FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward looking statements. Such
forward-looking statements represent the Company's reasonable expectation with
respect to future events or circumstances based on various factors and are
subject to various risks and uncertainties and assumptions relating to the
Company's operations, financial results, financial condition, business,
prospects, growth strategy and liquidity. Accordingly, there are or will be
important factors that could cause the Company's actual results to differ
materially from those indicated in these statements. Undue reliance should not
be placed on any forward-looking statements and consideration should be given to
the following factors when reviewing such statement. Such factors include,
but
are not limited to:
· the highly cyclical nature of OSG's industry;
· fluctuations in the market value of vessels;
· declines in charter rates, including spot charter rates or other market
deterioration;
· an increase in the supply of vessels without a commensurate increase in demand;
· the impact of adverse weather and natural disasters;
· the adequacy of OSG's insurance to cover its losses, including in connection
with maritime accidents or spill events;
· constraints on capital availability;
· changing economic, political and governmental conditions in the United States
and/or abroad and general conditions in the oil and natural gas industry;
· changes in fuel prices;
· acts of piracy on ocean-going vessels;
· terrorist attacks and international hostilities and instability;
· the effect of the Company's indebtedness on its ability to finance operations,
pursue desirable business operations and successfully run its business in the
future;
· the Company's ability to generate sufficient cash to service its indebtedness
and to comply with debt covenants;
· the Company's ability to make additional capital expenditures to expand the
number of vessels in its fleet and to maintain all its vessels;
· the availability and cost of third party service providers for technical and
commercial management of the Company's International Flag fleet;
· fluctuations in the contributions of the Company's joint ventures to its
profits and losses;
· the Company's ability to renew its time charters when they expire or to enter
into new time charters;
· termination or change in the nature of OSG's relationship with any of the
commercial pools in which it participates;
· competition within the Company's industry and OSG's ability to compete
effectively for charters with companies with greater resources;
· the loss of a large customer or significant business relationship;
· the Company's ability to realize benefits from its past acquisitions or
acquisitions or other strategic transactions it may make in the future;
· changes in demand in specialized markets in which the Company currently trades;
· increasing operating costs and capital expenses as the Company's vessels age,
including increases due to limited shipbuilder warranties or the consolidation
of suppliers;
· refusal of certain customers to use vessels of a certain age;
· the Company's ability to replace its operating leases on favorable terms, or at
all;
· changes in credit risk with respect to the Company's counterparties on
contracts;
· the failure of contract counterparties to meet their obligations;
· the Company's ability to attract, retain and motivate key employees;
· work stoppages or other labor disruptions by the unionized employees of OSG or
other companies in related industries;
· unexpected drydock costs;
· the potential for technological innovation to reduce the value of the Company's
vessels and charter income derived therefrom;
· the impact of an interruption in or failure of the Company's information
technology and communication systems upon the Company's ability to operate;
· seasonal variations in OSG's revenues;
· the Company's compliance with 46 U.S.C. sections 50501 and 55101 (commonly
known as the "Jones Act") limitations on U.S. coastwise trade, the waiver,
modification or repeal of the Jones Act limitations or changes in international
trade agreements;
26
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
· government requisition of the Company's vessels during a period of war or
emergency;
· the Company's compliance with requirements imposed by the U.S. government
restricting calls on ports located in countries subject to sanctions and
embargoes;
· the Company's compliance with complex laws, regulations and in particular,
environmental laws and regulations, including those relating to the emission of
greenhouse gases and ballast water treatment;
· any non-compliance with the U.S. Foreign Corrupt Practices Act of 1977 or other
applicable regulations relating to bribery or corruption;
· the impact of litigation, government inquiries and investigations;
· governmental claims against the Company;
· the arrest of OSG's vessels by maritime claimants;
· the potential for audit or material adjustment by the IRS of certain tax
benefits recognized by the Company;
· the Company's ability to use its net operating loss carryforwards;
· the shipping income of OSG's foreign subsidiaries becoming subject to current
taxation in the United States;
· changes in laws, treaties or regulations; and
· the lifting of the U.S. crude oil export ban could adversely impact the
Company's U.S. Flag fleet.
The Company assumes no obligation to update or revise any forward looking
statements. Forward looking statements in this Quarterly Report on Form 10-Q and
written and oral forward looking statements attributable to the Company or its
representatives after the date of this Quarterly Report on Form 10-Q are
qualified in their entirety by the cautionary statement contained in this
paragraph and in other reports hereafter filed by the Company with the
Securities and Exchange Commission.
General:
We are a provider of ocean transportation services for crude oil and refined
petroleum products, and the only major tanker company to operate in both the
U.S. Flag and International Flag fleet markets. We operate our vessels in two
strategic business units: we serve the U.S. Flag market through our subsidiary
OBS and the International Flag market through our subsidiary OIN. Our U.S. Flag
business operates as a single reportable segment. Our International Flag
business includes two reportable segments: International Crude Tankers and
International Product Carriers.
As of March 31, 2016, we owned or operated a fleet of 79 vessels aggregating 7.4
million deadweight tons ("dwt") and 864,800 cubic meters ("cbm"), including 17
vessels that have been chartered-in under operating leases. Our 24-vessel U.S.
