Tsakos Energy Navigation (TNP) - 2018 Q4 - Annual Report

PART I Item 3. Key Information The company presents a five-year financial summary, market overview, and key risk factors, highlighting a net loss in 2018 due to market challenges Selected Consolidated Financial Data and Other Data The company reported a significant net loss of $101.0 million in 2018, driven by a vessel impairment charge and lower TCE rates Selected Consolidated Financial Data (2014-2018) | Indicator | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Voyage Revenue | $529,879 | $529,182 | $481,790 | $587,715 | $501,013 | | Operating (Loss) Income | $(28,145) | $89,810 | $188,080 | $76,048 | $63,478 | | Vessels Impairment Charge | $65,965 | $— | $— | $— | $8,922 | | Net (Loss) Income | $(101,042) | $56,495 | $158,423 | $33,718 | $9,185 | | (Loss) Earnings per share, basic | $(1.53) | $0.47 | $1.69 | $0.32 | $(0.19) | | Net cash provided by operating activities | $73,945 | $170,354 | $234,409 | $106,971 | $170,827 | | Total Assets | $3,205,058 | $3,373,636 | $3,277,575 | $2,893,166 | $2,692,737 | | Total Stockholders' Equity | $1,506,777 | $1,508,138 | $1,417,450 | $1,415,072 | $1,177,912 | | Average number of vessels | 64.3 | 62.6 | 52.6 | 49.2 | 49.0 | | Average TCE per vessel per day | $18,226 | $18,931 | $20,412 | $25,940 | $19,834 | Capitalization The company's total capitalization stood at $3.11 billion as of year-end 2018, composed of long-term debt and stockholders' equity Consolidated Capitalization as of December 31, 2018 (in thousands of U.S. Dollars) | Category | Actual | Adjusted | | :--- | :--- | :--- | | Total Cash | $220,526 | $134,612 | | Long-term secured debt obligations | $1,607,122 | $1,561,651 | | Total stockholders' equity | $1,506,777 | $1,486,521 | | Total capitalization | $3,113,899 | $3,048,172 | General Market Overview The tanker market experienced one of its worst years in 2018 due to oversupply, though the LNG shipping market showed strong performance - 2018 was described as the worst year on record for tanker shipping in the 21st century, with earnings for both crude and products tanker markets disappointing for a third consecutive year due to tonnage oversupply and rising bunker prices[30] - The LNG shipping market experienced one of its best years in recent memory in 2018, marked by a significant increase in short-term rates and a large number of newbuilding orders[109][110] 2018 Average Daily Tanker Earnings (YoY Change) | Vessel Type | 2018 Average Earnings/Day | YoY Change | | :--- | :--- | :--- | | VLCC | $19,000 | -18% | | Suezmax | $14,000 | +$1,000/day | | Aframax Composite | $13,000 | +16% | | LR2 | $11,000 | Flat | | LR1 | $6,700 | -10% | | MR Composite | $11,000 | -8% | Risk Factors The company faces significant risks related to industry cyclicality, debt covenants, dependency on key managers, and potential PFIC classification - The tanker industry is cyclical, leading to volatile charter rates that can adversely affect revenues, earnings, and vessel values, potentially impacting compliance with loan covenants[133] - Credit facilities require maintaining specified collateral coverage ratios, and a decline in vessel values could lead to non-compliance with these covenants and potential debt acceleration[166] - The company is highly dependent on its external managers, and termination of the management agreement could trigger a substantial payment estimated at $161.8 million as of Dec 31, 2018[173][177] - The company faces risk of being classified as a Passive Foreign Investment Company (PFIC), which would result in unfavorable U.S. federal income tax treatment for U.S. shareholders[225] Item 4. Information on the Company The company operates a modern fleet of 64 vessels for international oil transportation, managed by related parties under a complex regulatory framework Business Overview The company operates a diverse and modern fleet of 64 vessels with an average age younger than the industry average, serving high-quality clientele - The company's fleet has an average age of 8.5 years as of April 2, 2019, which is younger than the industry average of 10.8 years, and the fleet is 100% double-hulled[252] - The company has four newbuildings under construction as of April 2, 2019: two Aframax tankers and two Suezmax tankers, with expected deliveries in 2019 and 2020[262] Fleet Composition as of April 2, 2019 | Vessel Type | Number of Vessels | | :--- | :--- | | VLCC | 2 | | Suezmax | 13 | | Aframax | 17 | | Aframax LR2 | 3 | | Panamax LR1 | 11 | | Handymax MR2 | 6 | | Handysize MR1 | 7 | | LNG carrier | 2 | | Shuttle DP2 | 3 | | Total | 64 | Fleet Deployment The company employs a balanced chartering strategy, with 