Teekay(TK) - 2023 Q4 - Annual Report

PART I Item 3. Key Information Teekay Corporation faces principal risks across industry, business operations, legal, regulatory, and tax categories, including potential PFIC classification Risk Factors The company faces significant risks from tanker market cyclicality, geopolitical events, fleet renewal costs, stringent environmental regulations, and potential PFIC tax classification - Industry risks are dominated by the cyclical nature of the tanker market, which leads to volatile charter rates and vessel utilization, directly impacting earnings. The company's exposure is heightened by its significant presence in the more volatile spot tanker market[30] - Geopolitical conflicts, such as the war in Ukraine and Houthi attacks in the Red Sea, have reshaped global oil trading patterns, affecting tanker demand, rates, and operating expenses. These events could lead to economic instability and business disruption[33][34][45] - A key business risk is the anticipated need for Teekay Tankers to accelerate its fleet renewal, as approximately 50% of its fleet is 15 years or older. This will require significant capital expenditure and depends on vessel availability, market conditions, and financing[79] - The company is subject to extensive and evolving environmental regulations from the IMO, EU, and U.S., which may require significant capital expenditures for compliance (e.g., ballast water treatment systems) and could increase operating expenses[116][117][125] - There is a significant risk that U.S. tax authorities could classify the company as a Passive Foreign Investment Company (PFIC) due to its large cash holdings. A PFIC classification would result in adverse U.S. federal income tax consequences for its U.S. shareholders[138] Item 4. Information on the Company Teekay Corporation provides crude oil marine transportation via Teekay Tankers and marine services, operating a fleet of approximately 64 vessels under strict regulations A. Overview, History and Development Teekay Corporation, a crude oil marine transportation provider, operates through Teekay Tankers and a debt-free Teekay Parent, focusing on increasing intrinsic value per share - Teekay's business is structured into two main parts: its controlling interest in Teekay Tankers Ltd. (TNK) and Teekay Parent, which comprises the company and its remaining subsidiaries[148] - As of March 1, 2024, Teekay holds a 28.7% economic interest and 53.8% voting power in Teekay Tankers[149] - Following the sale of the Teekay Gas Business in January 2022, Teekay Parent became debt-free and held a cash and short-term investment position of approximately $287 million as of December 31, 2023[150] B. Business Overview The company's business encompasses conventional tankers via Teekay Tankers and marine services through Teekay Parent, having fully divested FPSO units Consolidated Fleet Summary (as of March 1, 2024) | Vessel Type | Owned and Leased | Chartered-in | Total | | :--- | :--- | :--- | :--- | | Teekay Tankers | | | | | Aframax Tankers / LR2 Product Tankers | 17 | 7 | 24 | | Suezmax Tankers | 25 | 1 | 26 | | VLCC Tanker (50%-owned) | 1 | 0 | 1 | | STS Support Vessels | 0 | 2 | 2 | | Total | 43 | 10 | 53 | - Teekay Tankers utilizes Revenue Sharing Agreements (RSAs) with third-party vessel owners to spread operational costs and risks and to share net revenues for vessels operating in the spot market[162][163] - Teekay Parent's Australian operations provide marine services under long-term contracts for 11 Australian government-owned vessels and crewing services for a third-party FPSO unit[180] - The company has completed the divestment and recycling of all its directly owned FPSO units, including the Sevan Hummingbird, Petrojarl Foinaven, and Petrojarl Banff[181][182][183][184] C. Organizational Structure Teekay Corporation controls Teekay Tankers Ltd. with a 53.8% voting power despite a 28.7% economic interest as of March 1, 2024 - Teekay Corporation controls Teekay Tankers through ownership of Class A and Class B shares, holding an aggregate voting power of 53.8% as of March 1, 2024, despite an economic interest of only 28.7%[284] E. Taxation of the Company The company primarily earns income from international shipping, believing it qualifies for the Section 883 Exemption from U.S. federal income tax - The company believes it qualifies for the Section 883 Exemption, which exempts its U.S.