Flag fleet includes tankers and articulated tug barges ("ATBs"), of which 22
operate under the Jones Act and two operate internationally in the U.S. Maritime
Security Program. Our 55-vessel International Flag fleet includes ULCC, VLCC,
Aframax and Panamax crude tankers and LR1, LR2 and MR product carriers. Through
joint venture partnerships, we have ownership interests in two floating storage
and offloading ("FSO") service vessels and four LNG Carriers (together the "JV
Vessels"), which are included in the International Flag fleet. Revenues from our
U.S. Flag fleet and JV Vessels are derived predominantly from time charter
agreements which, within a contract period, provide a more predictable level of
revenues. Revenues from our International Flag fleet (other than the JV Vessels)
are derived predominantly from spot market voyage charters and those vessels are
predominantly employed in the spot market via market-leading commercial pools.
Revenues from our International Flag fleet constituted 53% and 50% of our total
TCE revenues during the three months ended March 31, 2016 and 2015,
respectively. Revenues from our U.S. Flag segment constituted 47% and 50% of our
total TCE revenues during the three months ended March 31, 2016 and 2015,
respectively.
The following is a discussion and analysis of our financial condition as of
March 31, 2016 and results of operations for the three-month periods ended March
31, 2016 and 2015. You should consider the foregoing when reviewing the
condensed consolidated financial statements and this discussion and analysis.
You should read this section together with the condensed consolidated financial
statements, including the notes thereto. This Quarterly Report on Form 10-Q
includes industry data and forecasts that we have prepared based, in part, on
information obtained from industry publications and surveys. Third-party
industry publications, surveys and forecasts generally state that the
information contained therein has been obtained from sources believed to be
reliable. In addition, certain statements regarding our market position in this
report are based on information derived from internal market studies and
research reports. Unless we state otherwise, statements about the Company's
relative competitive position in this report are based on our management's
beliefs, internal studies and management's knowledge of industry trends.
All dollar amounts are in thousands, except daily dollar amounts and per share
amounts.
27
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Operations and Oil Tanker Markets:
The Company's revenues are highly sensitive to patterns of supply and demand for
vessels of the size and design configurations owned and operated by the Company
and the trades in which those vessels operate. Rates for the transportation of
crude oil and refined petroleum products from which the Company earns a
substantial majority of its revenues are determined by market forces such as the
supply and demand for oil, the distance that cargoes must be transported, and
the number of vessels expected to be available at the time such cargoes need to
be transported. The demand for oil shipments is significantly affected by the
state of the global economy, levels of U.S. domestic and international
production and OPEC exports. The number of vessels is affected by newbuilding
deliveries and by the removal of existing vessels from service, principally
through storage, scrappings or conversions. The Company's revenues are also
affected by the mix of charters between spot (voyage charter) and long-term
(time or bareboat charter). Because shipping revenues and voyage expenses are
significantly affected by the mix between voyage charters and time charters, the
Company manages its vessels based on TCE revenues. Management makes economic
decisions based on anticipated TCE rates and evaluates financial performance
based on TCE rates achieved.
The International Energy Agency ("IEA") estimates global oil consumption for the
first quarter of 2016 at 94.7 million barrels per day ("b/d") an increase of 1.2
million b/d, or 1.3%, over the same quarter in 2015. The increase was mainly
caused by higher demand in non-OECD areas. The estimate for global oil
consumption for all of 2016 is 95.8 million b/d, an increase of 1.3%. It is
estimated that OECD demand in 2016 will decrease by 0.6% to 46.2 million b/d,
while non-OECD demand will increase by 2.8% to 48.4 million b/d.
Global oil production in the first quarter of 2016 reached 96.2 million b/d, an
increase of 1.9 million b/d over the first quarter of 2015. OPEC crude oil
production continued record production averaging 32.3 million b/d in the first
quarter of 2016, only a slight increase of 0.1 million b/d from the fourth
quarter of 2015, but 2.0 million b/d higher than the first quarter of 2015.
Non-OPEC production growth decreased by 0.3 million b/d in the first quarter of
2016 compared with the first quarter of 2015 to 57.1 million b/d. Driven by
lower oil prices, oil production in the U.S. decreased by 0.4 million b/d from
13.0 million b/d in the fourth quarter of 2015 to 12.6 million b/d in the first
quarter of 2016, decreasing to the production levels seen in the first quarter
of 2015.
U.S. refinery throughput increased by about 0.6 million b/d in the first quarter
of 2016 compared with the comparable quarter in 2015. Crude oil imports
increased by about 0.5 million b/d as declines in local production required
sourcing additional foreign crudes. Imports from OPEC countries increased by 0.5
million b/d.
Chinese imports of crude oil increased in February by 20% compared with the previous February, reaching a record eight million b/d as a result of continued low oil prices.
During the first quarter of 2016, the International Flag tanker fleet of vessels
over 10,000 deadweight tons ("dwt") increased by 6.7 million dwt as the crude
fleet increased by 4.9 million dwt, while the product carrier fleet expanded by
1.8 million dwt. Year on year, the size of the tanker fleet increased by 19.9
million dwt with the largest increases seen in the VLCC (8.6 million dwt), MR
(6.7 million dwt) and Aframax (3.4 million dwt) sectors.
