SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR THE FISCAL YEAR ENDED
Date of event requiring this shell company report
For the transition period from to
Commission file number
(Exact name of Registrant as specified in its charter)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
(Name, Address, Telephone Number, E-mail and Facsimile Number of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
value $1.00 per share
value $1.00 per share
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
As of December 31, 2022, there were of the registrant’s Common Shares, 3,517,061 Series D Preferred Shares, 4,745,947 Series E Preferred Shares, 6,747,147 Series F Preferred Shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report Yes
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|International Financial Reporting Standards as issued by the International Accounting Standards Board ☐||Other ☐|
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Table of Contents
|Item 1. Identity of Directors, Senior Management and Advisers||2|
|Item 2. Offer Statistics and Expected Timetable||2|
|Item 3. Key Information||2|
|Item 4. Information on the Company||25|
|Item 4A. Unresolved Staff Comments||45|
|Item 5. Operating and Financial Review and Prospects||46|
|Item 6. Directors, Senior Management and Employees||68|
|Item 7. Major Shareholders and Related Party Transactions||76|
|Item 8. Financial Information||79|
|Item 9. The Offer and Listing||80|
|Item 10. Additional Information||80|
|Item 11. Quantitative and Qualitative Disclosures About Market Risk||96|
|Item 12. Description of Securities Other than Equity Securities||97|
|Item 13. Defaults, Dividend Arrearages and Delinquencies||97|
|Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds||97|
|Item 15. Controls and Procedures||97|
|Item 16A. Audit Committee Financial Expert||98|
|Item 16B. Code of Ethics||98|
|Item 16C. Principal Accountant Fees and Services||99|
|Item 16D. Exemptions from the Listing Standards for Audit Committees||99|
|Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers||99|
|Item 16F. Change in Registrant’s Certifying Accountant||99|
|Item 16G. Corporate Governance||99|
|Item 16H. Mine Safety Disclosure||100|
|Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections||100|
|Item 17. Financial Statements||100|
|Item 18. Financial Statements||100|
|Item 19. Exhibits||100|
All statements in this Annual Report on Form 20-F that are not statements of historical fact are “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. The disclosure and analysis set forth in this Annual Report on Form 20-F includes assumptions, expectations, projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as forward-looking statements. In some cases, predictive, future-tense or forward-looking words such as “believe,” “intend,” “anticipate,” “estimate,” “project,” “forecast,” “plan,” “potential,” “may,” “should” and “expect” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements include, but are not limited to, such matters as:
|•||future operating or financial results and future revenues and expenses;|
|•||future, pending or recent business and vessel acquisitions, business strategy, areas of possible expansion and expected capital spending and our ability to fund such expenditures;|
|•||operating expenses including the availability of key employees, crew, length and number of off-hire days, dry-docking requirements and fuel and insurance costs;|
|•||general market conditions and shipping industry trends, including charter rates, vessel values and factors affecting supply and demand of crude oil, petroleum products and LNG, including the impact of the COVID-19 pandemic and the ongoing efforts throughout the world to contain it and the conflict in Ukraine and related sanctions;|
|•||our financial condition and liquidity, including our ability to make required payments under our credit facilities, comply with our loan covenants and obtain additional financing in the future to fund capital expenditures, acquisitions and other corporate activities, as well as higher inflation and increasing interest rate levels;|
|•||the overall health and condition of the U.S. and global financial markets, including the value of the U.S. dollar relative to other currencies and the impact of the COVID-19 pandemic and the conflict in Ukraine;|
|•||the carrying value of our vessels and the potential for any asset impairments;|
|•||our expectations about the time that it may take to construct and deliver new vessels or the useful lives of our vessels;|
|•||our continued ability to enter into period time charters with our customers and secure profitable employment for our vessels in the spot market;|
|•||the ability and willingness of our counterparties, including our charterers and shipyards, to honor their contractual obligations;|
|•||our expectations relating to dividend payments and ability to make such payments;|
|•||our ability to leverage to our advantage the relationships and reputation of Tsakos Shipping & Trading S.A. within the shipping industry;|
our anticipated general and administrative expenses;
|•||environmental and regulatory conditions, including changes in laws and regulations or actions taken by regulatory authorities;|
|•||risks inherent in vessel operation, including terrorism, piracy and discharge of pollutants;|
|•||potential liability from future litigation;|
|•||global and regional political conditions;|
|•||tanker, product carrier and LNG carrier supply and demand; and|
|•||other factors discussed in the “Risk Factors” described in Item 3 of this Annual Report on Form 20-F.|
We caution that the forward-looking statements included in this Annual Report on Form 20-F represent our estimates and assumptions only as of the date of this Annual Report on Form 20-F and are not intended to give any assurance as to future results. These forward-looking statements are not statements of historical fact and represent only our management’s belief as of the date hereof, and involve risks and uncertainties that could cause actual results to differ materially and inversely from expectations expressed in or indicated by the forward-looking statements. Assumptions, expectations, projections, intentions and beliefs about future events may, and often do, vary from actual results and these differences can be material. There are a variety of factors, many of which are beyond our control, which affect our operations, performance, business strategy and results and could cause actual reported results and performance to differ materially from the performance and expectations expressed in these forward-looking statements. These factors include, but are not limited to, supply and demand for crude oil carriers, product tankers and LNG carriers, charter rates and vessel values, supply and demand for crude oil and petroleum products and liquefied natural gas, accidents, collisions and spills, environmental and other government regulation, the availability of debt financing, fluctuation of currency exchange and interest rates and the other risks and uncertainties that are outlined in this Annual Report on Form 20-F. As a result, the forward-looking events discussed in this Annual Report on Form 20-F might not occur and our actual results may differ materially from those anticipated in the forward-looking statements. Accordingly, you should not unduly rely on any forward-looking statements.
We undertake no obligation to update or revise any forward-looking statements contained in this Annual Report on Form 20-F, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.
Tsakos Energy Navigation Limited is a Bermuda company that is referred to in this Annual Report on Form 20-F, together with its subsidiaries, as “Tsakos Energy Navigation,” “the Company,” “we,” “us,” or “our.” This report should be read in conjunction with our consolidated financial statements and the accompanying notes thereto, which are included in Item 18 to this report.
On July 1, 2020, the Company effected a 1-for-5 reverse stock split of the common shares of the Company. All share and per share data disclosed in this annual report give effect to this reverse share split.
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
The following table sets forth our (i) cash and cash equivalents, (ii) restricted cash and (iii) consolidated capitalization as of December 31, 2022.This table should be read in conjunction with our consolidated financial statements and the notes thereto, and “Item 5. Operating and Financial Review and Prospects,” included elsewhere in this Annual Report.
|In thousands of U.S. Dollars||As of December 31, 2022|
|Cash and cash equivalents||$||304,367|
|Long-term secured debt obligations and other financial liabilities (including current portion) ¹||$||1,577,877|
|Preferred shares, $1.00 par value; 25,000,000 shares authorized, 3,517,061 Series D Preferred Shares,
4,745,947 Series E Preferred Shares, 6,747,147 Series F Preferred Shares issued and outstanding
|Common shares, $5.00 par value; 60,000,000 shares authorized; 30,183,776 shares issued, and 29,505,603 shares outstanding||150,919|
|Additional paid-in capital||993,368|
|Cost of treasury stock||(6,791)|
|Accumulated other comprehensive income||7,665|
|Total stockholders’ equity||1,522,919|
|1 Obligations under finance leases are not included.|
Reasons for the Offer and Use of Proceeds
Summary of Risk Factors
An investment in our common shares or preferred shares is subject to a number of risks, including risks related to our industry, business and corporate structure. The following summarizes some, but not all, of these risks. Please carefully consider all of the information discussed in “Item 3. Key Information— Risk Factors” in this annual report for a more thorough description of these and other risks.
Risks Related To Our Industry
· If rates in the cyclical tanker charter market, which can be volatile, again decline to low levels and remain at low levels for any significant period it will have an adverse effect on our results of operations.
· The COVID-19 pandemic may continue to have negative consequences for the shipping industry, including demand for oil and charter rates, which may continue to negatively affect our results of operations.
· Disruptions in world financial markets and economic conditions, including as a result of the conflict in Ukraine, as well as protectionist trade measures and other governmental action, could have a material adverse impact on our results of operations.
· The tanker industry is highly dependent upon the crude oil and petroleum products industries, with the level of availability and demand for oil and petroleum products impacting demand for tankers and, in turn, charter rates.
· An increase in the supply of vessels could cause charter rates to decline, adversely affecting our results.
· We face substantial competition for charters, including from state and independent oil companies.
· We operate internationally, and terrorist attacks, international hostilities, economic sanctions and economic conditions could adversely affect our business.
· Failure to comply with the U.S. Foreign Corrupt Practices Act and other anti-bribery legislation could result in fines, criminal penalties, contract terminations and adversely affect our business.
· We are subject to regulation and liability under environmental, health and safety laws that could require significant expenditures.
Risks Related To Our Business
· A decline in the future value of our vessels could affect our ability to comply with various covenants in our credit facilities, which are secured by mortgages on our subsidiaries’ vessels.
· Charters at attractive rates may not be available when our current time charters expire.
· We are dependent on the ability and willingness of our charterers to honor their commitments to us for substantially all our revenues.
· Contracts for newbuilding vessels present certain economic and other risks.
· Credit conditions internationally might impact our ability to raise debt financing.
· The future performance of our subsidiaries’ LNG carriers depends on continued growth in LNG production and demand for LNG and LNG shipping, which could be significantly affected by volatile natural gas prices and demand for natural gas, and the supply of LNG carriers.
· Our growth in shuttle tankers depends partly on continued growth in demand for offshore oil transportation, processing and storage services.
· Fuel is the largest expense in our shipping operations, and fuel prices may adversely affect our profits.
· The shipping industry has inherent operational risks that may not be adequately covered by our insurance.
· Our degree of leverage and certain restrictions in our financing agreements impose constraints on us.
· We are exposed to volatility in LIBOR and SOFR and selectively enter into derivative contracts, which can result in higher than market interest rates and charges against our income, and uncertainty surrounding the transitioning of LIBOR-based agreements to SOFR.
· Inflation could adversely affect our business and financial results by increasing the costs of operating our business.
· The Tsakos Holdings Foundation and the Tsakos family, who own a significant percentage of our common shares, can exert considerable control over us, which may limit your ability to influence our actions.
Risks Related to Our Management Arrangements
· We depend on Tsakos Energy Management and Tsakos Shipping to manage our business, as we do not have the employee infrastructure to manage our operations and have no physical assets.
· Tsakos Shipping could experience conflicts of interests in performing obligations owed to us and the operators of other tankers, including tankers that clients of Tsakos Shipping have acquired.
· Our chief executive officer has affiliations with Tsakos Energy Management and Tsakos Shipping, which could create conflicts of interest.
Risks Related To Our Common and Preferred Shares
· Future sales of our shares in the public market could cause the market price of our shares to decline.
· We may not be able to pay cash dividends on our common shares or preferred shares as intended if market conditions change.
· Our preferred shares represent perpetual equity interests and holders have no right to receive any greater payment than the liquidation preference regardless of the circumstances.
· Holders of our preferred shares have extremely limited voting rights.
· Provisions in our Bylaws and our management agreement with Tsakos Energy Management would make it difficult for a third party to acquire us, even if such a transaction is beneficial to our shareholders.
· Because we are a Bermuda company you may not have the same rights as a shareholder in a U.S. corporation.
· As “foreign private issuer” under NYSE rules we are entitled to exemption from certain NYSE corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.
· If we became subject to corporate income tax in jurisdictions in which we operate, our financial results would be adversely affected.
· If we were treated as a passive foreign investment company, a U.S. investor in our shares would be subject to disadvantageous rules under U.S. tax laws.
Risks Related To Our Industry
The tanker industry is cyclical, resulting in charter rates that can be volatile. Poor charter markets for crude oil and product tankers may adversely affect our future revenues and earnings.
The tanker industry is historically cyclical, resulting in volatility in charter rates, and, in turn, our revenue and earnings. The typical cycle is partially the result of fluctuations in the number of tankers available in the market, which determines the overall supply of tankers competing for charters. The number of tankers in the market changes as a result of new deliveries to the market, offset by vessels demolished or converted due to technical obsolescence, as well as changes in the number of vessels occupied on long-distance travel or delayed by geopolitical events. The cycle is also impacted by demand for charter hires resulting from material changes in the supply of and demand for oil due primarily to fluctuations in the price of oil and to geopolitical factors. As of April 3, 2023, half of the vessels owned by our subsidiary companies were employed under charters based upon prevailing market rates (including time charters with a profit share component), and the remaining vessels were employed on time charters which, if not extended, are scheduled to expire on various dates between April 2023 and November 2028, including eleven which are scheduled to expire within 2023.
After declining significantly from 2016 through most of 2018, adversely affecting our revenues, profitability and cash flows, tanker charter rates improved significantly in the latter part of 2019 and stayed strong through the first half of 2020 due mainly to a strong demand for floating oil storage brought about by low oil prices. However, stagnant demand for oil induced by the COVID-19 pandemic and the release of inventory from storage caused a dramatic fall in tanker rates in the second half of 2020 which continued through 2021 and through the first half 2022, before increasing significantly since such time through the date of this Annual Report. The current crisis in Ukraine that started during the first quarter of 2022, has created a global redrawing of trade routes leading to an increase in oil tanker voyages. The global economy and demand for oil and oil products remains subject to substantial uncertainty due to the COVID-19 outbreak and related containment efforts throughout the world. In addition, the conflict in Ukraine is disrupting energy production and trade patterns and its impact on energy prices and tanker charter rates, which initially have increased, is uncertain. If rates in the charter market were to decline and remain at low levels for any significant period in 2023, it will have an adverse effect on our revenues, profitability and cash flows. Declines in prevailing charter rates also affect the value of our vessels, which are correlated to the trends of charter rates, and could affect our ability to comply with our loan covenants.
The COVID-19 pandemic will continue to have significant consequences globally that may continue to have a broad range of consequences for the shipping industry, including negatively impacting demand for energy and charter rates, which could continue to negatively affect our business and results of operations.
