Teekay Tankers .(TNK) - 2021 Q4 - Annual Report

PART I Key Information The company's business is subject to principal risks including industry cyclicality, market volatility, and potential PFIC tax classification Risk Factors Significant risks arise from tanker industry cyclicality, high operating costs, vessel value volatility, substantial debt, and regulatory compliance - The company's profitability is highly exposed to the volatile spot tanker market, which accounted for approximately 72.0% of net revenues in 2021 and 74.3% in 2020[37] - A decline in the market value of tankers could trigger defaults on financing agreements, which require vessel value to outstanding loan/lease ratios of 100%-125%[61] - The company faces significant capital expenditure for fleet renewal, as approximately 30% of its fleet is 15 years or older[80] - Compliance with the IMO's Ballast Water Management Convention requires installing on-board treatment systems, estimated to cost approximately $1.5 million per vessel between 2022 and 2023[124][222] - Teekay Corporation holds a majority of the voting power through a dual-class stock structure, limiting the influence of Class A common shareholders[128] Tax Risks The primary tax risk involves potential classification as a Passive Foreign Investment Company (PFIC), which could adversely affect U.S. shareholders - A significant U.S. tax risk is the potential classification as a Passive Foreign Investment Company (PFIC), which could have adverse tax consequences for U.S. shareholders[131] - The company is subject to taxes in various jurisdictions, and a successful challenge by a tax authority could reduce cash available for distribution to shareholders[133] Information on the Company The company's history, business operations, fleet composition, and strategic direction are detailed within a competitive and regulated industry context History and Development of the Company Since its 2007 formation, the company has grown its fleet to 52 tankers with a total capacity of approximately 6.8 million dwt through strategic acquisitions - The company's fleet has expanded from nine owned Aframax tankers at its IPO in 2007 to a total of 52 tankers by the end of 2021[135][136] - Key strategic moves include the 2015 acquisition of its STS transfer business, the 2017 acquisition of full ownership of Teekay Tanker Operations Ltd. (TTOL), and the 2017 merger with Tanker Investments Ltd. (TIL)[137][138][139] Business Overview The company owns and operates oil tankers, employing a mixed chartering strategy and leveraging its relationship with Teekay Corporation for operational expertise Fleet Composition as of December 31, 2021 | Vessel Type | Owned and Leased | Chartered-in | Total | | :--- | :--- | :--- | :--- | | Fixed-rate: | | | | | Aframax Tankers | 3 | — | 3 | | Spot-rate: | | | | | Suezmax Tankers | 26 | — | 26 | | Aframax Tankers | 10 | 2 | 12 | | LR2 Product Tankers | 9 | 1 | 10 | | VLCC Tanker (50% JV) | 1 | — | 1 | | Total Tanker Fleet | 49 | 3 | 52 | | Ship-to-Ship Support Vessels | — | 2 | 2 | | Total Fleet | 49 | 5 | 54 | - The company's business strategies focus on accretive fleet expansion, tactical management of its charter mix (spot, fixed-rate, FSL), and maintaining high standards for customer service, safety, and quality[163] - The tanker industry is highly cyclical; as of December 31, 2021, the world Suezmax fleet consisted of 598 vessels with 50 on order, and the Aframax fleet had 672 vessels with 53 on order[184] - The company's operations are subject to extensive environmental regulations, including the IMO's global 0.50% sulfur cap on fuel oil and ballast water management rules, requiring significant compliance efforts and capital expenditure[217][222] Organizational Structure Teekay Corporation is the controlling shareholder, holding a 54.7% voting interest through a dual-class stock structure as of December 31, 2021 - Teekay Corporation controls Teekay Tankers Ltd. with a 54.7% voting interest as of December 31, 2021, achieved through ownership of all Class B common stock and approximately 5.5 million shares of Class A common stock[268] Taxation of the Company The company believes it qualifies for the Section 883 Exemption from U.S. federal income tax on its international shipping income - The company believes it qualifies for the Section 883 Exemption, which exempts its U.S. Source International Transportation Gross Income from U.S. federal income tax[277][279] - If the Section 883 Exemption did not apply, the company estimates its