. |
| 5. | Acquisition of Navion AS |
| In April 2003, Teekay completed its acquisition of 100% of the issued and outstanding shares of Navion AS for approximately $774.2 million in cash, including transaction costs of approximately $7.0 million. The Company made a deposit of $76.0 million towards the purchase price on December 16, 2002. The remaining portion of the purchase price was paid on closing. The Company funded its acquisition of Navion by borrowing under a $500 million 364-day credit facility (subsequently replaced by a $550 million revolving credit facility), together with available cash and borrowings under other existing revolving credit facilities. Navion’s results of operation have been consolidated with Teekay’s results commencing April 1, 2003. |
| Navion, based in Stavanger, Norway, operates primarily in the shuttle tanker and the conventional crude oil and product tanker markets. Its modern shuttle tanker fleet, which as of December 31, 2005, consisted of eight owned and 19 chartered-in vessels (excluding five vessels chartered-in from the Company’s shuttle tanker subsidiary Ugland Nordic Shipping AS (or UNS ), and other subsidiaries of the Company), provides logistical services to the Norwegian state-owned oil company, Statoil ASA, and other oil companies in the North Sea under fixed-rate, long-term contracts of affreightment. Subsequent to the acquisition, the operations of UNS and the shuttle tanker operations of Navion were combined into one business unit, Teekay Navion Shuttle Tankers. The projected benefits resulting from the combined operations as well as possible growth opportunities in the North Sea and elsewhere in the world resulted in the recognition of goodwill. Navion’s modern, chartered-in, conventional tanker fleet, which as of December 31, 2005, consisted of eight crude oil tankers and 20 product tankers, operates primarily in the Atlantic region, providing services to Statoil and other oil companies. In addition, Navion owns two floating storage and offtake vessels currently trading as conventional crude oil tankers in the Atlantic region and one chartered-in methanol carrier on long-term charter to Statoil. Through Navion Chartering AS, an entity owned jointly with Statoil, Navion has a first right of refusal on Statoil’s oil transportation requirements at the prevailing market rate until December 31, 2007. In addition to tanker operations, Navion also constructs, installs, operates and leases equipment that reduces volatile organic compound emissions during loading, transportation and storage of oil and oil products. |
| The following table summarizes the fair value of the assets acquired and liabilities assumed by the Company at April 1, 2003, the date of the Navion acquisition. |
As at
April 1, 2003
$
ASSETS
Current assets.............................................................................. 64,457
Vessels and equipment....................................................................... 543,003
Net investment in direct financing leases................................................... 45,558
Other assets - long-term.................................................................... 3,835
Intangible assets subject to amortization: Contracts of affreightment (15-year
sum-of-years declining balance)......................................................... 117,000
Goodwill (fixed-rate tanker segment)........................................................ 40,033
-------------------------------------------------------------------------------------------- -------------------
Total assets acquired 813,886
============================================================================================ ===================
LIABILITIES
Current liabilities......................................................................... 36,270
Other long-term liabilities................................................................. 3,463
-------------------------------------------------------------------------------------------- -------------------
Total liabilities assumed................................................................... 39,733
-------------------------------------------------------------------------------------------- -------------------
Net assets acquired (cash consideration).................................................... 774,153
============================================================================================ ===================
| The following table shows comparative summarized consolidated pro forma financial information for the Company for the year ended December 31, 2003, giving effect to the acquisition of 100% of the outstanding shares in Navion as if the acquisition had taken place on January 1, 2003: |
Pro Forma
Year Ended
December 31, 2003
(unaudited)
$
------------------------
Voyage revenues............................................................... 1,804,528
Net income.................................................................... 223,403
Net income per common share
- Basic ...................................................................... 2.79
- Diluted..................................................................... 2.74
| 6. | Goodwill and Intangible Assets |
| The changes in the carrying amount of goodwill for the year ended December 31, 2005 for the Company’s reporting segments are as follows: |
Fixed-Rate Fixed-Rate
Spot Tanker Tanker LNG
Segment Segment Segment Other Total
$ $ $ $ $
---------- ----------- ----------- ---------- ----------
Balance as of December 31, 2004........ - 132,223 35,631 1,736 169,590
Goodwill acquired...................... - 1,973 - - 1,973
Goodwill impairment.................... - - - (666) (666)
---------- ----------- ----------- ---------- ----------
Balance as of December 31, 2005 - 134,196 35,631 1,070 170,897
========== =========== =========== ========== ==========
| As at December 31, 2005 and 2004, intangible assets consisted of: |
December 31, 2005 December 31, 2004
------------- ---------- ------------ ---------- ---------- ------------ ----------
Weighted-
Average Gross Net Gross Net
Amortization Carrying Accumulated Carrying Carrying Accumulated Carrying
Period Amount Amortization Amount Amount Amortization Amount
(years) $ $ $ $ $ $
------------- ---------- ------------ ---------- ---------- ------------ ----------
Contracts of affreightment.. 10.2 124,250 (45,748) 78,502 124,250 (30,880) 93,370
Time-charter contracts...... 19.2 182,552 (13,358) 169,194 182,552 (4,095) 178,457
Intellectual property....... 7.0 7,701 (3,117) 4,584 7,701 (2,017) 5,684
------------- ---------- ------------ ---------- ---------- ------------ ----------
15.4 314,503 (62,223) 252,280 314,503 (36,992) 277,511
============= ========== ============ ========== ========== ============ ==========
| Aggregate amortization expense of intangible assets for the year ended December 31, 2005 was $25.2 million ($25.7 million – 2004, $13.4 million – 2003). Amortization of intangible assets for the five fiscal years subsequent to December 31, 2005 is expected to be $22.3 million (2006), $21.3 million (2007), $20.3 million (2008), $19.3 million (2009), and $17.4 million (2010). |
| 7. | Accrued Liabilities |
December 31, 2005 December 31, 2004
$ $
---------------------- ------------------
Voyage and vessel.................................................... 62,018 79,566
Interest............................................................. 13,703 21,137
Payroll and benefits................................................. 50,157 43,712
---------------------- ------------------
125,878 144,415
====================== ==================
| 8. | Long-Term Debt |
December 31, 2005 December 31, 2004
$ $
---------------------- ------------------
Revolving Credit Facilities.......................................... 769,000 530,000
First Preferred Ship Mortgage Notes (8.32%) ......................... - 50,906
Premium Equity Participating Security Units (7.25%) due May 18, 2006. 143,750 143,750
Senior Notes (8.875%) due July 15, 2011 ............................. 265,559 351,530
USD-denominated Term Loans due through 2019 ......................... 289,582 588,080
Euro-denominated Term Loans due through 2023 ........................ 377,352 443,738
---------------------- ------------------
1,845,243 2,108,004
Less current portion................................................. 159,053 119,453
---------------------- ------------------
1,686,190 1,988,551
====================== ==================
| As of December 31, 2005, the Company had four long-term revolving credit facilities (or the Revolvers ) available, which, as at such date, provided for borrowings of up to $1,498.8 million, of which $729.8 million was undrawn. Interest payments are based on LIBOR plus margins depending on the financial leverage of the Company; at December 31, 2005, the margins ranged between 0.60% and 1.20% (2004 – 0.60% and 0.93%). The total amount available under the Revolvers reduces by $133.2 million (2006), $134.4 million (2007), $349.6 million (2008), $176.0 million (2009), $77.4 million (2010) and $628.2 million (thereafter). All of the Revolvers are collateralized by first-priority mortgages granted on 44 of the Company’s vessels, together with other related collateral, and include a guarantee from Teekay or its subsidiaries for all outstanding amounts. |
| On February 1, 2005, the Company repaid $45.0 million of the 8.32% First Preferred Ship Mortgage Notes (or the 8.32% Notes ). On March 30, 2005, the Company effectively repaid the remaining $5.9 million outstanding 8.32% Notes by depositing with the trustee, The Bank of New York, an amount that will satisfy the outstanding principal and accrued interest on the one remaining semi-annual repayment. As a result of these transactions, the 8.32% Notes are no longer collateralized by first-preferred mortgages on any of the Company’s vessels and they are not guaranteed by any of the Company’s subsidiaries. |
| The 7.25% Premium Equity Participating Security Units due May 18, 2006 (or the Equity Units ) are unsecured and subordinated to all of the Company’s senior debt. The Equity Units are not guaranteed by any of the Company’s subsidiaries and effectively rank behind all existing and future secured debt of the Company and all existing and future debt of the Company’s subsidiaries. Each Equity Unit includes (a) a forward contract that requires the holder to purchase for $25 a specified fraction of a share of the Company’s Common Stock on February 16, 2006 and (b) a $25 principal amount, subordinated note due May 18, 2006. The forward contracts provide for contract adjustment payments of 1.25% annually and the notes bear interest at 6.0% annually. |
| The net proceeds of the offering of the Equity Units have been allocated between the notes and the forward contracts in proportion to their respective fair market values at the time of the issuance. The present value of the Equity Units contract adjustment payments have been charged to stockholders’ equity, with an offsetting credit to liabilities. This liability is accreted over three years by interest charges to the income statement based on a constant rate calculation. Subsequent contract adjustment payments reduce this liability. Upon settlement of each forward contract, the $25 received on each purchase contract will be credited to stockholders’ equity in conjunction with the issuance of the requisite number of shares of the Company’s Common Stock. |
| Before the issuance of the Company’s Common Stock upon settlement of the purchase contracts, the purchase contracts will be reflected in the Company’s diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the Company’s Common Stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares that would be issued upon settlement of the purchase contracts (based on the settlement formula applied at the end of the reporting period) over the number of shares that could be purchased by the Company in the market (at the average market price during the period) using the proceeds receivable upon settlement (see Note 21). |
| The 8.875% Senior Notes due July 15, 2011 (or the 8.875% Notes ) rank equally in right of payment with all of Teekay’s existing and future senior unsecured debt and senior to Teekay’s existing and future subordinated debt. During the year ended December 31, 2005, the Company repurchased a principal amount of $85.7 million of the 8.875% Notes (see also Note 15). The 8.875% Notes are not guaranteed by any of Teekay’s subsidiaries and effectively rank behind all existing and future secured debt of Teekay and other liabilities, secured and unsecured, of its subsidiaries. |
| The Company has two U.S. Dollar-denominated term loans outstanding, which, as at December 31, 2005, totaled $289.6 million. One term loan bears interest at a fixed rate of 4.06%. Interest payments on the second loan are based on LIBOR plus margins. At December 31, 2005, the margins ranged between 0.90% and 1.05%. The U.S. Dollar-denominated term loans reduce in quarterly payments through 2019 and are collateralized by first-preferred mortgages on the vessels to which the loans relate, together with certain other collateral and are guaranteed by Teekay. |
| The Company has two Euro-denominated term loans outstanding, which, as at December 31, 2005, totaled 318.5 million Euros ($377.4 million). As part of certain capital leases, the Company has two long-term time-charter contracts that are denominated in Euros, the funds from which will be used to repay the associated Euro-denominated term loans. Interest payments on the loans are based on EURIBOR plus margins. At December 31, 2005, the margins ranged between 1.10% and 1.30%. The Euro-denominated term loans reduce in monthly or quarterly payments with varying maturities through 2023 and are collateralized by first-preferred mortgages on the two vessels to which the loans relate, together with certain other collateral, and are guaranteed by a subsidiary of Teekay. |
| Both Euro-denominated term loans are revalued at the end of each period using the then prevailing Euro/U.S. Dollar exchange rate. Due substantially to this revaluation, the Company recognized a foreign exchange gain during the year ended December 31, 2005, of $59.8 million ($42.7 million loss – 2004, $3.9 million loss – 2003). |
| The weighted average effective interest rate on the Company’s long-term debt as at December 31, 2005 was 5.5% (December 31, 2004 – 4.6%). This rate does not reflect the effect of our interest rate swaps (see Note 16). |
| Certain loan agreements require that a minimum level of free cash be maintained. As at December 31, 2005, this amount was $100.0 million. Certain of the loan agreements also require that the Company maintain a minimum level of free liquidity and undrawn revolving credit lines with at least six months to maturity. As at December 31, 2005, this amount was $110.5 million. |
| The aggregate annual long-term debt principal repayments required to be made for the five fiscal years subsequent to December 31, 2005 are $159.0 million (2006), $49.8 million (2007), $347.5 million (2008), $102.2 million (2009), $73.9 million (2010) and $1,112.8 million (thereafter). |
| 9. | Loan from Joint Venture Partner |
| The Company has one U.S. Dollar-denominated loan outstanding, which, as at December 31, 2005, totaled $33.5 million, due to a joint venture partner. During December 2005, $33.5 million of equity investment in three LNG newbuilding carriers by Qatar Gas Transport Company Ltd., a joint venture partner who holds 30% interest, was converted to an interest-bearing shareholder loan at a fixed rate of 4.84%. The loan is unsecured and repayable on demand no earlier than twenty years from the delivery date of the last of the three LNG carriers (see Note 17). |
| 10. | Operating Leases |
| Charters-out |
| Time charters and bareboat charters of the Company’s vessels to third parties are accounted for as operating leases. As at December 31, 2005, minimum scheduled future revenues to be received by the Company on time charters and bareboat charters currently in place are approximately $6,397.8 million, comprised of $440.3 million (2006), $446.6 million (2007), $419.6 million (2008), $448.0million (2009), $423.6 million (2010) and $4,219.7 million (thereafter). |
| The minimum scheduled future revenues should not be construed to reflect total charter hire revenues for any of the years. |
| Charters-in |
| As at December 31, 2005, minimum commitments owing by the Company under vessel operating leases by which the Company charters-in vessels are approximately $1,173.9 million, comprised of $352.8 million (2006), $213.0 million (2007) $133.3 million (2008), $99.3 million (2009), $98.3 million (2010) and $277.2 million (thereafter). |
| During March 2005, the Company sold and leased back a 1991-built shuttle tanker that is now being accounted for as an operating lease. The sale generated a $2.8 million gain, which has been deferred and is being amortized over the 6.5-year term of the lease. |
| During December 2003, the Company sold and leased back three Aframax tankers which are accounted for as operating leases. The sale generated a $16.8 million gain, which has been deferred and is being amortized over the 7-year term of the leases. |
| 11. | Capital Leases and Restricted Cash |
| Capital Leases |
| Aframax and Suezmax Tankers. As at December 31, 2005, the Company was a party, as lessee, to capital leases on one Aframax tanker and five Suezmax tankers. Under the terms of the lease arrangements, which include the Company’s contractual right to full operation of the vessels pursuant to bareboat charters, the Company is required to purchase these vessels at the end of their respective lease terms for a fixed price. The weighted-average annual interest rate implicit in these capital leases, at the inception of the leases, was 7.6%. The Aframax tanker capital lease is a fixed-rate capital lease. The Suezmax tanker capital leases are variable-rate capital leases; however, any change in the Company’s lease payments resulting from changes in interest rates is offset by a corresponding change in the charter hire payments the Company receives under the vessels’ time charter contract. As at December 31, 2005, the remaining commitments under these capital leases, including the purchase obligations, approximated $333.1 million, including imputed interest of $68.1 million, repayable as follows: |
Year Commitment
--------------------- ------------------------
2006 ................................................................. $29.6 million
2007 ................................................................. 149.2 million
2008 ................................................................. 12.7 million
2009 ................................................................. 12.6 million
2010 ................................................................. 92.2 million
Thereafter ................................................................. 36.8 million
| LNG Carriers. As at December 31, 2005, the Company was a party, as lessee, to capital leases on two LNG carriers, which are structured as “Spanish tax leases”. Under the terms of the Spanish tax leases, the Company will purchase these vessels at the end of their respective lease terms in 2006 and 2011, both of which purchase obligations have been fully funded with restricted cash deposits described below. As at December 31, 2005, the weighted-average interest rate implicit in the Spanish tax leases was 5.7%. As at December 31, 2005, the commitments under these capital leases, including the purchase obligations, approximated 288.2 million Euros ($341.5 million), including imputed interest of 44.2 million Euros ($52.3 million), repayable as follows: |
Year Commitment
--------------------- --------------------------
2006 ............................................... 123.2.million Euros ($146.0 million)
2007 ............................................... 23.3 million Euros ($27.5 million)
2008 ............................................... 24.4 million Euros ($28.9 million)
2009 ............................................... 25.6 million Euros ($30.4 million)
2010 ............................................... 26.9 million Euros ($31.9 million)
Thereafter ............................................... 64.8 million Euros ($76.8 million)
| Restricted Cash |
| Under the terms of the Spanish tax leases for our LNG carriers, the Company is required to have on deposit with financial institutions an amount of cash that approximates the present value of the remaining amounts owing under the leases, including the obligations to purchase the LNG carriers at the end of the lease periods. This amount was 249.0 million Euros ($295.0 million) and 309.5 million Euros ($421.6 million) as at December 31, 2005 and 2004, respectively. These cash deposits are restricted to being used for capital lease payments and have been fully funded with term loans (see Note 8) and a Spanish government grant. The interest rates earned on the deposits approximate the interest rate implicit in the Spanish tax leases. As at December 31, 2005 and 2004, the weighted-average interest rate earned on the deposits was 5.2% and 5.3%, respectively. |
| The Company also maintains restricted cash deposits relating to certain term loans and other obligations. As at December 31, 2005 and 2004, these deposits totaled $16.1 million and $27.2 million, respectively. |
| 12. | Fair Value of Financial Instruments |
| Long-term debt – The fair values of the Company’s fixed-rate long-term debt are either based on quoted market prices or estimated using discounted cash flow analyses, based on rates currently available for debt with similar terms and remaining maturities. |
| Interest rate swap agreements, foreign exchange contracts, bunker fuel swap contracts and freight forward agreements – The fair value of these financial instruments, used for hedging purposes, is the estimated amount that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates, foreign exchange rates, bunker fuel prices, spot market rates for vessels, and the current credit worthiness of the swap counter parties. |
| The estimated fair value of the Company’s financial instruments is as follows: |
December 31, 2005 December 31, 2004
Carrying Fair Carrying Fair
Amount Value Amount Value
$ $ $ $
---------------------------------------------------- ------------ ------------ ------------ ------------
Cash and cash equivalents, marketable securities,
and restricted cash............................... 581,163 581,163 875,849 875,849
Long-term debt (including capital lease obligation
and loan from joint venture partner).............. (2,432,978) (2,466,173) (2,744,545) (2,801,553)
Derivative instruments (note 17) ...................