During the first quarter of 2016, the International Flag tanker orderbook
decreased by 6.7 million dwt, led by crude tankers (VLCC decrease of 2.7 million
dwt, Suezmax 0.2 million dwt and Aframax 1.7 million dwt) while the MR orderbook
decreased by 1.9 million dwt. Year over year, the total tanker orderbook gained
15.1 million dwt attributable primarily to increases in the VLCC, Aframax and
Suezmax fleets. The MR orderbook has decreased by 3.5 million dwt from a year
ago. The Company does not have any tankers on order.
VLCC freight rates continued to show great volatility during the first quarter
of 2016, starting the quarter around $100,000 per day, decreasing to $40,000 per
day by the beginning of March, before increasing back to $70,000 per day in
early April. Other crude segments had similar earning patterns, although the
smaller ships did not demonstrate as much volatility. MR rates ranged from
around $19,000 per day in January to around $15,000 per day in March.
Estimated spot TCE rates for prompt Jones Act Product Carriers and large ATBs
averaged $62,800 and $42,400 per day, respectively, during the first quarter of
2016, representing a decrease of 31% for each class of vessel compared with the
first quarter of 2015. These are estimated rates because there was little spot
market activity in the first quarter of 2016 as nearly all vessels were
committed to time charters. Spot voyages only occurred when time-charter
customers relet their vessels for the occasional voyage. The decrease in the
first quarter of 2016 compared with the same quarter of 2015 can be attributed
to market uncertainty created by the decline in oil prices and the realization
by the third quarter of 2014 that low oil prices would persist for a long period
and to what degree that such sustained low prices might cause U.S. crude oil
production to decline.
The average monthly rate of production from the Eagle Ford formation decreased
417,000 b/d, or 24%, in March 2016 compared with March 2015. Eagle Ford crude is
transported through pipeline infrastructure to Corpus Christi, Texas, where it
is loaded on Jones Act vessels for transportation to refineries in Texas,
Louisiana, Mississippi and the Philadelphia area. Adding to the market
uncertainty in the first quarter of 2016 was the lifting of the crude oil export
ban on December 18, 2015. Crude oil exports by the U.S. have, accordingly,
slowly increased during the first quarter of 2016.
As of March 31, 2016, the industry's entire Jones Act fleet of Product Carriers
and large ATBs (defined as vessels having carrying capacities of between 140,000
barrels and 350,000 barrels, which excludes numerous tank barges below 140,000
barrel capacity and 11 much larger tankers dedicated exclusively to the Alaskan
crude oil trade) consisted of 80 vessels. During the first quarter of 2016,
there was one delivery of an ATB, one new fixed order for an ATB, and no vessels
were scrapped. In addition to the 80 vessels mentioned above, there are two
late-1970s-built Alaskan crude tankers that were sold by Exxon to competitors
and redeployed into the lower-48 coastwise trade during 2015.
28
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
The industry's firm Jones Act orderbook as of March 31, 2016, with deliveries
scheduled through the fourth quarter of 2017 consisted of 20 vessels (13 Product
Carriers and seven large ATBs). Options for an additional three ATBs remain
open. The Company does not have any Jones Act vessels on order.
Delaware Bay lightering volumes averaged 145,000 b/d in the first quarter of
2016 compared with 72,000 b/d in the first quarter of 2015. The increase
resulted from Delaware Bay refineries increased crude oil imports as the use of
more costly crude by rail declined.
Update on Critical Accounting Policies:
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates in the application of its accounting policies based on
the best assumptions, judgments and opinions of management. For a description of
all of the Company's material accounting policies, see Note 3, "Summary of
Significant Accounting Policies," to the Company's consolidated financial
statements included in the Company's Annual Report on Form 10-K for 2015. See
Note 3, "Significant Accounting Policies," to the accompanying condensed
consolidated financial statements for any changes or updates to the Company's
critical accounting policies for the current period.
Results from Vessel Operations:
During the first quarter of 2016, income from vessel operations improved by
$9,416 to $74,548 from $65,132 in the first quarter of 2015. This increase
reflects the impact of higher TCE revenues and lower general and administrative
expenses. Such impacts were partially offset by quarter-over-quarter increases
in depreciation and amortization and vessel expenses.
TCE revenues increased in the current quarter by $15,280, or 7%, to $236,922
from $221,642 in the first quarter of 2015. The increase was primarily due to
(i) a significant strengthening of rates in the VLCC and Panamax fleets, (ii)
increased Delaware Bay lightering volumes benefitting the U.S. Flag segment, and
(iii) a 77 day increase in revenue days. Such increases were partially
counteracted by a decline in rates earned by the Company's MRs in the first
quarter of 2016. The growth in revenue days was driven by the Company's ULCC
being taken out of lay-up in the first quarter of 2015 and commencing a time
charter in April 2015, along with fewer drydock days in the International Crude
Tankers and U.S. Flag segments in the current quarter. These increases were
partially offset by the sale of a 1998-built MR in July 2015 and the redelivery
of a MR to its owners at the expiry of its time charter in March 2015.
The increase in depreciation and amortization in the first quarter of 2016 resulted primarily from a reduction in the useful lives of six rebuilt Jones Act ATBs effective on October 1, 2015.