The impact of the COVID-19 pandemic has had and may continue to have far-reaching repercussions on our business and industry which continue to evolve. There have been many effects on the shipping industry, directly and indirectly, arising from the pandemic. The most important issue to face the industry and our Company, given the high number of fatalities since the beginning of the outbreak, is the potential temporary or permanent loss of onshore personnel and seafarers including individuals who have years of experience with the Company. Our suppliers, the yards that repair and build our vessels and the refineries that our vessels serve, may also suffer reductions in personnel, lost demand for their products and services and government-imposed restrictions on their operations.
The outbreak of the COVID-19 virus, beginning in early 2020 and continued into 2022, has led several countries, ports and organizations to take measures against its spread, such as quarantines and restrictions on travel. These measures have and may continue to cause severe trade disruptions due to, among other things, the unavailability of personnel, supply chain disruption, interruptions of production, delays in planned strategic projects and closure of businesses and facilities.
The COVID-19 pandemic and the global response to it has introduced uncertainty in various areas of our business, including our operational, commercial and financial activities. It has also negatively impacted, and may continue to impact negatively, global economic activity, which has negatively impacted demand for energy including oil and oil products, as well as LNG, and in turn charter rates for our vessels not fixed on long-term fixed-rate charters until the second quarter of 2022. If tighter restrictions are again imposed due to outbreaks of COVID-19 variants or similar health crises, these factors may again have a significant adverse effect on our ability to secure charters at profitable rates, particularly for our vessels in the spot market or those operating with profit share arrangements or the eleven tankers in our fleet with charters expiring in 2023, as demand for additional charters could again be significantly affected. The business of our charterers could also be adversely affected, which could adversely affect their ability and willingness to perform their obligations under our existing charters as well as decreasing demand for future charters. COVID-19 is also affecting oil major vetting processes, which could lead to the loss of oil major approvals to conduct business with us and in turn the loss of revenue under existing charters or future chartering opportunities.
Travel restrictions imposed on a global level also caused disruptions in scheduled crew changes on our vessels and delays in carrying out of certain hull repairs and maintenance during 2020 and 2021, which disruptions could also continue to affect our operations, including the construction of our eight newbuilding vessels. Our business and the shipping industry as a whole may continue to be impacted by a reduced workforce and delays of crew changes as a result of quarantines applicable in several countries and ports, as well as delays in the construction of newbuild vessels, scheduled dry dockings, intermediate or special surveys of vessels and scheduled and unscheduled ship repairs and upgrades. A resurgence of the COVID-19 pandemic could impact credit markets and financial institutions and result in increased interest rate spreads and other costs of, and difficulty in obtaining, bank financing, including to refinance balloon payments due upon maturity of existing credit facilities and to finance the purchase price of vessel acquisitions, which could limit our ability to grow our business in line with our strategy.
The lockdowns and commitment by world governments to provide financial support to their populations during the pandemic may have serious adverse long-term effects on the economies and budgetary resources of these nations, which in turn may result in a decline in oil demand and a reduction of vessel utilization. Government-imposed lockdowns, curfews and other restrictions on businesses and personal activity in many countries may even lead to changes in prevailing governmental practices and relationships between governments and their citizens that may in turn lead to political turmoil and strife.
Failure to control the continued spread of COVID-19 could continue to significantly impact economic activity, and in turn demand for crude oil, oil products and LNG, which could further negatively affect our business, financial condition, results of operations and cash flows.
Disruptions in world financial markets and economic conditions, including due to the COVID-19 pandemic and the conflict in Ukraine, and protectionist trade measures and other governmental action in the United States and in other parts of the world could have a material adverse impact on our results of operations, financial condition, cash flows and share price.
Global financial markets and economic conditions have been disrupted and volatile at times over the past two decades, and more recently since 2020 as a result of the COVID-19 pandemic and in 2022 as a result of the conflict in Ukraine and inflation concerns, and remain subject to significant vulnerabilities, such as the deterioration of fiscal balances and the rapid accumulation of public debt, continued deleveraging in the banking sector and a limited supply of credit in the shipping industry, all of which are likely to be exacerbated by the continued spread the COVID-19 and its variants. While the global economy was improving, it remained subject to downside risk, and the outbreak of COVID-19 and second waves in several key economies has dramatically disrupted the global economy, the duration of which is unpredictable. This may also prolong tight credit markets and potentially cause such conditions to become more severe.
In addition, the exit of the UK from the European Union and the possible need of realignment of trading patterns as a consequence, as well as continued turmoil and hostilities in Ukraine and the Middle East or potential hostilities elsewhere in the world and additional public health emergencies or natural disasters, could contribute to volatility in the global financial markets. These circumstances, along with the re-pricing of credit risk and the reduced participation of certain financial institutions from financing of the shipping industry, will likely continue to affect the availability, cost and terms of vessel financing. If financing is not available to us when it is needed, or is available only on unfavorable terms, our business may be adversely affected, with corresponding effects on our profitability, cash flows and ability to pay dividends.
Moreover, as a result of the slow recovery from the economic crisis in Greece, exacerbated by the spread of COVID-19 in the country and related restrictions of movement, and the related austerity measures implemented by the Greek government, our operations may be subjected to new regulations that may require us to incur new or additional compliance or other administrative costs and may require that we pay to the Greek government new taxes or other fees or that dividends we pay be subject to withholding taxes. Financial difficulties of the European Union resulting from the UK exit from the European Union and challenges confronted by member states in addressing the COVID-19 pandemic, may place additional pressure on the Eurozone and limit the flexibility of its leadership and member states in lending to the Greek government.
The implementation by the U.S. or other governments of protectionist trade measures, including tariffs or other trade restrictions such as those imposed by the U.S. and China, could also adversely affect the world oil and petroleum markets.
The tanker industry is highly dependent upon the crude oil and petroleum products industries.
The employment of our subsidiaries’ vessels is driven by the availability of and demand for crude oil and petroleum products, the availability of modern tanker capacity and the scrapping, conversion, or loss of older vessels. Historically, the world oil and petroleum markets have been volatile and cyclical because of the many conditions and events that affect the supply, price, production and transport of oil, including:
• increases and decreases in the demand and price for crude oil and petroleum products;
• availability of crude oil and petroleum products;
• demand for crude oil and petroleum product substitutes, such as natural gas, coal, hydroelectric power and other alternate sources of energy that may, among other things, be affected by environmental regulation;
• actions taken by OPEC and major oil producers and refiners;
• political turmoil in or around oil producing nations;
• global and regional political and economic conditions;
• developments in international trade;
• international trade sanctions;
• environmental factors;
• natural catastrophes;
• terrorist acts;
• weather; And
• changes in seaborne and other transportation patterns.
Despite turbulence in the world economy at times in recent years, worldwide demand for oil and oil products has continued to rise; however, the COVID-19 pandemic caused demand for oil and oil products to stagnate for an extended period of time and the conflict in Ukraine could ultimately have a similar effect. In the event that such softness persists and the long-term trend falters, the production of and demand for crude oil and petroleum products will encounter pressure which could lead to a decrease in shipments of these products and consequently this would have an adverse impact on the employment of our vessels and the charter rates that they command, as was case from the second half of 2020 until the second quarter of 2022. Also, if oil prices decline to uneconomic levels for producers, it may lead to declining output. As a result of any reduction in demand or output, the charter rates that we earn from our vessels employed on charters related to market rates may decline, as they did in the second half of 2020 through the second quarter of 2022, and possibly remain at low levels for a prolonged period, as was the case for most periods during the preceding ten years.
Our operating results are subject to seasonal fluctuations.
The tankers owned by our subsidiary companies operate in markets that have historically exhibited seasonal variations in tanker demand, which may result in variability in our results of operations on a quarter-by-quarter basis. Tanker markets are typically stronger in the winter months due to increased oil consumption in the northern hemisphere, but weaker in the summer months as a result of lower oil consumption in the northern hemisphere and refinery maintenance. As a result, revenues generated by the tankers in our fleet have historically been weaker during the fiscal quarters ended June 30 and September 30. However, there may be periods in the northern hemisphere when the expected seasonal strength does not materialize to the extent required to support sustainable profitable rates due to tanker overcapacity.
An increase in the global supply of vessels, or specifically in a particular category of vessel, without an increase in demand for such vessels could cause global charter rates to decline, or rates for a particular category of vessel to decline, which could have a material adverse effect on our revenues and profitability.
Historically, the marine transportation industry has been cyclical. The profitability and asset values of companies in the industry have fluctuated based on certain factors, including changes in the supply and demand of vessels. The supply of vessels generally increases with deliveries of newly constructed vessels and decreases with the scrapping or conversion of older vessels and/or the removal of vessels from the competitive fleet either for storage purposes or for utilization in offshore projects. The newbuilding order book equaled approximately 4% of the existing world tanker fleet at the end of February 2023, by number of vessels, with a significant amount of these newbuilding vessels scheduled to be delivered in 2023. No assurance can be given that the order book will not increase further in proportion to the existing fleet. If vessel supply increases, and demand does not match that increase, the charter rates for our vessels could decline significantly. In addition, any decline of trade on specific long-haul trade routes will effectively increase available capacity with a detrimental impact on rates. A decline in charter rates could have a material adverse effect on our revenues and profitability.
The global tanker industry is highly competitive.
We operate our fleet in a highly competitive market. Our competitors include owners of VLCC, suezmax, aframax, panamax, handymax and handysize tankers, as well as owners in the shuttle tanker and LNG markets, which are other independent tanker companies, as well as state and independent oil companies, some of which have greater financial strength and capital resources than we do. Competition in the tanker industry is intense and depends on price, location, size, age, condition, installation of required or technically up to date equipment and the acceptability of the available tankers and their operators to potential charterers.
Acts of piracy on ocean-going vessels, although recently declining in frequency, could still adversely affect our business.
Despite a decline in the frequency of pirate attacks on seagoing vessels in the western part of the Indian Ocean, such attacks remain prevalent off the west coast of Africa and between Malaysia and Indonesia. In addition, more recently, there has been an apparent attempted hijack of a tanker by stowaways off the UK coast, requiring military intervention by British special forces. If piracy attacks or vessel hijacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones, as the Gulf of Aden has been, or Joint War Committee (JWC) “war and strikes” listed areas, premiums payable for such insurance coverage could increase significantly and such insurance coverage may be more difficult to obtain. Crew costs, including those due to employing onboard security guards, could increase in such circumstances. In addition, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and it is therefore entitled to cancel the charter party, a claim that we would dispute. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Terrorist attacks, international hostilities, economic and trade sanctions, including those related to the conflict in Ukraine, can affect the tanker industry, which could adversely affect our business.
Major oil and gas producing countries in the Middle East have become involved militarily in conflicts in Iraq, Syria, Azerbaijan and Yemen. Armed conflicts with insurgents and others continue, as well, in Chad and Libya, and political unrest and instability have adversely affected the infrastructure and economic stability of Venezuela, each of which is a major oil exporting country. In addition, tension and instability in the Persian Gulf, such as explosions on two oil tankers in June 2019 in the Strait of Hormuz, a vital passageway for international oil shipment, may adversely affect the future export of oil around the region. In 2020, bellicose tensions between Greece and Turkey have increased relating to oil exploration rights in the Aegean Sea and off Cyprus and also relating to illegal movements of migrants from Turkey to Greece.
Any such hostility or instability could seriously disrupt the production of oil or LNG and endanger their export by vessel or pipeline, which could put our vessels at serious risk and impact our operations and our revenues, expenses, profitability and cash flows in varying ways that we cannot now project with any certainty.
Furthermore, Russia’s invasion of Ukraine, and sanctions subsequently announced by the United States, the EU and several European and other nations against Russia and any further sanctions, including any sanctions or restrictions affecting companies with Russian connections or the Russian energy sector and harmed by any retaliatory measures by Russia or other countries in response, may also adversely impact our business given Russia’s role as a major global exporter of crude oil.
The increasing number of terrorist attacks throughout the world, longer-lasting wars, international incidents or international hostilities, such as in the Ukraine, Afghanistan, Iraq, Syria, Libya, Yemen and the Korean peninsula, could damage the world economy and adversely affect the availability of and demand for crude oil and petroleum products and negatively affect our investment and our customers’ investment decisions over an extended period of time. In addition, sanctions against oil exporting countries such as Iran, Sudan, Syria, Russia and Venezuela may also impact the availability of crude oil which would increase the availability of tankers, thereby negatively impacting charter rates. We conduct our vessel operations internationally and despite undertaking various security measures, our vessels may become subject to terrorist acts and other acts of hostility like piracy, either at port or at sea. Such actions could adversely impact our overall business, financial condition and results of operations. In addition, terrorist acts and regional hostilities around the world in recent years have led to increases in our insurance premium rates and the implementation of special “war risk” premiums for certain trading routes, although our charter party agreements generally provide that additional war risks insurance costs are for charterers’ account.
The conflict in Ukraine could disrupt our operations and negatively impact charter rates and costs.
The conflict in Ukraine, and the economic sanctions imposed by the EU, U.S. and other countries in response to Russian action, is disrupting energy production and trade patterns, including shipping in the Black Sea and elsewhere, and its impact on energy prices and tanker rates, which initially have increased, is uncertain. Some of these sanctions and executive orders target the Russian oil sector, including a prohibition on the import of oil from Russia to the United States or the United Kingdom, and the European Union's recent ban on Russian crude oil and petroleum products which took effect in December 2022 and February 2023, respectively, as well as a price cap on Russian oil of $60 per barrel. Prior to the war, Russia exported approximately 5.5 mbpd of seaborne crude oil and refined petroleum products to the EU, USA, South Korea and Japan. After February 2023, Russia is exporting less than 0.4 mbpd to these countries. The price of crude oil (Brent) initially traded above $100 per barrel as a result of the war and escalating tensions in the region and fears of potential shortages in the supply of Russian crude oil but has since come down and is now trading above $80 per barrel. Russian crude oil is restricted for export, due to the extension of economic sanctions, and has also been impacted by boycotts and general sentiment, which could result in a reduction in the supply of crude oil and refined petroleum products cargoes available for transportation and, while initially tanker rates have increased, this could negatively impact tanker charter rates over the longer term. In addition, higher oil prices could reduce demand for oil and refined petroleum products, including in the event of any slowdown in the global economy due such high oil prices or the impact of economic sanctions or geopolitical tensions and uncertainty, and in turn reduce demand for tankers and tanker charter rates. The conflict may also impact various costs of operating our business, such as bunker expenses, for which we are responsible when our vessels operate in the spot market, which have increased with higher oil prices, war risk insurance premiums and crewing services, as Russia and the Ukraine are significant sources of crews, which may be disrupted or more expensive.