Interest rate swap agreements ..................... (33,509) (33,509) (158,482) (158,482)
Foreign currency contracts ........................ (1,241) (1,241) 16,635 16,635
Bunker fuel swap contracts......................... - - 98 98
Freight forward agreements ........................ (163) (163) (3,276) (3,276)
| The Company transacts all of its derivative instruments through investment-grade rated financial institutions and requires no collateral from these institutions. |
| 13. | Capital Stock |
| The authorized capital stock of Teekay at December 31, 2005 was 25,000,000 shares of Preferred Stock, with a par value of $1 per share, and 725,000,000 shares of Common Stock, with a par value of $0.001 per share. As at December 31, 2005, Teekay had 71,375,593 shares of Common Stock and no shares of Preferred Stock issued and outstanding. On May 17, 2004, Teekay effected a two-for-one stock split relating to its Common Stock. All earnings per share and share capital amounts disclosed in these financial statements give effect to this stock split retroactively. |
| In April, July and December 2005, Teekay announced that its Board of Directors had authorized the repurchase of up to $225 million, $250 million and $180 million, respectively, of shares of its Common Stock in the open market. As at December 31, 2005, Teekay had repurchased 11,083,500 shares of Common Stock subsequent to such authorizations at an average price of $42.47 per share, for a total cost of $470.8 million. The total remaining share repurchase authorization at December 31, 2005 was approximately $184.2 million. |
| In November 2004, Teekay announced that its Board of Directors had authorized the repurchase of up to 3,000,000 shares of its Common Stock in the open market. As at December 31, 2004, Teekay had repurchased 1,400,200 shares of Common Stock since such authorization at an average price of $43.73 per share. In January 2005, Teekay repurchased an additional 1,599,800 shares at an average price of $42.27, for a total of 3,000,000 shares repurchased at an average price of $42.95 per share, for a total cost of $128.9 million. |
| In September 2003, the Company’s 1995 Stock Option Plan was terminated with respect to new grants and the Company’s 2003 Equity Incentive Plan was adopted. As at December 31, 2005, the Company had reserved pursuant to its 1995 Stock Option Plan and 2003 Equity Incentive Plan (collectively referred to as the Plans ) 5,618,518 shares of Common Stock for issuance upon exercise of options or equity awards granted or to be granted. During the years ended December 31, 2005, 2004, and 2003, the Company granted options under the Plans to acquire up to 620,700, 833,840, and 2,119,160 shares of Common Stock, respectively, to certain eligible officers, employees and directors of the Company. The options under the Plans have a 10-year term and vest equally over three years from the grant date, except for one grant of 50,000 options made in 2004 which will vest 100% on December 31, 2006. |
| As at December 31, 2005, the Company had 652,832 restricted stock units outstanding that were awarded in March 2005 as incentive based compensation. Each restricted stock unit is equal in value to one share of the Company’s Common Stock and reinvested dividends from the date of the grant to the vesting of the restricted stock unit. Based on the December 31, 2005 share price of $39.90 per share, the restricted stock units outstanding at December 31, 2005 had a notional value of $26.0 million. The restricted stock units vest in three equal amounts on March 31, 2006, March 31, 2007 and November 30, 2007. Upon vesting, 123,325 of the restricted stock units will be paid to the grantees in the form of cash, and 529,507 of the restricted stock units will be paid to the grantees in the form of cash or shares of Teekay’s Common Stock, at the election of the grantee. Shares of Teekay’s Common Stock issued as payment of the restricted stock units will be purchased in the open market by the Company. During the year ended December 31, 2005, the Company accrued $12.9 million related to restricted stock units, which is primarily included in general and administrative expenses. |
| During 2005, the Company granted 13,640 (2004 – 14,260 and 2003 – 10,000) shares of restricted stock awards with a fair value of $0.6 million, based on the quoted market price, to certain of the Company’s Directors. The stock will be released from a forfeiture provision equally over three years from the date of the award. |
| During 2003, the Company granted 72,500 shares of restricted stock with a fair value of $1.4 million, based on the quoted market price, as compensation to one of the Company’s executive officers. |
| A summary of the Company’s stock option activity and related information for the years ended December 31, 2005, 2004 and 2003, is as follows: |
December 31, 2005 December 31, 2004 December 31, 2003 ----------- ---------- ----------- ---------- ----------- ----------- Weighted- Weighted- Weighted- Average Average Average Options Exercise Options Exercise Options Exercise (000's) Price (000's) Price (000's) Price # $ # $ # $ ----------- ---------- ----------- ---------- ----------- ----------- Outstanding-beginning of year........ 4,721 20.47 7,254 17.18 7,014 15.73 Granted.............................. 621 46.69 834 33.67 2,119 19.55 Exercised............................ (1,098) 18.54 (3,125) 16.41 (1,764) 14.17 Forfeited............................ (84) 24.44 (242) 19.39 (115) 19.64 ----------- ----------- ----------- Outstanding-end of year.............. 4,160 24.81 4,721 20.47 7,254 17.18 ----------- ----------- ----------- Exercisable - end of year ........... 2,386 18.55 1,980 15.82 3,328 14.20 =========== =========== =========== Weighted-average fair value of options granted during the year (per option). 15.49 9.60 4.23 Further details regarding the Company's outstanding and exercisable stock options at December 31, 2005 are as follows:
Outstanding Options Exercisable Options
-----------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Remaining Exercise Options Exercise
(000's) Life Price (000's) Price
Range of Exercise Prices # (years) $ # $
-------------------------------------- ----------- ----------- ----------- ---------- -----------
$ 8.44 - $ 9.99 300 3.6 8.46 300 8.46
$10.00 - $14.99 312 3.6 12.26 312 12.26
$15.00 - $19.99 1,810 6.8 19.54 1,199 19.55
$20.00 - $24.99 384 5.3 20.57 376 20.58
$25.00 - $29.99 - - - - -
$30.00 - $34.99 745 8.2 33.66 195 33.62
$35.00 - $39.99 - - - - -
$40.00 - $44.99 3 9.4 42.33 - -
$45.00 - $47.13 606 9.2 46.80 4 46.80
------------ ----------
4,160 6.8 24.81 2,386 18.55
============ ===========
| 14. | Related Party Transactions |
| As at December 31, 2005, Resolute Investments, Inc. (or Resolute ) owned 45.7% of our outstanding common stock. One of our directors, C. Sean Day, who is also Chair of our Board, is a director and the Chairman of Resolute. Two additional directors, Thomas Kuo-Yuen Hsu and Axel Karlshoej, are among the Managing Directors of The Kattegat Trust Company Limited, which is the trustee of the trust that owns all of Resolute’s outstanding equity. |
| Another of the Company’s directors, Bruce Bell, is Manager Director, Chief Executive Officer and Chairman of Oceanic Bank and Trust Limited, a Bahamian bank and trust company. Payments made by the Company to Resolute, Oceanic Bank and Trust Limited, or companies related through common ownership in respect of legal and administration fees and shared office costs for the years ended December 31, 2005, 2004 and 2003 totaled $0.5 million in each of the years. |
| 15. | Restructuring Charge and Other Loss |
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
$ $ $
---------------- ---------------- ---------------
Minority interest expense.................................. (16,628) (2,268) (3,339)
Loss on bond repurchase.................................... (13,255) (769) (5,385)
Loss from settlement of interest rate swaps................ (7,820) - -
Writeoff of capitalized loan costs......................... (7,462) - -
Write-down in the carrying value of marketable securities.. - - (4,910)
Income tax recovery (expense).............................. 2,340 (35,048) (36,501)
Miscellaneous.............................................. 9,483 13,128 7,981
---------------- ---------------- --------------
Other - net................................................ (33,342) (24,957) (42,154)
================ ================ ===============
| During the year ended December 31, 2005, the Company incurred $2.9 million of restructuring costs primarily relating to the relocation of certain operational functions and the closure of the Company’s office in Sandefjord, Norway. During the first three quarters of 2006, the Company expects to incur approximately $7.0 million of further restructuring charges to complete the relocation. During the year ended December 31, 2004, the Company incurred $1.0 million of restructuring and severance costs associated with the closure of the Company’s office in Oslo, Norway. During the year ended December 31, 2003, the Company incurred $6.4 million of restructuring costs associated with closure of the Company’s offices in Oslo, Norway and Melbourne, Australia, and severance costs related to the termination of seafaring staff. |
| 16. | Derivative Instruments and Hedging Activities |
| The Company uses derivatives only for hedging purposes. The following summarizes the Company’s risk strategies with respect to market risk from foreign currency fluctuations, changes in interest rates and spot market rates for vessels. |
| The Company hedges portions of its forecasted expenditures denominated in foreign currencies with foreign exchange forward contracts. As at December 31, 2005, the Company was committed to foreign exchange contracts for the forward purchase of approximately Norwegian Kroner 611.1 million, Canadian Dollars 13.2 million, Euros 9.0 million and Australian Dollars 6.0 million for U.S. Dollars at an average rate of Norwegian Kroner 6.56 per U.S. Dollar, Canadian Dollar 1.23 per U.S. Dollar, Euro 0.83 per U.S. Dollar and Australian Dollar 1.35 per U.S. Dollar, respectively. The foreign exchange forward contracts mature in 2006. |
| As at December 31, 2005, the Company was committed to the following interest rate swap agreements related to its LIBOR- and EURIBOR- based debt, whereby certain of the Company’s floating-rate debt was swapped with fixed-rate obligations: |
Fair Value Weighted-
/ Carrying Average Fixed
Interest Principal Amount of Remaining Interest
Rate Amount Liability Term Rate
Index $ $ (years) (%) (1)
----------- ---------- ------------ ------------ ----------
U.S. Dollar-denominated interest rate swaps...... LIBOR 700,000 (8,022) 2.6 4.5
U.S. Dollar-denominated interest rate swaps (2).. LIBOR 1,344,000 31,393 14.1 5.2
Euro-denominated interest rate swaps (3) (4)..... EURIBOR 377,352 10,138 18.5 3.8
___________________________
| (1) | Excludes the margins the Company pays on its variable-rate debt, which as of December 31, 2005 ranged from 1.1% to 1.3%. |
| (2) | Inception dates of swaps are 2006 ($438.0 million), 2007 ($256.0 million) and 2009 ($650.0 million). |
| (3) | Principal amount reduces monthly to 70.1 million Euros ($83.1 million) by the maturity dates of the swap agreements. |
| (4) | Principal amount is the U.S. Dollar equivalent of 318.5 million Euros. |
| During April 2005, the Company repaid term loans of $337.3 million on two LNG carriers and settled the related interest rate swaps. A loss of $7.8 million was recognized as a result of these interest rate swap settlements. During April 2005, the Company also settled interest rate swaps associated with 322.8 million Euros ($390.5 million) of term loans and entered into new swaps of the same amount with a lower fixed interest rate. A loss of 39.2 million Euros ($50.4 million) relating to these interest rate swap settlements has been deferred in accumulated other comprehensive income and is being recognized over the remaining term of the term loans. The cost to settle all of these interest rate swaps was $143.3 million. |
| The Company hedges certain of its voyage revenues through the use of forward freight agreements. Forward freight agreements involve contracts to provide a fixed number of theoretical voyages at fixed-rates, thus hedging a portion of the Company’s exposure to the spot charter market. As at December 31, 2005, the Company was committed to forward freight agreements totaling 4.9 million metric tonnes with a notional principal amount of $35.4 million. The forward freight agreements expire between January and December 2006. |
| The Company is exposed to credit loss in the event of non-performance by the counter parties to the interest rate swap agreements, foreign exchange forward contracts, and forward freight agreements; however, the Company does not anticipate non-performance by any of the counter parties. |
| During the year ended December 31, 2005, the Company recognized a net loss of $1.4 million (2004 – net gain of $0.9 million) relating to the ineffective portion of its interest rate swap agreements and foreign currency forward contracts. The ineffective portion of these derivative instruments is presented as interest expense and other (loss) income, respectively. |
| As at December 31, 2005, the Company estimates, based on current foreign exchange rates, interest rates and spot market rates for vessels, that it will reclassify approximately $9.7 million of net loss on derivative instruments from accumulated other comprehensive income to earnings during the next 12 months due to actual voyage, vessel operating, drydocking and general and administrative expenditures and the payment of interest expense associated with the floating-rate debt. |
| As at December 31, 2005 and 2004, the Company’s accumulated other comprehensive loss consisted of the following components: |
December 31, 2005 December 31, 2004
$ $
---------------------- ------------------
Unrealized loss on derivative instruments............................ (67,482) (56,132)
Unrealized loss on marketable securities............................. (1,348) -
---------------------- ------------------
(68,830) (56,132)
====================== ==================
| 17. | Commitments and Contingencies |
| a) Vessels Under Construction |
| As at December 31, 2005, the Company was committed to the construction of three Aframax tankers, two Suezmax tankers and three product tankers scheduled for delivery between November 2006 and December 2008, at a total cost of approximately $386.0 million, excluding capitalized interest. As at December 31, 2005, payments made towards these commitments totaled $41.3 million, excluding $5.9 million of capitalized interest and other miscellaneous construction costs. Long-term financing arrangements existed for $203.0 million of the unpaid cost of these vessels. The Company intends to finance the remaining unpaid amount of $141.7 million through incremental debt or surplus cash balances, or a combination thereof. As at December 31, 2005, the remaining payments required to be made under these newbuilding contracts were $133.0 million in 2006, $104.3 million in 2007, and $107.4 million in 2008. Two of the Aframax tankers will be subject to 10-year time charters to Skaugen PetroTrans Inc., a joint venture of the Company, upon delivery scheduled for 2008. |
| As at December 31, 2005, the Company was committed to the construction of five LNG carriers scheduled for delivery between October 2006 and February 2009. The Company has entered into these transactions with joint venture partners who have taken a 30% interest in the vessels and related long-term, fixed-rate time charter contracts. The total cost of these LNG carriers is approximately $891.6 million (including the joint venture partner’s share of $267.5 million), excluding capitalized interest. As at December 31, 2005, payments made towards these commitments totaled $391.2 million (including the joint venture partner’s 30% share of $117.4 million), excluding $23.2 million of capitalized interest and other miscellaneous construction costs. Long-term financing arrangements existed for all of the remaining $500.4 million unpaid cost of these LNG carriers. As at December 31, 2005, the remaining payments required to be made under these contracts (including the joint venture partner’s 30% share) were $137.3 million in 2006, $253.5 million in 2007, $73.6 million in 2008 and $36.0 million in 2009. |
| Three of the LNG carriers will be subject to 20-year, fixed-rate time charters to Ras Laffan Natural Gas Co. Limited (II), a joint venture between Qatar Gas Transport Company Ltd. and ExxonMobil RasGas Inc., a subsidiary of ExxonMobil Corporation. Pursuant to existing agreements, the Company has agreed to sell to Teekay LNG its ownership interest in these three vessels and related charter contracts. |
| Two of the LNG carriers will be subject to 20-year, fixed rate time charters to The Tangguh Production Sharing Contractors, a consortium led by BP Berau, a subsidiary of BP plc. Pursuant to existing agreements, the Company is required to offer its ownership interest in these two vessels and related charter contracts to Teekay LNG. |
| As at December 31, 2005, the Company had options to have constructed four LNG carriers at predetermined prices. The options for two of these carriers, which are scheduled for delivery in 2010, expire on April 15, 2006. If the options are exercised, then the $6.0 million cost for the options will be applied to the first construction installment payments. The options for the other two of these carriers expired on February 28, 2006 and the $6.0 million cost for these options was forfeited. |
| b) Joint Ventures |
| In August 2005, the Company announced that it had been awarded long-term fixed-rate contracts to charter four LNG carriers to Ras Laffan Liquefied Natural Gas Co. Limited (3) (or RasGas 3 ), a joint venture company between a subsidiary of ExxonMobil Corporation and Qatar Petroleum. The vessels will be chartered to RasGas 3 at fixed rates, with inflation adjustments, for a period of 25 years (with options to extend up to an additional 10 years), scheduled to commence in the first half of 2008. The Company is entering into these transactions with its joint venture partner, Qatar Petroleum, which has taken a 60% interest in the vessels and time charters. In connection with this award, the joint venture has entered into agreements with Samsung Heavy Industries Co. Ltd. to construct four 217,000 cubic meter LNG carriers at a total cost of approximately $1.0 billion (of which the Company’s 40% portion is $400.7 million), excluding capitalized interest. As at December 31, 2005, payments made towards these commitments by the joint venture company totaled $200.3 million, excluding capitalized interest and other miscellaneous construction costs (of which the Company’s 40% contribution was $82.4 million). Long-term financing arrangements existed for all of the remaining $801.3 million unpaid cost of these LNG carriers. As at December 31, 2005, the remaining payments required to be made under these newbuilding contracts (including the joint venture partner’s 60% share) were $200.8 million in 2006, $400.2 million in 2007 and $200.3 million in 2008. |
| Under the terms of a joint venture agreement with an entity controlled by the former controlling shareholder of Teekay Spain, Teekay will make capital contributions to the joint venture company of $50.0 million in share premium. If Teekay has not contributed the $50.0 million equity prior to April 30, 2007, it will be required to pay the other partner up to $25.0 million calculated by a pre-determined formula based on the occurrence of certain future events. |
| Teekay and certain of its subsidiaries have guaranteed their share of the outstanding vessel mortgage debt in five 50%-owned joint venture companies. As at December 31, 2005, Teekay and these subsidiaries had guaranteed $120.5 million, or 50% of the total $241.0 million, in outstanding mortgage debt of the joint venture companies. These joint venture companies own an aggregate of five shuttle tankers. |
| c) Long-Term Incentive Program |
| In 2005, the Company adopted the Vision Incentive Plan (or the VIP ) to reward exceptional corporate performance and shareholder returns. This plan will result in an award pool for senior management based on the following two measures: (a) economic profit from 2005 to 2010 (or the Economic Profit ); and (b) market value added from 2001 to 2010 (or the MVA ). The Plan terminates on December 31, 2010. Under the Plan, the Economic Profit is the difference between the Company’s annual return on invested capital and its weighted-average cost of capital multiplied by its average invested capital employed during the year, and MVA is the amount by which the average market value of the Company for the preceding 18 months exceeds the average book value of the Company for the same period. |
| In 2008, if the VIP’s award pool has a cumulative positive balance based on the Economic Profit contributions for the preceding three years, an interim distribution may be made to participants in an amount not greater than half of the award pool. In 2011, the balance of the VIP award pool will be distributed to the participants. Fifty percent of any distribution from the award pool, in each of 2008 and 2011, must be paid in a form that is equity-based, with vesting on half of this percentage deferred for one year and vesting on the remaining half of this percentage deferred for two years. |
| The Economic Profit contributions added to the award pool each quarter are accrued when incurred. The estimated MVA contributions are accrued on a straight-line basis from the date of plan approval, which was March 9, 2005, until December 31, 2010. Any subsequent increases or decreases to the MVA contribution are accrued on a straight-line basis until December 31, 2010. During the year ended December 31, 2005, the Company accrued $21.5 million of VIP contributions, which are included in general and administrative expenses. |
| d) Other |
| The Company has been awarded a contract by a consortium of major oil companies to construct and install on seven of its shuttle tankers volatile organic compound emissions plants, which reduce emissions during cargo operations. These plants will be leased to the consortium of major oil companies. The construction and installation of these plants are expected to be completed by the end of 2006 at a total cost of approximately $106.1 million. As at December 31, 2005, the Company had made payments towards these commitments of approximately $84.1 million. As at December 31, 2005, the remaining payments required to be made towards these commitments were $22.0 million in 2006. |
| The Company enters into indemnification agreements with certain officers and directors. In addition, the Company enters into other indemnification agreements in the ordinary course of business. The maximum potential amount of future payments required under these indemnification agreements is unlimited. However, the Company maintains what it believes is appropriate liability insurance that reduces its exposure and enables the Company to recover future amounts paid up to the maximum amount of the insurance coverage, less any deductible amounts pursuant to the terms of the respective policies, the amounts of which are not considered material. |
| 18. | Change in Non-Cash Working Capital Items Related to Operating Activities |
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
$ $ $
-------------- -------------- --------------
Accounts receivable......................................... 58,357 (60,494) (26,587)
Prepaid expenses and other assets........................... (23,052) (1,189) 9,474
Accounts payable............................................ (17,690) 11,484 14,627
Accrued liabilities......................................... (26,259) 23,649 (1,770)
-------------- -------------- --------------
(8,644) (26,550) (4,256)
============== ============== ==============
| 19. | Vessel Sales and Writedowns on Vessels and Equipment |
| During 2005, the Company sold 13 Aframax tankers built between 1988 and 1991, two shuttle tankers built in 1981 and 1986, one Suezmax tanker built in 1990 and one newbuilding Suezmax tanker that was sold concurrently upon its delivery in March 2005. The results for the year ended December 31, 2005 include a gain on sale from these vessels totaling $148.7 million. |
| In March 2005, the Company sold and leased back a 1991-built shuttle tanker that is now being accounted for as an operating lease. The sale generated a $2.8 million gain, which has been deferred and is being amortized over the 6.5 year term of the lease. The amortization of this deferred gain was $0.3 million in 2005. |
| The results for the year ended December 31, 2005 include $12.3 million of writedowns of certain offshore equipment due to a lower estimated net realizable value arising from the early termination of a contract in June 2005. |
| During 2004, the Company sold 10 Aframax tankers built between 1988 and 1993, two Suezmax tankers built in 1989 and 1991, one 1993-built Very Large Crude Carrier, and one 1982-built shuttle tanker. The results for the year ended December 31, 2004 include a gain on sale from these vessels totaling $76.9 million. |
| In December 2003, the Company also sold and leased back three Aframax tankers which are accounted for as vessel operating leases. The sale generated a $16.8 million deferred gain, which has been included in other long-term liabilities and is being amortized over the seven-year term of the leases. The amortization of this deferred gain was $2.4 million in 2005 and $2.4 million in 2004, respectively. |
| During 2003, the Company sold eight 1980‘s-built Aframax tankers and eight 1980‘s-built Panamax oil/bulk/ore carriers. The results for the year ended December 31, 2003 include a $34.7 million write-down in the book value of these vessels, partially offset by a $1.2 million gain on sale from these vessels. |
| In 2003 the International Maritime Organization (or IMO ), the United Nations’ global maritime regulatory body, announced stricter regulations governing the tanker industry on a worldwide basis. The IMO regulations, which became effective April 5, 2005, will accelerate the mandatory phase-out of single-hull tankers and imposed a more rigorous inspection regime for older tankers. As a result of these regulations, the Company recorded a $56.9 million non-cash write-down in the fourth quarter of 2003, and reduced the estimated useful lives from 25 years to approximately 21 years for its two remaining vessels affected by these regulatory changes. |
| 20. | Earnings Per Share |
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
$ $ $
-------------- -------------- --------------
Net income available for common stockholders.................. 570,900 757,440 177,364
============== ============== ==============
Weighted average number of common shares...................... 78,201,996 82,829,336 79,986,746
Dilutive effect of employee stock options and
restricted stock awards................................... 2,110,373 2,189,053 1,479,548
Dilutive effect of Equity Units............................... 3,235,317 2,710,648 -
-------------- -------------- --------------
Common stock and common stock equivalents.................... 83,547,686 87,729,037 81,466,294
============== ============== ==============
Earnings per common share:
- Basic....................................................... 7.30 9.14 2.22
- Diluted..................................................... 6.83 8.63 2.18
| For the years ended December 31, 2005 and 2003, the anti-dilutive effect of 0.6 million and 3.3 million shares attributable to outstanding stock options and the Equity Units were excluded from the calculation of diluted earnings per share. For the year ended December 31, 2004, no outstanding stock options or Equity Units were anti-dilutive. |
| 21. | Subsequent Events |
| a) | During February 2006, the Company announced that it has been awarded long-term contracts to charter two Suezmax shuttle tankers and one Aframax shuttle tanker to a subsidiary of Petroleo Brasileiro S.A. The vessels will be chartered at fixed-rates for a period of 13 years, commencing at various dates during the second half of 2006 and the first quarter of 2007. In connection with these contracts, Teekay has entered into agreements to acquire a 2000-built Aframax tanker presently trading as part of the Company’s spot-rate chartered-in fleet and a newbuilding Suezmax tanker, both of which will be converted to shuttle tankers. The third vessel is presently operating in Teekay’s shuttle tanker fleet. |
| b) | On February 16, 2006, the Company issued 6,534,300 shares of its Common Stock upon settlement of the purchase contracts associated with its Equity Units. The Equity Units were issued in February 2003 and each consisted of a share purchase contract and a $25 principal amount subordinated note due May 18, 2006 (see Note 8). On February 16, 2006, the Company repurchased the notes for net proceeds equal to 100% of their aggregate principal amount. The net proceeds were applied to satisfy the obligations of the holders of the Equity Units to purchase Company Common Stock under the related purchase contracts. The notes were subsequently cancelled and are no longer outstanding. The Equity Units are no longer outstanding. |
| c) | During February 2006, the Company ordered four 159,000-deadweight tonnes Suezmax newbuildings scheduled to deliver at various dates during the second half of 2008 and 2009. The total cost of these vessels is approximately $302.6 million, including estimated construction supervision costs and capitalized interest. Upon delivery, it is expected that these vessels will join the Company’s spot tanker segment. |
| d) | During January 2006, the Company completed a 30-year U.K. lease arrangement that will be used to finance the purchase of three LNG newbuilding carriers. The tax benefits of this lease arrangement are expected to reduce the equity portion of the Company’s 70% interest in the three newbuildings by approximately $40 million, from approximately $93 million to approximately $53 million. Under the terms of the U.K. leases, the Company will be required to have on deposit with financial institutions an amount of cash that, together with interest earned on the deposit, will equal the remaining amounts owing under the leases. These restricted cash deposits will be used for capital lease payments and will be fully funded with term loans and loans from the Company’s joint venture partner (see Note 9). |
EXHIBIT 4.6
Teekay Shipping
Corporation
Vision Incentive Program
In 2005, the Company adopted the Vision Incentive Plan (the “VIP”) to reward exceptional corporate performance and shareholder returns and to reward a shift away from cycle-dependent results. This plan will result in an award pool for senior management based on two measures: (a) economic profit from 2005 to 2010 (the “Economic Profit”); and (b) the increase in market value added from 2001 to 2010 (the “MVA”). The VIP terminates on December 31, 2010. Under the VIP, the Economic Profit is the difference between the Company’s annual return on invested capital (“ROIC”) and its weighted-average cost of capital (“WACC”) multiplied by its average invested capital employed during the year and MVA is the amount by which the average market value of the Company for the preceding 18 months exceeds the average book value of the Company for the same period.
From 2005 to 2010, annual Economic Profit contributions will notionally be made to the Plan award pool and may be positive or negative. A factor, which will range from a low of negative 3% to a maximum of 5%, will be applied to the Economic Profit to determine the amount of the Economic Profit contributions. The maximum factor of 5% is applied when the Company’s ROIC is greater than its WACC by 1.5% points or more. A factor of negative 3% is applied when the Company’s ROIC is less than its WACC by 0.5% points or more.
At the end of 2010, a MVA contribution will be made to the plan award pool if two threshold requirements are met: (a) shares of the Company’s common stock must have an average market value, for the preceding 18 months, that is at least 120% of their book value for the same period and (b) the Company’s cumulative total shareholder return (“TSR”) for the period from 2001 to 2010 must be above the 25th percentile relative to the TSR of the S&P 500 (as calculated in accordance with U.S. securities regulations) during the same period. If both threshold requirements are met, a factor, which will range from a low of 1.5% to a maximum of 6.0%, will be applied to the Market Value Added to determine the amount of the Market Value Added contribution. This factor will be based on the Company’s TSR for the period from 2001 to 2010 in comparison to the TSR of the S&P 500. The minimum factor of 1.5% is applied when the Company’s TSR is between the 25th and 50th percentile and the maximum factor of 6.0% is applied when the Company’s TSR is equal to or greater than the 90th percentile. Individual awards relating to the Market Valued Added contribution are capped at ten times the individual’s annual base salary and target annual incentive award in 2010.
In 2008, if the VIP’s award pool has a cumulative positive balance based on economic profit contributions for the preceding three years, then an interim distribution may be made to participants in an amount not greater than half of the award pool. In 2011, the balance of the VIP award pool will be distributed to the participants. Fifty percent of any distribution from the award pool, in 2008 and in 2011, must be paid in a form that is equity-based, with vesting on half of this percentage deferred for one year and vesting on the remaining half of this percentage deferred for two years.
EXHIBIT 8.1
The following is a list of the Company’s significant subsidiaries as at March 15, 2006.