U.S. federal income tax for 2021 would have been approximately $5.6 million, based on a 4% gross basis tax[284] Operating and Financial Review and Prospects Financial performance declined significantly in 2021 due to weak spot tanker rates, leading to a net loss and reduced liquidity Significant Developments in 2021 and Early 2022 Key developments included weak tanker rates from the COVID-19 pandemic, active fleet management through vessel sales, and financing activities to bolster liquidity - The COVID-19 pandemic and OPEC+ oil supply cuts led to a significant decline in spot tanker rates since mid-May 2020, which continued to pressure earnings throughout 2021[293][294] 2021 Vessel Sales | Transaction Date | Vessel Type | Number of Vessels | Total Price | | :--- | :--- | :--- | :--- | | February 2021 | Aframax | 2 | $32.0 million | | August 2021 | Aframax | 1 | $11.7 million | | November 2021 | Aframax | 1 | $13.0 million | - In 2021, the company repurchased eight tankers for a total of $185.5 million and completed new sale-leaseback financing transactions for six tankers for a total of $141.7 million[301][302][304][305] - In March 2022, the company completed a $177.3 million sale-leaseback financing transaction for eight Suezmax tankers[306] Results of Operations Financial performance deteriorated significantly in 2021, with a net loss of $242.4 million compared to a net income of $87.3 million in 2020 Financial Performance Comparison (2021 vs. 2020) | Metric | 2021 (in thousands USD) | 2020 (in thousands USD) | | :--- | :--- | :--- | | Revenues | 542,367 | 886,434 | | (Loss) income from operations | (194,095) | 141,573 | | Net (loss) income | (242,372) | 87,317 | | Net revenues (Non-GAAP) | 227,246 | 589,209 | | Adjusted EBITDA (Non-GAAP) | 3,016 | 335,647 | Average TCE Rates per Day (2021 vs. 2020) | Vessel Class (Voyage-charter) | 2021 | 2020 | | :--- | :--- | :--- | | Suezmax | $9,639 | $33,405 | | Aframax | $10,137 | $22,452 | | LR2 | $11,144 | $22,318 | - The tanker market outlook is positive for 2023, with the tanker orderbook-to-fleet ratio at 7.3% as of January 2022, the lowest since 1996[341][343] - The company recorded asset write-downs of $92.4 million in 2021, primarily due to impairments on seven tankers ($85.0 million) because of the weak near-term market outlook[335] Liquidity and Capital Resources Total consolidated liquidity decreased to $144.8 million at year-end 2021 from $372.6 million in 2020, driven by operating cash outflows and vessel repurchases Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity (in thousands USD) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash flow (used for) provided by operating activities | (107,312) | 347,943 | | Net cash flow provided by (used for) financing activities | 21,951 | (416,104) | | Net cash flow provided by investing activities | 38,143 | 74,517 | - Total consolidated liquidity decreased by $227.8 million, from $372.6 million at Dec 31, 2020, to $144.8 million at Dec 31, 2021[372] Contractual Obligations as of December 31, 2021 | Obligation (in millions USD) | Total | 2022 | 2023 | 2024 | Beyond 2024 | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt Repayments & Maturities | 349.5 | 40.8 | 107.4 | 201.3 | — | | Finance Leases | 295.8 | 27.3 | 28.1 | 29.0 | 211.4 | | Operating Leases | 81.2 | 24.8 | 18.2 | 6.8 | 31.4 | | Total | 726.5 | 92.9 | 153.7 | 237.1 | 242.8 | Critical Accounting Estimates Vessel impairment is a critical accounting estimate, highly sensitive to assumptions about future charter rates and vessel values - Vessel impairment is a critical estimate; as of Dec 31, 2021, 35 vessels had an aggregate market value of $832.9 million, which was below their aggregate carrying value of $1,139.8 million[392][394] - The impairment analysis is highly sensitive to charter rate assumptions; a 10% reduction in the long-term historical average spot rate assumption would have triggered an $85.2 million impairment charge for six vessels[395] - The company's recognized uncertain tax liabilities, primarily for freight taxes, totaled $45.6 million as of December 31, 2021[399] Directors, Senior Management and Employees The company's governance includes its Board, executive officers with shared roles at Teekay Corporation, and approximately 1,900 seagoing staff - The President & CEO, Kevin Mackay, and CFO, Stewart Andrade, also hold senior roles within Teekay Corporation, allocating their time between the two entities[414] - Non-employee directors receive an annual cash fee of $60,000 and an annual