The increase in vessel expenses in the current quarter was primarily due to
increased repair costs in both the International Flag and the U.S. Flag segments
and increased crew costs in the U.S. Flag segment, partially offset by
reactivation costs incurred in the first quarter of 2015 in conjunction with the
Company's ULCC being placed back into service.
See Note 5, "Business and Segment Reporting," to the accompanying condensed
consolidated financial statements for additional information on the Company's
segments, including equity in income of affiliated companies and reconciliations
of (i) time charter equivalent revenues to shipping revenues and (ii) income
from vessel operations for the segments to income before income taxes and
reorganization items, as reported in the condensed consolidated statements of
operations. Information with respect to the Company's proportionate share of
revenue days for vessels operating in companies accounted for using the equity
method is shown below in the discussion of "Equity in Income of Affiliated
Companies."
29
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
International Crude Tankers Three Months Ended
March 31,
2016 2015
TCE revenues $ 87,364 $ 66,821
Vessel expenses (20,563 ) (20,836 )
Charter hire expenses (1,504 ) (1,549 )
Depreciation and amortization (12,976 ) (12,445 )
Income from vessel operations (a) $ 52,321 $ 31,991 Average daily TCE rate
$ 40,428 $ 33,868
Average number of owned vessels (b) 24.0 24.0 Number of revenue days: (c)
2,161 1,973
Number of ship-operating days: (d)
Owned vessels 2,184 2,160
(a) Income from vessel operations by segment is before general and administrative
expenses, technical management transition costs, severance and relocation
costs and gain/(loss) on disposal of vessels.
(b) The average is calculated to reflect the addition and disposal of vessels
during the period.
(c) Revenue days represent ship-operating days less days that vessels were not
available for employment due to repairs, drydock or lay-up.
(d) Ship-operating days represent calendar days.
30
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
The following table provides a breakdown of TCE rates achieved for the three
months ended March 31, 2016 and 2015, between spot and fixed earnings and the
related revenue days. The information in these tables is based, in part, on
information provided by the pools or commercial joint ventures in which the
segment's vessels participate.
Three Months Ended March 31, 2016 2015
Spot Fixed Spot Fixed
Earnings Earnings Earnings Earnings
ULCCs:
Average rate $ - $ 39,881 $ - $ -
Revenue days - 91 - -
VLCCs:
Average rate $ 63,402 $ 42,372 $ 49,280 $ -
Revenue days 607 116 648 -
Aframaxes:
Average rate $ 31,301 $ - $ 30,932 $ -
Revenue days 627 - 620 -
Panamaxes:
Average rate $ 28,421 $ 20,975 $ 27,695 $ 14,007
Revenue days 448 272 348 354
During the first quarter of 2016, TCE revenues for the International Crude
Tankers segment increased by $20,543, or 31%, to $87,364 from $66,821 in the
first quarter of 2015. This increase in TCE revenues resulted primarily from
substantial increases in average daily blended rates in the VLCC and Panamax
sectors. The increase in fixed rates for the Panamax fleet reflects the renewal
of time charters in the fourth quarter of 2015. Further contributing to the
increase was the Company's ULCC exiting lay-up and commencing an 11-month time
charter for storage in April 2015, which has subsequently been extended for
another 12 months. The re-entry into service of the ULCC, along with 66 fewer
VLCC drydock days in the current quarter were the primary drivers of an increase
of 188 revenue days for the segment over the first quarter of 2015.
Charter hire expenses decreased marginally by $45 to $1,504 in the first quarter
of 2016 from $1,549 in the first quarter of 2015. The only vessels in the
segment chartered-in by the Company during either period were workboats employed
in the International Flag Lightering business.
International Product Carriers Three Months Ended
March 31,
2016 2015
TCE revenues $ 37,345 $ 43,517
Vessel expenses (14,731 ) (14,467 )
Charter hire expenses (6,711 ) (7,797 )
Depreciation and amortization (6,843 ) (6,977 )
Income from vessel operations $ 9,060 $ 14,276
Average daily TCE rate $ 16,983 $ 18,300
Average number of owned vessels 18.0
19.0
Average number of vessels chartered-in under
operating leases 7.0 7.9
Number of revenue days 2,199
2,378
Number of ship-operating days:
Owned vessels 1,638
1,710
Vessels bareboat chartered-in under operating
leases 273 270
Vessels time chartered-in under operating leases 364
437
The following table provides a breakdown of TCE rates achieved for the three
months ended March 31, 2016 and 2015, between spot and fixed earnings and the
related revenue days. The information is based, in part, on information provided
by the pools or commercial joint ventures in which the segment's vessels
participate.
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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Three Months Ended March 31, 2016 2015
Spot Fixed Spot Fixed
Earnings Earnings Earnings Earnings
LR2:
Average rate $ 28,341 $ - $ 26,755 $ -
Revenue days 90 - 90 -
LR1:
Average rate $ 31,170 $ 20,426 $ 29,741 $ 15,732
Revenue days 91 266 90 270
MR:
Average rate $ 16,200 $ 10,499 $ 18,846 $ 9,816
Revenue days 1,597 155 1,761 167
During the first quarter of 2016, TCE revenues for the International Product
Carrier segment decreased by $6,172, or 14%, to $37,345 from $43,517 in the
first quarter of 2015. This decrease in TCE revenues resulted primarily from
period-over-period decreases in average daily blended rates earned by the MR
fleet. Also contributing to the decreased TCE revenues was a 179-day decrease in
revenue days resulting primarily from the delivery to buyers of a 1998-built MR
in July 2015 and the redelivery of an MR upon its time charter expiration in
March 2015. Partially offsetting such decreases were stronger rates earned by
the LR fleet in the current quarter.