State or Proportion of
Jurisdiction of Ownership
Name of Significant Subsidiary Incorporation Interest
NAVION OFFSHORE LOADING AS.............................. NORWAY 100%
NAVION SHIPPING LTD..................................... MARSHALL ISLANDS 100%
NORSK TEEKAY AS......................................... NORWAY 100%
NORSK TEEKAY HOLDINGS LTD............................... MARSHALL ISLANDS 100%
SINGLE SHIP COMPANIES................................... AUSTRALIA 100%
SINGLE SHIP COMPANIES................................... SPAIN 100%
SINGLE SHIP LIMITED LIABILITY COMPANIES................. MARSHALL ISLANDS 100%
TEEKAY CHARTERING LIMITED............................... MARSHALL ISLANDS 100%
TEEKAY LIGHTERING SERVICES LLC.......................... MARSHALL ISLANDS 100%
TEEKAY LNG PARTNERS LP.................................. MARSHALL ISLANDS 68%
TEEKAY MARINE SERVICES AS............................... NORWAY 100%
TEEKAY NAVION OFFSHORE LOADING PTE LTD.................. SINGAPORE 100%
TEEKAY NORDIC HOLDINGS INC.............................. MARSHALL ISLANDS 100%
TEEKAY NORWAY AS........................................ NORWAY 100%
TEEKAY SHIPPING (CANADA) LTD............................ CANADA 100%
TEEKAY SHIPPING LIMITED................................. BAHAMAS 100%
TEEKAY SHIPPING SPAIN SL................................ SPAIN 100%
UGLAND NORDIC SHIPPING AS............................... NORWAY 100%
EXHIBIT 12.1
I, Bjorn Moller, President and Chief Executive Officer of the company, certify that:
| 1. | I have reviewed this report on Form 20-F of Teekay Shipping Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: April 7, 2006 |
By:
/s/ Bjorn Moller
Bjorn Moller President and Chief Executive Officer |
EXHIBIT 12.2
I, Peter Evensen, Executive Vice President and Chief Financial Officer of the company, certify that:
| 1. | I have reviewed this report on Form 20-F of Teekay Shipping Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: April 7, 2006 |
By:
/s/ Peter Evensen
Peter Evensen Executive Vice President and Chief Financial Officer |
EXHIBIT 13.1
In connection with the annual report of Teekay Shipping Corporation (the “ Company ”) on Form 20-F for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “ Form 20-F ”), I Bjorn Moller, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 7, 2006
By:
/s/ Bjorn Moller
Bjorn Moller
President and Chief Executive Officer
EXHIBIT 13.2
In connection with the annual report of Teekay Shipping Corporation (the “ Company ”) on Form 20-F for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “ Form 20-F ”), I Peter Evensen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 7, 2006
By:
/s/ Peter Evensen
Peter Evensen
Executive Vice President and Chief Financial Officer
EXHIBIT 15.1
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-42434) pertaining to the Amended 1995 Stock Option Plan of Teekay Shipping Corporation (“Teekay”), in the Registration Statement (Form S-8 No. 333-119564) pertaining to the 2003 Equity Incentive Plan and the Amended 1995 Stock Option Plan of Teekay, in the Registration Statement (Form F-3 No. 333-102594) and related Prospectus of Teekay for the registration of up to $500,000,000 of its common stock, preferred stock, warrants, stock purchase contracts, stock purchase units or debt securities and in the Registration Statement (Form F-3 No. 33-97746) and related Prospectus of Teekay for the registration of 2,000,000 shares of Teekay common stock under its Dividend Reinvestment Plan of our report dated February 21, 2006, with respect to the consolidated financial statements of Teekay included in the Annual Report (Form 20-F) for the year ended December 31, 2005.
|
Vancouver, Canada,
April 3, 2006 |
/s/ Ernst &Young LLP
Chartered Accountants |
Page
1 Definitions and Interpretation.......................................................................4
2 The Facility and its Purpose........................................................................22
3 Conditions Precedent and Subsequent.................................................................27
4 Representations and Warranties......................................................................30
5 Repayment and Prepayment............................................................................36
6 Interest............................................................................................37
7 Commitment Commission...............................................................................38
8 Security Documents..................................................................................38
9 Agency and Trust....................................................................................39
10 Covenants...........................................................................................48
11 Earnings............................................................................................52
12 Events Of Default...................................................................................52
13 Set-Off and Lien....................................................................................58
14 Assignment and Sub-Participation....................................................................60
15 Payments, Mandatory Prepayment, Reserve Requirements and Illegality.................................62
16 Communications......................................................................................66
17 General Indemnities.................................................................................67
18 Miscellaneous.......................................................................................69
19 Law and Jurisdiction................................................................................74
SCHEDULE 1...................................................................................................75
The Banks, the Commitments and the Proportionate Shares..........................................75
SCHEDULE 2...................................................................................................79
The Vessels......................................................................................79
SCHEDULE 8...................................................................................................80
Vessel Provisions................................................................................80
| (1) | THE COMPANIES listed in Schedule 2 each of which is a limited liability company formed according to the law of the Marshall Islands with its registered office at c/o Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands MH96960 and its principal place of business at TK House, Bayside Executive Park, West Bay Street & Blake Road, Nassau, The Bahamas (each a “ Borrower ” together the “ Borrowers ”); and |
| (2) | the banks and financial institutions listed in Schedule 1, each acting through its office at the address indicated against its name in Schedule 1 (together “ the Banks ” and each a “ Bank ”); and |
| (3) | CITIGROUP GLOBAL MARKETS LTD, ING BANK N.V. and NORDEA BANK FINLAND PLC, New York Branch acting as mandated lead arrangers (in that capacity each an “ MLA ” together the “ MLA’s ”); and |
| (4) | CITIBANK N.A., ING BANK N.V. and NORDEA BANK NORGE ASA, Grand Cayman Branch acting as underwriters (in that capacity each an “ Underwriter ” together the “ Underwriters ”); and |
| (5) | CITIGROUP GLOBAL MARKETS LTD and ING BANK N.V. acting as bookrunners (in that capacity each a “ Bookrunner ” together the “Bookrunners ”); and |
| (6) | NORDEA BANK FINLAND PLC, New York Branch acting as administrative agent and security trustee through its office at 437 Madison Avenue, New York NY 10022 (in that capacity the “ Agent ”). |
Each of the Banks has agreed to advance to the Borrowers as joint and several borrowers its respective Commitment of an aggregate principal amount not exceeding five hundred and fifty million Dollars ($550,000,000) to assist the Borrowers in refinancing certain existing indebtedness and otherwise for the general corporate and working capital purposes of the Guarantor Group.
IT IS AGREED as follows:-
| 1 | Definitions and Interpretation |
| 1.1 | Definitions |
| In this Agreement:- |
| 1.1.1 | “ the Address for Service ” means c/o Teekay Shipping (UK) Ltd of 49 St James’s Street, London SW1 A11, England or, in relation to any of the Security Parties, such other address in England and Wales as that Security Party may from time to time designate by no fewer than ten Business Days’ written notice to the Agent. |
| 1.1.2 | “ Administration ” has the meaning given to it in paragraph 1.1.3 of the ISM Code. |
| 1.1.3 | the “ Advance Date ”, in relation to any Drawing, means the date on which that Drawing is advanced by the Banks to the Borrowers pursuant to Clause 2. |
| 1.1.4 | “ Approved Brokers ” means H. Clarkson & Co. Ltd, Simpson Spence & Young Shipbrokers Ltd, Compass Maritime Services LLC, Fearnley AS, R. S. Platou AS and P.F. Bassoe AS. |
| 1.1.5 | “ Assignments ” means the deeds of assignment of Insurances, Earnings and Requisition Compensation in respect of each of the Vessels referred to in Clause 8.1.1 (each an “ Assignment ”). |
| 1.1.6 | “ Authorisation ” means an authorisation, consent, approval, resolution, licence, exemption, filing, notarisation or registration. |
| 1.1.7 | “ the Borrowers’ Obligations ” means all of the liabilities and obligations of the Borrowers to the Finance Parties under or pursuant to the Borrowers’ Security Documents, whether actual or contingent, present or future, and whether incurred alone or jointly or jointly and severally with any other and in whatever currency, including (without limitation) interest, commission and all other charges and expenses. |
| 1.1.8 | “ the Borrowers’ Security Documents ” means those of the Security Documents to which any of the Borrowers is or is to be a party. |
| 1.1.9 | “ Break Costs ” means all documented costs, losses, premiums or penalties incurred by any of the Finance Parties in the circumstances contemplated by Clause 17.4 or as a result of any of them receiving any prepayment of all or any part of the Facility (whether pursuant to Clauses 5.2 and 5.3 or otherwise) or any other payment under or in relation to the Security Documents on a day other than the due date for payment of the sum in question, and includes (without limitation) any losses or costs incurred in liquidating or re-employing deposits from third parties acquired to effect or maintain the Facility, and any liabilities, expenses or losses incurred by any of the Finance Parties in terminating or reversing, or otherwise in connection with, any interest rate and/or currency swap, transaction or arrangement entered into by any of the Finance Parties with any member of the Guarantor Group to hedge any exposure arising under this Agreement, or in terminating or reversing, or otherwise in connection with, any open position arising under this Agreement. |
| 1.1.10 | “ Business Day ” means a day on which banks are open for the transaction of business of the nature contemplated by this Agreement (and not authorised by law to close) in New York City, United States of America; London, England; and any other financial centre which the Agent may reasonably consider appropriate for the operation of the provisions of this Agreement. |
| 1.1.11 | “ Change of Control ” means either (i) in respect of each of the Borrowers that the Guarantor shall cease, for any reason whatsoever, to own or control directly or indirectly, all of the shares of the Borrowers or (ii) in respect of the Guarantor any person or any two or more persons acting in concert (excluding Resolute Investments Inc. or any successor thereto) acquire (a) legally or beneficially and either directly or indirectly more than fifty per cent (50%) of the entire issued share capital of the Guarantor; or (b) the right or ability to control, either directly or indirectly the affairs or the composition of the majority of the board of directors (or equivalent of it) of the Guarantor. |
| 1.1.12 | “ Commitment ” means, in relation to each Bank, the amount of the Facility which that Bank agrees to advance to the Borrowers as its several liability as indicated against the name of that Bank in Schedule 1, as reduced from time to time in accordance with Clause 2.4, or, where the context permits, the amount of the Facility advanced by that Bank and remaining outstanding. |
| 1.1.13 | “ Commitment Commission ” means the commitment commission to be paid by the Borrowers to the Agent on behalf of the Banks pursuant to Clause 7. |
| 1.1.14 | “ Commitment Termination Date ” means the date falling one month prior to the Termination Date. |
| 1.1.15 | a “ Communication ” means any notice, approval, demand, request or other communication from one party to this Agreement to any other party to this Agreement. |
| 1.1.16 | “ the Communications Address ” means c/o Teekay Shipping (Canada) Ltd, Suite 2000, Bentall 5, 550 Burrard Street, Vancouver, B.C., Canada V6C 2K2, fax no: +1 604 681 3011 marked for the attention of Director, Finance. |
| 1.1.17 | “ Company ” means at any given time the company responsible for a Vessel’s compliance with (i) the ISM Code under paragraph 1.1.2 of the ISM Code and or (ii) the ISPS Code (as the case may be). |
| 1.1.18 | “ Currency of Account ” means, in relation to any payment to be made to a Finance Party pursuant to any of the Security Documents, the currency in which that payment is required to be made by the terms of the relevant Security Document. |
| 1.1.19 | “ Default Rate ” means the rate which is the aggregate of LIBOR, any Mandatory Cost, the Margin and two per centum (2%) per annum. |
| 1.1.20 | “ Dollars ” “ US$ ” and “ $ ” each means available and freely transferable and convertible funds in lawful currency of the United States of America. |
| 1.1.21 | “ Drawdown Notice ” means a notice complying with Clause 2.3 in the form set out in Schedule 5. |
| 1.1.22 | “ Drawing ” means a part (or, if requested and available, all) of the Facility advanced by the Banks to the Borrowers in accordance with Clause 2. |
| 1.1.23 | “ DOC ” means, in relation to the relevant Company responsible for each Vessel’s compliance with the ISM Code, a valid Document of Compliance issued for that Company by the Administration under paragraph 13.2 of the ISM Code. |
| 1.1.24 | “ Earnings ”, in relation to a Vessel, means all hires including (without limitation) all time charter hire and bareboat charter hire, freights, pool income and other sums payable to or for the account of the Owner in respect of that Vessel including (without limitation) all remuneration for salvage and towage services, demurrage and detention moneys, contributions in general average, compensation in respect of any requisition for hire and damages and other payments (whether awarded by any court or arbitral tribunal or by agreement or otherwise) for breach, termination or variation of any contract for the operation, employment or use of that Vessel. |
| 1.1.25 | “ Encumbrance ” means any mortgage, charge, pledge, lien, assignment, hypothecation, preferential right, option, title retention or trust arrangement or any other agreement or arrangement which, in any of the aforementioned instances, has the effect of creating security. |
| 1.1.26 | “ Environmental Affiliate ” means an agent or employee of an Owner or a person in a contractual relationship with an Owner in respect of the Vessel owned by it (including without limitation, the operation of or the carriage of cargo of such Vessel). |
| 1.1.27 | “ Environmental Approvals ” means any present or future permit, licence, approval, ruling, variance, exemption or other authorisation required under the applicable Environmental Laws. |
| 1.1.28 | “ Environmental Claim ” means any and all enforcement, clean-up, removal, administrative, governmental, regulatory or judicial actions, orders, demands or investigations instituted or completed pursuant to any Environmental Laws or Environmental Approvals together with any claims made by any third person relating to damage, contribution, loss or injury resulting from any Environmental Incident. |
| 1.1.29 | “ Environmental Incident ” means: |
| (a) | any release of Environmentally Sensitive Material from a Vessel; or |
| (b) | any incident in which Environmentally Sensitive Material is released from a vessel other than a Vessel and which involves a collision between a Vessel and such other vessel or some other incident of navigation or operation, in either case, in connection with which the relevant Vessel is actually or potentially liable to be arrested, attached, detained or injuncted and/or where any guarantor, any manager (or any sub-manager of such Vessel) or any of its officers, employees or other persons retained or instructed by it (or such sub-manager) are at fault or allegedly at fault or otherwise liable to any legal or administrative action; or |
| (c) | any other incident in which Environmentally Sensitive Material is released otherwise than from such Vessel and in connection with which that Vessel is actually or potentially liable to be arrested and/or where any guarantor, any manager (or any sub-manager of the relevant Vessel) or any of its officers, employees or other persons retained or instructed by it (or such sub-manager) are at fault or allegedly at fault or otherwise liable to any legal or administrative action. |
| 1.1.30 | “ Environmental Laws ” means all present and future laws, regulations, treaties and conventions of any applicable jurisdiction which: |
| (a) | have as a purpose or effect the protection of, and/or prevention of harm or damage to, the environment; |
| (b) | relate to the carriage of Environmentally Sensitive Material or to actual or threatened releases of Environmentally Sensitive Material; |
| (c) | provide remedies or compensation for harm or damage to the environment; or |
| (d) | relate to Environmentally Sensitive Materials or health or safety matters. |
| 1.1.31 | “ Environmentally Sensitive Material ” means (i) oil and oil products and (ii) any other waste, pollutant, contaminant or other substance (including any liquid, solid, gas, ion, living organism or noise) that may be harmful to human health or other life or the environment or a nuisance to any person or that may make the enjoyment, ownership or other territorial control of any affected land, property or waters more costly for such person to a material degree. |
| 1.1.32 | “ Event of Default ” means any of the events set out in Clause 12.2. |
| 1.1.33 | “ Execution Date ” means the date on which this Agreement is executed by each of the parties hereto. |
| 1.1.34 | “ Facility ” means the reducing revolving credit facility made available by the Banks to the Borrowers pursuant to this Agreement. |
| 1.1.35 | “ the Facility Outstandings ” at any time means the total of all Drawings made at that time, to the extent not reduced by repayments, prepayments and voluntary reductions. |
| 1.1.36 | “ the Facility Period ” means the period beginning on the Execution Date and ending on the date when the whole of the Indebtedness has been repaid in full and the Borrowers have ceased to be under any further actual or contingent liability to the Finance Parties under or in connection with the Security Documents. |
| 1.1.37 | “ the Finance Parties ” means the Banks, the MLA’s, the Underwriters, the Bookrunners and the Agent. |
| 1.1.38 | “ Financial Indebtedness ” means any indebtedness of any person for or in respect of: |
| (a) | moneys borrowed or raised; |
| (b) | amounts raised under any acceptance credit facility; |
| (c) | amounts raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or similar instruments; |
| (d) | amounts raised pursuant to any issue of shares of the relevant person which are expressed to be redeemable; |
| (e) | the amount of any liability in respect of leases or hire purchase contracts which would, in accordance with GAAP, be treated as finance or capital leases; |
| (f) | the amount of any liability in respect of any purchase price for assets or services, the payment of which is deferred for a period in excess of one hundred and eighty (180) days; |
| (g) | all reimbursement obligations whether contingent or not in respect of amounts paid under a letter of credit or similar instrument; |
| (h) | all interest rate, currency swap and similar agreements obliging the making of payments, whether periodically or upon the happening of a contingency (and the value of such indebtedness shall be the mark-to-market valuation of such transaction at the relevant time); |
| (i) | amounts raised under any other transaction (including, without limitation, any forward sale or purchase agreement) having the commercial effect of a borrowing; and |
| (j) | any guarantee of indebtedness falling within paragraphs (a) to (i) above. |
| 1.1.39 | “ First Reduction Date ” means the date falling six (6) calendar months after the Execution Date. |
| 1.1.40 | “ Free Liquidity ”, in relation to the Guarantor, means cash, cash equivalents and marketable securities to which the Guarantor shall have free, immediate and direct access each as reflected in the Guarantor’s most recent quarterly management accounts forming part of the Guarantor’s Accounts. |
| 1.1.41 | “ GAAP ” means the generally accepted accounting principles in the United States of America. |
| 1.1.42 | “ the Guarantee ” means the guarantee and indemnity of the Guarantor in respect of the Borrowers’ Obligations referred to in Clause 8.1.2. |
| 1.1.43 | “ Guarantor ” means Teekay Shipping Corporation, a company incorporated under the laws of the Marshall Islands and with its registered office at c/o Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands MH96960. |
| 1.1.44 | “ Guarantor Group ” means the Guarantor and each of its Subsidiaries (including but not limited to the Borrowers). |
| 1.1.45 | “ Guarantor’s Accounts ” means the financial accounts of the Guarantor and the Guarantor Group to be provided to the Agent pursuant to Clause 9 of the Guarantee. |
| 1.1.46 | “ the Indebtedness ” means the Facility Outstandings; all other sums of any nature including costs (together with all interest on any of those sums) which from time to time may be payable by the Borrowers to the Finance Parties pursuant to the Security Documents; any damages payable as a result of any breach by any of the Borrowers of any of the Security Documents; and any damages or other sums payable as a result of any of the obligations of the Borrowers under or pursuant to any of the Security Documents being disclaimed by a liquidator or any other person, or, where the context permits, the amount thereof for the time being outstanding. |
| 1.1.47 | “ Insurances ”, in relation to a Vessel, means all policies and contracts of insurance (including but not limited to hull and machinery, all entries in protection and indemnity or war risks associations) which are from time to time taken out or entered into in respect of or in connection with that Vessel or her increased value and (where the context permits) all benefits thereof, including all claims of any nature and returns of premium. |
| 1.1.48 | “ Interest Payment Date ” means each date for the payment of interest in accordance with Clause 6. |
| 1.1.49 | “ Interest Period ” means each interest period selected by the Borrowers or agreed by the Banks pursuant to Clause 6. |
| 1.1.50 | “ the ISM Code ” means the International Management Code for the Safe Operation of Ships and for Pollution Prevention. |
| 1.1.51 | “ ISSC ” means a valid international ship security certificate for a Vessel issued under the ISPS Code. |
| 1.1.52 | “ the ISPS Code ” means the International Ship and Port Security Code as adopted by the Conference of Contracting Governments to the Safety of Life at Sea Convention 1974 on 13 December 2002 and incorporated as Chapter XI-2 of the Safety of Life at Sea Convention 1974. |
| 1.1.53 | “ law ” or “ Law ” means any law, statute, treaty, convention, regulation, instrument or other subordinate legislation or other legislative or quasi-legislative rule or measure, or any order or decree of any government, judicial or public or other body or authority, or any directive, code of practice, circular, guidance note or other direction issued by any competent authority or agency (whether or not having the force of law). |
| 1.1.54 | “ LIBOR ” means the rate, rounded to the nearest four decimal places downwards (if the digit displayed in the fifth decimal place is 1,2,3 or 4) or upwards (if the digit displayed in the fifth decimal place is 5,6,7,8 or 9) displayed on Reuters page LIBOR 01 (or such other page or pages which replace(s) such page for the purposes of displaying offered rates of leading banks, for deposits in Dollars of amounts equal to the amount of the relevant Drawing for a period equal in length to the relevant Interest Period or if there is no such display rate then available for Dollars for an amount comparable to the Drawing, the arithmetic mean (rounded upwards, if necessary, to the nearest whole multiple of one-sixteenth per centum (1/16%)) of the respective rates notified to the Agent by each of the Reference Banks as the rate at which it is offered deposits in Dollars and for the required period by prime banks in the London Interbank Market. |
| 1.1.55 | “ Majority Banks ” means any one or more Banks whose combined Proportionate Shares exceed fifty per centum (50%). |
| 1.1.56 | “ Mandatory Cost ” means for each Bank to which it applies, the cost imputed to that Bank of compliance with the mandatory liquid asset requirements of the Bank of England and/or the banking supervision or other costs imposed by the Financial Services Authority, determined in accordance with Schedule 6 (Calculation of the Mandatory Cost ). |
| 1.1.57 | “ Margin ” means sixty basis points (60bps) per annum. |
| 1.1.58 | “ Material Adverse Effect ” means a material adverse change in, or a material adverse effect on: |
| (a) | the financial condition, assets, prospects or business of any Security Party or on the consolidated financial condition, assets, prospects or business of the Guarantor Group; |
| (b) | the ability of any Security Party to perform and comply with its obligations under any Security Document or to avoid any Event of Default; |
| (c) | the validity, legality or enforceability of any Security Document; or |
| (d) | the validity, legality or enforceability of any security expressed to be created pursuant to any Security Document or the priority and ranking of any such security, |
| provided that, in determining whether any of the forgoing circumstances shall constitute such a material adverse change or material adverse effect for the purposes of this definition, the Finance Parties shall consider such circumstance in the context of (x) the Guarantor Group taken as a whole and (y) the ability of the Guarantor to perform each of its obligations under the Security Documents. |
| 1.1.59 | “ Material Subsidiary ” means: |
| (a) | the Borrowers; and |
| (b) | any other Subsidiary of the Guarantor whose assets, as determined in accordance with GAAP and as shown from the most recent financial statements available to the Agent relating to it, as multiplied by the Relevant Percentage in respect of such Subsidiary, equal or exceed 10% of the aggregate value of the assets of the Guarantor Group as determined in accordance with GAAP and as shown from the most recently available financial statements of the Group, |
| provided that: |
| (i) | in respect of any Subsidiary of the Guarantor, only the value of its assets as multiplied by the Relevant Percentage in respect of such Subsidiary shall be taken into account in the computation of the value of the assets of the Guarantor Group; |
| (ii) | a statement by the auditors of the Guarantor to the effect that, in their opinion, a Subsidiary of the Guarantor is or is not or was or was not at any particular time a Material Subsidiary shall, in the absence of manifest error, be conclusive and binding on each of the parties to this Agreement; and |
| (iii) | for the avoidance of doubt TGP shall not be a Material Subsidiary |
| 1.1.60 | “ the Maximum Facility Amount ” means the amount of the aggregate Commitments subject to any reductions effected in accordance with Clauses 2.4, 15.7 and 15.8. |
| 1.1.61 | “ Mortgages ” means (i) together the first priority statutory ship mortgages together in each case with a deed of covenants collateral thereto or (ii) the first preferred ship mortgages (as applicable by reference to the relevant Pre-Approved Flag) over each of the Vessels made or to be made between the relevant Owners and the Agent referred to in Clause 8.1.4 (each a “ Mortgage ”). |
| 1.1.62 | “ Necessary Authorisations ” means all Authorisations of any person including any government or other regulatory authority required by applicable Law to enable it to: |
| (a) | lawfully enter into and perform its obligations under the Security Documents to which it is party; |
| (b) | ensure the legality, validity, enforceability or admissibility in evidence in England and, if different, its jurisdiction of incorporation, of such Security Documents to which it is party; and |
| (c) | carry on its business from time to time. |
| 1.1.63 | “ Owner ” means in respect of a Vessel the Borrower whose name appears beside that Vessel in Schedule 2. |
| 1.1.64 | “ Permitted Liens ” means (i) any Encumbrance which has the prior written approval of the Agent acting upon the instructions of all the Banks or (ii) any Encumbrances that do not exceed ten million Dollars ($10,000,000) arise either by operation of law or in the ordinary course of the business of the relevant Security Party which are discharged in the ordinary course of business. |
| 1.1.65 | “ Pledgor ” means the Guarantor. |
| 1.1.66 | “ Potential Event of Default ” means any event which, with the giving of notice and/or the passage of time and/or the satisfaction of any materiality test, would constitute an Event of Default. |
| 1.1.67 | “ Pre-Approved Classification Society ” means any of Det norske Veritas, Lloyds Register, American Bureau of Shipping (ABS), Germanischer Lloyd or Bureau Veritas. |
| 1.1.68 | “ Pre-Approved Flag ” means Marshall Islands, Norwegian International Ship Registry, Liberia, Panama, Isle of Man, Cayman Islands, Bermuda, Bahamas, Singapore or Canada. |
| 1.1.69 | “ Proceedings ” means any suit, action or proceedings begun by any of the Finance Parties arising out of or in connection with the Security Documents. |
| 1.1.70 | “ Proportionate Share ” means, for each Bank, the percentage that its Commitment bears to the aggregate Commitments of all Banks from time to time, being initially the percentage indicated against the name of that Bank in Schedule 1. |