In addition, our vessels carry lawful cargoes originating in Russia, in compliance with existing sanctions, oil majors and other charterers may elect not to charter our vessels simply for doing business with companies that do lawful business in Russia. In addition, it may not be possible for us to obtain war risk insurance for any vessel loading Russian origin cargoes, in which case our vessels would not be allowed to call Russian ports and thereby impacting the vessels’ future trading pattern and earnings.
The situation in Ukraine, and the global response, continues to evolve and its impact on energy supply and demand, energy prices and tanker operations and charter rates remains subject to considerable uncertainty, which could adversely impact our business, results of operations and financial condition.
Our charterers may direct one of our vessels to call on ports located in countries that are subject to restrictions imposed by the U.S. government, the UN or the EU, which could negatively affect the trading price of our shares.
On charterers’ instructions, our subsidiaries’ vessels may be requested to call on ports located in countries subject to sanctions and embargoes imposed by the U.S. government, the UN or the EU and countries identified by the U.S. government, the UN or the EU as state sponsors of terrorism. The U.S., UN- and EU- sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time.
On January 16, 2016, “Implementation Day” for the Iran Joint Comprehensive Plan of Action (JCPOA), the United States lifted its secondary sanctions against Iran which prohibited certain conduct by non-U.S. companies and individuals that occurred entirely outside of U.S. jurisdiction involving specified industry sectors in Iran, including the energy, petrochemical, automotive, financial, banking, mining, shipbuilding and shipping sectors. By lifting the secondary sanctions against Iran, the U.S. government effectively removed U.S. imposed restraints on dealings by non-U.S. companies, such as our Company, and individuals with these formerly targeted Iranian business sectors. Non-U.S. companies continued to be prohibited under U.S. sanctions from (i) knowingly engaging in conduct that seeks to evade U.S. restrictions on transactions or dealings with Iran or that causes the export of goods or services from the United States to Iran, (ii) exporting, reexporting or transferring to Iran any goods, technology, or services originally exported from the U.S. and / or subject to U.S. export jurisdiction and (iii) conducting transactions with the Iranian or Iran-related individuals and entities that remain or are placed in the future on OFAC’s list of Specially Designated Nationals and Blocked Persons (SDN List), notwithstanding the lifting of secondary sanctions.
However, on August 6, 2018, the U.S. re-imposed an initial round of secondary sanctions and as of November 5, 2018, virtually all of the secondary sanctions the U.S. had suspended under the JCPOA have been re-imposed.
The U.S. government’s primary Iran sanctions have remained in place throughout recent years and, consequently, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings in or with Iran or its government. In addition, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings with the Government of Iran and Iranian financial institutions, which effectively impacts the transfer of funds to, from, or through the U.S. financial system whether denominated in U.S. dollars or any other currency. The new presidential administration in the United States may result in further amendments that could impact the number of operational tankers in the global fleet with adverse consequences for us.
The U.S. also maintains embargoes on Cuba, North Korea and Syria, and certain regions of Ukraine. Beginning in February 2022, the United States, the European Union and numerous other nations have also been imposing substantial additional sanctions on Russia regarding its invasion of Ukraine.
We can anticipate that some of our charterers may request our vessels to call on ports located in these countries. Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Such sanctions and embargo laws and regulations may be amended or expanded over time as is the case with the war in Ukraine. Any such violation could result in fines or other penalties and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. Additionally, some investors may decide to divest their interest, or not to invest, in us simply because we do business with companies that do lawful business in sanctioned countries. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations because of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. Current or future counterparties of ours may be or become affiliated with persons or entities that are now or may in the future be the subject of sanctions imposed by the U.S. Government, the European Union, and/or other international bodies. If we determine that such sanctions or embargoes require us to terminate existing or future contracts to which we, or our subsidiaries are a party or if we are found to be in violation of such applicable sanctions or embargoes, we could face monetary fines, we may suffer reputational harm and our results of operations may be adversely affected. Investor perception of the value of our shares may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.
Failure to comply with the U.S. Foreign Corrupt Practices Act and other anti-bribery legislation in other jurisdictions could result in fines, criminal penalties, contract terminations and an adverse effect on our business.
The vessels of our subsidiaries load and discharge cargoes in several countries throughout the world. In addition, we deal with many charterers and shipbrokers that are based in various countries. Certain of the countries in which these charterers and brokers operate may, in the past, have had a reputation for corruption. Brazilian authorities have charged certain shipbrokers with various offenses in connection with charters entered into between a major state oil entity and various international shipowners. We are subject to the risk that the alleged actions taken by these brokers are determined to constitute a violation of anti-corruption laws applicable to the Company, including the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”). In 2020, in parallel with U.S. Department of Justice and U.S. Securities and Exchange Commission investigations regarding whether the circumstances surrounding these charters, including the actions taken by these shipbrokers, constituted non-compliance with provisions of the FCPA applicable to the Company, we began investigating these matters. We are always committed to doing business in accordance with anti-corruption laws and are cooperating with these agencies.
Any violation of the FCPA or other anti-bribery legislation in other jurisdictions could result in substantial fines, sanctions, civil and/or criminal penalties, or curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
Efforts to take advantage of opportunities in pursuit of our growth strategy may result in financial or commercial difficulties.
A key strategy of management is to continue to renew and grow the fleet by pursuing the acquisition of additional vessels or fleets or companies that are complementary to our existing operations. If we seek to expand through acquisitions, we face numerous challenges, including:
• difficulties in raising the required capital;
• depletion of existing cash resources more quickly than anticipated;
• assumption of potentially unknown material liabilities or contingent liabilities of acquired companies; and
• competition from other potential acquirers, some of which have greater financial resources.
We cannot assure you that we will successfully integrate the operations, personnel, services or vessels that we might acquire in the future, and our failure to do so could adversely affect our profitability.
Increasing scrutiny and changing expectations from investors, lenders and other market participants with respect to ESG policies may impose additional costs on us or expose us to additional risks.
Companies across all industries, including the shipping industry, are facing increased scrutiny relating to their ESG policies. Investor advocacy groups, certain institutional investors, investment funds, lenders and other market participants are increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. The increased focus and activism related to ESG and similar matters may hinder access to capital, as investors and lenders may decide to reallocate capital or to not commit capital as a result of their assessment of a company’s ESG practices. Companies which do not adapt to or comply with investor, lender or other industry shareholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial condition, and/or the stock price of such a company could be materially and adversely affected. As a result, we may be required to implement more stringent ESG procedures or standards so that we continue to have access to capital and our existing and future investors and lenders remain invested in us and make further investments in us.
Specifically, we may face increasing pressures from investors, lenders and other market participants, who are increasingly focused on climate change, to prioritize sustainable energy practices, reduce our carbon footprint and promote sustainability. Additionally, certain investors and lenders may exclude tanker shipping companies, such as us, from their investing portfolios altogether due to environmental, social and governance factors. If we are faced with limitations in the debt and/or equity markets as a result of these concerns, or if we are unable to access alternative means of financing on acceptable terms, or at all, we may be unable to access funds to implement our business strategy or service our indebtedness, which could have a material adverse effect on our financial condition and results of operations.
We are subject to regulation and liability under environmental, health and safety laws that could require significant expenditures and affect our cash flows and net income.
Our business and the operation of our subsidiaries’ vessels are subject to extensive international, national, and local environmental and health and safety laws and regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. In addition, major oil companies chartering our vessels impose, from time to time, their own environmental and health and safety requirements.
To comply with these requirements and regulations, including the new MARPOL Annex VI sulfur emission requirements instituting a global 0.5% sulfur cap on marine fuels from January 1, 2020 and the IMO ballast water management (“BWM”) convention, which requires vessels to install expensive ballast water treatment systems (“BWTS”) before the first MARPOL renewal survey conducted after September 8, 2019, for newly constructed vessels after September 8, 2017 to have a BWTS installed by delivery and for all vessels to be certified in accordance with the BWM convention by September 8, 2024, we may be required to incur additional costs to meet new maintenance and inspection requirements, develop contingency plans for potential spills, and obtain insurance coverage. In addition, for instance, in June 2021, the IMO, working with the Marine Environmental Protection Committee, passed amendments to Annex VI aimed at reducing carbon emissions produced by vessels and include two new metrics for measuring a vessel’s overall energy efficiency and actual carbon dioxide emissions: Energy Efficiency Existing Shipping Index (“EEXI”) and Carbon Intensity Indicator (“CII”). If our vessels are only able to comply with the maximum EEXI and CII thresholds by reducing their speed, our vessels may be less attractive to charterers, and we may only be able to charter our vessels for lower charter rates or to less creditworthy charters, if we are able to do so at all.
These and future environmental regulations, which may become stricter, may limit our ability to do business, increase our operating costs and/or force the early retirement of our vessels, all of which could have a material adverse effect on our financial condition and results of operations. Environmental laws and regulations are often revised, and we cannot predict the ultimate cost of complying with them, or the impact they may have on the resale prices or useful lives of our vessels. We believe that regulation of the shipping industry will continue to become more stringent and compliance with such new regulations will be more expensive for us and our competitors.
International, national and local laws imposing liability for oil spills are also becoming increasingly stringent. Some impose joint, several, and in some cases, unlimited liability on owners, operators and charterers regardless of fault. We could be held liable as an owner, operator or charterer under these laws. In addition, under certain circumstances, we could also be held accountable under these laws for the acts or omissions of Tsakos Shipping & Trading S.A. (“Tsakos Shipping”) or Tsakos Energy Management Limited (“Tsakos Energy Management”), companies that provide technical and commercial management services for our subsidiaries’ vessels and us, or others in the management or operation of our subsidiaries’ vessels. Although we currently maintain, and plan to continue to maintain, for each of our subsidiaries’ vessels’ pollution liability coverage in the amount of $1 billion per incident (the maximum amount available), liability for a catastrophic spill could exceed the insurance coverage we have available and result in our having to liquidate assets to pay claims. In addition, we may be required to contribute to funds established by regulatory authorities for the compensation of oil pollution damage or provide financial assurances for oil spill liability to regulatory authorities.
Adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also have an effect on demand for our services. For example, increased regulation of greenhouse gases or other concerns relating to climate change may reduce the demand for oil and natural gas in the future or create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil and gas industry could have significant financial and operational adverse impacts on our business that we cannot predict with certainty at this time.
Maritime disasters and other operational risks may adversely impact our reputation, financial condition, and results of operations.
The operation of ocean-going vessels has an inherent risk of maritime disaster and/or accident, environmental mishaps, cargo and property losses or damage and business interruptions caused by, among others:
• mechanical failure;
• human error;
• labor strikes;
• adverse weather conditions;
• vessel off hire periods;
• regulatory delays; And
• political action, civil conflicts, terrorism and piracy in countries where vessel operations are conducted, vessels are registered or from which spare parts and provisions are sourced and purchased.
Any of these circumstances could adversely affect our operations, result in loss of revenues or increased costs and adversely affect our profitability and our ability to perform our charters.
Our subsidiaries’ vessels could be arrested at the request of third parties.
Under general maritime law in many jurisdictions, crew members, tort claimants, vessel mortgagees, suppliers of goods and services and other claimants may lien a vessel for unsatisfied debts, claims or damages. In many jurisdictions a maritime lien holder may enforce its lien by arresting a vessel through court process. In some jurisdictions, under the extended sister ship theory of liability, a claimant may arrest not only the vessel with respect to which the claimant’s maritime lien has arisen, but also any associated vessel under common ownership or control. While in some jurisdictions which have adopted this doctrine, liability for damages is limited in scope and would only extend to a company and its ship-owning subsidiaries, we cannot assure you that liability for damages caused by some other vessel determined to be under common ownership or control with our subsidiaries’ vessels would not be asserted against us.
Risks Related To Our Business
A decline in the future value of our vessels could affect our ability to comply with various covenants in our credit facilities unless waived or modified by our lenders.
Our credit facilities, which are secured by mortgages on our subsidiaries’ vessels, require us to maintain specified collateral coverage ratios and satisfy financial covenants, including requirements based on the market value of our vessels, such as maximum corporate leverage levels and loan-to-asset collateral coverage requirements. The appraised value of a vessel fluctuates depending on a variety of factors including the age of the vessel, its hull configuration, prevailing charter market conditions, supply and demand balance for vessels and new and pending legislation. The oversupply of tankers and depressed tanker charter market adversely affected tanker values from the middle of 2008 to the middle of 2019, and despite the relatively young age of our subsidiaries’ fleet and extensive long-term charter employment on many of the vessels, resulted in a significant decline in the charter-free values of certain of our subsidiaries’ vessels. Vessel values recovered from the end of 2013, but again declined during 2016 and 2017 and remained at relatively low levels through 2018 due primarily to global fleet overcapacity and lack of financing for potential buyers to acquire second-hand, charter free vessels. Values recovered in 2019 and continued to improve into early 2020. However, the decline in demand for tankers in mid-2020 due to the effects of the COVID-19 pandemic resulted in a fall in values, which continued throughout 2021 and into 2022 before beginning to increase in the second half of 2022. If these values again decline and remain at low levels for a prolonged period, it may result in an inability to comply with the financial covenants under our credit facilities which relate to our consolidated leverage and loan-to-asset value collateral requirements. If we were unable to obtain waivers in the case of non-compliance with consolidated leverage or other financial covenants or post additional collateral or prepay principal in the case of loan-to-asset value requirements, our lenders could accelerate our indebtedness. We have paid all our scheduled loan installments and related loan interest consistently without delay or omission.
Charters at attractive rates may not be available when our current time charters expire.
During 2022 and 2021, we derived approximately 53% of our revenues from time charters. Although tanker charter rates are currently at high levels, as our current period charters on eleven of the vessels owned by our subsidiary companies expire in the remainder of 2023 and for additional vessels in future years, considering the volatile nature of the tanker market, it may not be possible to re-charter these vessels on a period basis at attractive rates. If attractive period charter opportunities are not available, we may seek to charter the vessels owned by our subsidiary companies on the spot market, which is subject to significant fluctuations. In the event a vessel owned by one of our subsidiary companies may not find employment at economically viable rates, management may opt to lay up the vessel until such time that rates become attractive again (an action which our subsidiary companies have never undertaken). During the period of any layup, the vessel would continue to incur expenditures such as debt service, insurance, reduced crew wages and maintenance costs.