Charter hire expenses decreased by $1,086 to $6,711 in the first quarter of 2016
from $7,797 in the first quarter of 2015 reflecting 70 fewer chartered-in days
in the MR fleet, as one vessel was returned to its owner at the expiry of its
charter as discussed above.
U.S. Flag
Three Months Ended March 31,
2016 2015
TCE revenues $ 112,213 $ 111,212
Vessel expenses (35,904 ) (33,907 )
Charter hire expenses (22,842 ) (22,552 )
Depreciation and amortization (23,002 ) (17,226 )
Income from vessel operations $ 30,465 $ 37,527
Average daily TCE rate $ 52,410 $ 53,659
Average number of owned vessels 14.0
14.0
Average number of vessels chartered-in under
operating leases 10.0
10.0
Number of revenue days 2,141
2,073
Number of ship-operating days:
Owned vessels 1,274
1,260
Vessels bareboat chartered-in under operating
leases 910 900
32
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
The following tables provide a breakdown of TCE rates achieved for the three
months ended March 31, 2016 and 2015, between spot and fixed earnings and the
related revenue days.
Three Months Ended March 31, 2016 2015
Spot Fixed Spot Fixed
Earnings Earnings Earnings Earnings
Jones Act Handysize Product
Carriers:
Average rate $ - $ 64,498 $ - $ 64,777
Revenue days - 1,080 - 1,070
Non-Jones Act Handysize Product
Carriers:
Average rate $ 31,517 $ 19,016 $ 28,103 $ -
Revenue days 91 91 164 -
ATBs:
Average rate $ - $ 37,870 $ - $ 38,429
Revenue days - 697 - 690
Lightering:
Average rate $ 63,036 $ - $ 71,390 $ -
Revenue days 182 - 149 -
During the first quarter of 2016, TCE revenues for the U.S. segment increased by
$1,001, or 1%, to $112,213 from $111,212 in the first quarter of 2015. This
increase reflects higher Delaware Bay lightering volumes, as 145,000 b/d were
transported during the current quarter as compared with 72,000 b/d in the first
quarter of 2015. Such increase resulted from imported crude oil becoming more
attractive compared with shale oil to refineries in the Delaware Bay following
the decline in oil prices that began in late 2014 and continued through the
current quarter.
U.S. Flag vessel expenses increased by $1,997 to $35,904 in the first quarter of
2016 from $33,907 in the first quarter of 2015, due to an increase in average
daily vessel expenses of $742 per day, which resulted primarily from higher crew
and repair costs and the timing of delivery of spares. Depreciation and
amortization increased by $5,776 to $23,002 in the first quarter of 2016 from
$17,226 in the prior year period as a result of the shortening of the useful
lives of six of the Company's rebuilt Jones Act ATBs effective October 1, 2015,
and a $2,187 increase in amortization of drydock costs.
Two reflagged U.S. Flag Product Carriers participate in the U.S. Maritime
Security Program, which ensures that militarily useful U.S. Flag vessels are
available to the U.S. Department of Defense in the event of war or national
emergency. Each of the vessel owning companies receives an annual subsidy,
subject in each case to annual congressional appropriations, which is intended
to offset the increased cost incurred by such vessels from operating under the
U.S. Flag. In December 2015, the annual subsidy was increased and the Company
expects to receive $3.9 million for each vessel for 2016, $5.0 million from 2017
through 2020, and $5.2 million beginning in 2021.
General and Administrative Expenses
During the first quarter of 2016, general and administrative expenses decreased
by $1,933 to $17,349 from $19,282 in the first quarter of 2015, principally due
to a decrease of $1,500 in legal and consulting fees and a decrease in
accounting fees of $1,909. These decreases were partially offset by an increase
of $833 in compensation and benefit costs, primarily resulting from an increase
in share based compensation expense, and the inclusion in the 2015 period of
approximately $617 in insurance premium credits.
Equity in Income of Affiliated Companies:
During the first quarter of 2016, equity in income of affiliated companies
decreased by $807 to $11,605 from $12,412 in the first quarter of 2015. The
quarter-over-quarter decrease was principally attributable to a $1,313 decrease
in equity in income from the LNG joint venture. This decrease was driven by a
$2,200 reimbursement received from the joint venture's charterer during the
quarter ended March 31, 2015 for increased costs incurred by the joint venture
related to maintaining an inventory of ship spare parts. This decrease was
partially offset by a $500 increase in earnings from the FSO joint venture
resulting from lower interest expense associated withchanges in the
mark-to-market valuation of the interest rate swap covering the FSO Africa's
original debt and lower outstanding debt principal amounts.