| 1.1.71 | “ Reference Banks ” means ING Bank N.V., Citibank N.A. and Nordea Bank Finland Plc. |
| 1.1.72 | “ Relevant Percentage ” means, in respect of any Subsidiary of the Guarantor at any time, the percentage of the equity share capital or the partnership capital, as the case may be, of such Subsidiary which is beneficially owned (free from Encumbrances) by the Guarantor at such time. |
| 1.1.73 | “ Relevant Reduction Amount ” means, in respect of each Vessel, a figure equal to (x) a fraction in which (i) the numerator is the market value of such Vessel (based on a Valuation) and (ii) the denominator is the aggregate market value of all the Vessels (based on the Valuations) multiplied by (y) the Maximum Facility Amount. |
| 1.1.74 | “ Replacement Vessel ” means a double hulled tanker of between 75,000 dwt and 125,000 dwt constructed after 1 January 2000 and of substantially similar or higher value as the Vessel it replaces (such value to be determined by a Valuation). |
| 1.1.75 | “ Requisition Compensation ”, in relation to a Vessel, means all compensation or other money which may from time to time be payable to an Owner as a result of that Vessel being requisitioned for title or in any other way compulsorily acquired (other than by way of requisition for hire). |
| 1.1.76 | “ the Security Documents ” means this Agreement, the Shares Charge, the Assignments, the Guarantee, the Mortgages or (where the context permits) any one or more of them, and any other agreement or document which may at any time be executed as security for the payment of all or any part of the Indebtedness. |
| 1.1.77 | “ Security Parties ” means, at any relevant time, the Borrowers, the Guarantor, the Pledgor and any other party who may at any time during the Facility Period be liable for, or provide security for, all or any part of the Indebtedness, and “ Security Party ” means any one of them. |
| 1.1.78 | “ Shares Charge ” means the charge over the issued share capital of each of the Borrowers executed by the Pledgor referred to in Clause 8.1.3. |
| 1.1.79 | “ Subsequent Reduction Dates ” means each date falling at consecutive six monthly intervals after the previous Subsequent Reduction Date which in the case of the first Subsequent Reduction Date shall be six months after the First Reduction Date. |
| 1.1.80 | “ Subsidiary ” means a subsidiary undertaking, as defined in section 736 Companies Act 1985 or any analogous definition under any other relevant system of law. |
| 1.1.81 | “ Taxes ” means all taxes, levies, imposts, duties, charges, fees, deductions and withholdings (including any related interest and penalties) and any restrictions or conditions resulting in any charge, other than taxes on the overall net income of a Finance Party or branch thereof, and “ Tax ” and “ Taxation ” shall be interpreted accordingly. |
| 1.1.82 | “ the Termination Date ” means the eighth anniversary of the Execution Date. |
| 1.1.83 | “ TGP ” means Teekay LNG Partners L.P.. |
| 1.1.84 | “ Total Debt ” means the aggregate of:- |
| 1.1.84.1 | the amount calculated in accordance with GAAP shown as each of “long term debt”, “short term debt” and “current portion of long term debt” on the latest consolidated balance sheet of the Guarantor but excluding TGP debt which is non-recourse to the Guarantor; and |
| 1.1.84.2 | the amount of any liability in respect of any lease or hire purchase contract entered into by the Guarantor or any of its Subsidiaries which would, in accordance with GAAP, be treated as a finance or capital lease (excluding any amounts applicable to leases whereby the lease obligations are secured by a security deposit which is held on the balance sheet under “Restricted Cash ”). |
| 1.1.85 | “ Total Loss ”, in relation to a Vessel, means:- |
| 1.1.85.1 | an actual, constructive, arranged, agreed or compromised total loss of that Vessel; or |
| 1.1.85.2 | the requisition for title, compulsory acquisition, nationalisation or expropriation of that Vessel by or on behalf of any government or other authority (other than by way of requisition for hire); or |
| 1.1.85.3 | the capture, seizure, arrest, detention or confiscation of that Vessel, unless the Vessel is released and returned to the possession of its Owner within ninety (90) days after the capture, seizure, arrest, detention or confiscation in question. |
| 1.1.86 | “ Transfer Certificate ” means a certificate materially in the form set forth in Schedule 4 signed by a Bank and a Transferee whereby:- |
| 1.1.86.1 | such Bank seeks to procure the transfer to such Transferee of all or a part of such Bank’s rights and obligations under this Agreement upon and subject to the terms and conditions set out in Clause 14; and |
| 1.1.86.2 | such Transferee undertakes to perform the obligations it will assume as a result of delivery of such certificate to the Agent as is contemplated in Clause 14. |
| 1.1.87 | “ Transfer Date ” means, in relation to any Transfer Certificate, the date for the making of the transfer specified in the schedule to such Transfer Certificate. |
| 1.1.88 | “ Transferee ” means a bank or other financial institution to which a Bank seeks to transfer all or part of such Bank’s rights and obligations under this Agreement. |
| 1.1.89 | “ the Trust Property ” means:- |
| 1.1.89.1 | the benefit of Clause 8 and the covenants contained in Clause 9.3; and |
| 1.1.89.2 | all benefits arising under (including, without limitation, all proceeds of the enforcement of) each of the Security Documents (other than this Agreement), with the exception of any benefits arising solely for the benefit of the Agent. |
| 1.1.90 | “ Valuation ” means in relation to a Vessel or a Replacement Vessel, the written valuation of that Vessel or Replacement Vessel expressed in Dollars prepared by one of the Approved Brokers (or such other firms of reputable independent shipbrokers as may be acceptable to the Majority Banks), to be nominated by the Borrowers, such nomination to be subject to the approval of the Agent. Such valuations shall be prepared at the Borrowers’ expense, without a physical inspection, on the basis of a sale for prompt delivery for cash at arm’s length between a willing buyer and a willing seller without the benefit of any charterparty or other engagement. |
| 1.1.91 | “ the Vessels ” means the vessels listed in Schedule 2 and everything now or in the future belonging to them on board and ashore (each a “ Vessel ”). |
| 1.2 | Interpretation |
| In this Agreement:- |
| 1.2.1 | words denoting the plural number include the singular and vice versa; |
| 1.2.2 | words denoting persons include corporations, partnerships, associations of persons (whether incorporated or not) or governmental or quasi-governmental bodies or authorities and vice versa; |
| 1.2.3 | references to Recitals, Clauses, Schedules and Appendices are references to recitals and clauses of, and schedules and appendices to, this Agreement; |
| 1.2.4 | references to this Agreement include the Recitals, the Schedules and the Appendices; |
| 1.2.5 | the headings and contents page(s) are for the purpose of reference only, have no legal or other significance, and shall be ignored in the interpretation of this Agreement; |
| 1.2.6 | references to any document (including, without limitation, to all or any of the Security Documents) are, unless the context otherwise requires, references to that document as amended, supplemented, novated or replaced from time to time; |
| 1.2.7 | references to statutes or provisions of statutes are references to those statutes, or those provisions, as from time to time amended, replaced or re-enacted; |
| 1.2.8 | references to any of the Finance Parties include its successors, transferees and assignees; |
| 1.2.9 | in the case of the Borrowers, references to company, incorporation, shares, officers, directors and shareholders shall be construed as references to a limited liability company, formation, limited liability, interests and members/membership respectively; and |
| 1.2.10 | references to times of day are unless otherwise stated to New York time. |
| 1.3 | Joint and several liability |
| 1.3.1 | All obligations, covenants, representations, warranties and undertakings in or pursuant to the Security Documents assumed, given, made or entered into by the Borrowers shall, unless otherwise expressly provided, be assumed, given, made or entered into by the Borrowers jointly and severally. |
| 1.3.2 | Each of the Borrowers agrees that any rights which it may have at any time during the Facility Period by reason of the performance of its obligations under the Security Documents to be indemnified by any other Borrower and/or to take the benefit of any security taken by the Banks or by the Agent pursuant to the Security Documents shall be exercised in such manner and on such terms as the Agent may require. Each of the Borrowers agree to hold any sums received by it as a result of its having exercised any such right on trust for the Agent (as security trustee for the Banks) absolutely. |
| 1.3.3 | Each of the Borrowers agrees that it will not at any time during the Facility Period claim any set-off or counterclaim against any other Borrower in respect of any liability owed to it by that other Borrower under or in connection with the Security Documents, nor prove in competition with the Finance Parties in any liquidation of (or analogous proceeding in respect of) any other Borrower in respect of any payment made under the Security Documents or in respect of any sum which includes the proceeds of realisation of any security held by the Banks or the Agent for the repayment of the Indebtedness. |
| 2 | The Facility and its Purpose |
| 2.1 | Agreement to lend Subject to the terms and conditions of this Agreement, and in reliance on each of the representations and warranties made or to be made in or in accordance with each of the Security Documents, each of the Banks agrees to advance to the Borrowers its Commitment of an aggregate principal amount not exceeding the Maximum Facility Amount to be used by the Borrowers for the purposes referred to in the Recital. |
| 2.2 | Drawings Subject to satisfaction by the Borrowers of the conditions set out in Clause 3.1 (in respect of the first Drawing), Clause 3.3 (in respect of all subsequent Drawings), and subject to Clause 2.3, and provided that the maximum aggregate amount of the Facility Outstandings at any given time during the Facility Period shall not exceed the Maximum Facility Amount, each Drawing shall be advanced to the Borrowers, in each case by the Agent transferring the amount of the Drawing to such account as the Borrowers shall notify to the Agent in the relevant Drawdown Notice by such same day method of funds transfer as the Agent shall select. |
| 2.3 | Advance of Drawings Each Drawing shall be advanced in Dollars. Each Drawing shall be advanced on a Business Day, provided that the Borrowers shall have given to the Agent not more than ten and not fewer than three Business Days’ notice in writing materially in the form set out in Schedule 5 of the required Advance Date of the Drawing in question and provided that the requested Drawing would not cause a breach of Clause 2.5. Each Drawdown Notice once given shall be irrevocable and shall constitute a warranty by the Borrowers that:- |
| 2.3.1 | all conditions precedent to the advance of the Drawing requested in that Drawdown Notice will have been satisfied on or before the Advance Date requested; |
| 2.3.2 | no Event of Default or Potential Event of Default has occurred or will then have occurred; and |
| 2.3.3 | no Event of Default or Potential Event of Default will result from the advance of the Drawing in question. |
| The Agent shall promptly notify each Bank of the receipt of each Drawdown Notice, following which each Bank will make its Proportionate Share of the amount of the requested Drawing available to the Borrowers through the Agent on the Advance Date requested. |
| 2.4 | Facility Reduction |
| 2.4.1 | The amount of the Facility available to the Borrowers for drawing under this Agreement shall, subject to the provisions of Clause 2.4.5, be five hundred and fifty million Dollars ($550,000,000) during the period from the Execution Date until the First Reduction Date. On the First Reduction Date and on each of the fourteen (14) Subsequent Reduction Dates the amount of the Facility available for drawing shall be reduced by twenty two million five hundred thousand Dollars ($22,500,000). On the Termination Date the Facility available shall be reduced to zero. Subject to the proviso hereto, the mandatory reductions in the amount of the Facility available for drawing required pursuant to this Clause will be made in the amounts and at the times specified whether or not the Maximum Facility Amount is reduced pursuant to Clause 2.4.2, Clause 2.4.3, Clause 2.4.4, Clause 15.7 or Clause 15.8. PROVIDED ALWAYS THAT any mandatory reductions pursuant to Clause 2.4.2 (voluntary reductions), Clause 2.4.3 (sale) or Clause 2.4.4 (Total Loss) shall be applied to the remaining mandatory reductions hereunder on a pro rata basis. |
| 2.4.2 | The Borrowers may voluntarily cancel the Maximum Facility Amount in whole or in part in an amount of not less than five million Dollars ($5,000,000) such amount to be in integral multiples of one million Dollars ($1,000,000), provided that they have first given to the Agent not fewer than three (3) Business Days’ prior written notice expiring on a Business Day (the “ Cancellation Date ”) of their desire to reduce the Maximum Facility Amount, such notice once received by the Agent to be irrevocable and shall oblige the Borrowers to make payment of all interest and Commitment Commission accrued on the amount so cancelled up to and including the Cancellation Date together with any Break Costs in respect of such cancelled amount if the Cancellation Date is not an Interest Payment Date. Any such reduction in the Maximum Facility Amount shall not be reversed. |
| 2.4.3 | In the event of a sale or disposal of a Vessel or the Agent having received not less than 5 Business Days’ notice from the Borrowers requesting that the security relating to a Vessel be released and discharged (a “Released Vessel ”), the Maximum Facility Amount shall be reduced by the Relevant Reduction Amount applicable to that Vessel. Such reduction shall be made in the case of a sale or disposal of such Vessel on the date of such sale or disposal and in the case of a Released Vessel on the date proposed by the Borrowers for release and discharge of the security relating to that Vessel unless the Vessel or Released Vessel in question is replaced on or prior to the sale, disposal or release with a Replacement Vessel acceptable to the Agent in its absolute discretion or with an asset being in all respects acceptable to all of the Finance Parties in their absolute discretion, and in such case of replacement any security held by the Agent (whether directly or indirectly) over such Vessel or Released Vessel is reconstituted immediately after the sale to the new owner or after the release and discharge of security (as the case may be) or over the replacement asset in substantially identical form, and the Agent obtains favourable legal opinions in respect of such reconstituted security. If, as a result of any reduction in the Maximum Facility Amount pursuant to this Clause, the Facility Outstandings exceed the Maximum Facility Amount, the Borrowers shall, on the date of the sale, disposal or replacement, prepay such amount of the Facility Outstandings as will ensure that the Facility Outstandings are not greater than the Maximum Facility Amount. Any such prepayment shall oblige the Borrowers to make payment of all interest and Commitment Commission accrued on the amount so reduced up to and including the date of reduction together with any Break Costs in respect of such reduced amount if the date of such reduction is not an Interest Payment Date. Any such reduction in the Maximum Facility Amount shall not be reversed. |
| 2.4.4 | In the event that any Vessel becomes a Total Loss, on the earlier to occur of (a) the date of receipt of the proceeds of the Total Loss and (b) the date falling one hundred and eighty (180) days after the occurrence of the Total Loss (the “ Reduction Date ”), the Maximum Facility Amount shall (subject to the proviso hereto) be reduced by the Relevant Reduction Amount in respect of such Vessel. Any such reductions in the Maximum Facility Amount shall not be reversed. If, as a result of any reduction in the Maximum Facility Amount pursuant to this Clause the Facility Outstandings exceed the Maximum Facility Amount, the Borrowers shall, on the earlier to occur of (i) the date on which the relevant Owner receives the proceeds of such Total Loss and (ii) the one hundred and eightieth day after the date of such Total Loss occurring, prepay such amount of the Facility Outstandings as will ensure that the Facility Outstandings are not greater than the Maximum Facility Amount. Any such prepayment shall not be reborrowed and Clause 5.4 shall apply to any such prepayment. PROVIDED ALWAYS that if there is an investment in a Replacement Vessel acceptable to the Agent in its absolute discretion on or prior to the Reduction Date, and security over such Replacement Vessel acceptable to the Agent in its absolute discretion is also executed and delivered either prior to or on the Reduction Date, then the reduction in the Maximum Facility Amount shall not apply. |
| 2.4.5 | To the extent that repayments or prepayments made by the Borrowers to the Agent in accordance with this Agreement reduce the Facility Outstandings to less than the Maximum Facility Amount, the Borrowers shall again be entitled to make Drawings up to the Commitment Termination Date in accordance with and subject to the terms of this Agreement. Any part of the Facility which is undrawn on the Commitment Termination Date shall be automatically cancelled. |
| 2.4.6 | Simultaneously with each reduction of the Maximum Facility Amount in accordance with Clause 2.4.1, Clause 2.4.2, Clause 2.4.3 or Clause 2.4.4 (as the case may be), the Commitment of each Bank will reduce so that the Commitments of the Banks in respect of the reduced Maximum Facility Amount remain in accordance with their respective Proportionate Shares. |
| 2.5 | Restrictions on Drawings The Borrowers shall not be entitled to make more than one Drawing on any Business Day and no more than ten (10) Drawings may be outstanding at any one time during the Facility Period. Each Drawing shall be of an amount of not less than five million Dollars ($5,000,000). If at any time during the Facility Period the Facility Outstandings exceed the Maximum Facility Amount then available or if a proposed Drawing added to the Facility Outstandings would result in the Maximum Facility Amount being exceeded then the Borrowers shall immediately pay to the Agent on behalf of the Banks such amounts as will ensure that the Facility Outstandings are equal to or less than the Maximum Facility Amount then available. |
| 2.6 | Termination Date No Bank shall be under any obligation to advance all or any part of its Commitment after the Commitment Termination Date. |
| 2.7 | Several obligations The obligations of the Banks under this Agreement are several. The failure of a Bank to perform its obligations under this Agreement shall not affect the obligations of the Borrowers to any Finance Party nor shall any Finance Party be liable for the failure of another Bank to perform any of its obligations under or in connection with this Agreement. |
| 2.8 | Application of Facility Without prejudice to the obligations of the Borrowers under this Agreement, no Finance Party shall be obliged to concern itself with the application of the Facility by the Borrowers. |
| 2.9 | Loan facility and control accounts The Agent will open and maintain such loan facility account or such other control accounts as the Agent shall in its discretion consider necessary or desirable in connection with the Facility. |
| 3 | Conditions Precedent and Subsequent |
| 3.1 | Conditions Precedent — First Drawing Before any Bank shall have any obligation to advance the first Drawing under the Facility, the Borrowers shall pay to the Agent the relevant fees referred to in Clause 7 and deliver or cause to be delivered to or to the order of the Agent the following documents and evidence:- |
| 3.1.1 | Evidence of incorporation Such evidence as the Agent may reasonably require that each Security Party was duly incorporated in its country of incorporation and remains in existence and, where appropriate, in good standing, with power to enter into, and perform its obligations under, those of the Security Documents to which it is, or is intended to be, a party, including (without limitation) a copy, certified by a director or an officer of the Security Party or its sole member in question as true, complete, accurate and unamended, of all documents establishing or limiting the constitution of each Security Party. |
| 3.1.2 | Corporate authorities A copy, certified by a director or any duly authorised officer of the Security Party (or its sole member) in question as true, complete, accurate and neither amended nor revoked, of a resolution of the directors, in the case of the Guarantor, and a resolution of the sole member in the case of each other Security Party (together, where appropriate, with signed waivers of notice of any directors’ meetings) approving, and authorising or ratifying the execution of, those of the Security Documents and each Drawdown Notice to which that Security Party is or is intended to be a party and all matters incidental thereto. |
| 3.1.3 | Officer’s certificate A certificate (i) signed by a duly authorised officer or representative of each of the Security Parties setting out the names of the directors, officers and, in the case of the Borrowers, members of that Security Party and (ii) issued by each Security Party’s company registry confirming due incorporation and valid existence and (when such information is maintained by the registry) the names of its directors and shareholders. |
| 3.1.4 | Power of attorney The power of attorney (notarially attested and legalised, if necessary, for registration purposes) of each of the Security Parties under which any documents are to be executed or transactions undertaken by that Security Party. |
| 3.1.5 | The Security Documents The Security Documents, together with all notices and other documents required by any of them, duly executed. |
| 3.1.6 | Drawdown Notice A Drawdown Notice. |
| 3.1.7 | Process agent A letter from Teekay Shipping (UK) Ltd accepting their appointment by each of the Security Parties as agent for service of Proceedings pursuant to the Security Documents. |
| 3.1.8 | Legal opinions Confirmation satisfactory to the Agent that all legal opinions required by the Agent on behalf of the Finance Parties will be given substantially in the form required by the Agent on behalf of the Finance Parties. |
| 3.1.9 | Share Charge Documents Any documents required by the Shares Charges. |
| 3.1.10 | Evidence of Borrower’s title Evidence that on the date of the first Drawing (i) the Vessels are registered under the flag stated in Schedule 2 in the ownership of the relevant Borrower and (ii) each the Mortgages will be capable of being registered against the Vessels with first priority. |
| 3.1.11 | Evidence of insurance Evidence that each of the Vessels is insured in the manner required by the Security Documents and that letters of undertaking will be issued in the manner required by the Security Documents, together with a written opinion on the Insurances from an insurance adviser appointed by the Agent. |
| 3.1.12 | Confirmation of class Certificates of Confirmation of Class for hull and machinery confirming that each of the Vessels is classed with the highest class applicable to vessels of her type with a Pre-Approved Classification Society. |
| 3.2 | Conditions Subsequent The Borrowers undertake to deliver or to cause to be delivered to the Agent on, or not later than ten (10) days or such other period as the Agent may have consented to after, the first Advance Date, the following additional documents and evidence:- |
| 3.2.1 | Legal opinions Such legal opinions as the Agent on behalf of the Banks shall require pursuant to Clause 3.1.8. |
| 3.2.2 | Companies Act registrations Evidence that the prescribed particulars of the Security Documents have been delivered to the Registrar of Companies of England and Wales and any other relevant authorities within the statutory time limit. |
| 3.2.3 | Letters of undertaking Letters of undertaking in respect of the Insurances as required by the Security Documents together with copies of the relevant policies or cover notes or entry certificates duly endorsed with the interest of the Agent. |
| 3.2.4 | Evidence of Borrowers’ title Certificates of ownership and encumbrance (or equivalent) issued by the Registrar of Ships (or equivalent official) of each Vessel’s flag state confirming that (a) each Vessel is permanently registered under that flag in the ownership of the relevant Owner (b) the relevant Mortgage has been registered with first priority against each of the Vessels and (c) there are no further Encumbrances registered against any of the Vessels. |
| 3.3 | Conditions Precedent – Subsequent Drawings Before any Bank shall have any obligation to advance any subsequent Drawings under the Facility, the Borrowers shall deliver or cause to be delivered to the order of the Agent, a Drawdown Notice, in addition to the documents and evidence referred to in Clause 3.1 where such documents and evidence have not already been delivered to and received by the Agent. |
| 3.4 | No waiver If the Banks in their sole discretion agree to advance any part of the Facility to the Borrowers before all of the documents and evidence required by Clause 3.1 or Clause 3.3 (as the case may be) have been delivered to or to the order of the Agent, the Borrowers undertake to deliver all outstanding documents and evidence to or to the order of the Agent no later than the date specified by the Agent, and the advance of any part of the Facility shall not be taken as a waiver of the Agent’s right to require production of all the documents and evidence required by Clause 3.1 or Clause 3.3 (as the case may be). |
| 3.5 | Form and content All documents and evidence delivered to the Agent pursuant to this Clause shall:- |
| 3.5.1 | be in form and substance acceptable to the Agent; |
| 3.5.2 | be accompanied, if required by the Agent, by translations into the English language, certified in a manner acceptable to the Agent; |
| 3.5.3 | if required for registration purposes, be certified, notarised, legalised or attested in a manner acceptable to the Agent. |
| 3.6 | Event of Default No Bank shall be under any obligation to advance any part of its Commitment nor to act on any Drawdown Notice if, at the date of the Drawdown Notice or at the date on which the advance of a Drawing is requested in the Drawdown Notice, an Event of Default or Potential Event of Default shall have occurred, or if an Event of Default or Potential Event of Default would result from the advance of the Drawing in question. |
| 4 | Representations and Warranties |
| Each of the Borrowers represents and warrants jointly and severally to each of the Finance Parties at the Execution Date and (by reference to the facts and circumstances then pertaining) at the date of each Drawdown Notice, at each Advance Date and at each Interest Payment Date as follows (except that the representation and warranty contained at Clause 4.6 shall only be made on the first Advance Date and that the representation and warranty contained at Clause 4.2 shall only be made on the Execution Date) :- |
| 4.1 | Status and Due Authorisation Each of the Security Parties is a corporation or limited liability company duly organised or formed under the laws of its jurisdiction of incorporation, organisation or formation (as the case may be) with power to enter into the Security Documents and to exercise its rights and perform its obligations under the Security Documents and all corporate and other action required to authorise its execution of the Security Documents and its performance of its obligations thereunder has been duly taken. |
| 4.2 | No Deductions or Withholding Under the laws of the Security Parties’ respective jurisdictions of incorporation or organisation in force at the date hereof, none of the Security Parties will be required to make any deduction or withholding from any payment it may make under any of the Security Documents. |
| 4.3 | Claims Pari Passu Under the laws of the Security Parties’ respective jurisdictions of incorporation or organisation in force at the date hereof, the Indebtedness will, to the extent that it exceeds the realised value of any security granted in respect of the Indebtedness, rank at least pari passu with all the Security Parties’ other unsecured indebtedness save that which is preferred solely by any bankruptcy, insolvency or other similar laws of general application. |
| 4.4 | No Immunity In any proceedings taken in any of the Security Parties’ respective jurisdictions of incorporation in relation to any of the Security Documents, none of the Security Parties will be entitled to claim for itself or any of its assets immunity from suit, execution, attachment or other legal process. |
| 4.5 | Governing Law and Judgments In any proceedings taken in any of the Security Parties’ jurisdiction of incorporation or organisation in relation to any of the Security Documents in which there is an express choice of the law of a particular country as the governing law thereof, that choice of law and any judgment or (if applicable) arbitral award obtained in that country will be recognised and enforced. |
| 4.6 | Validity and Admissibility in Evidence As at the date hereof, all acts, conditions and things required to be done, fulfilled and performed in order (a) to enable each of the Security Parties lawfully to enter into, exercise its rights under and perform and comply with the obligations expressed to be assumed by it in the Security Documents, (b) to ensure that the obligations expressed to be assumed by each of the Security Parties in the Security Documents are legal, valid and binding and (c) to make the Security Documents admissible in evidence in the jurisdictions of incorporation or organization of each of the Security Parties, have been done, fulfilled and performed. |