We are dependent on the ability and willingness of our charterers to honor their commitments to us for substantially all our revenues and the failure of our counterparties to meet their obligations under our charter agreements could cause us to suffer losses or otherwise adversely affect our business.
We derive substantially all our revenues from the payment of charter hire by our charterers. As of April 3, 2023, 44 of our 58 subsidiaries’ vessels were employed under time charters including time charters with profit sharing provisions above specified minimum rate levels. We could lose a charterer or the benefits of a time charter if:
• the charterer fails to make charter payments to us because of its financial inability, liquidation, disagreements with us, defaults on a payment or otherwise;
• the charterer exercises certain specific limited rights to terminate the charter;
• we do not take delivery of a newbuilding vessel we may contract for at the agreed time; or
• the charterer terminates the charter because the vessel fails to meet certain guaranteed speed and fuel consumption requirements and we are unable to rectify the situation or otherwise reach a mutually acceptable settlement; or.
• a serious accident or explosion occurs at a client refinery.
If we lose a time charter, we may be unable to re-deploy the related vessel on terms as favorable to us or at all. We would not receive any revenues from such a vessel while it remained unchartered, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition, insure it and service any indebtedness secured by such vessel.
The ability and willingness of each of the counterparties to perform their obligations under their charters will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the oil and energy industries and of the oil and oil products shipping industry as well as the overall financial condition of the counterparties and prevailing charter rates. There can be no assurance that some of our subsidiaries’ customers would not fail to pay charter hire or attempt to renegotiate charter rates and, if the charterers fail to meet their obligations or attempt to renegotiate charter agreements, we could sustain significant /losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends in the future.
If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, as part of a court-led restructuring or otherwise, we could sustain significant reductions in revenue and earnings which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends, if any, in the future, and comply with the covenants in our credit facilities.
If our exposure to the spot market increases, our revenues could suffer and our expenses could increase.
The spot market for crude oil and petroleum product tankers is highly competitive. As of April 3, 2023, fourteen of the vessels owned by our subsidiary companies were employed under spot charters, as we have decided to maintain a considerable number of vessels in the spot market to take advantage of current high spot rates. Due to increased participation in the spot market, we may experience a lower overall utilization of our fleet through waiting time or ballast voyages, which could lead to a decline in operating revenue in rate environments where spot rates earned do not offset such lower utilization. Moreover, to the extent our vessels are employed in the spot market, both our revenue from vessels and our operating costs, specifically our voyage expenses, will be significantly impacted by adverse movements in the cost of bunkers (fuel), including the price of low sulfur fuel certain of our vessels have been required to use since the beginning of 2020. See “—Fuel prices may adversely affect our profits.” Unlike time charters in which the charterer bears all the bunker costs, in spot market voyages we bear the bunker charges as part of our voyage costs. As a result, while historical movements in bunker charges are factored into the prospective freight rates for spot market voyages periodically announced by World Scale Association (London) Limited and similar organizations, increases in bunker charges in any given period could have a material adverse effect on our cash flow and results of operations for the period in which the increase occurs. In addition, to the extent we employ our vessels pursuant to contracts of affreightment, the rates that we earn from the charterers under those contracts may be subject to reduction based on market conditions, which could lead to a decline in our operating revenue.
Because the market value of our vessels may fluctuate significantly, we may incur impairment charges or losses when we sell vessels which may adversely affect our earnings.
The fair market value of tankers may increase or decrease depending on any of the following:
• general economic and market conditions affecting the tanker industry;
• supply and demand balance for ships within the tanker industry;
• competition from other shipping companies;
• types and sizes of vessels;
• other modes of transportation;
• cost of newbuildings;
• governmental or other regulations;
• prevailing level of charter rates; and
• technological advances.
The global economic downturn that commenced in 2008 and the consequences thereof, resulted in a decrease in vessel values. Since then, valuations have fluctuated, falling whenever there was excess fleet capacity and falling freight rates, as in 2013, and recovering when tanker market conditions improved as in 2015. Valuations declined again in 2016 and remained low through 2017 and 2018, but recovered in 2019, before falling again in the second half of 2020 along with charter rates, until the third quarter of 2022, where they started to recover and remained high at the end of 2022 year. Although our subsidiaries currently own a relatively modern fleet, with an average age of 10.3 years as of April 3, 2023, as vessels grow older, they generally decline in value.
We have a policy of considering the disposal of tankers periodically. If our subsidiaries’ tankers are sold at a time when tanker prices have fallen, the sale may be at less than the vessel’s carrying value on our financial statements, with the result that we will incur a loss.
In addition, accounting standards require that we periodically review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment charge for an asset held for use should be recognized when the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than it’s carrying amount. Measurement of the impairment charge is based on the fair value of the asset as provided by third parties. Such reviews may from time-to-time result in asset write-downs, which could adversely affect our results of operations, such as we did in 2020 and 2021, with respect to four and seven of our subsidiaries’ tankers, respectively.
If TST is unable to attract and retain skilled crew members, our reputation and ability to operate safely and efficiently may be harmed.
Our continued success depends in significant part on the continued services of the officers and seamen whom TST provides to crew the vessels owned by our subsidiary companies. The market for qualified, experienced officers and seamen is extremely competitive and has grown more so in recent periods due to the growth in world economies and other employment opportunities. Although TST has manning management arrangements with a number of accredited manning agencies in Philippines, Ukraine, Romania, Georgia, Latvia, Brazil, Greece and Russia and sponsors various academies in the relevant regions, we cannot assure you that TST will be successful in its efforts to recruit and retain properly skilled personnel at commercially reasonable salaries. Any failure to do so could adversely affect our ability to operate cost-effectively and our ability to increase the size of the fleet.
Labor interruptions could disrupt our operations.
Substantially all of the seafarers and land-based employees of TST are covered by industry-wide collective bargaining agreements that set basic standards. We cannot assure you that these agreements will prevent labor interruptions. In addition, like many other vessels internationally, some of our subsidiaries’ vessels operate under so-called “flags of convenience” and may be vulnerable to unionization efforts by the International Transport Federation and other similar seafarer organizations which could be disruptive to our operations. Any labor interruption or unionization effort which is disruptive to our operations could harm our financial performance.
Contracts for newbuilding vessels present certain economic and other risks.
As of April 3, 2023, our subsidiaries have contracts for the construction of two DP2 suezmax shuttle tankers for delivery in 2025, four dual-fuel LNG powered aframax tankers for delivery in 2023 and 2024 and two suezmax tankers for delivery in 2025. Our subsidiaries may also order additional newbuilding vessels. During the construction of a vessel, we are required to make progress payments. While we typically have refund guarantees from banks to cover defaults by the shipyards and our construction contracts would be saleable in the event of our payment default, we can still incur economic losses if we or the shipyards are unable to perform our respective obligations. Shipyards may periodically experience financial difficulties. We have arranged senior secured debt financing for the remaining installment payments for the four dual fuel LNG powered aframax tankers of these newbuildings and we are in the process of seeking to arrange debt financing for the two DP2 suezmax shuttle vessels and the two suezmax tankers, all of which, apart from the two suezmax tankers, have time charter employment arranged commencing upon their delivery. Management is in discussion with various high-end charterers to employ the remaining two suezmax vessels on long-term contracts upon delivery.
Delays in the delivery of these vessels, or any newbuilding or secondhand vessels our subsidiaries may agree to acquire, could delay our receipt of revenues generated by these vessels and, to the extent we have arranged charter employment for these vessels, could possibly result in the cancellation of those charters, and therefore adversely affect our anticipated results of operations. The delivery of newbuilding vessels could be delayed because of, among other things: work stoppages or other labor disturbances; bankruptcy or other financial crisis of the shipyard building the vessel; hostilities or political or economic disturbances in the countries where the vessels are being built, including any escalation of tensions involving North Korea; weather interference or catastrophic events, such as a major earthquake, tsunami or fire; our requests for changes to the original vessel specifications; requests from our customers, with whom our commercial managers arrange charters for such vessels, to delay construction and delivery of such vessels due to weak economic conditions and shipping demand or a dispute with the shipyard building the vessel.
Credit conditions internationally might impact our ability to raise debt financing.
Global financial markets and economic conditions have been disrupted and volatile for periods in recent years. At times, the credit markets as well as the debt and equity capital markets were distressed, and it was difficult for many shipping companies to obtain adequate financing. The cost of available financing also increased significantly, but for leading shipping companies has since declined. The global financial markets and economic conditions could again experience volatility and disruption in the future.
We have traditionally financed our vessel acquisitions or constructions with our own cash (equity), including from share issuances, and bank debt from various reputable national and international commercial banks. In relation to newbuilding contracts, the equity portion usually covers part of the pre-delivery obligations while the debt portion covers the outstanding amount due to the shipyard on delivery. More recently, however, we have arranged pre-delivery bank financing to cover much of the installments due before delivery, and, therefore, we would be required to provide the remainder of our equity investment at delivery. In addition, several of our existing loans will mature over the next few years, including two in 2023. If the related vessels are not sold, or we do not wish to use existing cash for paying the final balloon payments, then re-financing of the loans for an extended period beyond the maturity date will be necessary. Current and future terms and conditions of available debt financing, especially for older vessels without time charter could be different from terms obtained in the past and could result in a higher cost of capital, if available at all. Any adverse development in the credit markets could materially alter our current and future financial and corporate planning and growth and have a negative impact on our balance sheet.
The future performance of our subsidiaries’ LNG carriers depends on continued growth in LNG production and demand for LNG and LNG shipping.
The future performance of our subsidiaries’ LNG carriers will depend on continued growth in LNG production and the demand for LNG and LNG shipping. A complete LNG project includes production, liquefaction, storage, re-gasification, and distribution facilities, in addition to the marine transportation of LNG. Increased infrastructure investment has led to an expansion of LNG production capacity in recent years, but material delays in the construction of new liquefaction facilities could constrain the amount of LNG available for shipping, reducing ship utilization. The rate of growth in global LNG demand has fluctuated due to several factors, including global economic conditions and economic uncertainty, fluctuations in the price of natural gas and other sources of energy, growth in natural gas production from unconventional sources in regions such as North America and the highly complex and capital-intensive nature of new or expanded LNG projects, including liquefaction projects. Growth in LNG production and demand for LNG and LNG shipping could be negatively affected by several factors, including:
|•||increases in the cost of natural gas derived from LNG relative to the cost of natural gas generally;|
|•||increases in the production levels of low-cost natural gas in domestic natural gas consuming markets, which could further depress prices for natural gas in those markets and render LNG uneconomical;|
|•||increases in the production of natural gas in areas linked by pipelines to consuming areas, the extension of existing, or the development of new pipeline systems in markets we may serve, or the conversion of existing non-natural gas pipelines to natural gas pipelines in those markets;|
|•||decreases in the consumption of natural gas due to increases in its price, decreases in the price of alternative energy sources or other factors making consumption of natural gas less attractive;|
|•||any significant explosion, spill or other incident involving an LNG facility or carrier;|
|•||infrastructure constraints such as delays in the construction of liquefaction facilities, the inability of project owners or operators to obtain financing or governmental approvals to construct or operate LNG facilities, as well as community or political action group resistance to new LNG infrastructure due to concerns about the environment, safety and terrorism;|
|•||labor or political unrest or military conflicts affecting existing or proposed areas of LNG production or re-gasification;|
|•||decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG projects;|
|•||technological advances render existing LNG carriers obsolete or non-viable; or|
|•||negative global or regional economic or political conditions, particularly in LNG consuming regions, which could reduce energy consumption or its growth.|
Reduced demand for LNG or LNG shipping, or any reduction or limitation in LNG production capacity, could have a material adverse effect on our ability to secure future multi-year time charters for the LNG carriers, or for any new LNG carriers our subsidiaries may acquire, which could harm our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.
Demand for LNG shipping could be significantly affected by volatile natural gas prices and the overall demand for natural gas.
Natural gas prices are volatile and are affected by numerous factors beyond our control, including but not limited to the following:
the supply and cost of crude oil and petroleum products;
worldwide demand for natural gas;
the cost of exploration, development, production, transportation and distribution of natural gas;
expectations regarding future energy prices for both natural gas and other sources of energy;
the level of worldwide LNG production and exports;
government laws and regulations, including but not limited to environmental protection laws and regulations;
local and international political, economic and weather conditions;
political and military conflicts; and
the availability and cost of alternative energy sources, including alternate sources of natural gas in gas importing and consuming countries.
Any decline in oil prices, which can be very volatile, can depress natural gas prices and lead to a narrowing of the gap in pricing in different geographic regions, which can adversely affect the length of voyages in the spot LNG shipping market and the spot rates and medium-term charter rates for charters which commence in the near future. Any renewed decline in oil prices could adversely affect both the competitiveness of gas as a fuel for power generation and the market price of gas, to the extent that gas prices are benchmarked to the price of crude oil. Some production companies have announced delays or cancellations of certain previously announced LNG projects, which, unless offset by new projects coming on stream, could adversely affect demand for LNG charters over the next few years, while the amount of tonnage available for charter is expected to increase. A decline in the price of oil, which until recently had been at relatively low levels for an extended period of time, could make LNG a less attractive alternative for some uses and generally lead to reduced production of LNG. Reduced demand for LNG and LNG shipping could have an adverse effect on our future growth and would harm our business, results of operations and financial condition.
An oversupply of LNG carriers may lead to a reduction in the charter hire rates we are able to obtain when seeking charters in the future.
Driven in part by an increase in LNG production capacity and the expectation of further future capacity, the construction and delivery of new LNG carriers has been increasing. Any future expansion of the global LNG carrier fleet that cannot be absorbed by existing or future LNG projects may have a negative impact on charter rates, vessel utilization and vessel values. Such impact could be amplified if the expansion of LNG production capacity does not keep pace with fleet growth.
Hire rates for LNG carriers may fluctuate substantially and if rates are low when we are seeking a new charter, our revenues and cash flows may decline.