33
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Interest Expense:
Total interest expense was $22,659 in the first quarter of 2016 compared with
$28,569 in the first quarter of 2015. Interest expense for the first quarter of
2016 reflects interest expense, including administrative and other fees, of
$2,786 and $19,802 associated with the Company's Unsecured Senior Notes and the
Exit Financing Facilities, respectively. Interest expense for the first quarter
of 2015 reflects interest expense, including administrative and other fees, of
$8,830 and $19,703 associated with the Company's Unsecured Senior Notes and the
Exit Financing Facilities, respectively. The quarter-over-quarter decrease in
interest expense associated with the Company's Unsecured Senior Notes reflects
the impact of the Company's repurchase of $326,345 in aggregate principal amount
of its outstanding Unsecured Senior Notes between the third quarter of 2015 and
January 2016. Interest expense is expected to decrease for the remainder of 2016
as a result of the mandatory principal prepayments and open market repurchases
made during the three months ended March 31, 2016 compared with the first
quarter under the Exit Financing Facilities. Refer to Note 9, "Debt," in the
notes to the accompanying condensed consolidated financial statements for
additional information.
Income Taxes:
For the three months ended March 31, 2016 and 2015, the Company recorded income
tax provisions of $33,239 and $2,660, respectively, which represents effective
tax rates of 40% and 6%, respectively. The increase in the effective tax rate
for the 2016 period was substantially due to management's determination that
commencing for the third quarter of 2015 the Company could not make an assertion
that OSG's investment in OIN was essentially permanent in duration and the
resulting inclusion of a deferred tax liability for OIN's earnings during 2016
as part of its income tax provision. The foreign income is primarily
attributable to operations of companies domiciled in the Marshall Islands, which
are not subject to income tax in the Marshall Islands. For the full year ended
December 31, 2016, the Company expects its effective tax rate, excluding the
impact of any non-recurring items, to approximate 36%.
EBITDA and Adjusted EBITDA:
EBITDA represents net income before interest expense, income taxes and
depreciation and amortization expense. Adjusted EBITDA consists of EBITDA
adjusted for the impact of certain items that we do not consider indicative of
our ongoing operating performance. EBITDA and Adjusted EBITDA are presented to
provide investors with meaningful additional information that management uses to
monitor ongoing operating results and evaluate trends over comparative periods.
EBITDA and Adjusted EBITDA do not represent, and should not be considered a
substitute for, net income or cash flows from operations determined in
accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical
tools, and should not be considered in isolation, or as a substitute for
analysis of our results reported under GAAP. Some of the limitations are:
· EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future
requirements for capital expenditures or contractual commitments;
· EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for,
our working capital needs; and
· EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or
the cash requirements necessary to service interest or principal payments, on
our debt.
While EBITDA and Adjusted EBITDA are frequently used by companies as a measure
of operating results and performance, neither of those items as prepared by the
Company is necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculation.
The following table reconciles net income, as reflected in the condensed consolidated statements of operations, to EBITDA and Adjusted EBITDA:
Three Months Ended March 31,
2016 2015
Net income $ 50,739 $ 42,901
Income tax provision 33,239 2,660
Interest expense 22,659 28,569
Depreciation and amortization 43,083 37,119
EBITDA 149,720 111,249
Technical management transition costs -
40
Severance and relocation costs -
5
Gain on disposal of vessels and other property (157 ) (1,073 )
Gain on repurchase of debt (2,332 )
-
Other costs associated with repurchase of debt 217
-
Reorganization items, net (17,910 ) 3,487
Adjusted EBITDA $ 129,538 $ 113,708
34
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Liquidity and Sources of Capital:
Our business is capital intensive. Our ability to successfully implement our
strategy is dependent on the continued availability of capital on attractive
terms. In addition, our ability to successfully operate our business to meet
near-term and long-term debt repayment obligations is dependent on maintaining
sufficient liquidity.
Liquidity
Working capital at March 31, 2016 was approximately $343,000 compared with
$470,000 at December 31, 2015. Current assets are highly liquid, consisting
principally of cash, interest-bearing deposits and receivables. The Company's
total cash (including restricted cash) decreased by approximately $105,827
during the three months ended March 31, 2016. As further described below, this
decrease reflects the use of cash for repurchases and principal prepayments on
outstanding debt and repurchases of outstanding Class A common stock and Class A
warrants during the first quarter of 2016. These outflows were offset in part by
approximately $18,223 of proceeds from the Proskauer litigation settlement,
which amount is net of (i) all related out-of-pocket expenses incurred by the
Company during the three months ended March 31, 2016 and (ii) related amounts
paid to the class action plaintiffs.
As of March 31, 2016, we had total liquidity on a consolidated basis of
$541,581, comprised of $416,581 of cash (including $14,576 of restricted cash)
and $125,000 of undrawn revolver capacity. Approximately 60% of cash on hand at
March 31, 2016, including restricted cash, is held by the Company's foreign
subsidiaries. We manage our cash in accordance with our intercompany cash
management system subject to the requirements of our Exit Financing Facilities.
Our cash and cash equivalents, as well as our restricted cash balances,
generally exceed Federal Deposit Insurance Corporation insured limits. We place
our cash, cash equivalents and restricted cash in what we believe to be
credit-worthy financial institutions. In addition, certain of our money market
accounts invest in U.S. Treasury securities or other obligations issued or
guaranteed by the U.S. government, or its agencies.