-source international shipping income from U.S. federal income tax[288][290] - If the Section 883 Exemption did not apply, the estimated U.S. federal income tax on U.S. Source International Transportation Gross Income for 2023 would have been approximately $16.4 million[294] - The company is not subject to taxation under the laws of the Marshall Islands, as it does not conduct business or operations there[295] Item 5. Operating and Financial Review and Prospects This section analyzes Teekay's financial condition and operations, highlighting a surge in vessel operating income due to higher tanker rates and strong liquidity Summary Financial Data (GAAP) | (in thousands of U.S. Dollars) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $1,464,975 | $1,190,184 | $682,508 | | Income (loss) from vessel operations, continuing operations | $531,725 | $245,766 | ($185,353) | | Net income (loss) | $517,423 | $189,360 | ($3,368) | | Net income attributable to shareholders of Teekay | $150,641 | $78,407 | $7,806 | | Total assets | $2,196,638 | $2,164,846 | $6,531,982 | | Total debt | $139,599 | $553,944 | $3,639,593 | | Total equity | $1,800,346 | $1,369,606 | $2,432,483 | Recent Developments and Results of Operations Consolidated income from vessel operations significantly increased in 2023, driven by higher spot tanker rates and strategic vessel repurchases Income from Vessel Operations by Segment (Continuing Operations) | (in thousands of U.S. dollars) | 2023 | 2022 | | :--- | :--- | :--- | | Teekay Tankers | $535,910 | $255,949 | | Teekay Parent | ($4,185) | ($10,183) | | Teekay Corporation Consolidated | $531,725 | $245,766 | - The primary driver for the increase in operating income was a $237.4 million rise from higher average realized spot TCE rates for Teekay Tankers' Suezmax and Aframax tankers[338] - Teekay Tankers repurchased a total of 19 vessels (11 Aframax/LR2 and 8 Suezmax) from sale-leaseback arrangements in 2023 for a total cost of $364.3 million[336][337] - The sale of the Teekay Gas Business on January 13, 2022, resulted in a loss on deconsolidation of $58.7 million, but a net gain of $26.2 million attributable to shareholders after recognizing $84.8 million in previously deferred gains[381][822][824] Liquidity and Capital Resources The company maintains strong liquidity, with Teekay Parent being debt-free and Teekay Tankers increasing its liquidity and initiating dividends - Teekay Parent's total liquidity was $287.4 million as of December 31, 2023. The company is debt-free[384][406] - During 2023, Teekay Parent repurchased approximately 8.9 million of its common shares for $50.7 million[386][398] - Teekay Tankers' total liquidity, including cash and undrawn credit facilities, was $687.1 million as of December 31, 2023, an increase of $344.1 million from the prior year[412] - In May 2023, Teekay Tankers initiated a regular quarterly dividend of $0.25 per share and declared a special dividend of $1.00 per share[411] Critical Accounting Estimates Key accounting estimates involve revenue recognition, vessel depreciation over 25 years, and impairment assessments highly dependent on future charter rates - Vessel Depreciation: The company uses an estimated useful life of 25 years. If a 20-year life were used, depreciation expense for 2023 would have increased by approximately $56.7 million[424][425] - Vessel Impairment: The impairment test relies on estimates of future undiscounted cash flows, with future charter rates being a key assumption. For its long-term forecast, the company uses a 10-year historical average of spot rates but excluded the year 2021, which was deemed an outlier[427] - Taxes: The company had recognized uncertain freight tax liabilities totaling $47.8 million as of December 31, 2023[433] Item 6. Directors, Senior Management and Employees This section details the company's board, senior management, and employees, including compensation and staffing levels as of December 31, 2023 - The aggregate compensation for the three executive officers in 2023 was $4.2 million, comprising base salary, annual bonus, and other benefits, excluding long-term incentives[453] - Non-employee directors receive annual cash retainers and an additional $110,000 annual retainer paid in restricted stock or stock options[450][451] - As of December 31, 2023, the company employed approximately 2,000 seagoing staff and 300 shore-based personnel[473] Item 7. Major Shareholders and Certain Relationships and Related Party Transactions Resolute Investments, Ltd. is the largest shareholder, and the company engages in related party transactions, including management fees to Teekay Tankers Major Shareholders (as of March 1, 2024) | Identity of Person or Group | Shares Owned | Percent of Class | | :--- | :--- | :--- | | Resolute Investments, Ltd. | 31,936,012 | 35.0% | | Dimensional Fund Advisors LP | 5,084,487 | 5.6% | - Several directors, including Rudolph Krediet, Peter Antturi, and Heidi Locke Simon, have relationships with the company's largest shareholder, Resolute Investments, Ltd., or its parent company[483] - Under a management agreement, Teekay Tankers incurred $35.9 million in fees for administrative and strategic services provided by a Teekay subsidiary in 2023[490] Item 8. Financial Information This