equity award of $75,000 (paid as restricted stock units or stock options)[429] - As of December 31, 2021, approximately 1,900 seagoing staff served on the company's owned and leased vessels, with the majority covered by a Collective Bargaining Agreement[444][445] Major Shareholders and Related Party Transactions Teekay Corporation is the controlling shareholder, and the company engages in significant related party transactions for various management services Teekay Corporation Share Ownership (as of March 1, 2022) | Share Class | Shares Owned | % of Class Owned | % of Total Stock Owned | Total Voting Power | | :--- | :--- | :--- | :--- | :--- | | Class A Common | 5,942,735 | 20.4% | 31.3% | 55.6% | | Class B Common | 4,625,997 | 100.0% | | | - The company operates under a long-term Management Agreement with a subsidiary of Teekay Corporation, for which it pays various fees for commercial, technical, administrative, and strategic services[471][472][474] - A business opportunities agreement allows Teekay Corporation and its affiliates to pursue opportunities in the tanker sector without an obligation to offer them to Teekay Tankers[457][458] Financial Information The company reports no material legal proceedings and maintains a discretionary dividend policy focused on balance sheet deleveraging - The company is not aware of any legal proceedings expected to have a material adverse effect on its financial condition[482] - In November 2019, the dividend policy was revised to be at the discretion of the Board of Directors, with a primary focus on building net asset value through deleveraging[483] Additional Information This section details the company's articles of incorporation, material contracts, and key U.S. federal income tax considerations for shareholders - For U.S. Holders, distributions are generally treated as dividends; qualified dividends may be taxed at preferential rates, provided the company is not classified as a PFIC[496] - If the company were treated as a PFIC, U.S. Holders would face adverse tax rules unless a timely QEF or mark-to-market election is made[501][502][505] - Under current Marshall Islands law, non-resident shareholders are not subject to Marshall Islands tax on dividends or capital gains from the company's common stock[518] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from foreign currency fluctuations, interest rate changes, and spot tanker market volatility - The company is exposed to interest rate risk through its floating-rate borrowings based on LIBOR or SOFR and uses interest rate swaps to mitigate this risk[523] Interest Rate Sensitive Financial Instruments (as of Dec 31, 2021) | Instrument (in millions USD) | Total Amount | Fair Value | Weighted-Avg. Rate | | :--- | :--- | :--- | :--- | | Short-term debt (Variable) | 25.0 | (25.0) | 3.6% | | Long-term debt (Variable) | 324.5 | (325.5) | 2.5% | | Finance Leases (Variable) | 137.2 | (137.2) | 3.0% | | Finance Leases (Fixed) | 158.6 | (169.2) | 6.3% | | Interest rate swap (Notional) | 50.0 | 0.6 | 0.8% (Fixed Pay Rate) | - The company is exposed to spot tanker market rate risk due to the cyclical nature of the industry and may use forward freight agreements (FFAs) to manage this exposure[529] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of December 31, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[534] - Management assessed the company's internal control over financial reporting and determined it was effective as of December 31, 2021, an assessment audited by KPMG LLP which issued an unqualified opinion[540][541] PART III Financial Statements This section contains the audited consolidated financial statements for the three-year period ended December 31, 2021, prepared under U.S. GAAP Consolidated Statement of (Loss) Income Highlights | (in thousands USD) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenues | 542,367 | 886,434 | 943,917 | | (Loss) income from operations | (194,095) | 141,573 | 123,883 | | Net (loss) income | (242,372) | 87,317 | 41,362 | | Diluted (loss) earnings per share | ($7.16) | $2.57 | $1.23 | Consolidated Balance Sheet Highlights (at year-end) | (in thousands USD) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | 1,618,749 | 1,840,245 | | Total Liabilities | 780,337 | 761,343 | | Total Equity | 838,412 | 1,078,902 | - The independent auditor, KPMG LLP, identified the assessment of the recoverability of conventional tankers as a critical audit matter due to the subjective judgment required to evaluate future charter rates[569][571]