As of March 31, 2016, we had total debt outstanding (net of original issue
discount and deferred financing costs) of $1,143,687 and a total debt to total
capitalization of 42.7%, which compares with 45.7% at December 31, 2015. Our
debt profile reflects recent actions (discussed further below) to deleverage our
balance sheet as well as minimal scheduled amortization requirements before 2018
other than estimated mandatory prepayments as a result of estimated Excess Cash
Flow that management believes will be required for the OBS Term Loan.
Management has designated cash reserves of $5,587 as of March 31, 2016 (compared
with $10,583 at December 31, 2015) to be utilized within the next twelve months
for the settlement of certain unsecured claims, including disputed unsecured
claims related to the Company's emergence from bankruptcy. Such restricted cash
reserves will be subject to adjustment based upon the settlement of claims.
Additionally, restricted cash as of March 31, 2016 includes approximately $8,989
of legally restricted cash relating to the OIN Facilities. The OIN Facilities
stipulate that if annual aggregate cash proceeds of OIN asset sales exceed
$5,000, the net cash proceeds from each such sale are required to be reinvested
in vessels within twelve months of such sale, which occurred in July 2015, or be
used to prepay the principal balance outstanding of the OIN Facilities.
Sources, Uses and Management of Capital
We generate significant cash flows through our complementary mix of time
charters and international spot rate exposure. Our contracted revenues, coupled
with the spot rate exposure of our International Flag fleet, provide us with a
significant opportunity to further strengthen our balance sheet. Net cash
provided by operating activities in the three months ended March 31, 2016 was
$113,418. In addition to operating cash flows, our other current sources of
funds are proceeds from issuances of equity securities, additional borrowings as
permitted under the Exit Financing Facilities and proceeds from the
opportunistic sales of our vessels. In the past we have also obtained funds from
the issuance of long-term debt securities. We or our subsidiaries may in the
future complete transactions consistent with achieving the objectives of our
business plan.
Our current uses of funds are to fund working capital requirements, maintain the
quality of our vessels, comply with U.S. and international shipping standards
and environmental laws and regulations, repay or repurchase our outstanding loan
facilities and to repurchase our common stock and warrants from time to time.
The OBS Term Loan and OIN Facilities require that a portion of Excess Cash Flow
(as defined in the respective term loan agreements) be used to prepay the
outstanding principal balance of each such loan. To the extent permitted under
the terms of the Exit Financing Facilities we may also use cash generated by
operations to finance capital expenditures to modernize and grow our fleet.
During the three months ended March 31, 2016, we used cash in the following financing activities:
Pursuant to the October 2015 Board resolution authorizing the Company to
repurchase up to $200,000 worth of the Company's Class A and Class B common
stock and warrants, we repurchased 460,900 shares of Class A common stock at an
aggregate cost of $971. In addition, during the three months ended March 31,
2016, we repurchased 24,999,078 Class A warrants at an aggregate cost of
$56,990.
35
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Subsequent to March 31, 2016, the Company repurchased an additional 35,000 shares of Class A common stock at an aggregate cost of $70.
In addition, $294 of our outstanding 2024 Notes was repurchased and retired in January 2016.
Also, during the three months ended March 31, 2016, OBS and OIN
opportunistically repurchased and retired $27,000 and $68,922 of the outstanding
principal under the OBS Term Loan and OIN Term Loan, respectively, at discounted
prices of $23,584 and $65,167, respectively. Pursuant to the OBS Term Loan, OBS
also made a mandatory principal prepayment of $51,295 in March 2016.
Historically, we had also used funds to pay dividends and to repurchase our
common stock from time to time. The Parent Company's ability to receive cash
dividends, loans or advances from OBS and OIN is restricted under their
respective loan facilities. After an OIN dividend distribution to the Parent
Company of $72,000 during the first quarter of 2016, the Available Amount for
cash dividends, loans or advances to the Parent Company permitted under the OBS
Term Loan and OIN Term Loan was $51,295 and $60,200, respectively, as of March
31, 2016. On February 29, 2016, the Board declared a cash dividend of $0.08 per
share on its Class A and Class B common stock. This dividend, totaling $30,573,
was paid on March 25, 2016. The declaration and timing of future cash dividends,
if any, will be at the discretion of the Board and will depend upon, among other
things, our future operations and earnings, capital requirements, general
financial condition, contractual restrictions and such other factors as our
Board of Directors may deem relevant.
Outlook
We believe the actions we have taken have strengthened our balance sheet as well
as increased our flexibility to actively pursue fleet renewal or potential
strategic opportunities that may arise within the diverse sectors in which we
operate and at the same time positioned us to generate sufficient cash to
support our operations over the next twelve months.
At our annual meeting of stockholders held on June 9, 2015, our stockholders
approved an amendment to our amended and restated certification of incorporation
to reflect a reverse split of Class A common stock and Class B common stock at
one of three ratios, 1-for-4, 1-for-5 or 1-for-6, and a corresponding reduction
in the number of authorized shares. Our stockholders further authorized the
Board of Directors to determine both the timing of and the ratio at which the
reverse split would be effected and to file an appropriate amendment to our
Certification of Incorporation. This authorization will expire if no amendment
is filed with the Secretary of State of Delaware by the time of our next annual
meeting of stockholders in June 2016.