section references consolidated financial statements, notes ordinary course legal proceedings, and details dividend policies for Teekay Corporation and Teekay Tankers - Teekay Corporation's quarterly dividend on common stock was eliminated commencing with the first quarter of 2019[497] - In May 2023, Teekay Tankers initiated a regular, fixed quarterly cash dividend of $0.25 per common share and also paid a special cash dividend of $1.00 per share[498] Item 11. Quantitative and Qualitative Disclosures About Market Risk Teekay faces market risks from currency, interest rates, credit, and tanker rates, managing them with derivatives, and has no outstanding swaps or forward contracts - The company's primary market risks are from foreign currency fluctuations, interest rates, credit risk, and spot tanker market rates[543] - As of December 31, 2023, the company had $140.8 million in variable-rate obligations related to finance leases, sensitive to changes in interest rates (SOFR)[548][549] - As of year-end 2023, the company was not committed to any interest rate swap agreements, foreign currency forward contracts, or forward freight agreements[545][547][553] PART II Item 15. Controls and Procedures Management and independent auditors concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[558] - Management determined that the company's internal control over financial reporting was effective as of December 31, 2023, a conclusion supported by an attestation report from its independent auditor, KPMG LLP[563][564] Item 16. Corporate Governance and Other Matters This section details corporate governance, including audit committee expertise, code of ethics, accountant fees, share repurchases, and cybersecurity risk management Item 16C. Principal Accountant Fees and Services KPMG LLP, the principal accountant, received $1.628 million in 2023 for audit and audit-related services, all pre-approved by the Audit Committee Accountant Fees (in thousands of U.S. dollars) | Fees | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $1,596 | $1,610 | | Audit-Related Fees | $32 | $30 | | Total | $1,628 | $1,640 | Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers The company repurchased 8.9 million shares for $50.7 million in 2023, with $19.1 million remaining under its share repurchase authorization - In 2023, the company repurchased 8,884,766 of its own shares for a total cost of approximately $50.7 million[575] - As of March 1, 2024, the company had $19.1 million remaining under its current share repurchase authorization[574] Item 16K. Cybersecurity Teekay's cybersecurity program, aligned with NIST, is overseen by the Audit Committee, and has not materially impacted operations to date - The company's cybersecurity program is integrated with its enterprise risk management and uses the National Institute of Standards and Technology (NIST) Cybersecurity Framework[581][582] - The Board's Audit Committee has oversight responsibility for cybersecurity risks and receives regular briefings from management[586] - As of the report date, risks from cybersecurity threats have not materially affected the company's business strategy, results of operations, or financial condition[585] PART III Item 18. Financial Statements This section presents audited consolidated financial statements with an unqualified auditor's opinion, highlighting vessel impairment assessment as a critical audit matter Consolidated Statements of Income (Loss) | (in thousands of U.S. dollars) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | 1,464,975 | 1,190,184 | 682,508 | | Income (loss) from vessel operations | 531,725 | 245,766 | (185,353) | | Income (loss) from continuing operations | 517,423 | 209,636 | (277,463) | | Net income (loss) | 517,423 | 189,360 | (3,368) | | Net income attributable to shareholders | 150,641 | 78,407 | 7,806 | Consolidated Balance Sheets (Year-End) | (in thousands of U.S. dollars) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | 921,948 | 823,605 | | Total assets | 2,196,638 | 2,164,846 | | Total current liabilities | 172,821 | 232,272 | | Total liabilities | 396,292 | 795,240 | | Total equity | 1,800,346 | 1,369,606 | Consolidated Statements of Cash Flows | (in thousands of U.S. dollars) | 2023 | 2022 | | :--- | :--- | :--- | | Net operating cash flow - continuing operations | 633,456 | 172,288 | | Net financing cash flow - continuing operations | (524,050) | (456,948) | | Net investing cash flow - continuing operations | 54,659 | 308,980 | | Increase (decrease) in cash, cash equivalents and restricted cash | 164,065 | 51,186 | - The independent auditor, KPMG LLP, identified the assessment of indicators of impairment for vessels and equipment as a critical audit matter due to the high degree of subjective judgment required in evaluating future operating cash flows and charter rates[608][609]