Until recently increasing, in part due to the anticipated impact of sanctions and other actions related to the Russian invasion of Ukraine on natural gas trading patterns, LNG carrier charter rates had generally been at relatively low levels for a number of years, having been negatively impacted by declines in the price of LNG, delays in the completion of liquefaction and regasification facilities around the world and a high order book. In addition, in recent years, as a result of more LNG being traded on a short-term basis and greater liquidity in the LNG shipping market, there has been a decrease in the duration of term charters for on-the-water vessels with such charters now generally being anywhere between six months and three years in duration. If LNG charter market conditions decline, we may have difficulty in securing new charters at attractive rates and durations for our LNG carriers when their current charters expire.
Our growth in shuttle tankers depends partly on continued growth in demand for offshore oil transportation, processing and storage services.
Our growth strategy includes expansion in the shuttle tanker sector. Growth in this sector depends on continued growth in world and regional demand for these offshore services, which could be negatively affected by a number of factors, such as:
|•||decreases in the actual or projected price of oil, which could lead to a reduction in or termination of production of oil at certain offshore fields our shuttle tankers will service or a reduction in exploration for or development of new offshore oil fields;|
|•||increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets;|
|•||decreases in the consumption of oil due to increases in its price relative to other energy sources, other factors making consumption of oil less attractive or energy conservation measures;|
|•||availability of new, alternative energy sources;|
|•||negative global or regional economic or political conditions, particularly in oil consuming regions, which could reduce energy consumption or its growth; and|
|•||fall in the price of oil leading to cutbacks in the offshore industry.|
Oil prices declined substantially in the second half of 2014, which resulted in oil companies announcing reductions in oil production and exploration activities, including in offshore fields, and have since been volatile, most recently increasing in late 2021 and, in part due to the conflict in Ukraine, 2022 and early 2023, after being at relatively low levels prior to that time. Oil prices may again decline, including due to reduced demand resulting from the consequences of the COVID-19 outbreak or any economic downturn resulting from the conflict in Ukraine which has initially increased oil prices. Continued volatility in oil prices may exist depending on the policies of oil production countries and cartels, as well as international economic conditions and global geopolitics.
Fuel prices may adversely affect our profits.
While we do not bear the cost of fuel (bunkers) under time and bareboat charters, fuel is the largest expense in our shipping operations when vessels are under spot charters. Increases in the price of fuel may, as a result, adversely affect our profitability. The marine fuel with low sulfur content required to comply with the 0.5% sulfur cap on marine fuels became effective on January 1, 2020, for vessels without scrubbers. Initially, low sulfur fuel was substantially more expensive compared to the existing widely used marine fuel, and after narrowing for a period of time, this price differential has again increased recently. If this price differential continues, it could increase our fuel costs for vessels employed in the spot market. In addition, the price of fuel is an important factor in negotiating charters with customers, and rising costs of fuel could make older and less fuel efficient vessels less competitive compared to the more fuel efficient newer vessels or compared with vessels which can utilize less expensive fuel. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments.
The shipping industry has inherent operational risks that may not be adequately covered by our insurance.
We believe that we maintain as much insurance on the vessels in the fleet, through insurance companies, including Argosy, a related party company, and P&I clubs, as is appropriate and consistent with industry practice. While we endeavor to be adequately insured against all known risks related to the operation of our subsidiaries’ vessels, there remains the possibility that a liability may not be adequately covered and we may not be able to obtain adequate insurance coverage for the fleet in the future. Certain insurers may also not pay particular claims. Even if our insurance coverage is adequate, we may not be able to obtain a replacement vessel in a timely manner in the event of a loss. Our insurance policies contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs or lower our revenue. In addition, some of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims make an excessive impact on association reserves. The Company’s P&I renewals as of February 20, 2023 saw an increase in costs of 6.62%. The International Group of P&I Clubs continues to provide its members with $1 billion of oil pollution liability coverage and more than $4 billion of coverage for other liabilities. P&I, Hull and Machinery and War Risk insurance premiums are accounted for as part of operating expenses in our consolidated financial statements; accordingly, any changes in insurance premiums directly impact our operating results.
Failure to protect our information systems against security breaches could adversely affect our business and financial results. Additionally, if these systems fail or become unavailable for any significant period, our business could be harmed.
The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. We rely on industry-accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent cybersecurity breaches, the access, capture or alteration of information by criminals, the exposure or exploitation of potential security vulnerabilities, the installation of malware or ransomware, acts of vandalism, computer viruses, misplaced data or data loss. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased operating costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and financial results, as well as our cash flows available for distribution to our shareholders.
Our degree of leverage and certain restrictions in our financing agreements impose constraints on us.
We incur substantial debt to finance the acquisition of our vessels. At December 31, 2022, our debt to capital ratio was 51.04% (debt / debt plus equity), with $1.4 billion in debt outstanding and $0.2 billion in other financial liabilities related to vessel financings. We are required to apply a substantial portion of our cash flow from operations to the payment of principal and interest on this debt. In 2022, a substantial portion of our cash flow derived from operations was dedicated to debt service, voluntary early debt prepayments and balloon payments to be refinanced. This limits the funds available for working capital, capital expenditures, dividends and other purposes. We may incur significant additional amounts of indebtedness in connection with financing our eight newbuilding tankers under construction or otherwise.
Our degree of leverage could have important consequences for us, including the following:
a substantial decrease in our net operating cash flows or an increase in our expenses could make it difficult for us to meet our debt service requirements and force us to modify our operations;
we may be more highly leveraged than our competitors, which may make it more difficult for us to expand our fleet; and
any significant amount of leverage exposes us to increased interest rate risk and makes us vulnerable to a downturn in our business or the economy in general.
In addition, our financing arrangements, which we secured by mortgages on our vessels, impose operating and financial restrictions on us that restrict our ability to:
incur additional indebtedness;
sell the capital of our subsidiaries or other assets;
engage in mergers and acquisitions;
make capital expenditures;
repurchase or redeem common or preferred shares; and
pay cash dividends.
We have a holding company structure which depends on dividends from our subsidiaries and interest income to pay our overhead expenses and otherwise fund expenditures. As a result, restrictions contained in our financing arrangements and those of our subsidiaries, including preferred shares issued by our subsidiary that owns four of the tankers in our fleet, on the payment of dividends may restrict our ability to fund our various activities.
We are exposed to volatility in interest rates, including LIBOR and the Secured Overnight Funding Rate (“SOFR”), and selectively enter into derivative contracts, which can result in higher than market interest rates and charges against our income.
Over the past 15 years we have selectively entered derivative contracts both for investment purposes and to hedge our overall interest expense and, more recently, our bunker expenses. Our board of directors monitors the status of our derivatives to assess whether such derivatives are within reasonable limits and reasonable in light of our particular investment strategy at the time we entered into the derivative contracts.
Loans advanced under our secured credit facilities are, generally, advanced at a floating rate based on the London interbank offered rate (“LIBOR”), which has increased significantly in 2022 and early 2023 after a long period of stability at historically low levels, and has been volatile in past years, which can affect the amount of interest payable on our debt, and which, in turn, could have an adverse effect on our earnings and cash flow. LIBOR rates were at historically low levels for an extended period of time and benchmark interest rates, including LIBOR and SOFR, may continue to increase from current high levels. Our financial condition could be materially adversely affected at any time that we have not entered into interest rate hedging arrangements to hedge our interest rate exposure and the interest rates applicable to our credit facilities and any other financing arrangements we may enter into in the future, including those we enter into to finance a portion of the amounts payable with respect to newbuildings, increase. Moreover, even if we have entered into interest rate swaps or other derivative instruments for purposes of managing our interest rate or bunker cost exposure, our hedging strategies may not be effective, and we may incur substantial loss.
We have a risk management policy and the Audit Committee oversees all our derivative transactions. It is our policy to monitor our exposure to business risk, and to manage the impact of changes in interest rates, foreign exchange rate movements and bunker prices on earnings and cash flows through derivatives. Derivative contracts are executed when management believes that the action is not likely to significantly increase overall risk. Entering swaps and derivatives transactions is inherently risky and presents various possibilities for incurring significant expenses. The derivatives strategies that we employ in the future may not be successful or effective, and we could, as a result, incur substantial additional interest costs. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a description of our current interest rate swap arrangements.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2023 may adversely affect the amounts payable under our credit facilities and our preferred shares.
The United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, has announced that it will phase-out three-month and six-month LIBOR by June 30, 2023. Various alternative reference rates are being considered in the financial community. The Secured Overnight Financing Rate (“SOFR”) has been proposed by the Alternative Reference Rate Committee, a committee convened by the U.S. Federal Reserve that includes major market participants and on which regulators participate, as an alternative rate to replace U.S. dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash in the overnight U.S. treasury repo market. At this time, we expect that SOFR will be the alternative reference rate that the Company’s LIBOR-based agreements will transition to as the 2023 LIBOR sunset date draws closer; however, it is impossible to predict whether SOFR or another reference rate will become an accepted alternative to LIBOR. The changes may adversely affect the trading market for LIBOR based agreements, including our credit facilities, interest rate swaps and preferred shares. We will need to negotiate the replacement benchmark rate on our credit facilities and interest rate swaps, and the use of an alternative rate or benchmark may negatively impact our interest rate expense. Any other contracts entered into in the ordinary course of business which currently refer to, use or include LIBOR may also be impacted.
Our credit facilities bear interest costs at a floating rate based on LIBOR and/or SOFR. Uncertainties surrounding changes to the basis of which LIBOR is calculated or the phase-out of LIBOR, which may cause a sudden and prolonged increase or decrease in LIBOR, could adversely affect our operating results and financial condition, as well as our cash flows, including cash available for dividends to our shareholders. While we use interest rate swaps to reduce our exposure to interest rate risk and to hedge a portion of our outstanding indebtedness, there is no assurance that our derivative contracts will provide adequate protection against adverse changes in interest rates or that our bank counter parties will be able to perform their obligations.
If a three-month LIBOR rate is not available, the terms of our various credit facilities, and to the extent applicable, our preferred shares will require alternative determination procedures which may result in an interest and/or a dividend rate differing from expectations and could materially affect the value of such instruments, and our ability to comply with covenants in our credit facilities.
Inflation could adversely affect our business and financial results.
Inflation has increased significantly on a worldwide basis since mid-2021, with many countries facing their highest inflation rates in decades and could adversely affect our business and financial results. Inflation has had a moderate impact on operating expenses, dry-docking expenses, with main engine overhauls and higher costs for routine repairs and maintenance increasing costs of maintenance, and corporate overhead in 2022. Interest rates have increased rapidly and substantially as central banks in developed countries raise interest rates in an effort to subdue inflation. The eventual implications of tighter monetary policy, and higher long-term interest rates, has had and may continue to drive a higher cost of capital for our business. See “Item 5. Operating and Financial Review and Prospects-Inflation and Interest Rates.”
Changing laws and evolving reporting requirements could have an adverse effect on our business.
Changing laws, regulations and standards relating to reporting requirements may create additional compliance requirements for us. The European Union Code of Conduct Group has assessed the tax policies of a range of countries including Bermuda, where we are incorporated. Bermuda was included in a list of jurisdictions which are required to address the European Union Code of Conduct Group's concerns in respect of ‘economic substance’. Bermuda, along with the British Virgin Islands, the Cayman Islands, Guernsey, Bailiwick of Jersey and the Isle of Man, has committed to comply with the European Union Code of Conduct Group's requirements on economic substance and has passed legislation in the form of the Economic Substance Act 2018 (the “ESA”). The ESA applies to every registered entity in Bermuda that engages in a relevant activity and requires that every such entity shall maintain a substantial economic presence in Bermuda. The Republic of the Marshall Islands, where a number of the Company’s subsidiaries are incorporated, has also adopted economic substance requirements. The Company believes in its in compliance with these requirements, including with respect to the filing of any requisite declarations.
Certain of our subsidiaries may from time to time be organized in other jurisdictions identified by the COCG based on global standards set by the Organization for Economic Co-operation and Development with the objective of preventing low-tax jurisdictions from attracting profits from certain activities. If we fail to comply with our obligations under the ESA or any similar law applicable to us in any other jurisdiction, we could be subject to financial penalties and spontaneous disclosure of information to foreign tax officials in related jurisdictions. Any of these actions could have a material adverse effect on our business, financial condition and results of operations.
Because some of our subsidiaries’ vessels’ expenses are incurred in foreign currencies, we are exposed to exchange rate risks.
The charterers of the vessels owned by our subsidiary companies pay in U.S. dollars. While most of the expenses incurred by our managers or by us on our subsidiaries’ behalf are paid in U.S. dollars, certain of these expenses are in other currencies, most notably the Euro. In 2022, Euro expenses accounted for approximately 34% of our total operating expenses, including dry dockings. Declines in the value of the U.S. dollar relative to the Euro, or the other currencies in which we incur expenses, would increase the U.S. dollar cost of paying these expenses and thus would adversely affect our results of operations.
We depend on our key personnel.
Our future success depends particularly on the continued service of Nikolas Tsakos, our president and chief executive officer and the sole shareholder of Tsakos Energy Management. The loss of Mr. Tsakos’s services or the services of any of our key personnel could have a material adverse effect on our business. We do not maintain key man life insurance on any of our executive officers.
The Tsakos Holdings Foundation and the Tsakos family can exert considerable control over us, which may limit your ability to influence our actions.
As of April 3, 2023, companies controlled by the Tsakos Holdings Foundation or affiliated with the Tsakos Group own approximately 26.1% of our outstanding common shares. The Tsakos Holdings Foundation is a Liechtenstein foundation whose beneficiaries include persons and entities affiliated with the Tsakos family, charitable institutions and other unaffiliated persons and entities. The council which controls the Tsakos Holdings Foundation consists of five members, two of whom are members of the Tsakos family. As long as the Tsakos Holdings Foundation and the Tsakos family beneficially own a significant percentage of our common shares, each will have the power to influence the election of the members of our board of directors and the vote on substantially all other matters, including significant corporate actions.
Risks Related to our Management Arrangements
We depend on Tsakos Energy Management and Tsakos Shipping to manage our business.