| 4.7 | No Filing or Stamp Taxes Under the laws of the Security Parties’ respective jurisdictions of incorporation or organisation in force at the date hereof, it is not necessary that any of the Security Documents be filed, recorded or enrolled with any court or other authority in its jurisdiction of incorporation or organisation (other than the Registrar of Companies for England and Wales or the relevant maritime registry, to the extent applicable) or that any stamp, registration or similar tax be paid on or in relation to any of the Security Documents. |
| 4.8 | Binding Obligations The obligations expressed to be assumed by each of the Security Parties in the Security Documents are legal and valid obligations, binding on each of them in accordance with the terms of the Security Documents and no limit on any of their powers will be exceeded as a result of the borrowings, granting of security or giving of guarantees contemplated by the Security Documents or the performance by any of them of any of their obligations thereunder. |
| 4.9 | No Winding-u Neither the Borrowers, the Guarantor nor any Material Subsidiary of the Guarantor have taken any corporate action nor have any other steps been taken or legal proceedings been started or (to the best of the Borrowers’ knowledge and belief) threatened against the Borrowers, the Guarantor or any Material Subsidiary of the Guarantor for its winding-up, dissolution, administration or reorganisation or for the appointment of a receiver, administrator, administrative receiver, trustee or similar officer of it or of any or all of its assets or revenues which might have a material adverse effect on the business or financial condition of the Guarantor Group taken as a whole. |
| 4.10 | Solvency |
| 4.10.1 | Neither the Borrowers, the Guarantor nor the Guarantor Group taken as a whole is unable, or admits or has admitted its inability, to pay its debts or has suspended making payments in respect of any of its debts. |
| 4.10.2 | Neither the Borrowers, the Guarantor nor any Material Subsidiary of the Guarantor by reason of actual or anticipated financial difficulties, has commenced, or intends to commence, negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness. |
| 4.10.3 | The value of the assets of each of the Borrowers, the Guarantor and the Guarantor Group taken as a whole is not less than the liabilities of such entity or the Guarantor Group taken as a whole (as the case may be) (taking into account contingent and prospective liabilities). |
| 4.10.4 | No moratorium has been, or may, in the reasonably foreseeable future be, declared in respect of any indebtedness of the Borrowers, the Guarantor or any Material Subsidiary of the Guarantor. |
| 4.11 | No Material Defaults |
| 4.11.1 | Without prejudice to Clause 4.11.2, neither the Borrowers, the Guarantor nor any Material Subsidiary of the Guarantor is in breach of or in default under any agreement to which it is a party or which is binding on it or any of its assets to an extent or in a manner which might have a material adverse effect on the business or financial condition of the Guarantor Group taken as a whole. |
| 4.11.2 | No Event of Default is continuing or might reasonably be expected to result from the advance of any Drawing. |
| 4.12 | No Material Proceedings No action or administrative proceeding of or before any court, arbitral body or agency which is not covered by adequate insurance or which might have a material adverse effect on the business or financial condition of the Guarantor Group taken as a whole has been started or is reasonably likely to be started. |
| 4.13 | Guarantor’s Accounts The first set of Guarantor’s Accounts and all other annual financial statements relating to the Guarantor Group required to be delivered under Clause 9 of the Guarantee, were each prepared in accordance with GAAP, give (in conjunction with the notes thereto) a true and fair view of (in the case of annual financial statements) or fairly represent (in the case of quarterly accounts) the financial condition of the Guarantor Group at the date as of which they were prepared and the results of the Guarantor Group’s operations during the financial period then ended. |
| 4.14 | No Material Adverse Change Since the publication of the last financial statements relating to the Guarantor Group delivered pursuant to the Guarantee, there has been no material adverse change in the business, financial condition or operations of the Guarantor Group taken as a whole. |
| 4.15 | No Undisclosed Liabilities As at the date to which the Guarantor’s Accounts were prepared neither the Borrowers’, the Guarantor nor any Material Subsidiary of the Guarantor had any material liabilities (contingent or otherwise) which were not disclosed thereby (or by the notes thereto) or reserved against therein nor any unrealised or anticipated losses arising from commitments entered into by it which were not so disclosed or reserved against therein. |
| 4.16 | No Obligation to Create Security The execution of the Security Documents by the Security Parties and their exercise of their rights and performance of their obligations thereunder will not result in the existence of nor oblige the Borrowers or the Guarantor to create any Encumbrance over all or any of their present or future revenues or assets, other than pursuant to the Security Documents. |
| 4.17 | No Breach The execution of the Security Documents by each of the Security Parties and their exercise of their rights and performance of their obligations under any of the Security Documents do not constitute and will not result in any breach of any agreement or treaty to which any of them is a party. |
| 4.18 | Ownership and Security |
| 4.18.1 | Each of the Security Parties (other than the Guarantor) is a wholly-owned Subsidiary of the Guarantor. |
| 4.18.2 | Each of the Security Parties is the legal and beneficial owner of all assets and other property which it purports to charge, mortgage, pledge, assign or otherwise secure pursuant to each Security Document and those Security Documents to which it is a party create and give rise to valid and effective Security having the ranking expressed in those Security Documents. |
| 4.19 | Necessary Authorisations The Necessary Authorisations required by each Security Party, are in full force and effect, and each Security Party is in compliance with the material provisions of each such Necessary Authorisation relating to it and, to the best of its knowledge, none of the Necessary Authorisations relating to it are the subject of any pending or threatened proceedings or revocation. |
| 4.20 | Money Laundering Any amount borrowed hereunder, and the performance of the obligations of the Security Parties under the Security Documents, will be for the account of members of the Guarantor Group and will not involve any breach by any of them of any law or regulatory measure relating to “money laundering” as defined in Article 1 of the Directive (91/308/EEC) of the Council of the European Communities. |
| 4.21 | Disclosure of material facts The Borrowers are not aware of any material facts or circumstances which have not been disclosed to the Agent and which might, if disclosed, have reasonably been expected to adversely affect the decision of a person considering whether or not to make loan facilities of the nature contemplated by this Agreement available to the Borrowers. |
| 4.22 | Use of Facility The Facility will be used for the purposes specified in the Recital. |
| 4.23 | Representations Limited The representation and warranties of the Borrowers in this Clause 4 are subject to: |
| 4.23.1 | the principle that equitable remedies are remedies which may be granted or refused at the discretion of the court; |
| 4.23.2 | the limitation of enforcement by laws relating to bankruptcy, insolvency, liquidation, reorganisation, court schemes, moratoria, administration and other laws generally affecting or limiting the rights of creditors; |
| 4.23.3 | the time barring of claims under any applicable limitation acts; |
| 4.23.4 | the possibility that a court may strike out provisions for a contract as being invalid for reasons of oppression, undue influence or similar; and |
| 4.23.5 | any other reservations or qualifications of law expressed in any legal opinions obtained by the Agent in connection with the Facility. |
| 5 | Repayment and Prepayment |
| 5.1 | Repayment Each Drawing shall be repaid by the Borrowers to the Agent on behalf of the Banks on the last day of its Interest Period unless the Borrowers select a further Interest Period for that Drawing in accordance with Clause 6, provided that the Borrowers shall not be permitted to select such further Interest Period if an Event of Default or Potential Event of Default has occurred and shall then be obliged to repay such Drawing on the last day of its then current Interest Period. The Borrowers shall on the Termination Date repay to the Agent as agent for the Banks all Facility Outstandings. |
| 5.2 | Prepayment The Borrowers may prepay the Facility Outstandings in whole or in part in integral multiples of five million Dollars ($5,000,000) (or as otherwise may be agreed by the Agent) provided that they have first given to the Agent not fewer than five (5) Business Days’ prior written notice expiring on a Business Day of its intention to do so. Any notice pursuant to this Clause 5.2 once given shall be irrevocable and shall oblige the Borrowers to make the prepayment referred to in the notice on the Business Day specified in the notice, together with all interest accrued on the amount prepaid up to and including that Business Day. |
| 5.3 | Mandatory Prepayment If at any time the Facility Outstandings shall exceed the Maximum Facility Amount the Borrowers shall immediately prepay to the Agent on behalf of the Banks such amounts as will ensure that the Facility Outstandings do not exceed the Maximum Facility Amount and shall pay to the Banks all interest accrued on the amount prepaid up to and including the date on which such prepayment occurred. |
| 5.4 | Prepayment indemnity If the Borrowers shall make a prepayment on a Business Day other than the last day of an Interest Period, they shall pay to the Agent on behalf of the Banks any amount which is necessary to compensate the Banks for any Break Costs incurred by the Agent or any of the Banks as a result of the prepayment in question. |
| 5.5 | Application of prepayments Any prepayment in an amount less than the Indebtedness shall be applied in satisfaction or reduction first of any costs and other expenses outstanding; secondly of all interest accrued with respect to the outstanding Drawings; and thirdly of the outstanding Drawings as the Borrowers may specify. |
| 5.6 | Reborrowing of prepayments Any amount prepaid pursuant to this Agreement may be reborrowed in accordance with Clause 2.4. |
| 6 | Interest |
| 6.1 | Interest Periods The period during which any Drawing shall be outstanding pursuant to this Agreement shall be divided into consecutive Interest Periods of one, three or six months’ duration, as selected by the Borrowers by written notice to the Agent not later than 11.00 a.m. on the fourth Business Day before the beginning of the Interest Period in question, or such other duration as may be agreed by the Banks in their discretion. No more than six one (1) month Interest Periods may be selected by the Borrowers in each twelve (12) month period during the Facility Period. |
| 6.2 | Beginning and end of Interest Periods The first Interest Period in respect of each Drawing shall begin on the Advance Date of that Drawing and shall end on the last day of the Interest Period selected in accordance with Clause 6.1. Any subsequent Interest Period selected in respect of each Drawing shall commence on the day following the last day of its previous Interest Period and shall end on the last day of its current Interest Period selected in accordance with Clause 6.1. However, in respect of any Drawings outstanding on the Termination Date, the Interest Period applicable to such Drawings shall end on the Termination Date. |
| 6.3 | Interest rate During each Interest Period, interest shall accrue on each Drawing at the rate determined by the Agent to be the aggregate of (a) the Margin (b) LIBOR and (c), if applicable, the Mandatory Cost determined at or about 11.00 a.m. (London time) on the second Business Day prior to the beginning of the Interest Period relating to that Drawing. |
| 6.4 | Accrual and payment of interest During the Facility Period, interest shall accrue from day to day, shall be calculated on the basis of a 360 day year and the actual number of days elapsed (or, in any circumstance where market practice differs, in accordance with the prevailing market practice) and shall be paid by the Borrowers to the Agent on behalf of the Banks on the last day of each Interest Period and additionally, during any Interest Period exceeding three months, on the last day of each successive three month period after the beginning of that Interest Period. |
| 6.5 | Ending of Interest Periods If any Interest Period would end on a day which is not a Business Day, that Interest Period shall end on the next succeeding Business Day (unless the next succeeding Business Day falls in the next calendar month, in which event the Interest Period in question shall end on the immediately preceding Business Day). |
| 6.6 | Default Rate If an Event of Default shall occur, the whole of the Indebtedness shall, from the date of the occurrence of the Event of Default, bear interest up to the date of actual payment (both before and after judgment) at the Default Rate, compounded at such intervals as the Agent shall in its reasonable discretion determine, which interest shall be payable from time to time by the Borrowers to the Agent on behalf of the Banks on demand. |
| 6.7 | Determinations conclusive Each determination of an interest rate made by the Agent in accordance with Clause 6 shall (save in the case of manifest error or on any question of law) be final and conclusive. |
| 7 | Commitment Commission |
| The Borrowers shall pay to the Agent Commitment Commission at the rate of twenty one basis points (21 bps) on any undrawn and uncancelled part of the Facility. The Commitment Commission will accrue from day to day on the basis of a 360 day year and the actual number of days elapsed and shall be paid quarterly in arrears from the Execution Date until the Commitment Termination Date with a pro rata payment being due and payable on the Commitment Termination Date. |
| 8 | Security Documents |
| 8.1 | As security for the repayment of the Indebtedness, the Borrowers will execute and deliver to the Agent or cause to be executed and delivered to the Agent, on or before the first Advance Date, the following Security Documents in such forms and containing such terms and conditions as the Agent requires:- |
| 8.1.1 | the Assignments deeds of assignment of Insurances, Earnings and Requisition Compensation executed in respect of each of the Vessels by the relevant Owners; |
| 8.1.2 | the Guarantee the guarantee and indemnity of the Guarantor in respect of the Borrowers' Obligations; |
| 8.1.3 | Shares Charge a pledge of shares of each of the Borrowers entered into by the Pledgor; and |
| 8.1.4 | the Mortgages (i) the first priority statutory ship mortgages together with deeds of covenant collateral thereto or (ii) the first preferred ship mortgages (as the case may be) over each of the Vessels executed by the relevant Owners. |
| 9 | Agency and Trust |
| 9.1 | Appointment Each of the Banks appoints the Agent its agent for the purpose of administering the Facility and the Security Documents and authorises the Agent and its directors, officers, employees and agents acting on the instructions from time to time of the Majority Banks, and subject to Clauses 9.4 and 9.19, to execute the Security Documents on its behalf and to exercise all rights, powers, discretions and remedies vested in the Banks under or pursuant to the Security Documents, together with all powers reasonably incidental to them. |
| 9.2 | Authority Each of the Banks irrevocably authorises the Agent, acting on the instructions from time to time of the Majority Banks (save where the terms of any Security Document expressly require the instructions of all of the Banks):- |
| 9.2.1 | to give or withhold any consents or approvals; and |
| 9.2.2 | to exercise, or refrain from exercising, any discretions; and |
| 9.2.3 | to collect, receive, release or pay any money; |
| under or pursuant to any of the Security Documents. The Agent shall have no duties or responsibilities as agent or as security trustee other than those expressly conferred on it by the Security Documents and shall not be obliged to act on any instructions if to do so would, in the opinion of the Agent, be contrary to any provision of the Security Documents or to any law, or would expose the Agent to any actual or potential liability to any third party. |
| 9.3 | Trust The Agent agrees and declares, and each of the Banks acknowledges, that, subject to the terms and conditions of this Clause, the Agent holds the Trust Property on trust for the Banks, in accordance with their respective Proportionate Shares, absolutely. Each of the Banks agrees that the obligations, rights and benefits vested in the Agent in its capacity as security trustee shall be performed and exercised in accordance with this Clause. The Agent in its capacity as security trustee shall have the benefit of all of the provisions of this Agreement benefiting it in its capacity as agent for the Banks, and all the powers and discretions conferred on trustees by the Trustee Act 1925 (to the extent not inconsistent with this Agreement). In addition:- |
| 9.3.1 | the Agent (and any attorney, agent or delegate of the Agent) may indemnify itself or himself out of the Trust Property against all liabilities, costs, fees, damages, charges, losses and expenses sustained or incurred by it or him in relation to the taking or holding of any of the Trust Property or in connection with the exercise or purported exercise of the rights, trusts, powers and discretions vested in the Agent or any other such person by or pursuant to the Security Documents or in respect of anything else done or omitted to be done in any way relating to the Security Documents other than as a result of its gross negligence or wilful misconduct; and |
| 9.3.2 | the Banks acknowledge that the Agent shall be under no obligation to insure any property nor to require any other person to insure any property and shall not be responsible for any loss which may be suffered by any person as a result of the lack or insufficiency of any insurance; and |
| 9.3.3 | the Agent and the Banks agree that the perpetuity period applicable to the trusts declared by this Agreement shall be the period of eighty years from the Execution Date. |
| 9.4 | Limitations on authority Except with the prior written consent of each of the Banks, the Agent shall not be entitled to :- |
| 9.4.1 | release or vary any security given for the Borrowers' obligations under this Agreement; nor |
| 9.4.2 | agree to waive the payment of any sum of money payable by any of the Security Parties under the Security Documents; nor |
| 9.4.3 | change the meaning of the expression “ Majority Banks ”; nor |
| 9.4.4 | exercise, or refrain from exercising, any discretion, or give or withhold any consent, the exercise or giving of which is, by the terms of this Agreement, expressly reserved to the Banks; nor |
| 9.4.5 | extend the due date for the payment of any sum of money payable by any of the Security Parties under the Security Documents; nor |
| 9.4.6 | take or refrain from taking any step if the effect of such action or inaction may lead to the increase of the obligations of a Bank under any of the Security Documents; nor |
| 9.4.7 | agree to change the currency in which any sum is payable under the Security Documents; nor |
| 9.4.8 | agree to amend this Clause 9.4; nor |
| 9.4.9 | agree to amend the definitions of “ Margin ” “ Commitment Commission ” or “ Default Rate ”. |
| 9.5 | Liability Neither the Agent nor any of its directors, officers, employees or agents shall be liable to any of the other Finance Parties for anything done or omitted to be done by the Agent under or in connection with the Security Documents unless as a result of the Agent’s wilful misconduct or gross negligence. |
| 9.6 | Acknowledgement Each of the Finance Parties (other than the Agent) acknowledges that:- |
| 9.6.1 | it has not relied on any representation made by the Agent or any of the Agent’s directors, officers, employees or agents or by any other person acting or purporting to act on behalf of the Agent to induce it to enter into any of the Security Documents; |
| 9.6.2 | it has made and will continue to make without reliance on the Agent, and based on such documents and other evidence as it considers appropriate, its own independent investigation of the financial condition and affairs of the Security Parties in connection with the making and continuation of the Facility; |
| 9.6.3 | it has made its own appraisal of the creditworthiness of the Security Parties; |
| 9.6.4 | the Agent shall not have any duty or responsibility at any time to provide it with any credit or other information relating to any of the Security Parties unless that information is received by the Agent pursuant to the express terms of the Security Documents. |
| Each of the Finance Parties (other than the Agent) agrees that it will not assert nor seek to assert against any director, officer, employee or agent of the Agent or against any other person acting or purporting to act on behalf of the Agent any claim which it might have against them in respect of any of the matters referred to in this Clause. |
| 9.7 | Limitations on responsibility The Agent shall have no responsibility to any of the Security Parties or to any of the other Finance Parties on account of:- |
| 9.7.1 | the failure of any of the Finance Parties or of any of the Security Parties to perform any of their respective obligations under the Security Documents; |
| 9.7.2 | the financial condition of any of the Security Parties; |
| 9.7.3 | the completeness or accuracy of any statements, representations or warranties made in or pursuant to any of the Security Documents, or in or pursuant to any document delivered pursuant to or in connection with any of the Security Documents; |
| 9.7.4 | the negotiation, execution, effectiveness, genuineness, validity, enforceability, admissibility in evidence or sufficiency of any of the Security Documents or of any document executed or delivered pursuant to or in connection with any of the Security Documents. |
| 9.8 | The Agent’s rights The Agent may:- |
| 9.8.1 | assume that all representations or warranties made or deemed repeated by any of the Security Parties in or pursuant to any of the Security Documents are true and complete, unless, in its capacity as the Agent, it has acquired actual knowledge to the contrary; and |
| 9.8.2 | assume that no Event of Default or Potential Event of Default has occurred unless, in its capacity as the Agent, it has acquired actual knowledge to the contrary; and |
| 9.8.3 | rely on any document or Communication believed by it to be genuine; and |
| 9.8.4 | rely as to legal or other professional matters on opinions and statements of any legal or other professional advisers selected or approved by it; and |
| 9.8.5 | rely as to any factual matters which might reasonably be expected to be within the knowledge of any of the Security Parties on a certificate signed by or on behalf of that Security Party; and |
| 9.8.6 | refrain from exercising any right, power, discretion or remedy unless and until instructed to exercise that right, power, discretion or remedy and as to the manner of its exercise by the Banks (or, where applicable, by the Majority Banks) and unless and until the Agent has received from the Banks any payment which the Agent may require on account of, or any security which the Agent may require for, any costs, claims, expenses (including legal and other professional fees) and liabilities which it considers it may incur or sustain in complying with those instructions. |
| 9.9 | The Agent’s duties The Agent shall:- |
| 9.9.1 | if requested in writing to do so by a Bank, make enquiry and advise the Banks as to the performance or observance of any of the provisions of the Security Documents by any of the Security Parties or as to the existence of an Event of Default; and |
| 9.9.2 | inform the Banks promptly of any Event of Default of which the Agent has actual knowledge. |
| 9.10 | No deemed knowledge The Agent shall not be deemed to have actual knowledge of the falsehood or incompleteness of any representation or warranty made or deemed repeated by any of the Security Parties or actual knowledge of the occurrence of any Event of Default or Potential Event of Default unless a Bank or any of the Security Parties shall have given written notice thereof to the Agent. |
| 9.11 | Other business The Agent may, without any liability to account to the Banks, generally engage in any kind of banking or trust business with any of the Security Parties or any of their respective Subsidiaries or associated companies or with a Bank as if it were not the Agent. |
| 9.12 | Indemnity The Banks shall, promptly on the Agent’s request, reimburse the Agent in their respective Proportionate Shares, for, and keep the Agent fully indemnified in respect of:- |
| 9.12.1 | all amounts payable by the Borrowers to the Agent pursuant to Clause 17 (other than under Clauses 17.3 and 17.4) to the extent that those amounts are not paid by the Borrowers; |
| 9.12.2 | all liabilities, damages, costs and claims sustained or incurred by the Agent in connection with the Security Documents, or the performance of its duties and obligations, or the exercise of its rights, powers, discretions or remedies under or pursuant to any of the Security Documents; or in connection with any action taken or omitted by the Agent under or pursuant to any of the Security Documents, unless in any case those liabilities, damages, costs or claims arise solely from the Agent’s wilful misconduct or gross negligence. |
| 9.13 | Employment of agents In performing its duties and exercising its rights, powers, discretions and remedies under or pursuant to the Security Documents, the Agent shall be entitled to employ and pay agents to do anything which the Agent is empowered to do under or pursuant to the Security Documents (including the receipt of money and documents and the payment of money) and to act or refrain from taking action in reliance on the opinion of, or advice or information obtained from, any lawyer, banker, broker, accountant, valuer or any other person believed by the Agent in good faith to be competent to give such opinion, advice or information. |
| 9.14 | Distribution of payments The Agent shall pay promptly to the order of each of the Banks that Bank’s Proportionate Share of every sum of money received by the Agent pursuant to the Security Documents (with the exception of any amounts payable pursuant to Clause 7 and any amounts which, by the terms of the Security Documents, are paid to the Agent for the account of the Agent alone or specifically for the account of one or more Banks) and until so paid such amount shall be held by the Agent on trust absolutely for that Bank. |
| 9.15 | Reimbursement The Agent shall have no liability to pay any sum to another Finance Party until it has itself received payment of that sum. If, however, the Agent does pay any sum to a Finance Party on account of any amount prospectively due to it pursuant to Clause 9.14 before it has itself received payment of that amount, and the Agent does not in fact receive payment within five Business Days after the date on which that payment was required to be made by the terms of the Security Documents, the recipient will, on demand by the Agent, refund to the Agent an amount equal to the amount received by it, together with an amount sufficient to reimburse the Agent for the cost of money for funding the amount in question during the period beginning on the date on which that amount was required to be paid by the terms of the Security Documents and ending on the date on which the Agent receives reimbursement. |
| 9.16 | Redistribution of payments Unless otherwise agreed between the Finance Parties, if at any time a Bank receives or recovers by way of set-off, the exercise of any lien or otherwise other than from any assignee or transferee of or sub-participant in that Bank’s Commitment, an amount greater than that Bank’s Proportionate Share of any sum due from any of the Security Parties under the Security Documents (the amount of the excess being referred to in this Clause as the “ Excess Amount ”) then:- |
| 9.16.1 | that Bank shall promptly notify the Agent (which shall promptly notify each other Bank); |
| 9.16.2 | that Bank shall pay to the Agent an amount equal to the Excess Amount within ten days of its receipt or recovery of the Excess Amount; and |
| 9.16.3 | the Agent shall treat that payment as if it were a payment by the Security Party in question on account of the sum owed to the Banks as aforesaid and shall account to the Banks in respect of the Excess Amount in accordance with the provisions of this Clause. |
| However, if a Bank has commenced any Proceedings to recover sums owing to it under the Security Documents and, as a result of, or in connection with, those Proceedings has received an Excess Amount, the Agent shall not distribute any of that Excess Amount to any other Bank which had been notified of the Proceedings and had the legal right to, but did not, join those Proceedings or commence and diligently prosecute separate Proceedings to enforce its rights in the same or another court. |
| 9.17 | Rescission of Excess Amount If all or any part of any Excess Amount is rescinded or must otherwise be restored to any of the Security Parties or to any other third party, the Banks which have received any part of that Excess Amount by way of distribution from the Agent pursuant to Clause 9.16 shall repay to the Agent for the account of the Bank which originally received or recovered the Excess Amount, the amount which shall be necessary to ensure that the Banks share rateably in accordance with their Proportionate Shares in the amount of the receipt or payment retained, together with interest on that amount at a rate equivalent to that (if any) paid by the Bank receiving or recovering the Excess Amount to the person to whom that Bank is liable to make payment in respect of such amount, and Clause 9.16.3 shall apply only to the retained amount. |
| 9.18 | Proceedings Each of the Finance Parties shall notify one another of the proposed commencement of any Proceedings under any of the Security Documents prior to their commencement. No such Proceedings may be commenced without the prior written consent of the Majority Banks. |