Off-Balance Sheet Arrangements
OSG guarantees debt and other obligations of certain of its equity method
investees. The debt and other obligations are primarily due to banks in
connection with financing the purchase and conversion of vessels and equipment
used in the joint venture operations. As of March 31, 2016, the affiliated
companies in which OSG held an equity interest had total bank debt outstanding
of $758,521 of which $668,568 was nonrecourse to the Company.
As of March 31, 2016, the maximum potential amount of future principal payments
(undiscounted) that OSG could be required to make relating to equity method
investees secured bank debt was $48,112 and the carrying amount of the liability
related to this guarantee was $0.
36
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Aggregate Contractual Obligations
A summary of the Company's long-term contractual obligations, excluding operating lease obligations for office space, as of March 31, 2016 follows:
Beyond
2016 2017 2018 2019 2020 2020 Total
Long-term debt (1)
Unsecured senior notes -
fixed rate $ 4,859 $ 9,718 $ 123,849 $ 52 $ 52 $ 805 $ 139,335
OBS term loan - floating
rate 24,633 89,588 28,517 458,465 - - 601,203
OIN term loan - floating
rate 28,688 37,901 37,535 554,298 - - 658,422
Operating lease
obligations (2)
Bareboat Charter-ins 74,224 98,219 93,200 111,819 9,168 41,007 427,637
Time Charter-ins 19,879 12,819 - - - - 32,698
Total $ 152,283 $ 248,245 $ 283,101 $ 1,124,634 $ 9,220 $ 41,812 $ 1,859,295
(1) Amounts shown include contractual interest obligations. Interest obligations
on fixed rate debt of $119,655 as of March 31, 2016 range from 7.5% to
8.125%. The interest rate obligations of floating rate debt have been
estimated based on the aggregate LIBOR floor rate of 1% and applicable
margins for the OBS Term Loan and the OIN Term Loan of 4.25% and 4.75%,
respectively. Amount shown for the OBS Term Loan for 2017 includes an
estimated mandatory prepayment of $59,386 as a result of estimated Excess
Cash Flow for the year ended December 31, 2016. Management estimates that no
prepayment will be required for the OIN Term Loan as a result of estimated
Excess Cash Flow for the year ended December, 2016. Amounts shown for the OBS
Term Loan and OIN Term Loan for years subsequent to 2017 exclude any
estimated repayment as a result of Excess Cash Flow.
(2) As of March 31, 2016, the Company had charter-in commitments for 17 vessels
on leases that are accounted for as operating leases. Certain of these leases
provide the Company with various renewal and purchase options. The future
minimum commitments for time charters-in have been reduced to reflect
estimated days that the vessels will not be available for employment due to
drydock.
Risk Management:
The Company is exposed to market risk from changes in interest rates, which
could impact its results of operations and financial condition. The Company
manages this exposure to market risk through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. To manage its interest rate risk in a cost-effective manner, the
Company, from time-to-time, enters into interest rate swap or cap agreements, in
which it agrees to exchange various combinations of fixed and variable interest
rates based on agreed upon notional amounts or to receive payments if floating
interest rates rise above a specified cap rate. The Company uses such derivative
financial instruments as risk management tools and not for speculative or
trading purposes. In addition, derivative financial instruments are entered into
with a diversified group of major financial institutions in order to manage
exposure to nonperformance on such instruments by the counterparties.
At March 31, 2016 and December 31, 2015, OBS and OIN were party to two separate
Interest Rate Cap agreements each with a start date of February 5, 2015 with
major financial institutions covering notional amounts of $375,000 and $400,000,
respectively, to limit the floating interest rate exposure associated with their
respective term loans. These agreements contain no leverage features. The OBS
Interest Rate Cap has a cap rate of 2.5% through February 5, 2017, at which time
the cap rate increases to 3.0% through the termination date of February 5,
2018. The OIN Interest Rate Cap has a cap rate of 2.5% through the termination
date of February 5, 2017.
37
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Available Information
The Company makes available free of charge through its internet website,
www.osg.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the
Securities and Exchange Commission.
The public may also read and copy any materials the Company files with the SEC
at the SEC's Public Reference Room at 100 F Street, N.E. Washington D.C. 20549
(information on the operation of the Public Reference Room is available by
calling the SEC at 1-800-SEC-0330). The SEC also maintains a web site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.
The Company also makes available on its website, its corporate governance
guidelines, its code of business conduct, insider trading policy, anti-bribery
and corruption policy and charters of the Audit Committee, the Human Resources
and Compensation Committee and the Corporate Governance and Risk Assessment
Committee of the Board of Directors. Neither our website nor the information
contained on that site, or connected to that site, is incorporated by reference
into this Quarterly Report on Form 10-Q.
Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's current
disclosure controls and procedures were effective as of March 31, 2016 to ensure
that information required to be disclosed by the Company in the reports the
Company files or submits under the Exchange Act is (i) recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms and (ii) accumulated and communicated to
the Company's management, including the CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting
during the three months ending March 31, 2016 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
38
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
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