We do not have the employee infrastructure to manage our operations and have no physical assets. In common with industry practice, our subsidiaries own the vessels in the fleet and any contracts to construct newbuildings. We have engaged Tsakos Energy Management to perform all our executive and management functions. Tsakos Energy Management employees directly provide us with financial, accounting, and other back-office services, including acting as our liaison with the New York Stock Exchange and the Bermuda Monetary Authority. Tsakos Energy Management, in turn, oversees and subcontracts part of commercial management (including treasury, chartering and vessel purchase and sale functions) and day-to-day fleet technical management, such as vessel operations, repairs, supplies and crewing, to TST. As a result, we depend upon the continued services provided by Tsakos Energy Management and Tsakos Energy Management depends on the continued services provided by Tsakos Shipping
We derive significant benefits from our relationship with Tsakos Energy Management and its affiliated companies, including purchasing discounts to which we otherwise would not have access. We would be materially adversely affected if any of Tsakos Energy Management or Tsakos Shipping becomes unable or unwilling to continue providing services for our benefit at the level of quality, they have provided such services in the past and at comparable costs as they have charged in the past. TST only recently assumed technical management responsibilities for our fleet from Tsakos Columbia Management (“TCM”), and there can be no assurance there will not be any adverse change in the quality or cost of such technical management services provided to us. If we were required to employ a ship management company other than Tsakos Energy Management or Tsakos Shipping, we cannot offer any assurances that the terms of such management agreements would be on terms as favorable to the Company in the long term.
Tsakos Energy Management and Tsakos Shipping are privately held companies and there is little or no publicly available information about them.
The ability of Tsakos Energy Management and Tsakos Shipping to continue providing services for our and our subsidiaries’ benefit will depend in part on their own financial strength. Circumstances beyond our control could impair their financial strength and because each of these companies is privately held, it is unlikely that information about their financial strength would become public. Any such problems affecting these organizations could have a material adverse effect on us.
Tsakos Energy Management has the right to terminate its management agreement with us and Tsakos Shipping has the right to terminate their respective contracts with Tsakos Energy Management.
Tsakos Energy Management may terminate its management agreement with us at any time upon one year’s notice. In addition, if even one director were to be elected to our board without having been recommended by our existing board, Tsakos Energy Management would have the right to terminate the management agreement on 10 days’ notice. If Tsakos Energy Management terminates the agreement for this reason, we would be obligated to pay Tsakos Energy Management the present discounted value of all payments that would have otherwise become due under the management agreement until June 30 in the tenth year following the date of the termination plus the average of the incentive awards previously paid to Tsakos Energy Management multiplied by 10. A termination as of December 31, 2022, would have resulted in a payment of approximately $166.5 million. Tsakos Energy Management’s contracts with TST may be terminated by either party upon six months’ notice or would terminate automatically upon termination of our management agreement with Tsakos Energy Management.
Our ability to pursue legal remedies against Tsakos Energy Management and Tsakos Shipping is very limited.
In the event Tsakos Energy Management breaches its management agreement with us, we or our subsidiaries could bring a lawsuit against it. However, because neither we nor they are ourselves party to a contract with Tsakos Shipping, it may be difficult to sue Tsakos Shipping for breach of their obligations under their contracts with Tsakos Energy Management, and Tsakos Energy Management may have no incentive to sue Tsakos Shipping. Tsakos Energy Management is a company with no substantial assets and no income other than the income it derives under the management agreement with us. Therefore, it is unlikely that we or our subsidiaries would be able to obtain any meaningful recovery if we or they were to sue Tsakos Energy Management or Tsakos Shipping on contractual grounds.
Tsakos Shipping provides chartering services to other tankers and could experience conflicts of interests in performing obligations owed to us and the operators of other tankers.
In addition to the vessels that it manages for our fleet, TST technically manages a fleet of privately owned vessels and is available on occasion to provide similar management services to third-party clients. These vessels are operated by the same group of TST employees that manage our vessels, and we are advised that its employees manage these vessels on an “ownership neutral” basis; that is, without regard to who owns them. It is not impossible that Tsakos Shipping, which provides chartering services for all TEN’s vessels, might allocate charter or spot opportunities to other managed vessels when our subsidiaries’ vessels are unemployed.
Clients of Tsakos Shipping have acquired and may acquire additional vessels that may compete with our fleet.
Tsakos Shipping and we have an arrangement whereby it affords us a right of first refusal on any opportunity to purchase a tanker which is 10 years of age or younger or contract to construct a tanker that is referred to or developed by Tsakos Shipping. Were we to decline any opportunity offered to us, or if we do not have the resources or desire to accept it, other clients of Tsakos Shipping might decide to accept the opportunity. In this context, Tsakos Shipping clients have in the past acquired modern tankers and have ordered the construction of vessels. They may acquire or order tankers in the future, which, if we decline to buy from them, could be entered into charters in competition with our vessels. These charters and future charters of tankers by Tsakos Shipping could result in conflicts of interest between their own interests and their obligations to us.
Our chief executive officer has affiliations with Tsakos Energy Management and Tsakos Shipping which could create conflicts of interest.
Nikolas Tsakos is the president, chief executive officer and a director of our company and the director and sole shareholder of Tsakos Energy Management. Nikolas Tsakos is also the son of the founder of Tsakos Shipping. These responsibilities and relationships could create conflicts of interest that could result in losing revenue or business opportunities or increase our expenses.
Our commercial arrangements with Tsakos Energy Management and Argosy may not always remain on a competitive basis.
We pay Tsakos Energy Management a management fee for its services pursuant to our management agreement. We also place our hull and machinery insurance, increased value insurance and loss of hire insurance through Argosy Insurance Company, Guernsey, a captive insurance company affiliated with Tsakos interests. We believe that the management fees that we pay Tsakos Energy Management compare favorably with management compensation and related costs reported by other publicly traded shipping companies and that our arrangements with Argosy are structured at market rates. Our board reviews publicly available data periodically in order to confirm this. However, we cannot assure you that the fees charged to us are or will continue to be as favorable to us as those we could negotiate with third parties and our board could determine to continue transacting business with Tsakos Energy Management and Argosy even if less expensive alternatives were available from third parties.
We depend upon Hyundai Ocean Services and Bernhard Schulte Shipmanagement to manage our subsidiaries’ LNG carriers.
Tsakos Energy Management has subcontracted all technical management of our LNG operations to Hyundai Ocean Services Co., Ltd (“HOS”) and Bernhard Schulte Shipmanagement Ltd (“BSM”) for a fee. Neither Tsakos Energy Management nor TST has the dedicated personnel for running LNG operations nor can we guarantee that they will employ an adequate number of employees to conduct LNG operations in the future. As such, we are currently dependent on the reliability and effectiveness of third-party managers for whom we cannot guarantee that their employees, both onshore and at-sea are sufficient in number or capability for their assigned role. We also cannot assure you that we will be able to continue to receive such services from HOS and BSM on a long-term basis on acceptable terms or at all.
Risks Related To Our Common and Preferred Shares
Future sales of our common shares could cause the market price of our common shares to decline.
Sales of a substantial number of our common shares in the public market, or the perception that these sales could occur, may depress the market price for our common shares. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future. We may issue additional common shares in the future, and our shareholders may elect to sell large numbers of shares held by them from time to time.
The market price of our common shares and preferred shares may be unpredictable and volatile.
The market price of our common shares and Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares may fluctuate due to factors such as actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry, mergers and strategic alliances in the tanker industry, market conditions in the tanker industry, changes in government regulation, shortfalls in our operating results from levels forecast by securities analysts, announcements concerning us or our competitors, our sales of our common shares or of additional preferred shares, changes in prevailing interest rates and the general state of the securities market. The tanker industry has been highly unpredictable and volatile. The market for common stock and preferred stock in this industry may be equally volatile. Therefore, we cannot assure you that you will be able to sell any of our common shares and preferred shares you may have purchased, or will purchase in the future, at a price greater than or equal to the original purchase price.
If the market price of our common shares again falls below $5.00 per share, under stock exchange rules, our shareholders will not be able to use such shares as collateral for borrowing in margin accounts. This inability to use common shares as collateral may depress demand and certain institutional investors are restricted from investing in or holding shares priced below $5.00, which could lead to sales of such shares creating further downward pressure on and increased volatility in the market price of our common shares.
We may not be able to pay cash dividends on our common shares or preferred shares as intended if market conditions change.
During 2022, we paid dividends on our common shares totaling $0.25 per common share, or $7.3 million. In addition, during 2022, the Company paid dividends on preferred shares totaling $36.4 million. Subject to the limitations discussed below, we currently intend to continue to pay cash dividends on our common shares and preferred shares. However, there can be no assurance that we will pay dividends or as to the amount of any dividend. The payment and the amount will be subject to the discretion of our board of directors and will depend, among other things, on restrictions contained in the Companies Act of 1981 of Bermuda, as amended, on our available cash balances, anticipated cash needs, our results of operations, our financial condition, and any loan agreement restrictions binding us or our subsidiaries, including a prohibition of dividend distribution should there be an event of default in existence relating to any loan, as well as other relevant factors. In addition, dividends on our common shares are subject to the priority of our dividend obligations relating to our Series D, Series E and Series F Preferred Shares. We may have insufficient cash to pay dividends on or redeem our preferred shares or pay dividends on our common shares. Depending on our operating performance for a particular year, this could result in no dividend at all despite the existence of net income, or a dividend that represents a lower percentage of our net income.
Because we are a holding company with no material assets other than the stock of our subsidiaries, our ability to pay dividends will depend on the earnings and cash flow of our subsidiaries and their ability to pay us dividends. In addition, the financing arrangements for indebtedness we incur in connection with our newbuilding program may further restrict our ability to pay dividends. In the event of any insolvency, bankruptcy or similar proceedings of a subsidiary, creditors of, and holders of preferred shares issued by, such subsidiary would generally be entitled to priority over us with respect to assets of the affected subsidiary. Investors in our common shares and preferred shares may be adversely affected if we are unable to or do not pay dividends as intended.
Market interest rates may adversely affect the value of our Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares.
One of the factors that influences the price of our Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares is the dividend yield on these preferred shares (as a percentage of the price thereof) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates and have recently been increasing, may lead to lower prices for our shares when valued using their dividend yields. Higher interest rates would likely increase our borrowing costs and potentially decrease funds available for dividends. Accordingly, higher interest rates could cause the market prices of our preferred shares to decrease.
Our Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares represent perpetual equity interests and holders of such shares will have no right to receive any greater payment than the liquidation preference regardless of the circumstances.
The preferred shares represent perpetual equity interests in us and, unlike our indebtedness, will not give rise to a claim for payment of a principal amount at a particular date. As a result, holders of the preferred shares may be required to bear the financial risks of an investment in the preferred shares for an indefinite period of time.
The payment due to a holder of our Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares upon a liquidation is fixed at the redemption preference of $25.00 per share plus accumulated and unpaid dividends to the date of liquidation. If, in the case of our liquidation, there are remaining assets to be distributed after payment of this amount, you will have no right to receive or to participate in these amounts. Furthermore, if the market price for your preferred stock is greater than the liquidation preference, you will have no right to receive the market price from us upon our liquidation.
Our Preferred Shares are subordinated to our debt obligations and pari passu with each other, and your interests could be diluted by the issuance of additional preferred shares, including additional Series D, Series E and Series F Preferred Shares, and by other transactions.
Our preferred shares are subordinated to all of our existing and future indebtedness. As of December 31, 2022, we had outstanding indebtedness, including our lease obligations and other financial liabilities, of approximately $1.7 billion. Our existing indebtedness restricts, and our future indebtedness may include restrictions on, our ability to pay dividends to preferred stockholders. Our charter currently authorizes the issuance of up to 25 million preferred shares in one or more classes or series. Of these preferred shares, 9,989,845 preferred shares remain available for issuance as of April 3, 2023. The issuance of additional preferred shares on a parity with or senior to our outstanding preferred shares would dilute the interests of the holders of our exiting preferred shares and any issuance of preferred shares senior to or on a parity with our existing preferred shares or of additional indebtedness could affect our ability to pay dividends on, redeem or pay the liquidation preference on our preferred shares. No provisions relating to our preferred shares protect the holders of our Series D, Series E and Series F Preferred Shares in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all our assets or business, which might adversely affect the holders of our Series D, Series E and Series F Preferred Shares.
Holders of our Preferred Shares have extremely limited voting rights.
The voting rights of holders of our preferred shares are extremely limited. Our common shares are the only class or series of our shares carrying full voting rights. The voting rights of holders of our Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares are limited to the ability, subject to certain exceptions, to elect, voting together as a class with all other classes or series of parity securities upon which like voting rights have been conferred and are exercisable, one director if dividends for six quarterly dividend periods (whether or not consecutive) payable thereon are in arrears and certain other limited protective voting rights described in “Item 10. Additional Information—Description of Share Capital—Preferred Shares.”
Provisions in our Bye-laws and our management agreement with Tsakos Energy Management would make it difficult for a third party to acquire us, even if such a transaction is beneficial to our shareholders.
Our Bye-laws provide for a staggered board of directors, blank check preferred stock, super majority voting requirements and other anti-takeover provisions, including restrictions on business combinations with interested persons and limitations on the voting rights of shareholders who acquire more than 15% of our common shares. In addition, Tsakos Energy Management would have the right to terminate our management agreement and seek liquidated damages if a board member were elected without having been approved by the current board. These provisions could deter a third party from tendering for the purchase of some or all our shares. These provisions may have the effect of delaying or preventing changes of control of the ownership and management of our company.
Because we are a foreign corporation, you may not have the same rights as a shareholder in a U.S. corporation.
We are a Bermuda company. Our Memorandum of Association and Bye-laws and the Companies Act govern our affairs. While many provisions of the Companies Act resemble provisions of the corporation laws of several states in the United States, Bermuda law may not as clearly establish your rights and the fiduciary responsibilities of our directors as do statutes and judicial precedent in some U.S. jurisdictions. In addition, apart from two non-executive directors, our directors and officers are not resident in the United States and all or substantially all of our assets are located outside of the United States. As a result, investors may have more difficulty in protecting their interests and enforcing judgments in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.
In addition, you should not assume that courts in the country in which we are incorporated or where our assets are located would enforce judgments of U.S. courts obtained in actions against us based upon the civil liability provisions of applicable U.S. federal and state securities laws or would enforce, in original actions, liabilities against us based on those laws.