| 9.19 | Instructions Where the Agent is authorised or directed to act or refrain from acting in accordance with the instructions of the Banks, or of the Majority Banks where applicable, each of the Banks shall provide the Agent with instructions within seven Business Days of the Agent’s written request. If a Bank does not provide the Agent with instructions within that period, (i) that Bank shall be bound by the decision of the Agent, (ii) that Bank shall have no vote for the purposes of this Clause and (iii) the combined Proportionate Shares of the other Banks who provided such instructions shall be deemed to contribute 100%. Nothing in this Clause shall limit the right of the Agent to take, or refrain from taking, any action without obtaining the instructions of the Banks if the Agent in its discretion considers it necessary or appropriate to take, or refrain from taking, such action in order to preserve the rights of the Banks under or in connection with the Security Documents. In that event, the Agent will notify the Banks of the action taken by it as soon as reasonably practicable, and the Banks agree to ratify any action taken by the Agent pursuant to this Clause. |
| 9.20 | Communications Any Communication under this Clause shall be given, delivered, made or served, in the case of the Agent (in its capacity as Agent or as one of the Banks), and in the case of the other Banks, at the address indicated in Schedule 1 or such other addresses as shall be duly notified in writing to the Agent on behalf of the Banks. |
| 9.21 | Payments All amounts payable to a Bank under this Clause shall be paid to such account at such bank as that Bank may from time to time direct in writing to the Agent. |
| 9.22 | Retirement Subject to a successor being appointed in accordance with this Clause, the Agent may retire as agent and/or security trustee at any time without assigning any reason by giving to the Borrowers and the other Finance Parties notice of its intention to do so, in which event the following shall apply:- |
| 9.22.1 | with the consent of the Borrowers, not to be unreasonably withheld, the other Finance Parties may within thirty days after the date of the Agent’s notice appoint a successor to act as agent and/or security trustee or, if they fail to do so with the consent of the Borrowers, not to be unreasonably withheld, the Agent may appoint any other bank or financial institution as its successor; |
| 9.22.2 | the resignation of the Agent shall take effect simultaneously with the appointment of its successor on written notice of that appointment being given to the Borrowers and the other Finance Parties; |
| 9.22.3 | the Agent shall thereupon be discharged from all further obligations as agent and/or security trustee but shall remain entitled to the benefit of the provisions of this Clause; |
| 9.22.4 | the Agent’s successor and each of the other parties to this Agreement shall have the same rights and obligations amongst themselves as they would have had if that successor had been a party to this Agreement. |
| 9.23 | No fiduciary relationship Except as provided in Clauses 9.3 and 9.14, the Agent shall not have any fiduciary relationship with or be deemed to be a trustee of or for any other Finance Party and nothing contained in any of the Security Documents shall constitute a partnership between any two or more Banks or between the Agent and any other Finance Party. |
| 9.24 | The Agent as a Bank The expression “ the Banks ” when used in the Security Documents includes the Agent in its capacity as one of the Banks. The Agent shall be entitled to exercise its rights, powers, discretions and remedies under or pursuant to the Security Documents in its capacity as one of the Banks in the same manner as any other Bank and as if it were not also the Agent. |
| 9.25 | The Agent as security trustee Unless the context otherwise requires, the expression “ the Agent ” when used in the Security Documents includes the Agent acting in its capacities both as agent and security trustee. |
| 10 | Covenants |
| The Borrowers covenant with the Finance Parties in the following terms. |
| 10.1 | Maintenance of Legal Validity The Borrowers shall obtain, comply with the terms of and do all that is necessary to maintain in full force and effect all authorisations, approvals, licences and consents required in or by the laws and regulations of their respective jurisdictions of incorporation or organisation and all other applicable jurisdictions, to enable each of them lawfully to enter into and perform their obligations under the Security Documents and to ensure the legality, validity, enforceability or admissibility in evidence of the Security Documents in their jurisdictions of incorporation or organisation and all other applicable jurisdictions. |
| 10.2 | Notification of Default The Borrowers shall promptly, upon becoming aware of the same, inform the Agent in writing of the occurrence of any Event of Default and, upon receipt of a written request to that effect from the Agent, confirm to the Agent that, save as previously notified to the Agent or as notified in such confirmation, no Event of Default has occurred. |
| 10.3 | Claims Pari Passu The Borrowers shall ensure that at all times the claims of the Finance Parties against any of them under the Security Documents rank at least pari passu with the claims of all their other unsecured creditors save those whose claims are preferred by any bankruptcy, insolvency, liquidation, winding-up or other similar laws of general application. |
| 10.4 | Management of Vessels The Borrowers shall ensure that each Vessel which they own is at all times technically and commercially managed by a member of the Guarantor Group. |
| 10.5 | Classification The Borrowers shall ensure that each Vessel which they own maintains the highest classification required for the purpose of the relevant trade of such Vessel which shall be with a Pre-Approved Classification Society or such other society as may be acceptable to the Agent, in each case, free from any overdue recommendations and conditions affecting that Vessel’s class. |
| 10.6 | Financial Indebtedness |
| (a) | Subject to paragraph (c) of this Clause 10.6, other than pursuant to the Security Documents, the Borrowers shall not incur any Financial Indebtedness except (subject to paragraph (b) of this Clause 10.6,) any such indebtedness owed to any member of the Guarantor Group, provided that: |
| (i) | such inter-group Financial Indebtedness is unsecured and fully subordinated in right of payment to the rights of each of the Finance Parties under the Security Documents in accordance with paragraph (b) of this Clause 10.6; and |
| (ii) | each Borrower may incur Financial Indebtedness in the ordinary course of operating the Vessel owned by it provided that the aggregate of such Financial Indebtedness does not exceed US$1,000,000 in the case of each such Vessel at any time. |
| (b) | To the extent permitted under the foregoing provisions of this Clause 10.6, any Borrower may service Financial Indebtedness owed to any other member of the Guarantor Group in accordance with the terms of such Financial Indebtedness, provided that, on any day on which an amount remains due and payable by a Security Party under any Security Document, such amount shall be discharged in preference to any such Financial Indebtedness owed by such Borrower to another member of the Guarantor Group which is also due and payable on such day and notwithstanding the forgoing provisions of this Clause 10.6, following the occurrence of an Event of Default which is continuing unremedied or unwaived, any payment by a Borrower in respect of Financial Indebtedness owed to another member of the Guarantor Group shall require the prior consent of the Agent. |
| (c) | Any Borrower may enter into an interest rate hedge, currency swap or similar arrangement for a notional amount not exceeding the Facility Outstandings as applicable from time to time. |
| 10.7 | Certificate of Financial Responsibility Each Borrower shall obtain and maintain a certificate of financial responsibility in relation to any Vessel which it owns which is to call at the United States of America. |
| 10.8 | Negative Pledge The Borrowers shall not create, or permit to subsist, any Encumbrance (other than pursuant to the Security Documents) over all or any part of their present or future revenues or assets, other than a Permitted Lien. |
| 10.9 | Registration No Borrower shall change or permit a change to the flag of the Vessel owned by it other than to a Pre-Approved Flag or under such other flag as may be approved by the Agent, in writing, such approval not to be unreasonably withheld or delayed. |
| 10.10 | ISM and ISPS Compliance The Borrowers shall ensure that the relevant Company complies in all material respects with the ISM Code and the ISPS Code or any replacements thereof and in particular (without prejudice to the generality of the foregoing) shall ensure that the Company holds (i) a valid and current Document of Compliance issued pursuant to the ISM Code, (ii) a valid and current Safety Management Certificate issued in respect of such Vessel pursuant to the ISM Code and (iii) an ISSC in respect of such Vessel, and the Borrowers shall promptly, upon request, supply the Agent with copies of the same. |
| 10.11 | Necessary Authorisations Without prejudice to Clause 10.10 or any other specific provision of the Security Documents relating to an Authorisation, the Borrowers shall (i) obtain, comply with and do all that is necessary to maintain in full force and effect all Necessary Authorisations if a failure to do the same may cause a Material Adverse Effect; and (ii) promptly upon request, supply certified copies to the Agent of all Necessary Authorisations. |
| 10.12 | Compliance with Applicable Laws Each Borrower shall comply with all applicable laws to which it may be subject if a failure to do the same may have a Material Adverse Effect. |
| 10.13 | Loans and Guarantees The Borrowers shall not make any loans, grant any credit (save in the ordinary course of business) or give any guarantee or indemnity (except pursuant to the Security Documents) to or for the benefit of any person or otherwise voluntarily assume any liability, whether actual or contingent, in respect of any obligation of any other person, otherwise than to another member of the Guarantor Group pursuant to the terms of Clause 10.6. |
| 10.14 | Dividends Following the occurrence of an Event of Default which is continuing unremedied or unwaived, the Borrowers shall not pay, make or declare any dividend or other distribution. |
| 10.15 | Other Business Except to the extent expressly permitted by the Security Documents, the Borrowers shall not carry on any business other than that of owning, chartering and operating vessels. |
| 10.16 | Further Assurance The Borrowers shall at their own expense, promptly take all such action as the Agent may reasonably require for the purpose of perfecting or protecting any Finance Party’s rights with respect to the security created or evidenced (or intended to be created or evidenced) by the Security Documents. |
| 10.17 | Other information The Borrowers will promptly supply to the Agent such information and explanations as the Majority Banks may from time to time reasonably require in connection with the operation of the Vessels and the Guarantor’s profit and liquidity, and will procure that the Agent be given the like information and explanations relating to all other Security Parties. |
| 10.18 | Inspection of records The Borrowers will permit the inspection of its financial records and accounts on reasonable notice from time to time during business hours by the Agent or its nominee. |
| 10.19 | Valuations The Borrowers will deliver to the Agent a Valuation of each of the Vessels on the due date for delivery of the annual Guarantor’s Accounts pursuant to clause 9.1 of the Guarantee and on such other occasions as the Agent may reasonably request. |
| 10.20 | Insurance Each Owner covenants to ensure at its own expense throughout the Facility Period that the Vessels are insured and operated in accordance with the provisions set out in Schedule 8. |
| 11 | Earnings |
| Remittance of Earnings Immediately upon the occurrence of an Event of Default, the Borrowers shall procure that all Earnings are paid to such account(s) as the Agent shall from time to time specify by notice in writing to the Borrowers. |
| 12 | Events Of Default |
| 12.1 | The Agent’s rights If any of the events set out in Clause 12.2 occurs, the Agent may at its discretion (and, on the instructions of the Majority Banks, will): |
| 12.1.1 | by notice to the Borrowers declare the Banks to be under no further obligation to the Borrowers under or pursuant to this Agreement and may (and, on the instructions of the Majority Banks, will) declare all or any part of the Indebtedness (including such unpaid interest as shall have accrued and any Break Costs incurred by the Finance Parties) to be immediately payable, whereupon the Indebtedness (or the part of the Indebtedness referred to in the Agent’s notice) shall immediately become due and payable without any further demand or notice of any kind; and/or |
| 12.1.2 | declare that any undrawn portion of the Facility shall be cancelled, whereupon the same shall be cancelled and the corresponding Commitment of each Bank shall be reduced to zero; and/or |
| 12.1.3 | exercise any rights and remedies in existence or arising under the Security Documents. |
| 12.2 | Events of Default The events referred to in Clause 12.1 are:- |
| 12.2.1 | Borrowers’ Failure to Pay under this Agreement The Borrowers fail to pay any amount of principal due from them under this Agreement at the time, in the currency and otherwise in the manner specified herein provided that, if the Borrowers can demonstrate to the reasonable satisfaction of the Agent that all necessary instructions were given to effect such payment and the non-receipt thereof is attributable solely to an error in the banking system, such payment shall instead be deemed to be due, solely for the purposes of this paragraph (a), within 3 Business Days of the date on which it actually fell due under this Agreement; or |
| 12.2.2 | Security Parties’ Failure to Pay under the Security Documents A Security Party fails to pay any other amount due from it under a Security Document and such failure continues unremedied for 5 Business Days or, in the case of sums payable on demand, 10 Business Days, after such demand has been duly made on the relevant Security Party; or |
| 12.2.3 | Misrepresentation Any representation or statement made by any Security Party in any Security Document to which it is a party or in any notice or other document, certificate or statement delivered by it pursuant thereto or in connection therewith is or proves to have been incorrect or misleading, where the circumstances causing the same give rise to a Material Adverse Effect; or |
| 12.2.4 | Specific Covenants A Security Party fails duly to perform or comply with any of the obligations expressed to be assumed by or procured by the Borrowers under Clauses 10.1, 10.3, 10.4, 10.6, 10.8 10.13 or 10.14 or Clauses 8.3, 8.4, 8.5, 8.7, 8.8 or 8.10 of the Guarantee; or |
| 12.2.5 | Financial Covenants The Guarantor is in breach of the Guarantor’s financial covenants set out in Clauses 8.1 and 8.2 of the Guarantee at any time; or |
| 12.2.6 | Other Obligations A Security Party fails duly to perform or comply with any of the obligations expressed to be assumed by it in any Security Document (other than those referred to in Clause 12.2.4 or Clause 12.2.5) and such failure is not remedied within 30 days after the Agent has given notice thereof to the Borrowers; or |
| 12.2.7 | Cross Default Any indebtedness of a member of the Guarantor Group is not paid when due (or within any applicable grace period) or any indebtedness of a member of the Guarantor Group is declared to be or otherwise becomes due and payable prior to its specified maturity where (in either case) the aggregate of all such unpaid or accelerated indebtedness (i) of members of the Guarantor Group is equal to or greater than fifty million Dollars ($50,000,000) or its equivalent in any other currency; or (ii) of any Borrower is equal to or greater than five million Dollars ($5,000,000) or its equivalent in any other currency; or |
| 12.2.8 | Insolvency and Rescheduling A Security Party is unable to pay its debts as they fall due, commences negotiations with any one or more of its creditors with a view to the general readjustment or rescheduling of its indebtedness or makes a general assignment for the benefit of its creditors or a composition with its creditors; or |
| 12.2.9 | Winding-up A Security Party takes any corporate action or other steps are taken or legal proceedings are started for its winding-up, dissolution, administration or re-organisation or for the appointment of a liquidator, receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer of it or of any or all of its revenues or assets or any moratorium is declared or sought in respect of any of its indebtedness; or |
| 12.2.10 | Execution or Distress |
| (a) | Any Security Party fails to comply with or pay any sum due from it (within 30 days of such amount falling due) under any final judgment or any final order made or given by any court or other official body of a competent jurisdiction in an aggregate (i) in respect of the Guarantor equal to or greater than fifty million Dollars ($50,000,000) or its equivalent in any other currency; or (ii) in respect of any Borrower equal to or greater than five million Dollars ($5,000,000) or its equivalent in any other currency, being a judgment or order against which there is no right of appeal or if a right of appeal exists, where the time limit for making such appeal has expired. |
| (b) | Any execution or distress is levied against, or an encumbrancer takes possession of, the whole or any part of, the property, undertaking or assets of a Security Party in an aggregate amount (i) in respect of the Guarantor equal to or greater than fifty million Dollars ($50,000,000) or its equivalent in any other currency; or (ii) in respect of any Borrower equal to or greater than five million Dollars ($5,000,000) or its equivalent in any other currency, other than any execution or distress which is being contested in good faith and which is either discharged within 30 days or in respect of which adequate security has been provided within 30 days to the relevant court or other authority to enable the relevant execution or distress to be lifted or released. |
| (c) | Notwithstanding the foregoing paragraphs of this Clause 12.2.10, any levy of any distress on or any arrest, condemnation, confiscation, requisition for title or use, compulsory acquisition, seizure, detention or forfeiture of a Vessel (or any part thereof) or any exercise or purported exercise of any lien or claim on or against a Vessel where the release of or discharge the lien or claim on or against such Vessel has not been procured within 30 days; or |
| 12.2.11 | Similar Event Any event occurs which, under the laws of any jurisdiction, has a similar or analogous effect to any of those events mentioned in Clauses 12.2.8, 12.2.9 and 12.2.10; or |
| 12.2.12 | Insurance Insurance is not maintained in respect of any Vessel in accordance with the terms of Schedule 8 in respect of that Vessel; or |
| 12.2.13 | Environmental Matters |
| (a) | Any Environmental Claim is pending or made against an Owner or any of the Owner’s Environmental Affiliates or in connection with a Vessel, where such Environmental Claim has a Material Adverse Effect. |
| (b) | Any actual Environmental Incident occurs in connection with a Vessel, where such Environmental Incident has a Material Adverse Effect; or |
| 12.2.14 | Repudiation Any Security Party repudiates any Security Document to which it is a party or does or causes to be done any act or thing evidencing an intention to repudiate any such Security Document; or |
| 12.2.15 | Validity and Admissibility At any time any act, condition or thing required to be done, fulfilled or performed in order: |
| (a) | to enable any Security Party lawfully to enter into, exercise its rights under and perform the respective obligations expressed to be assumed by it in the Security Documents; |
| (b) | to ensure that the obligations expressed to be assumed by each of the Security Parties in the Security Documents are legal, valid and binding; or |
| (c) | to make the Security Documents admissible in evidence in any applicable jurisdiction is not done, fulfilled or performed within 30 days after notification from the Agent to the relevant Security Party requiring the same to be done, fulfilled or performed; or |
| 12.2.16 | Illegality At any time it is or becomes unlawful for any Security Party to perform or comply with any or all of its obligations under the Security Documents to which it is a party or any of the obligations of the Borrowers hereunder are not or cease to be legal, valid and binding and such illegality is not remedied or mitigated to the satisfaction of the Agent within 30 days after it has given notice thereof to the relevant Security Party; or |
| 12.2.17 | Material Adverse Change At any time there shall occur a change in the business or operations of a Security Party or a change in the financial condition of any Security Party which, in the reasonable opinion of the Majority Banks, materially impairs such Security Party’s ability to discharge its obligations under the Security Documents to which it is a party in the manner provided therein and such change, if capable of remedy, is not so remedied within 15 Business Days of the delivery of a notice confirming such change by the Agent to the relevant Security Party; or |
| 12.2.18 | Qualifications of Financial Statements The auditors of the Guarantor Group qualify their report on any audited consolidated financial statements of the Guarantor Group in any regard which, in the opinion of the Agent, has a Material Adverse Effect; or |
| 12.2.19 | Change of Control A Change of Control occurs in relation to the Guarantor or any of the Borrowers; or |
| 12.2.20 | Conditions Subsequent if any of the conditions set out in Clause 3.2 is not satisfied within ten (10) days or such other time period specified by the Agent in its discretion; or |
| 12.2.21 | Revocation or Modification of consents etc. if any Necessary Authorisation which is now or which at any time during the Facility Period becomes necessary to enable any of the Security Parties to comply with any of their obligations in or pursuant to any of the Security Documents is revoked, withdrawn or withheld, or modified in a manner which the Agent reasonably considers is, or may be, prejudicial to the interests of the Banks in a material manner, or if such Necessary Authorisation ceases to remain in full force and effect; or |
| 12.2.22 | Curtailment of Business if the business of any of the Security Parties is wholly or materially curtailed by any intervention by or under authority of any government, or if all or a substantial part of the undertaking, property or assets of any of the Security Parties is seized, nationalised, expropriated or compulsorily acquired by or under authority of any government or any Security Party disposes or threatens to dispose of a substantial part of its business or assets; or |
| 12.2.23 | Reduction of Capital if any of the members of the Guarantor Group reduces its authorised or issued or subscribed capital except reductions effected in compliance with Clause 8.4 of the Guarantee or as part of a share buy-back, whilst solvent, by the Guarantor; or |
| 12.2.24 | Challenge to Registration if the registration of any Vessel or any Mortgage becomes void or voidable or liable to cancellation or termination; or |
| 12.2.25 | War if the country of registration of any Vessel becomes involved in war (whether or not declared) or civil war or is occupied by any other power and the Agent reasonably considers that, as a result, the security conferred by the Security Documents is materially prejudiced; or |
| 12.2.26 | Notice of Termination if the Guarantor gives notice to the Agent to determine its obligations under the Guarantee. |
| 13 | Set-Off and Lien |
| 13.1 | Set-off The Borrowers irrevocably authorise each of the Finance Parties at any time after all or any part of the Indebtedness shall have become due and payable to set off without notice any liability of the Borrowers to any of the Finance Parties (whether present or future, actual or contingent, and irrespective of the branch or office, currency or place of payment) against any credit balance from time to time standing on any account of the Borrowers (whether current or otherwise and whether or not subject to notice) with any branch of any of the Finance Parties in or towards satisfaction of the Indebtedness and, in the name of that Finance Party or the Borrowers, to do all acts (including, without limitation, converting or exchanging any currency) and execute all documents which may be required to effect such application. |
| 13.2 | Lien If an Event of Default has occurred and is continuing, unremedied or unwaived, each Finance Party shall have a lien on and be entitled to retain and realise as additional security for the repayment of the Indebtedness any cheques, drafts, bills, notes or negotiable or non-negotiable instruments and any stocks, shares or marketable or other securities and property of any kind of any of the Borrowers (or of that Finance Party as agent or nominee of the Borrowers) from time to time held by that Finance Party, whether for safe custody or otherwise. |
| 13.3 | Restrictions on withdrawal Despite any term to the contrary in relation to any deposit or credit balance at any time on any account of any of the Borrowers with any of the Finance Parties, no such deposit or balance shall be repayable or capable of being assigned, mortgaged, charged or otherwise disposed of or dealt with by the Borrower in question after an Event of Default has occurred and while such Event of Default is continuing unremedied or unwaived, but any Finance Party may from time to time permit the withdrawal of all or any part of any such deposit or balance without affecting the continued application of this Clause. |
| 13.4 | Application Whilst an Event of Default is continuing unremedied or unwaived, the Borrowers irrevocably authorise the Agent to apply all sums which the Agent may receive:- |
| 13.4.1 | pursuant to a sale or other disposition of a Vessel or any right, title or interest in a Vessel; or |
| 13.4.2 | by way of payment to the Agent of any sum in respect of the Insurances, Earnings or Requisition Compensation of a Vessel; or |
| 13.4.3 | otherwise arising under or in connection with any of the Security Documents |
| in or towards satisfaction, or by way of retention on account, of the Indebtedness, in such manner as the Agent may in its discretion determine. |
| 14 | Assignment and Sub-Participation |
| 14.1 | Right to assign Each of the Banks may assign or transfer all or any of its rights under or pursuant to the Security Documents or assign or grant sub-participations in all or any part of its Commitment provided that each such assignment or sub participation shall be in a minimum amount of five million Dollars ($5,000,000) (i) to any other branch of that Bank or (ii) with the prior written consent of the Agent and the Guarantor (which shall not be unreasonably withheld) to any other bank or financial institution. |
| 14.2 | Borrowers’ co-operation The Borrowers will co-operate fully and will procure that the Guarantor co-operates fully with the Banks in connection with any assignment, transfer or sub-participation pursuant to Clause 14.1; will execute and procure the execution of such documents as the Banks may require in connection therewith; and irrevocably authorise each of the Finance Parties to disclose to any proposed assignee, transferee or sub-participant (whether before or after any assignment, transfer or sub-participation and whether or not any assignment, transfer or sub-participation shall take place) all information relating to the Security Parties, the Facility or the Security Documents which each such Finance Party may in its discretion consider necessary or desirable (subject to any duties of confidentiality applicable to the Banks generally). |
| 14.3 | Rights of assignee Any assignee, transferee or sub-participant of a Bank shall (unless limited by the express terms of the assignment, transfer or sub-participation) take the full benefit of every provision of the Security Documents benefiting that Bank. |
| 14.4 | Transfer Certificates If any Bank wishes to transfer all or any of its Commitment as contemplated in Clause 14.1 then such transfer may be effected by the delivery to the Agent of a duly completed and duly executed Transfer Certificate in which event, on the later of the Transfer Date specified in such Transfer Certificate and the fifth Business Day after the date of delivery of such Transfer Certificate to the Agent: |
| 14.4.1 | to the extent that in such Transfer Certificate the Bank which is a party thereto seeks to transfer its Commitment in whole, the Borrowers and such Bank shall be released from further obligations towards each other under this Agreement and their respective rights against each other shall be cancelled other than existing claims against such Bank for breach of this Agreement (such rights, benefits and obligations being referred to in this Clause 14.4 as “ discharged rights and obligations ”); |
| 14.4.2 | the Borrowers and the Transferee which is a party thereto shall assume obligations towards each other and/or acquire rights against each other which differ from such discharged rights and obligations only insofar as the Borrowers and such Transferee have assumed and/or acquired the same in place of the Borrowers and such Bank; |
| 14.4.3 | the Finance Parties and the Transferee shall acquire the same rights and benefits and assume the same obligations between themselves as they would have acquired and assumed had such Transferee been an original party to this Agreement as a Bank with the rights, benefits and/or obligations acquired or assumed by it as a result of such transfer; and |
| 14.4.4 | the Transferee shall pay to the Agent a transfer fee of three thousand Dollars ($3,000). |