72% of its fleet's operating days in 2018 under time charters to ensure stable cash flow Fleet Employment Basis (% of Operating Days) | Employment Basis | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Time Charter—fixed rate | 43% | 41% | 37% | | Time Charter—variable rate | 29% | 29% | 21% | | Period Employment at variable rates | 5% | 5% | 5% | | Spot Voyage | 23% | 25% | 37% | Operations and Ship Management Operations are outsourced to related parties, with Tsakos Energy Management providing executive services and subcontracting commercial and technical management - The company outsources its management: Tsakos Energy Management (TEM) provides executive and financial services, Tsakos Shipping handles commercial management, and Tsakos Columbia Shipmanagement (TCM) provides technical management[267][268] - Total management fees paid to Tsakos Energy Management were $20.2 million in 2018, $19.5 million in 2017, and $16.9 million in 2016[272] Management Fees per Vessel per Month (2018) | Vessel Type | Fee | | :--- | :--- | | Conventional Vessels | $27,500 | | Chartered-in / Bareboat / Under Construction | $20,400 | | DP2 Shuttle Tankers | $35,000 | | LNG Carriers | $36,877 | Regulation Operations are materially affected by extensive international and U.S. regulations governing pollution, safety, and ballast water management - The company is subject to extensive regulation, including IMO conventions like MARPOL, which mandates double-hull construction and sets strict pollution standards[291][293] - MARPOL Annex VI amendments will institute a global 0.5% sulfur cap on marine fuels starting January 1, 2020, requiring significant compliance measures[302] - The U.S. Oil Pollution Act of 1990 (OPA 90) imposes a strict liability regime for oil spills, requiring response plans and financial responsibility coverage of $1 billion per incident[321][323] - The Ballast Water Management (BWM) Convention requires vessels to install approved treatment systems, with full fleet compliance required by September 8, 2024[349] Item 5. Operating and Financial Review and Prospects A 2018 net loss of $99.2 million resulted from a significant vessel impairment charge and weak market conditions, despite stable voyage revenues Financial Analysis The 2018 net loss was driven by a $66.0 million impairment charge, lower TCE rates, and increased voyage and finance costs - The average daily Time Charter Equivalent (TCE) rate decreased by 3.7% to $18,226 in 2018 from $18,931 in 2017, reflecting weak market conditions[448] - Bunkering expenses, a major component of voyage costs, increased by 24.8% in 2018 due to a 34.8% rise in the average price paid for fuel[451] Financial Performance Comparison (2018 vs. 2017) | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Voyage Revenues | $529.9M | $529.2M | +0.1% | | Voyage Expenses | $125.4M | $113.4M | +10.5% | | Vessel Operating Expenses | $181.7M | $173.9M | +4.5% | | Vessel Impairment Charge | $66.0M | $8.9M | +640% | | Operating (Loss) Income | $(28.1M) | $63.5M | -144.3% | | Interest and Finance Costs, net | $76.8M | $56.8M | +35.1% | | Net (Loss) Income Attributable to TEN | $(99.2M) | $7.6M | -1405% | Liquidity and Capital Resources The company maintained adequate liquidity with positive working capital of $44.2 million and total debt of $1.6 billion at year-end 2018 - In 2018, the company raised $144.3 million net proceeds from the issuance of Series F Preferred Shares[401][530] - Total dividend payments in 2018 amounted to $13.1 million for common shareholders and $31.3 million for preferred shareholders[235][526] Liquidity and Debt Position (as of Dec 31) | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Working Capital | $44.2M | $(50.5M) | | Non-restricted Cash | $204.8M | $189.8M | | Net Cash from Operating Activities (Full Year) | $73.9M | $170.8M | | Total Debt | $1.6B | $1.75B | | Debt to Capital Ratio | 51.6% | 53.9% | Item 6. Directors, Senior Management and Employees The company is led by an experienced board and management team, with director compensation disclosed and no direct salaried employees - The company's board consists of nine directors, a majority of whom are deemed independent under NYSE standards, led by Chairman Efstratios Georgios Arapoglou and CEO Nikolas P. Tsakos[546][564] - The Board has four committees: Audit; Corporate Governance, Nominating and Compensation; Business Development and Capital Markets; and Operational, Safety and Environmental (OSE)[570] - The company has no salaried employees, as executive officers are employees of its managers and vessel crew members are employed by vessel-owning subsidiaries[584][586] 2018 Non-Executive Director Annual Fee Schedule | Service | Annual Fee | | :--- | :--- | | Board Membership | $60,000 | | Audit Committee | $20,000 | | Chairman of the Audit Committee | $30,000 | | Chairman of the Board | $40,000 | Item 7. Major Shareholders and Related Party Transactions The company engages in significant arm's-length transactions with related parties, and the Tsakos family maintains substantial ownership control - As of April 2, 2019, entities affiliated with the Tsakos family owned approximately 34.7% of the company's outstanding common shares, giving them significant influence[229][608] - A change of control could allow the manager to terminate the management agreement, triggering a significant payment estimated at $161.8 million as of December 31, 2018[599] Charges from Related Parties (in thousands of U.S. dollars) | Related Party | Service | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | | Tsakos Energy Management | Management fees | $20,169 | $19,480 | $16,935 | | Tsakos Shipping | Commissions | $6,580 | $6,532 | $5,989 | | Argosy Insurance | Insurance premiums | $9,799 | $10,199 | $9,036 | | AirMania Travel | Travel services | $5,345 | $5,404 | $4,866 | | Total | | $44,282 | $43,133 | $38,962 | Item 10. Additional Information The company's share capital includes common and preferred shares, with bye-laws containing anti-takeover provisions and an expected exemption from U.S. tax - The company's authorized share capital includes 175 million common shares and 25 million blank check preferred shares, with 87.6 million common and 18.0 million preferred shares outstanding as of April 2, 2019[628] - The company's bye-laws contain anti-takeover provisions, including a classified board and super-majority voting requirements for business combinations with 'interested persons'[657][658][659] - The company believes it is exempt from U.S. federal income tax on its U.S.-source shipping income under Section 883 of the Internal Revenue Code by satisfying the 'Publicly-Traded Test'[680][890] - The company does not believe it will be treated as a Passive Foreign Investment Company (PFIC), which would have adverse U.S. tax consequences for U.S. shareholders[708][709] Item 11. Quantitative and Qualitative Disclosures About Market Risk The company actively manages market risks from interest rates, bunker fuel prices, and foreign currency fluctuations using derivative instruments - The company is exposed to interest rate risk and had a notional amount of $256 million in hedging swaps as of March 31, 2019; a 0.25% rate increase would raise annual interest payments by approximately $4 million[728] - The company hedges its exposure to bunker price fluctuations for its spot trading vessels using swap agreements and call options[733] - Approximately 23% of the company's expenditures in 2018 were denominated in Euros, and a 1% change in the Euro/U.S. dollar exchange rate would impact vessel operating expenses by an estimated 0.3%[734] PART II Item 15. Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[740] - Based on an assessment using the COSO 2013 framework, management determined that the company's internal control over financial reporting was effective as of December 31, 2018[746] - The independent registered public accounting firm, Ernst & Young (Hellas), provided an unqualified attestation report on the effectiveness of the company's internal control over financial reporting[747] Item 16. Corporate Governance and Other Matters The company details its audit committee's financial expertise, accountant fees, and adherence to NYSE corporate governance standards - The Board of Directors has identified three members as qualifying as "audit committee financial experts"[749] - The company has a share repurchase program authorized by the Board of Directors, but no common or preferred shares were repurchased under this program in 2018 or 2017[760] Principal Accountant Fees (Ernst & Young) | Year | Audit Fees | | :--- | :--- | | 2018 | €680,000 | | 2017 | €735,000 | PART III Item 18. Financial Statements The report includes the company's audited consolidated financial statements for 2016-2018, which received an unqualified opinion from the auditor - The financial statements for the years ended December 31, 2018, 2017, and 2016 are audited by Ernst & Young (Hellas) Certified Auditors Accountants S.A., which issued an unqualified opinion[777][781] Key Financial Statement Figures (Year-End 2018) | Account | Amount (in thousands) | | :--- | :--- | | Total Assets | $3,205,058 | | Total Liabilities | $1,698,281 | | Total Stockholders' Equity | $1,506,777 | | Voyage Revenues (2018) | $529,879 | | Net Loss (2018) | $(101,042) | | Net Cash from Operations (2018) | $73,945 |