We are a “foreign private issuer” under NYSE rules, and as such we are entitled to exemption from certain NYSE corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.
We are a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under the securities laws of the United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting requirements. Under the NYSE rules, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of the NYSE permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements of the NYSE, including (i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that the nominating/corporate governance committees be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, (iii) the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, and (iv) the requirement of an annual performance evaluation of the nominating/corporate governance and compensation committees.
Nonetheless, a majority of our directors are independent, all of the members of our compensation, nominating and corporate governance committee are independent directors, and all of our board committees have written charters addressing their respective purposes and responsibilities. In accordance with Bermuda law, we may elect to issue authorized shares with Board approval, and not obtain shareholder approval in cases that a domestic U.S. public company would be required to do so.
In addition to the following risk factors, you should read “Item 10. Additional Information—Tax Considerations” for a more complete discussion of the material Bermuda and U.S. Federal income tax considerations relating to us and the ownership and disposition of our common shares and preferred shares.
If we were to be subject to corporate income tax in jurisdictions in which we operate, our financial results would be adversely affected.
Under current Bermuda law, there is no income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax, estate or inheritance tax payable by us or our shareholders, other than shareholders ordinarily resident in Bermuda, if any. We have received from the Minister of Finance under The Exempted Undertaking Tax Protection Act 1966, as amended of Bermuda, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to us or to any of our operations or shares, debentures or other obligations, until March 23, 2035. We believe that we should not be subject to tax under the laws of various countries, other than the United States, in which our subsidiaries’ vessels conduct activities or in which our subsidiaries’ customers are located. However, our belief is based on our understanding of the tax laws of those countries, and our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law or interpretation. We cannot determine in advance the extent to which certain jurisdictions may require us to pay corporate income tax or to make payments in lieu of such tax. In addition, payments due to us from our subsidiaries’ customers may be subject to tax claims. As a result of the continuing economic recovery in Greece, our operations in Greece may be subjected to new regulations that may require us to incur new or additional compliance or other administrative costs, which may include requirements that we pay to the Greek government new taxes or other fees. In addition, China has enacted a new tax for non-resident international transportation enterprises engaged in the provision of services of passengers or cargo, among other items, in and out of China using their own, chartered or leased vessels, including any stevedore, warehousing and other services connected with the transportation. The new regulation broadens the range of international transportation companies which may find themselves liable for Chinese enterprise income tax on profits generated from international transportation services passing through Chinese ports.
If we or our subsidiaries are not entitled to exemption under Section 883 of the United States Internal Revenue Code of 1986, as amended, for any taxable year, we or our subsidiaries could be subject for those years up to a 4% United States federal income tax on our gross U.S.-source shipping revenue, without allowance for deductions, under Section 887 of the Internal Revenue Code. The imposition of such tax could have a negative effect on our business and would result in decreased earnings and cash flows available for distribution to our shareholders.
See “Item 10. Additional Information—Tax Considerations—United States federal income tax considerations” for additional information about the requirements of this exemption.
If we were treated as a passive foreign investment company, a U.S. investor in our shares would be subject to disadvantageous rules under the U.S. tax laws.
If we were treated as a passive foreign investment company (a “PFIC”) in any year, our U.S. shareholders would be subject to unfavorable U.S. federal income tax treatment. We do not believe that we were a PFIC in 2022 or that we will be a PFIC with respect to the current or any future year. However, PFIC classification is a factual determination made annually and we could become a PFIC if the portion of our income derived from bareboat charters or other passive sources were to increase substantially or if the portion of our assets that produce or are held for the production of passive income were to increase substantially. Moreover, the IRS may disagree with our position that time and voyage charters do not give rise to passive income for purposes of the PFIC rules. Accordingly, we can provide no assurance that we will not be treated as a PFIC for 2022 or for any future year. Please see “Item 10. Additional Information— Tax Considerations—United States federal income tax considerations—Passive Foreign Investment Company Considerations” herein for a description of the PFIC rules.
Distributions on shares of non-U.S. companies that are treated as dividends for U.S. federal income tax purposes and are received by individuals generally will be eligible for taxation at capital gain rates if the shares with respect to which the dividends are paid are readily tradable on an established securities market in the United States. This treatment will not be available to dividends we pay, however, if we qualify as a PFIC for the taxable year of the dividend or the preceding taxable year, or to the extent that (i) the shareholder does not satisfy a holding period requirement that generally requires that the shareholder hold the shares on which the dividend is paid for more than 60 days during the 121-day period that begins 60 days before the date on which the shares become ex-dividend with respect to such dividend, (ii) the shareholder is under an obligation to make related payments with respect to substantially similar or related property or (iii) such dividend is taken into account as investment income under Section 163(d)(4)(B) of the Internal Revenue Code. We do not believe that we qualified as a PFIC for our last taxable year and, as described above, we do not expect to qualify as a PFIC for our current or future taxable years.
Item 4. Information on the Company
Tsakos Energy Navigation Limited is a leading provider of international seaborne crude oil and petroleum product transportation services. In 2007, it also started to transport liquefied natural gas. It was incorporated in 1993 as an exempted company under the laws of Bermuda under the name Maritime Investment Fund Limited and in 1996 was renamed MIF Limited. Our common shares were listed in 1993 on the Oslo Stock Exchange (OSE) and the Bermuda Stock Exchange, although we de-listed from the OSE in March 2005 due to limited trading. The Company’s shares are no longer actively traded on the Bermuda exchange. In July 2001, the Company’s name was changed to Tsakos Energy Navigation Limited to enhance our brand recognition in the tanker industry, particularly among charterers. In March 2002, we completed an initial public offering of our common shares in the United States and our common shares began trading on the New York Stock Exchange under the ticker symbol “TNP.” Since incorporation, the Company has owned and operated 101 vessels and has sold 43 vessels (of which eight had been chartered back and five of these eventually repurchased at the end of their charters; three of which have since been sold again).
Our principal offices are located at 367 Syngrou Avenue, 175 64 P. Faliro, Athens, Greece. Our telephone number at this address is +30 210 9407710. Our website address is http://www.tenn.gr.
For additional information on the Company, see “Item 5. Operating and Financial Review and Prospects.”
As of April 3, 2023, we operated a fleet of 51 modern crude oil and petroleum product tankers (including five vessels chartered-in) that provide world-wide marine transportation services for national, major and other independent oil companies and refiners under long, medium and short-term charters. Our fleet also includes three LNG carriers (including one chartered-in vessel) and four suezmax shuttle tankers with advanced dynamic positioning technology (DP2), bringing our total operating fleet to 58 vessels representing approximately 7.2 million dwt.
We believe that we have established a reputation as a safe, high-quality, cost-efficient operator of modern and well-maintained tankers. We also believe that these attributes, together with our strategy of proactively working towards meeting our customers’ chartering needs, has contributed to our ability to attract world-class energy producers as customers and to our success in obtaining charter renewals generating strong fleet utilization. Our fleet is managed by Tsakos Energy Management, a company owned by our chief executive officer. Tsakos Energy Management provides us with strategic advisory, financial, accounting, and administrative services, while subcontracting the commercial and technical management of our business to Tsakos Shipping.
In its capacity as commercial manager, Tsakos Shipping provides various services for our vessels, including charterer relations, obtaining insurance and vessel sale and purchase, supervising newbuilding construction and vessel financing. Tsakos Energy Management subcontracts the technical and operational management of our fleet to Tsakos Shipping and Trading S.A. (TST). TST now manages the technical and operational activities of all of our operating vessels apart from the LNG carriers Neo Energy, Maria Energy, Tenergy, the VLCCs Ulysses and Hercules I, the suezmax tanker Eurochampion 2004, and the aframax tankers Maria Princess, Sapporo Princess and Ise Princess which are technically managed by non-affiliated ship managers. TST is based in Athens, Greece. TST manages our day-to-day vessel operations, including provision of supplies, maintenance and repair, and crewing. Members of the Tsakos family are involved in the decision-making processes of Tsakos Energy Management and TST.
In February 2023, Tsakos Shipping and Trading S.A. assumed all technical management responsibilities for all vessels under TCM structure. The changeover was seamless with no delays for TEN vessels and the Company’s clients.
As of April 3, 2023, our operational fleet consisted of the following 58 vessels:
|Number of Vessels||Vessel Type|
Sixteen of the operating vessels are of ice-class specification. This fleet diversity, which includes several sister ships, provides us with the capability to be one of the more versatile operators in the market. The current operating fleet totals 7.2 million dwt, all of which are double-hulled. As of April 3, 2023, the average age of the tankers in our current operating fleet was 10.3 years, compared with the industry average of 12.1 years.
We believe the following factors distinguish us from other public tanker companies:
|•||Modern, high-quality, fleet. We own a fleet of modern, versatile, high-quality tankers that are designed for enhanced safety and low operating costs. Since inception, we have committed to investments of approximately $6.1 billion, including investments of approximately $5.1 billion in newbuilding constructions, in order to maintain and improve the quality of our fleet. We believe that increasingly stringent environmental regulations and heightened concerns about liability for oil pollution have contributed to a significant demand for our vessels by leading oil companies, oil traders and major government oil entities. TST, the technical manager of our fleet, has ISO 14001 environmental certification and ISO 9001 quality certification, ISO 45001 occupational health & safety certification and ISO 50001 energy management system certification, based in part upon audits conducted on our vessels and on technical manager’s management system.|
|•||Diversified fleet. Our diversified fleet, which includes VLCC, suezmax, aframax, panamax, handysize tankers, LNG carriers and DP2 shuttle tankers, allows us to better serve our customers’ international petroleum product and crude oil and LNG transportation needs. Sixteen of our tankers are ice-class, so may access ice-bound ports depending on accumulation of brash ice. We entered the LNG market with the delivery of our first LNG carrier in 2007 and took delivery of a second LNG carrier in 2016 and the third LNG carrier in 2022. We entered the shuttle tanker market with two DP2 suezmax shuttle tankers Rio 2016 and Brasil 2014 delivered in March and April 2013, respectively, each of which immediately entered a 15-year time charter with Petrobras. A third DP2 suezmax shuttle tanker, Lisboa, was delivered on May 4, 2017 for charter to a European state-owned oil major, and a fourth DP2 suezmax shuttle tanker, Porto, was delivered in July 7, 2022 for charter to the same European state-owned oil major.|
|•||Stability throughout industry cycles. Historically, we have employed a high percentage of our fleet on long and medium-term employment with fixed rates or minimum rates plus profit sharing agreements. We believe this approach has resulted in high utilization rates for our vessels, reflecting our industrial shipping model. At the same time, we maintain flexibility in our chartering policy to allow us to take advantage of favorable rate trends through spot market employment and contract of affreightment charters with periodic adjustments. Over the last five years, our overall average fleet utilization rate was 94.8%.|
|•||High-Quality, sophisticated clientele. For 50 years, Tsakos entities have maintained relationships with and achieved acceptance by national, and other independent oil companies and refiners. Several of the world’s major oil companies and traders, including Equinor, BP, Exxonmobil, Flopec, Total, Petrobras, Chevron, Shell, Petrogal, Trafigura and Vitol are among the regular customers of Tsakos Energy Navigation.|
|•||Developing LNG and offshore shuttle tanker platform. We believe we are well positioned to capitalize on demand for LNG sea transport as well as offshore shuttle tanker transport because of our extensive relationships with existing customers, strong safety track record, superior technical management capabilities and financial flexibility. We already operate three LNG carriers and four DP2 suezmax shuttle tankers, in these high-end markets.|
|•||Significant leverage from our relationship with TST. We believe the expertise, scale and scope of TST, are key components in maintaining low operating costs, efficiency, quality and safety. We leverage Tsakos Shipping’s reputation and longstanding relationships with leading charterers to foster charter renewals.|
As of April 3, 2023, our fleet consisted of the following 58 vessels:
(all double hull)
|1. Hercules I (3)||2017||300,000||2017||time charter||November 2024||Crude|
|2. Ulysses||2016||300,000||2016||time charter||November 2024||Crude|
|3. Dias I (3)||2020||300,000||2022||time charter||November 2025||Crude|
|1. Apollo Voyager (7)||2020||157,877||2020||bareboat charter||September 2025||Crude|
|2. Artemis Voyager (7)||2020||157,877||2020||bareboat charter||November 2025||Crude|
|6. Spyros K (4)||2011||157,648||2011||spot||—||Crude|
|7. Dimitris P (4)||2011||157,740||2011||time charter||August 2023||Crude|
|9. Arctic (9) (3)||2007||163,216||2007||time charter||November 2023||ice-class 1A||Crude|
|10. Antarctic (9)||2007||163,216||2007||spot||—||ice-class 1A||Crude|
|11. Archangel (9)||2006||163,216||2006||spot||—||ice-class 1A||Crude|
|12. Alaska (9)||2006||163,250||2006||spot||—||ice-class 1A||Crude|
|13. Eurochampion 2004||2005||164,608||2005||spot||—||ice-class 1C||Crude|
|14. Euronike||2005||164,565||2005||spot||—||ice-class 1C||Crude|
|SUEZMAX DP2 SHUTTLE|
|1. Lisboa (6)||2017||157,000||2017||time charter||May 2025||Crude/Products|