| 14.5 | Power of Attorney In order to give effect to each Transfer Certificate the Finance Parties and the Borrowers each hereby irrevocably and unconditionally appoint the Agent as its true and lawful attorney with full power to execute on their respective behalves each Transfer Certificate delivered to the Agent pursuant to Clause 14.4 without the Agent being under any obligation to take any further instructions from or give any prior notice to, any of the Finance Parties or, subject to the Borrowers’ rights under Clause 14.1, the Borrowers before doing so and the Agent shall so execute each such Transfer Certificate on behalf of the other Finance Parties and the Borrowers immediately on their receipt of the same pursuant to Clause 14.4. |
| 14.6 | Notification The Agent shall promptly notify the other Finance Parties, the Transferee and the Borrowers on the execution by it of any Transfer Certificate together with details of the amount transferred, the Transfer Date and the parties to such transfer. |
| 15 | Payments, Mandatory Prepayment, Reserve Requirements and Illegality |
| 15.1 | Payments All amounts payable by the Borrowers under or pursuant to any of the Security Documents shall be paid to such accounts at such banks as the Agent may from time to time direct to the Borrowers and shall be paid in Dollars in same day funds (or such funds as are required by the authorities in the United States of America for settlement of international payments for immediate value). Payments shall be deemed to have been received by the Agent on the date on which the Agent receives authenticated advice of receipt, unless that advice is received by the Agent on a day other than a Business Day or at a time of day (whether on a Business Day or not) when the Agent in its reasonable discretion considers that it is impossible or impracticable for the Agent to utilise the amount received for value that same day, in which event the payment in question shall be deemed to have been received by the Agent on the Business Day next following the date of receipt of advice by the Agent. |
| 15.2 | No deductions or withholdings All payments (whether of principal or interest or otherwise) to be made by the Borrowers pursuant to the Security Documents shall, subject only to Clause 15.3, be made free and clear of and without deduction for or on account of any Taxes or other deductions, withholdings, restrictions, conditions or counterclaims of any nature, and the Borrowers will not claim any equity in respect of any payment due from them to the Banks or to the Agent under or in relation to any of the Security Documents. |
| 15.3 | Grossing-up If at any time any law requires (or is interpreted to require) the Borrowers to make any deduction or withholding from any payment, or to change the rate or manner in which any required deduction or withholding is made, the Borrowers will promptly notify the Agent and, simultaneously with making that payment, will pay to the Agent whatever additional amount (after taking into account any additional Taxes on, or deductions or withholdings from, or restrictions or conditions on, that additional amount) is necessary to ensure that, after making the deduction or withholding, the Agent and the Banks receive a net sum equal to the sum which they would have received had no deduction or withholding been made. |
| 15.4 | Evidence of deductions If at any time the Borrowers are required by law to make any deduction or withholding from any payment to be made by it pursuant to any of the Security Documents, the Borrowers will pay the amount required to be deducted or withheld to the relevant authority within the time allowed under the applicable law and will, no later than thirty days after making that payment, deliver to the Agent an original receipt issued by the relevant authority, or other evidence reasonably acceptable to the Agent, evidencing the payment to that authority of all amounts required to be deducted or withheld. If the Borrowers make any deduction or withholding from any payment under or pursuant to any of the Security Documents, and a Bank subsequently receives a refund or allowance from any tax authority which that Bank at its sole discretion identifies as being referable to that deduction or withholding, that Bank shall, as soon as reasonably practicable, pay to the Borrowers an amount equal to the amount of the refund or allowance received, if and to the extent that it may do so without prejudicing its right to retain that refund or allowance and without putting itself in any worse financial position than that in which it would have been had the deduction or withholding not been required to have been made. Nothing in this Clause shall be interpreted as imposing any obligation on any Bank to apply for any refund or allowance nor as restricting in any way the manner in which any Bank organises its tax affairs, nor as imposing on any Bank any obligation to disclose to the Borrowers any information regarding its tax affairs or tax computations. All costs and expenses incurred by any Bank in obtaining or seeking to obtain a refund or allowance from any tax authority pursuant to this Clause shall be for the Borrowers’ account. |
| 15.5 | Adjustment of due dates If any payment to be made under any of the Security Documents, other than a payment of interest on the Facility (to which Clause 6.5 applies), shall be due on a day which is not a Business Day, that payment shall be made on the next succeeding Business Day (unless the next succeeding Business Day falls in the next calendar month in which event the payment shall be made on the next preceding Business Day). Any such variation of time shall be taken into account in computing any interest in respect of that payment. |
| 15.6 | Change in law If, by reason of the introduction of any law, or any change in any law, or the interpretation or administration of any law, or in compliance with any request or requirement from any central bank or any fiscal, monetary or other authority:- |
| 15.6.1 | any Finance Party (or the holding company of any Finance Party) shall be subject to any Tax with respect to payments of all or any part of the Indebtedness; or |
| 15.6.2 | the basis of Taxation of payments to any Finance Party in respect of all or any part of the Indebtedness shall be changed; or |
| 15.6.3 | any reserve requirements shall be imposed, modified or deemed applicable against assets held by or deposits in or for the account of or loans by any branch of any Finance Party or its direct or indirect holding company; or |
| 15.6.4 | any ratio (whether cash, capital adequacy, liquidity or otherwise) which any Finance Party or its direct or indirect holding company is required or requested to maintain shall be affected; or |
| 15.6.5 | there is imposed on any Finance Party (or on the direct or indirect holding company of any Finance Party) any other condition in relation to the Indebtedness or the Security Documents; |
| and the result of any of the above shall be to increase the cost to any Bank (or to the direct or indirect holding company of any Bank) of that Bank making or maintaining its Commitment or its Drawing, or to cause any Finance Party to suffer (in its reasonable opinion) a material reduction in the rate of return on its overall capital below the level which it reasonably anticipated at the Execution Date and which it would have been able to achieve but for its entering into this Agreement and/or performing its obligations under this Agreement, the Finance Party affected shall notify the Agent and, on demand to the Borrowers by the Agent, the Borrowers shall from time to time pay to the Agent for the account of the Finance Party affected the amount which shall compensate that Finance Party or the Agent (or the relevant holding company) for such additional cost or reduced return. A certificate signed by an authorised signatory of the Agent or of the Finance Party affected setting out the amount of that payment and the basis of its calculation shall be submitted to the Borrowers and shall be conclusive evidence of such amount save for manifest error or on any question of law. |
| 15.7 | Illegality and impracticality Notwithstanding anything contained in the Security Documents, the obligations of a Bank to advance or maintain its Commitment shall terminate in the event that a change in any law or in the interpretation of any law by any authority charged with its administration shall make it unlawful for that Bank to advance or maintain its Commitment. In such event the Bank affected shall notify the Agent and the Agent shall, by written notice to the Borrowers, declare that Bank’s obligations to be immediately terminated. If all or any part of the Facility shall have been advanced by the Banks to the Borrowers, the portion of the Indebtedness (including all accrued interest) advanced by the Bank so affected shall be prepaid within thirty days from the date of such notice, or sooner if illegality is determined. Clause 5.4 shall apply to that prepayment if it is made on a day other than the last day of an Interest Period. During that period, the affected Bank shall negotiate in good faith with the Borrowers to find an alternative method or lending base in order to maintain the Facility. |
| 15.8 | Changes in market circumstances If at any time a Bank determines (which determination shall be final and conclusive and binding on the Borrowers) that, by reason of changes affecting the London Interbank market, adequate and fair means do not exist for ascertaining the rate of interest on the Facility or any part thereof pursuant to this Agreement:- |
| 15.8.1 | that Bank shall give notice to the Agent and the Agent shall give notice to the Borrowers of the occurrence of such event; and |
| 15.8.2 | the Agent shall as soon as reasonably practicable certify to the Borrowers in writing the effective cost to that Bank of maintaining its Commitment for such further period as shall be selected by that Bank and the rate of interest payable by the Borrowers for that period; or, if that is not acceptable to the Borrowers, |
| 15.8.3 | the Agent in accordance with instructions from that Bank and subject to that Bank’s approval of any agreement between the Agent and the Borrowers, will negotiate with the Borrowers in good faith with a view to modifying this Agreement to provide a substitute basis for that Bank’s Commitment which is financially a substantial equivalent to the basis provided for in this Agreement. |
| If, within thirty days of the giving of the notice referred to in Clause 15.8.1, the Borrowers and the Agent fail to agree in writing on a substitute basis for such Bank’s Commitment the Borrowers will immediately prepay the amount of such Bank’s Commitment and the Maximum Facility Amount will automatically decrease by the amount of such Commitment and such decrease shall not be reversed. Clause 5.4 shall apply to that prepayment if it is made on a day other than the last day of an Interest Period. |
| 15.9 | Non-availability of currency If a Bank is for any reason unable to obtain Dollars in the London Interbank market and is, as a result, or as a result of any other contingency affecting the London Interbank market, unable to advance or maintain its Commitment in Dollars, that Bank shall give notice to the Agent and the Agent shall give notice to the Borrowers and that Bank’s obligations to make the Facility available shall immediately cease. In that event, if all or any part of the Facility shall have been advanced by that Bank to the Borrowers, the Agent in accordance with instructions from that Bank and subject to that Bank’s approval of any agreement between the Agent and the Borrower, will negotiate with the Borrowers in good faith with a view to establishing a mutually acceptable basis for funding the Facility or relevant part thereof from an alternative source. If the Agent and the Borrowers have failed to agree in writing on a basis for funding the Facility or relevant part thereof from an alternative source by 11.00 a.m. on the second Business Day prior to the end of the then current relevant Interest Period, the Borrowers will (without prejudice to its other obligations under or pursuant to this Agreement, including, without limitation, its obligation to pay interest on the Facility, arising on the expiry of the then relevant Interest Period) prepay the Indebtedness (or relevant part thereof) to the Agent on behalf of that Bank on the expiry of the then current relevant Interest Period. |
| 16 | Communications |
| 16.1 | Method Except for Communications pursuant to Clause 9, which shall be made or given in accordance with Clause 9.20, any Communication may be given, delivered, made or served (as the case may be) under or in relation to this Agreement by letter or fax and shall be in the English language and sent addressed:- |
| 16.1.1 | in the case of any of the Finance Parties to the Agent at its address at the head of this Agreement (fax no: + 1 212 421 4420) marked for the attention of: Agency Department; and |
| 16.1.2 | in the case of the Borrowers and/or the Guarantor to the Communications Address; |
| or to such other address or fax number as the Agent or the Borrowers may designate for themselves by written notice to the others. |
| 16.2 | Timing A Communication shall be deemed to have been duly given, delivered, made or served to or on, and received by a party to this Agreement:- |
| 16.2.1 | in the case of a fax when the sender receives one or more transmission reports showing the whole of the Communication to have been transmitted to the correct fax number; |
| 16.2.2 | if delivered to an officer of the relevant party or (in the case of the Borrowers) left at the Communications Address at the time of delivery or leaving; or |
| 16.2.3 | if posted, at 9.00 a.m. on the fifth Business Day after posting by prepaid first class post. PROVIDED ALWAYS that Communications to the Agent and (to the extent that they relate to the matters specified in Clause 9.4 only) the Banks shall be effective only upon receipt. |
| Any Communication by fax shall be promptly confirmed in writing by post or hand delivery. |
| 17 | General Indemnities |
| 17.1 | Currency In the event of any Finance Party receiving or recovering any amount payable under any of the Security Documents in a currency other than the Currency of Account, and if the amount received or recovered is insufficient when converted into the Currency of Account at the date of receipt to satisfy in full the amount due, the Borrowers shall, on the Agent’s written demand, pay to the Agent such further amount in the Currency of Account as is sufficient to satisfy in full the amount due and that further amount shall be due to the Agent on behalf of the Finance Parties as a separate debt under this Agreement. |
| 17.2 | Costs and expenses The Borrowers will, within fourteen days of the Agent’s written demand, reimburse the Agent (on behalf of each of the Finance Parties) for all reasonable out of pocket expenses including internal and external legal costs (including stamp duty, Value Added Tax or any similar or replacement tax if applicable) of and incidental to:- |
| 17.2.1 | the negotiation, syndication, preparation, execution and registration of the Security Documents (whether or not any of the Security Documents are actually executed or registered and whether or not all or any part of the Facility is advanced); |
| 17.2.2 | any amendments, addenda or supplements to any of the Security Documents (whether or not completed); |
| 17.2.3 | any other documents which may at any time be required by any Finance Party to give effect to any of the Security Documents or which any Finance Party is entitled to call for or obtain pursuant to any of the Security Documents; and |
| 17.2.4 | the exercise of the rights, powers, discretions and remedies of the Finance Parties under or pursuant to the Security Documents. |
| 17.3 | Events of Default The Borrowers shall indemnify the Finance Parties from time to time on demand against all losses and costs incurred or sustained by any Finance Party as a consequence of any Event of Default, including (without limitation) any Break Costs. |
| 17.4 | Funding costs The Borrowers shall indemnify the Finance Parties from time to time on demand against all losses and costs incurred or sustained by any Finance Party if, for any reason due to a default or other action by the Borrowers, any Drawing is not advanced to the Borrowers after the relevant Drawdown Notice has been given to the Agent, or is advanced on a date other than that requested in the Drawdown Notice, including (without limitation) any Break Costs. |
| 17.5 | Protection and enforcement The Borrowers shall indemnify the Finance Parties from time to time on demand against all losses, costs and liabilities which any Finance Party may from time to time sustain, incur or become liable for in or about the protection, maintenance or enforcement of the rights conferred on the Finance Parties by the Security Documents or in or about the exercise or purported exercise by the Finance Parties of any of the rights, powers, discretions or remedies vested in them under or arising out of the Security Documents, including (without limitation) any losses, costs and liabilities which any Finance Party may from time to time sustain, incur or become liable for by reason of any Finance Party being mortgagees of any Vessel, assignees of any Mortgage and/or a lender to the Borrowers, or by reason of any Finance Party being deemed by any court or authority to be an operator or controller, or in any way concerned in the operation or control, of any Vessel. No such indemnity will be given to a Finance Party where any such loss, cost or liability has occurred due to gross negligence or wilful misconduct on the part of that Finance Party; however this shall not affect the right of any other Finance Party to receive any such indemnity. |
| 17.6 | Liabilities of Finance Parties The Borrowers will from time to time reimburse the Finance Parties on demand for all sums which any Finance Party may pay on account of any of the Security Parties or in connection with any Vessel (whether alone or jointly or jointly and severally with any other person) including (without limitation) all sums which any Finance Party may pay or guarantees which any Finance Party may give in respect of the Insurances, any expenses incurred by any Finance Party in connection with the maintenance or repair of any Vessel or in discharging any lien, bond or other claim relating in any way to any Vessel, and any sums which any Finance Party may pay or guarantees which they may give to procure the release of any Vessel from arrest or detention. |
| 17.7 | Taxes The Borrowers shall pay all Taxes to which all or any part of the Indebtedness or any of the Security Documents may be at any time subject and shall indemnify the Finance Parties on demand against all liabilities, costs, claims and expenses incurred in connection therewith, including but not limited to any such liabilities, costs, claims and expenses resulting from any omission to pay or delay in paying any such Taxes. The indemnity contained in this Clause shall survive the repayment of the Indebtedness. |
| 18 | Miscellaneous |
| 18.1 | Waivers No failure or delay on the part of any Finance Party in exercising any right, power, discretion or remedy under or pursuant to any of the Security Documents, nor any actual or alleged course of dealing between any Finance Party and any of the Security Parties, shall operate as a waiver of, or acquiescence in, any default on the part of any Security Party, unless expressly agreed to do so in writing by the Agent, nor shall any single or partial exercise by any Finance Party of any right, power, discretion or remedy preclude any other or further exercise of that right, power, discretion or remedy, or the exercise by a Finance Party of any other right, power, discretion or remedy. |
| 18.2 | No oral variations No variation or amendment of any of the Security Documents shall be valid unless in writing and signed on behalf of the Agent and the relevant Security Party. |
| 18.3 | Severability If at any time any provision of any of the Security Documents is invalid, illegal or unenforceable in any respect that provision shall be severed from the remainder and the validity, legality and enforceability of the remaining provisions shall not be affected or impaired in any way. |
| 18.4 | Successors etc. The Security Documents shall be binding on the Security Parties and on their successors and permitted transferees and assignees, and shall inure to the benefit of the Finance Parties and their respective successors, transferees and assignees. The Borrowers may not assign or transfer any of its rights or duties under or pursuant to any of the Security Documents without the prior written consent of the Banks. |
| 18.5 | Further assurance If any provision of the Security Documents shall be invalid or unenforceable in whole or in part by reason of any present or future law or any decision of any court, or if the documents at any time held by the Finance Parties on their behalf are considered by the Banks for any reason insufficient to carry out the terms of this Agreement, then from time to time the Borrowers will promptly, on demand by the Agent, execute or procure the execution of such further documents as in the reasonable opinion of the Banks are necessary to provide adequate security for the repayment of the Indebtedness. |
| 18.6 | Other arrangements The Finance Parties may, without prejudice to their rights under or pursuant to the Security Documents, at any time and from time to time, on such terms and conditions as they may in their discretion determine, and without notice to the Borrowers, grant time or other indulgence to, or compound with, any other person liable (actually or contingently) to the Finance Parties or any of them in respect of all or any part of the Indebtedness, and may release or renew negotiable instruments and take and release securities and hold funds on realisation or suspense account without affecting the liabilities of the Borrowers or the rights of the Finance Parties under or pursuant to the Security Documents. |
| 18.7 | Advisers The Borrowers irrevocably authorise the Agent, at any time and from time to time during the Facility Period, to consult insurance advisers on any matters relating to the Insurances, including, without limitation, the collection of insurance claims, and from time to time to consult or retain advisers or consultants to monitor or advise on any other claims relating to the Vessels. The Borrowers will provide such advisers and consultants with all information and documents which they may from time to time reasonably require and will reimburse the Agent on demand for all reasonable costs and expenses incurred by the Agent in connection with the consultation or retention of such advisers or consultants. |
| 18.8 | Delegation The Finance Parties may at any time and from time to time delegate to any person any of their rights, powers, discretions and remedies pursuant to the Security Documents, other than rights relating to actions to be taken by the Majority Banks or the Banks as a group on such terms as they may consider appropriate (including the power to sub-delegate). |
| 18.9 | Rights etc. cumulative Every right, power, discretion and remedy conferred on the Finance Parties under or pursuant to the Security Documents shall be cumulative and in addition to every other right, power, discretion or remedy to which they may at any time be entitled by law or in equity. The Finance Parties may exercise each of their rights, powers, discretions and remedies as often and in such order as they deem appropriate subject to obtaining the prior written consent of the Majority Banks. The exercise or the beginning of the exercise of any right, power, discretion or remedy shall not be interpreted as a waiver of the right to exercise any other right, power, discretion or remedy either simultaneously or subsequently. |
| 18.10 | No enquiry The Finance Parties shall not be concerned to enquire into the powers of the Security Parties or of any person purporting to act on behalf of any of the Security Parties, even if any of the Security Parties or any such person shall have acted in excess of their powers or if their actions shall have been irregular, defective or informal, whether or not any Finance Parties had notice thereof. |
| 18.11 | Continuing security The security constituted by the Security Documents shall be continuing and shall not be satisfied by any intermediate payment or satisfaction until the Indebtedness shall have been repaid in full and none of the Finance Parties shall be under any further actual or contingent liability to any third party in relation to the Vessels, the Insurances, Earnings or Requisition Compensation or any other matter referred to in the Security Documents. |
| 18.12 | Security cumulative The security constituted by the Security Documents shall be in addition to any other security now or in the future held by the Finance Parties or any of them for or in respect of all or any part of the Indebtedness, and shall not merge with or prejudice or be prejudiced by any such security or any other contractual or legal rights of any of the Finance Parties, nor affected by any irregularity, defect or informality, or by any release, exchange or variation of any such security. Section 93 of the Law of Property Act 1925 and all provisions which the Agent considers analogous thereto under the law of any other relevant jurisdiction shall not apply to the security constituted by the Security Documents. |
| 18.13 | Re-instatement If any Finance Party takes any steps to exercise any of its rights, powers, remedies or discretions pursuant to the Security Documents and the result shall be adverse to the Finance Parties, the Borrowers and the Finance Parties shall be restored to their former positions as if no such steps had been taken. |
| 18.14 | No liability None of the Finance Parties, nor any agent or employee of any Finance Party, nor any receiver and/or manager appointed by the Agent, shall be liable for any losses which may be incurred in or about the exercise of any of the rights, powers, discretions or remedies of the Finance Parties under or pursuant to the Security Documents nor liable as mortgagee in possession for any loss on realisation or for any neglect or default of any nature for which a mortgagee in possession might otherwise be liable unless such Finance Party’s action constitutes gross negligence or wilful misconduct. |
| 18.15 | Rescission of payments etc. Any discharge, release or reassignment by any of the Finance Parties of any of the security constituted by, or any of the obligations of any Security Party contained in, any of the Security Documents shall be (and be deemed always to have been) void if any act (including, without limitation, any payment) as a result of which such discharge, release or reassignment was given or made is subsequently wholly or partially rescinded or avoided by operation of any law, unless such Finance Party’s action constitutes gross negligence or wilful misconduct. |
| 18.16 | Subsequent Encumbrances If the Agent receives notice of any subsequent Encumbrance (other than any Encumbrance permitted by the terms of this Agreement) affecting any Vessel or all or any part of the Insurances, Earnings or Requisition Compensation, the Agent may open a new account in its books for the Borrowers. If the Agent does not open a new account, then (unless the Encumbrance is permitted by the terms of this Agreement or the Agent gives written notice to the contrary to the Borrowers) as from the time of receipt by the Agent of notice of such subsequent Encumbrance, all payments made to the Agent shall be treated as having been credited to a new account of the Borrowers and not as having been applied in reduction of the Indebtedness. |
| 18.17 | Releases If any Finance Party shall at any time in its discretion release any party from all or any part of any of the Security Documents or from any term, covenant, clause, condition or obligation contained in any of the Security Documents, the liability of any other party to the Security Documents shall not be varied or diminished. |
| 18.18 | Certificates Any certificate or statement signed by an authorised signatory of the Agent purporting to show the amount of the Indebtedness (or any part of the Indebtedness) or any other amount referred to in any of the Security Documents shall, save for manifest error or on any question of law, be conclusive evidence as against the Borrowers of that amount. |
| 18.19 | Survival of representations and warranties The representations and warranties on the part of the Borrowers contained in this Agreement shall survive the execution of this Agreement and the advance of the Facility or any part thereof. |
| 18.20 | Counterparts This Agreement may be executed in any number of counterparts each of which shall be original but which shall together constitute the same instrument. |
| 18.21 | Third Party Rights Notwithstanding the provisions of the Contracts (Rights of Third Parties) Act 1999, no term of this Agreement is enforceable by a person who is not a party to it. |
| 19 | Law and Jurisdiction |
| 19.1 | Governing law This Agreement shall in all respects be governed by and interpreted in accordance with English law. |
| 19.2 | Jurisdiction For the exclusive benefit of the Finance Parties, the parties to this Agreement irrevocably agree that the courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that any Proceedings may be brought in those courts. The Borrowers irrevocably waive any objection which they may now or in the future have to the laying of the venue of any Proceedings in any court referred to in this Clause, and any claim that those Proceedings have been brought in an inconvenient or inappropriate forum. |
| 19.3 | Alternative jurisdictions Nothing contained in this Clause shall limit the right of the Finance Parties to commence any Proceedings against the Borrowers in any other court of competent jurisdiction nor shall the commencement of any Proceedings against the Borrowers in one or more jurisdictions preclude the commencement of any Proceedings in any other jurisdiction, whether concurrently or not. |
| 19.4 | Service of process Without prejudice to the right of the Finance Parties to use any other method of service permitted by law, the Borrowers irrevocably agree that any writ, notice, judgment or other legal process shall be sufficiently served on them if addressed to them and left at or sent by post to the Address for Service, and in that event shall be conclusively deemed to have been served at the time of leaving or, if posted, at 9.00 a.m. on the third Business Day after posting by prepaid first class registered post. |
IN WITNESS of which the parties to this Agreement have executed this Agreement the day and year first before written.
The Banks The Commitments ($) The Proportionate Shares (%) Citibank N.A. 45,000,000 8.182 388 Greenwich Street 23rd Floor New York NY 10013 Fax: +212 816 5429 Attention: Charles Delamater Nordea Bank Finland PLC, New York Branch 45,000,000 8.182 437 Madison Avenue New York NY 10022 Fax no: +1 212 421 4420 Attention: Shipping, Offshore and Oil Services Group ING Bank N.V., London Branch 45,000,000 8.182 60 London Wall London EC2M 5TQ Fax no: +44 207 767 7252 Attention: David Rolls Danish Ship Finance (Danmarks Skibskreditfond) 37,000,000 6.728 Sankt Annae Plads 3 DK-1250 Copenhagen K Denmark Fax no: +45 3333 9333 Attention: Christian Behnke HSH Nordbank AG 37,000,000 6.728 Gerhardt-Hauptmann-Platz 50, D-20095 Hamburg Federal Republic of Germany Fax no: +40 33 33 34 307 Attention: Martina Timm/Uta Urbaniak Schiffshypothekenbank zu Lubeck AG 37,000,000 6.728 Brandstwiete 1 D-20457 Hamburg Federal Republic of Germany Fax no: +49 40 3701 4649 Attn: Ship financing/International Credit Department The Royal Bank of Scotland plc 37,000,000 6.728 Shipping Business Centre 5-10 Great Tower Street London EC3P 3HX Fax no: +44 207 615 0119 Attn: Colin Manchester Deutsche Schiffsbank Aktiengesellschaft 37,000,000 6.728 Domshof 17 28195 Bremen Federal Republic of Germany Fax no: +49 421 3609 329 Attn: Credit Department Fleet National Bank 25,000,000 4.545 100 Federal Street Boston MA 02110 USA Fax no: +617 434 9820 Attn: Richard Bridge For credit matters Fax no: +617 434 1935 Attn: William Latham Sumitomo Mitsui Banking Corporation, New York 25,000,000 4.545 277 Park Avenue New York NY 10172 Fax no: +212 224 5197 Attn: Robert Dupree / Emily Estevez KfW 25,000,000 4.545 Palmengartenstrasse 5-9 D-60325 Frankfurt am Main Federal Republic of Germany Fax no: +49 69 7431 3768 Attn: Shipping Finance Landesbank Hessen-Thuringen Girozentrale New York Branch 25,000,000 4.545 420 Fifth Avenue, 25th Floor New York NY 10018-2729 U.S.A. Fax no: +1212 703 5256 Attn: Shipping Finance DnB NOR Bank ASA 25,000,000 4.545 Stranden 21 N-0021 Oslo Norway Fax no. +47 22 482020 Attn: Credit Administration Shipping Fokus Bank 20,000,000 3.636 PO Box 1170 Sentrum 0107 Oslo Fax no: +47 2400 7930 Attn: Divinde Haraldsen/Tore Besserud Braein BNP Paribas 20,000,000 3.636 Postboks 102-Sentrum Oslo Norway Fax no: +47 2241 08 44 Attn: Pierre de Fontenay/Tove Brandt The Governor and Company of the 20,000,000 3.636 Bank of Ireland Head Office Lower Baggot Street Dublin 2 Ireland Fax no: + 353 1 829 0129 Attn: John Hartigan/Ann-Marie Dodd For Credit Matters Bank of Ireland Corporate Banking Corporate Banking La Touche House 4th Floor Dublin 1 Ireland Fax no: +353 1829 0129 Attn: John Hartigan/Paul Packard Bayerische Hypo-und Vereinsbank 20,000,000 3.636 Aktiengesellschaft Am Tucherpark 16 D-80538 Munich Federal Republic of Germany Fax no: +49 40 3692 3696 Attn: Silvana Nicolini/Dorte Ziebarth Calyon 20,000,000 3.636 For administration matters: 9. Quai, du President Paul Doumer 92920 Paris La Defense France Fax no: +33 141 89 19 34
Borrower Country of Vessel Flag
Incorporation
Avalon Spirit L.L.C. Marshall Islands "AVALON SPIRIT" Canada
Axel Spirit L.L.C. Marshall Islands "AXEL SPIRIT" Bahamas
Esther Spirit L.L.C. Marshall Islands "ESTHER SPIRIT" Bahamas
Everest Spirit L.L.C. Marshall Islands "EVEREST SPIRIT" Bahamas
Gotland Spirit L.L.C. Marshall Islands "GOTLAND SPIRIT" Bahamas
Hamane Spirit L.L.C. Marshall Islands "HAMANE SPIRIT" Bahamas
Kanata Spirit L.L.C. Marshall Islands "KANATA SPIRIT" Bahamas
Kareela Spirit L.L.C. Marshall Islands "KAREELA SPIRIT" Bahamas
Kilimanjaro Spirit L.L.C. Marshall Islands "KILIMANJARO SPIRIT" Bahamas
Kyeema Spirit L.L.C. Marshall Islands "KYEEMA SPIRIT" Bahamas
Luzon Spirit L.L.C. Marshall Islands "LUZON SPIRIT" Bahamas
Mayon Spirit L.L.C. Marshall Islands "MAYON SPIRIT" Bahamas
Orkney Spirit L.L.C. Marshall Islands "ORKNEY SPIRIT" Bahamas
Sebarok Spirit L.L.C. Marshall Islands "SEBAROK SPIRIT" Bahamas
Shetland Spirit L.L.C. Marshall Islands "SHETLAND SPIRIT" Bahamas
Sotra Spirit L.L.C. Marshall Islands "SOTRA SPIRIT" Bahamas
| 1 | DEFINITIONS |
In this Schedule 8 (Vessel Provisions):
“ Damage Notification Event ” means any circumstance or event in connection with or in relation to a Vessel which gives rise to any claim or aggregate claims against the relevant insurers, before any adjustment for any relevant franchise or deduction, which exceeds ten million Dollars $10,000,000 or the equivalent in any other currency.
“ Environmental Approvals ” means any present or future permit, licence, approval, ruling, variance, exemption, or other authorisation required under the applicable Environmental Laws
“ Excess Risks ” means, in relation to a Vessel, the proportion of claims for general average, salvage and salvage charges not recoverable under the hull and machinery policies in respect of that Vessel as a consequence of the excess of the value at which that Vessel is assessed for the purposes of such claims is over the Vessel’s insured value.
“ Insurers ” means the underwriters or insurance companies with whom any of the Obligatory Insurances is effected and any protection and indemnity or war risks association in which a Vessel may at any time be entered.
“ Obligatory Insurances ” means in respect of a Vessel, any policy or contract of insurance and any entry in a protection and indemnity or war risks association which are now or may hereafter be taken out or effected by or on behalf of the Borrowers pursuant to clauses 5.1,5.2 and 5.4 of this schedule or the provisions of any other Security Document in respect of a Vessel or its increased value, Earnings or profits and all the benefits thereof including under all claims thereunder and returns of premium.
“ Policy ” means, in relation to the Obligatory Insurances, any binder, contract, slip, note, certificate of entry, record or any other document evidencing the contract of the Obligatory Insurance or its terms.
“ Threshold Amount ” means ten million Dollars ($10,000,000) or its equivalent in any other currency.
| 2 | INSURANCE COVENANTS |
Each of the Owners covenants with the Agent (for the benefit of the Finance Parties) that, at all times during the Facility Period, it shall:
| (a) | execute all such documents (including, without limitation, any guarantees and/or indemnities required by any protection and indemnity or war risks association) , provide copies of such documents to the Agent and ensure such documents remain in full force and effect and do all such things as may be necessary to confer the Agent with the benefit of the Obligatory Insurances including, without limitation, to: |
| (i) | notify the insurers of the Agent’s interest in the Vessels and the Obligatory Insurances by notices in the forms set out in the relevant Security Documents to which it is a party; and |
| (ii) | ensure that the Obligatory Insurances contain loss payable and, if applicable, notices of cancellation clauses substantially in the forms set out in the relevant Security Documents to which it is a party (or in such form as may be approved from time to time, in writing, by the Agent); |
| and that all declarations and notices required by the terms of the Obligatory Insurances to be made on behalf of each of the Owners to brokers, underwriters or associations have been duly and punctually made or given. |
| (b) | promptly upon effecting the Obligatory Insurances, give written notice to the Agent stating the full particulars (including, without limitation, the dates and amounts of the Obligatory Insurances) thereof; |
| (c) | punctually pay all premiums, calls, contributions or other sums payable in respect of the Obligatory Insurances; |
| (d) | within thirty days following a request by the Agent (such request not to be made more than once in any calendar year), provide the Agent with a detailed report signed by an independent and reputable firm of marine insurance brokers or consultants appointed by it and approved by the Agent detailing the Obligatory Insurances and stating that, in the reasonable opinion of such firm, the Obligatory Insurances are adequate, each such report to be prepared at the expense of the relevant Owner if the Agent has reasonable grounds for inquiring about the adequacy of such Obligatory Insurances, but otherwise at the expense of the Agent; |
| (e) | not alter materially or agree to any material alteration of any of the Obligatory Insurances without the prior written consent of the Agent or consent or agree to any act or omission which might invalidate or render unenforceable any of the Obligatory Insurances in whole or in part or waive any of its rights under or in respect of any of the Obligatory Insurances; |
| (f) | cause the insurance brokers and the managers of any protection and indemnity or war risks association in which the Vessels may be entered: |
| (i) | to hold to the order of the Agent in accordance with customary market practice the originals of all Policies (and the benefit of such Obligatory Insurances) and upon request deliver certified copies of the same to the Agent; |
| (ii) | to deliver to the Agent a letter or letters of undertaking in the form customarily provided by the relevant protection and indemnity club in a form acceptable to the Agent together with a copy of the club’s certificate of entry (if the relevant protection and indemnity club has confirmed that it will deliver the same). If a Vessel is at any time during the Facility Period insured under any form of fleet cover, the relevant Owner shall procure that those letters of undertaking contain confirmation that the brokers, underwriters or association (as the case may be) will not set off claims relating to that Vessel against premiums, calls or contributions in respect of any other vessel or other insurance, and that the insurance cover of that Vessel will not be cancelled by reason of non-payment of premiums, calls or contributions relating to any other vessel or other insurance. Failing receipt of those confirmations, the relevant Owner will instruct the brokers, underwriters or association concerned to issue a separate policy or certificate for that Vessel in the sole name of the relevant Owner or of the Owner’s brokers as agents for the Owner; and |
| (iii) | in the event that a Vessel enters United States of America waters (or the territorial waters of any other country which requires special certification) to provide the Agent upon request with such evidence as the Agent may reasonably require that such Vessel has a valid and current certificate of financial responsibility for pollution by oil and/or any other Environmentally Sensitive Material issued by the relevant certifying authority in relation to such Vessel; |
| (g) | promptly notify the Agent: |
| (i) | if any underwriter, insurance company or protection and indemnity or war risks association cancels any of the Obligatory Insurances; and |
| (ii) | of any other act, omission or event which would render invalid or unenforceable any of the Obligatory Insurances in whole or in part; |
| (h) | not, without the prior written consent of the Agent, settle, compromise or abandon any claim, give notice of abandonment in respect of a Vessel under any of the Obligatory Insurances other than a claim under protection and indemnity insurance or, so long as no Event of Default shall have occurred and be continuing, a claim of less than $10,000,000 (or the equivalent thereof in any other currency) arising otherwise than out of a Total Loss of the Vessel; |
| (i) | in the case of the Obligatory Insurances in respect of protection and indemnity risks, to pay or settle any liability to which a claim relates or, as the case may be, reimburse any relevant insured which has settled that claim; and |
| (j) | comply in all material respects with all terms and conditions of the Obligatory Insurances and make all such declarations to brokers, underwriters and associations as may be required to enable the Vessels to operate in accordance with the terms and conditions of the Obligatory Insurances. The Borrowers will not do, nor permit to be done, any act, nor make, nor permit to be made, any omission, as a result of which any of the Obligatory Insurances may become liable to be suspended, cancelled or avoided, or may become unenforceable, or as a result of which any sums payable under or in connection with any of the Obligatory Insurances may be reduced or become liable to be repaid or rescinded in whole or in part. |
| 3 | OPERATIONAL COVENANTS |
The Borrowers covenant with the Agent (for the benefit of the Finance Parties) that, at all times, during the Facility Period they shall:
| (a) | maintain the registration of the Vessels under a Pre-Approved Flag or under such other flag as may be approved by the Agent, in writing, such approval not to be unreasonably withheld or delayed, and maintain the registration of the Mortgages at the relevant ship registries, and shall not cause or permit to be done any act or omission whereby the registration of the Vessels or the Mortgages at any one time would or might be defeated or imperilled; |
| (b) | not knowingly cause or permit the Vessels to be operated in any manner or employed in any trade or business contrary to or unlawful under the laws, regulations, treaties and conventions (and all rules and regulations issued thereunder), from time to time applicable to each of the Vessels; |
| (c) | maintain and preserve, at their own expense, the Vessels in a seaworthy condition and in good working order and repair (ordinary wear and tear excepted) and in such condition to ensure that the Vessels are entitled to the highest class applicable to vessels of their type with a Pre-Approved Classification Society; |
| (d) | comply in all material respects with all laws, conventions, regulations and requirements (statutory or otherwise) including but not limited to the ISM Code and the ISPS Code from time to time applicable to the relevant Owner and/or in the jurisdictions where the Vessels are registered and/or in the jurisdictions where the Vessels trade and/or are operated from; |
| (e) | submit the Vessels on a regular basis to all periodical or other surveys as the classification society in which the Vessels are entered may require and at the request of the Agent provide the Agent with copies of all classification certificates of the Vessels and their machinery and of all damage or survey reports issued in connection therewith; |
| (f) | promptly notify the Agent of any substantial change in the structure of the Vessels or any other modification which might involve material alteration to the Vessels provided that they shall not without the prior written consent of the Agent, cause or permit to be made any change or modification which may result in a change to the type of the Vessels; |
| (g) | promptly notify the Agent of any change of the name or port of registry of the Vessels; |
| (h) | not permit or allow to occur any discharge, release, leak, migration or other escape of any Environmentally Sensitive Material into the environment on, under or from any property owned, leased, occupied or controlled by them (including, without limitation, the Vessels), where such discharge, release, leak, migration or other escape would or might have a Material Adverse Effect; |
| (i) | promptly notify the Agent by an effective and prompt mode of communication upon receiving notice of or becoming aware of any of the following events: |
| (i) | any circumstance or event which is or is likely to constitute a Damage Notification Event; |
| (ii) | any event as a result of which a Vessel has become or might, with the passage of time or otherwise, become a Total Loss; and |
| (iii) | any Environmental Claim or Environmental Incident pending, or made against them or in connection with the Vessels which has or will have a Material Adverse Effect; |
| (j) | to notify the Agent immediately the Borrowers become aware of any legal proceedings or arbitration involving a Vessel or an Owner where the amount claimed by any party (ignoring any counterclaim or defence of set-off) exceeds or may reasonably be expected to exceed the Threshold Amount; and |
| (k) | not without the prior written consent of the Agent (such consent not to be unreasonably withheld or delayed) to put a Vessel into the possession of any person for the purpose of work or repairs estimated to cost more than the Threshold Amount (except for repairs the cost of which is recoverable under the Obligatory Insurances and in respect of which the Insurers have agreed to make payment in accordance with any applicable loss payable clause) unless that person shall have given an undertaking to the Agent in such terms as the Agent shall require not to exercise a lien on that Vessel for the cost of the work. |
| 4 | MAINTENANCE OF SECURITY COVENANTS |
The Borrowers covenant with the Agent (for the benefit of the Finance Parties) that, at all times, during the Facility Period they shall:
| (a) | do everything necessary under all applicable laws for the purpose of perfecting the Security Documents and maintaining the Vessels as a good and valid security; |
| (b) | not, without the prior written consent of the Agent (which consent shall not be unreasonably withheld or delayed), let or agree to let the Vessels (or any part thereof) on demise charter or on any time charter or contract of affreightment with a third party outside the Guarantor Group whose period (including any options to extend held by such charterer) exceeds three years; |
| (c) | do all such acts and execute all such documents as may be reasonably required by the Agent to ensure the payment to the Agent of any Requisition Compensation and any other moneys owed to the Borrowers in respect of any requisition for use or hire of the Vessels by or on behalf of any government or other authority; and |
| (d) | not, without the prior written consent of the Agent, save for any Security Document to which they are a party, assign, charge, mortgage or otherwise create (or concur in the creation of or permit to exist) any Encumbrance (in part or in whole) other than Permitted Liens over the Vessels, the Requisition Compensation, the Obligatory Insurances or the Earnings. |
| 5 | OBLIGATORY INSURANCES |
| 5.1 | The Borrowers shall ensure that at all times, during the Facility Period: |
| (a) | each Vessel remains insured against marine risks and war risks (including blocking and trapping) for her full market value and in any event for an amount which is not less than the greater of (i) the market value of that Vessel and (ii) an amount which, when aggregated with the insured value of the other Vessels, equals one hundred and ten per centum (110%) of the aggregate of the Facility Outstandings; and |
| (b) | each Vessel remains entered in a protection and indemnity association in both protection and indemnity classes, or remains otherwise insured against protection and indemnity risks and liabilities (including, without limitation, protection and indemnity war risks); and |
| (c) | each Vessel remains insured against oil pollution caused by that Vessel for one billion Dollars ($1,000,000,000) such amounts as the Mortgagee may from time to time approve unless that risk is covered to the satisfaction of the Mortgagee by the Vessel’s protection and indemnity entry or insurance, |
| such insurance to be on such terms and with such insurers or insurance companies (or, in the case of war risks and protection and indemnity risks, such war risk or protection and indemnity associations) as may be approved in writing by the Agent from time to time (such approval not to be unreasonably withheld or delayed). |
| 5.2 | The Borrowers shall effect and maintain oil pollution insurance cover in respect of each Vessel in an amount equal to US$1,000,000,000 in respect of each incident (such insurance shall include cover taken out or effected under clause 5.1 of this Schedule insofar as insurance risks are concerned) or where (in the reasonable opinion of the Majority Banks, which shall take into consideration the price at which such cover can be effected) such insurance cannot be obtained in the international insurance market following due diligence (other than where the absence of available cover is caused by a history of accidents and/or spillage in respect of the Vessel in question and/or the relevant Owner) such insurance shall be in an amount equal to at least US$500,000,000 in respect of each incident (or such other amount as may be agreed by the Majority Banks). |
| 5.3 | If the Borrowers fail to take out or maintain any Obligatory Insurance required to be effected by them, the Agent, for and on behalf of the Borrowers, may (but shall not be obliged to) effect any such insurance (without prejudice to any other right of the Agent arising hereunder or under any other Security Document) and the Borrowers will on demand promptly pay to the Agent the amount of any payment made in connection therewith, together with interest thereon at the Default Rate. |
| 5.4 | Without prejudice to the Borrowers’ continuing obligations under this clause 5 of this Schedule, they shall, at least seven days before the expiry of any Obligatory Insurances (other than entry in a protection and indemnity association) and at least one day before the expiry of any entry in the protection and indemnity association (or within such shorter period as the Agent may from time to time agree) taken out or effected by them or on their behalf in respect of the each Vessel confirm, in writing, to the Agent that the same has been renewed in accordance with the terms hereunder and promptly provide certified copies of the terms and conditions of the renewals. |
| 5.5 | Without prejudice to clause 2 (h) of this Schedule (Insurance Covenants) provided that no Event of Default shall have occurred and be continuing unremedied or unwaived, the Borrowers may settle or compromise a claim arising out of any event or circumstance which does not constitute a Total Loss or a Damage Notification Event of or in respect of the Vessels. Further, where in accordance with clause 4(c) of this Schedule ( Maintenance of Security Covenants ) any Requisition Compensation has been paid to the Agent (to the extent that it is entitled to retain the same) the Agent shall, provided that the Borrowers are in compliance with their obligations under the Security Documents to which they are a party, release such proceeds to the Borrowers. |
| 6 | CHANGES TO OBLIGATORY INSURANCES |
If following a review of the Obligatory Insurances, the Agent reasonably determines that such Obligatory Insurances are inadequate to protect the Finance Parties’ interest in the Vessels by reason of changes to the insurance market (other than changes permitted hereunder) having regard to comparable insurances effected by owners and operators of vessels of a similar type and age to the Vessels, the Agent may by notice to the Borrowers require the Borrowers, at their own cost and expense, to promptly take such actions as in the reasonable opinion of the Agent are necessary to remedy such inadequacies.
| 7 | PROVISION OF INFORMATION |
The Borrowers agree that they shall, at all times, during the Facility Period:
| (a) | provide the Agent with any information regarding the Vessels as reasonably requested by the Agent; |
| (b) | provide to the Agent on request copies of the classification certificates of the Vessels and all machinery, damage and/or survey reports on the Vessels and of any charter and any contract of affreightment entered into by or on behalf of the relevant Owner with a third party outside the Guarantor Group in respect of the Vessels whose period (including any options to extend held by such charterer) exceeds three years; and |
| (c) | ensure that the Agent, its surveyors and/or other persons appointed by it will be permitted upon giving reasonable notice (and so as not to interrupt the trade of the Vessels) to board and have full and complete access to inspect that Vessel, its cargo and its logs. For the avoidance of doubt, any costs of such survey and inspection are not to be for the Borrowers’ cost unless an Event of Default or Potential Event of Default has occurred. |
| 8 | ENVIRONMENTAL INDEMNIFICATION |
| The Borrowers shall defend, indemnify and hold harmless each of the Finance Parties and any of its employees, agents, officers and directors from and against any claims, demands, penalties, disbursements, fines, liabilities, settlements, damages, costs or expenses of whatever kind or nature, known or unknown (including, without limitation, legal fees), contingent or otherwise, arising out of or in any way related to Environmentally Sensitive Material in, transported, stored or carried upon or forming a part of or discharge from a Vessel or in relation to any Environmental Laws, Environmental Approvals or Environmental Claims insofar as it relates to a Vessel or an Owner. |
SIGNED by ) duly authorised for and on behalf ) of NORDEA BANK FINLAND PLC, ) New York Branch ) (as the Agent) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of CITIBANK N.A. ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of ING BANK N.V. ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of NORDEA BANK NORGE ASA, ) Grand Cayman Branch ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of CALYON (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of DANISH SHIP FINANCE ) (DANMARKS SKIBSKREDITFOND) ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of HSH NORDBANK AG ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of SCHIFFSHYPOTHEKENBANK ) ZU LUBECK AG ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of KFW (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of LANDESBANK ) HESSEN-THURINGEN (HELABA) ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of FOKUS BANK ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of THE GOVERNOR AND COMPANY ) OF THE BANK OF IRELAND ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of BAYERISCHE ) HYPO- UND VEREINSBANK ) AKTIENGESELLSCHAFT ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of DNB NOR BANK ASA ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of THE ROYAL BANK OF ) SCOTLAND PLC ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of DEUTSCHE SCHIFFSBANK ) AKTIENGESELLSCHAFT ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of FLEET NATIONAL BANK ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of SUMITOMO MITSUI ) BANKING CORPORATION ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of BNP PARIBAS ) (as a Bank) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of CITIBANK N.A. ) (as an underwriter) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of ING BANK N.V. ) (as an underwriter) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of NORDEA BANK NORGE ASA, ) Grand Cayman Branch ) (as an underwriter) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of CITIGROUP GLOBAL ) MARKETS LTD ) (as a bookrunner) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of ING BANK N.V. ) (as a bookrunner) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of CITIGROUP GLOBAL ) MARKETS LTD ) (as a mandated lead arranger) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of ING BANK N.V. ) (as a mandated lead arranger) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of NORDEA BANK FINLAND PLC, ) New York Branch ) (as a mandated lead arranger) ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of AVALON SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of AXEL SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of ESTHER SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of EVEREST SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of GOTLAND SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of HAMANE SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of KANATA SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of KAREELA SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of KILIMANJARO SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of KYEEMA SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of LUZON SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of MAYON SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of ORKNEY SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of SEBAROK SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of SHETLAND SPIRIT L.L.C. ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of SOTRA SPIRIT L.L.C. ) in the presence of:- )