|2. Rio 2016||2013||155,708||2013||time charter||October 2028||Crude/Products|
|3. Brasil 2014||2013||155,721||2013||time charter||November 2028||Crude/Products|
|4. Porto||2022||154,500||2022||time charter||October 2027||Crude/Products|
|1. Caribbean Voyager (7)||2020||115,000||2020||bareboat
|2. Mediterranean Voyager (7)||2019||115,000||2019||bareboat
|3. Bergen TS (7)||2017||112,108||2017||time charter||October 2024||ice-class 1B||Crude|
|4. Stavanger TS (7)||2017||113,004||2017||time charter||July 2024||ice-class 1B||Crude|
|5. Oslo TS (7)||2017||112,949||2017||time charter||November 2024||ice-class 1B||Crude|
|6. Marathon TS (7)||2017||113,651||2017||time charter||February 2024||ice-class 1B||Crude|
|7. Sola TS (7)||2017||112,939||2017||time charter||May 2024||Crude|
|8. Elias Tsakos (8)||2016||113,737||2016||time charter||June 2025||Crude|
|9. Thomas Zafira (8)||2016||113,691||2016||time charter||August 2025||Crude|
|10. Leontios H (7)||2016||113,611||2016||time charter||October 2023||Crude|
|11. Parthenon TS (7)||2016||113,554||2016||time charter||November 2023||Crude|
|12. Sapporo Princess||2010||105,354||2010||spot||—||DNA||Crude|
|13. Uraga Princess||2010||105,344||2010||time charter||January 2024||DNA||Crude|
|14. Ise Princess||2009||105,361||2009||spot (coa)||—||DNA||Crude|
|15. Asahi Princess||2009||105,372||2009||time charter||May 2024||DNA||Crude|
|16. Maria Princess||2008||105,346||2008||time charter||August 2023||DNA||Crude|
|17. Nippon Princess (3)||2008||105,392||2008||time charter||January 2024||DNA||Crude|
|18. Izumo Princess||2007||105,374||2007||time charter||April 2023||DNA||Crude|
|19. Sakura Princess (9) (3)||2007||105,365||2007||time charter||August 2023||DNA||Crude|
|20. Promitheas (3)||2006||117,055||2006||time charter||July 2023||ice-class 1A||Crude/Products|
|21. Propontis (3)||2006||117,055||2006||time-charter||November 2023||ice-class 1A||Crude|
|1. Sunray (3) (2)||2016||74,039||2016||time charter||March 2024||Crude/Products|
|2. Sunrise (3) (2)||2016||74,043||2016||time charter||May 2024||Crude/Products|
|3. World Harmony (4)||2009||74,200||2010||time charter||April 2025||Crude/Products|
|4. Chantal (4)||2009||74,329||2010||time charter||May 2025||Crude/Products|
|5. Selini (4)(5)||2009||74,296||2010||time charter||January 2024||Crude/Products|
|6. Salamina (4)(5)||2009||74,251||2010||time charter||February 2024||Crude/Products|
|7. Selecao(4)||2008||74,296||2008||time charter||February 2025||Crude/Products|
|8. Socrates (4)||2008||74,327||2008||time charter||March 2025||Crude/Products|
|9. Andes||2003||68,439||2003||time charter||October 2023||Crude/Products|
|1. Andromeda||2007||37,061||2007||spot||—||ice-class 1A||Products|
|2. Aegeas||2007||37,061||2007||spot||—||ice-class 1A||Products|
|3. Byzantion (5)||2007||37,275||2007||time charter||April 2024||ice-class 1B||Products|
|4. Bosporos (5)||2007||37,275||2007||time charter||April 2024||ice-class 1B||Products|
|1. Tenergy (9) (3)||2022||93,649||2022||time charter||January 2027||Membrane (174,000 cbm)||LNG|
|2. Maria Energy (2) (6)||2016||93,301||2016||time charter||May 2024||Membrane (161,870 cbm)||LNG|
|3. Neo Energy||2007||85,602||2007||time charter||July 2023||Membrane (150,000 cbm)||LNG|
|(1)||Ice-class classifications are based on ship resistance in brash ice channels with a minimum speed of 5 knots for the following conditions ice-1A: 1m brash ice, ice-1B: 0.8m brash ice, ice-1C: 0.6m brash ice. DNA- design new aframax with shorter length overall allowing greater flexibility in the Caribbean and the United States.|
|(2)||The charterer has the option to extend the term of the charter for up to two additional years.|
|(3)||The charter rate for these vessels is based on a fixed minimum rate for the Company plus different levels of profit sharing above minimum rate, determined and settled on a calendar month basis.|
|(4)||These vessels are chartered under fixed and variable hire rates. The variable portion of hire is recognized to the extent the amount becomes fixed and determinable at the reporting date. Determination is every six months.|
|(5)||49% of the holding company of these vessels is held by a third party.|
|(6)||In March 2023, vessel entered into a new employment starting April 2026 for one year.|
|(7)||The charterer has the option to extend the term of the charter for up to five additional years.|
|(8)||The charterer has the option to extend the term of the charter for up to three additional years.|
|(9)||Vessels are chartered-in on a bare-boat basis by a subsidiary company. Vessel’s Archangel, Alaska and Sakura Princess until 2025 and Arctic and Antarctic until 2026 and Tenergy until 2027.|
Our vessels under construction, as of April 3, 2023, consisted of the following:
|Shipyard||Deadweight Tons||Purchase Price(1)|
of U.S. dollars)
|1. HN 5081||Q3 2023||Daehan Shipbuilding Co||115,000||74.66|
|2. HN 5082||Q4 2023||Daehan Shipbuilding Co||115,000||74.65|
|3. HN 5083||Q1 2024||Daehan Shipbuilding Co||115,000||74.64|
|4. HN 5084||Q1 2024||Daehan Shipbuilding Co||115,000||74.64|
|Suezmax DP2 Shuttle Tankers|
|5. HN 2654||Q2 2025||Samsung Heavy Indutsries Co||154,350||129.33|
|6. HN 2655||Q2 2025||Samsung Heavy Indutsries Co||154,350||129.33|
|7. HN 3431||Q2 2025||Hyundai Heavy Industries Co||157,000||85.50|
|8. HN 3432||Q4 2025||Hyundai Heavy Industries Co||157,000||85.50|
|(1)||Including any extra costs agreed as of April 3, 2023|
We have arranged charters starting from the delivery of our DP2 suezmax shuttle tankers under construction, for period of five to eleven years, including charterer options for extension and from the deliveries of our four new dual fuel LNG powered aframaxes, for a period of five to ten years, including charterer options for extension with minimum days. The newbuildings have a double hull design compliant with all classification requirements and prevailing environmental laws and regulations. Tsakos Shipping works closely with the shipyards in the design of the newbuildings and provides supervisory personnel present during the construction.
Depending on management’s view of the state of the current spot market and future prospects for the market, we aim to optimize the financial performance of our fleet by deploying at least half of our fleet on either time charters or period employment with variable rates, as we take proactive steps to meet any potential negative impact of the expanding world fleet on freight rates. As at April 3, 2023, the percentage of the fleet that is in employment at fixed rates (including time charters with a profit share component) was 69%, which is higher compared to prior periods. If the prospects for the spot market appear to management to generate sustainable positive returns, management may decide to deploy immediately to the spot market vessels coming off time-charter. We believe that our fleet deployment strategy and flexibility provide us with the ability to benefit from increases in tanker rates while at the same time maintaining a measure of stability through cycles in the industry. The following table details the respective employment basis of our fleet during 2022, 2021 and 2020 as a percentage of operating days.
|Year Ended December 31,|
|Time Charter—fixed rate||37%||41%||40%|
|Time Charter—variable rate and pool||36%||19%||25%|
|Period Employment at variable rates||2%||2%||1%|
|Total Net Earnings Days||22,640||22,090||22,394|
Tankers operating on time charters may be chartered for several months or years whereas tankers operating in the spot market typically are chartered for a single voyage that may last up to several weeks. Vessels on period employment at variable rates related to the market are operating under contract of affreightment for a specific charterer. Tankers operating in the spot market may generate increased profit margins during improvements in tanker rates, while tankers operating on time charters generally provide more predictable cash flows. Accordingly, we actively monitor macroeconomic trends and governmental rules and regulations that may affect tanker rates in order to optimize the deployment of our fleet. As of April 3, 2023, our fleet has 14 tankers operating on spot voyages.
We have also secured charters from the delivery of six of our newbuildings, our DP2 suezmax shuttle tankers and our four dual fuel LNG powered aframax tankers for periods from five to eleven years, including charterer options for extension. We have not yet arranged employment for our suezmax tankers under construction which are scheduled for delivery to us in the second and fourth quarters of 2025, respectively.
Operations and Ship Management
Management policies regarding our fleet that are formulated by our Board of Directors are executed by Tsakos Energy Management under a management contract. Tsakos Energy Management’s duties, which are performed exclusively for our benefit, include overseeing the purchase, sale and chartering of vessels, supervising day-to-day technical management of our vessels and providing strategic, financial, accounting and other services, including investor relations. Our tanker fleet’s technical management, including crewing, maintenance and repair, and voyage operations, have been subcontracted by Tsakos Energy Management to TST. Tsakos Energy Management also engages Tsakos Shipping to arrange chartering of our vessels, provide sales and purchase brokerage services, procure vessel insurance, and arrange bank financing. The technical management of thirteen vessels (seven with Hyundai Ocean Services, four with International Tanker Management, one with Bernhard Schulte Shipmanagement and one with LSC) was sub-contracted to third-party ship managers during 2022.
The following chart illustrates the management of our fleet as of April 3, 2023:
Technical management of the LNG carriers Neo Energy, Maria Energy and Tenergy, the VLCCs Hercules I, Ulysses, Dias I the suezmaxes Eurochampion 2004 and Decathlon the aframaxes Maria Princess, Sapporo Princess and Ise Princess, is subtracted to unaffiliated third-party ship managers.
Executive and Commercial Management
Pursuant to our management agreement with Tsakos Energy Management, our subsidiaries’ operations are executed and supervised by Tsakos Energy Management, based on the strategy devised by our Board of Directors and subject to the approval of our Board of Directors as described below. In accordance with the management agreement, we pay Tsakos Energy Management monthly management fees for its management of our subsidiaries’ vessels.
The monthly fee may be adjusted annually in accordance with the terms of the agreement with Tsakos Energy Management, if both parties agree. The fees relating to the conventional oil tankers payable to Tsakos Energy Management had not been adjusted since 2012. From May 1, 2022, monthly fees increased to $28,500 for all conventional vessels, for the suezmax Eurochampion 2004, the aframaxes Maria Princess and Sapporo Princess, the VLCCs Ulysses, Hercules I, which are managed by a third-party manager, amounted to $29,117, for third-party managed vessels, the handymaxes Afrodite and Ariadne remained at $27,500, for chartered in vessels or chartered out on a bare-boat basis and for vessels under construction monthly fees amounted to $21,000, $36,000 for the DP2 shuttle tankers, while the monthly fees for LNG carriers, Neo Energy and Maria Energy amounted to $42,447 and $34,333 for the LNG carrier Tenergy. From August 1, 2022, the suezmax tanker Decathlon is managed by a third-party manager and pays monthly fees of $28,500.
The management fee starts to accrue for a vessel at the point a newbuilding contract is executed. To help ensure that these fees are competitive with industry standards, our management has periodically made presentations to our Board of Directors in which the fees paid to Tsakos Energy Management are compared against the publicly available financial information of other listed tanker companies. We paid Tsakos Energy Management aggregate management fees of $20.2 million in 2022, $20.2 million in 2021 and $20.3 million in 2020. From these amounts, Tsakos Energy Management paid a technical management fee to Tsakos Columbia Shipmanagement. For additional information about the management agreement, including the calculation of management fees, see “Item 7. Major Shareholders and Related Party Transactions” and our consolidated financial statements which are included as Item 18 to this Annual Report.
Chartering. Our board of directors formulates with management our overall chartering strategy for our subsidiaries’ vessels and Tsakos Shipping, under the supervision of Tsakos Energy Management, implements the strategy by:
• evaluating the short, medium, and long-term opportunities available for each type of vessel;
• balancing short, medium, and long-term charters to achieve optimal results for our fleet; and
• positioning such vessels so that, when possible, re-delivery occurs at times when Tsakos Shipping expects advantageous charter rates to be available for future employment.
Tsakos Shipping utilizes the services of various charter brokers to solicit, research, and propose charters for our vessels. The charter brokers’ role involves researching and negotiating with different charterers and proposing charters to Tsakos Shipping for cargoes to be shipped in our subsidiaries’ vessels. Tsakos Shipping negotiates the exact terms and conditions of charters, such as delivery and re-delivery dates and arranges cargo and country exclusions, bunkers, loading and discharging conditions and demurrage. Tsakos Energy Management is required to obtain our approval for charters in excess of six months and is required to obtain the written consent of the administrative agents for the lenders under our secured credit facilities for charters in excess of thirteen months. There are frequently two or more brokers involved in fixing a vessel on a charter. Brokerage fees typically amount to 2.5% of the value of the freight revenue or time charter hire derived from the charters. A chartering commission of 1.25% is paid to Tsakos Shipping for every charter involving the vessels in the fleet. The total amount paid for these chartering and acquisition brokerage commissions was $10.7 million in 2022, $6.8 million in 2021 and $8.1 million in 2020. In addition, Tsakos Shipping may charge a brokerage commission on the sale of a vessel. In 2022, the aframax tanker Proteas and the panamax tanker Inca were sold and for this service Tsakos Shipping charged $0.3 million, representing 1.0% of the sale price. In 2021, the panamax tanker Maya was sold and for this service Tsakos Shipping charged a brokerage commission of $0.1 million, representing 1.0% of the sale price. In 2020, the suezmax tanker Silia T. and the handysize tanker Didimon were sold and for this service Tsakos Shipping charged a brokerage commission of $0.2 million in total, representing 1.0% of the sale price of each vessel. Tsakos Shipping may also charge a fee of $200 thousand (or such other sum as may be agreed) on delivery of each newbuilding vessel in payment for the cost of design and supervision of the newbuilding by Tsakos Shipping. In 2020, $1.0 million in aggregate was charged for supervision fees on four vessels which were delivered in the fourth quarter of 2019 and throughout 2020. No such fee was paid in 2022 and 2021.
Tsakos Shipping supervises the post fixture business of our vessels, including:
• monitoring the daily geographic position of such vessels in order to ensure that the terms and conditions of the charters are fulfilled by us and our charterers;
• collection of monies payable to us; and
• resolution of disputes through arbitration and legal proceedings.
In addition, Tsakos Shipping appoints superintendents to supervise the construction of newbuildings and the loading and discharging of cargoes when necessary.
General Administration. Tsakos Energy Management provides us with general administrative, office and support services necessary for our operations and the fleet, including technical and clerical personnel, communication, accounting, and data processing services.
Sale and Purchase of Vessels. Tsakos Energy Management advises our Board of Directors when opportunities arise to purchase, including through newbuildings, or to sell any vessels. All decisions to purchase or sell vessels require the approval of our Board of Directors.
Any purchases or sales of vessels approved by our Board of Directors are arranged and completed by Tsakos Energy Management. This involves the appointment of superintendents to inspect and take delivery of vessels and to monitor compliance with the terms and conditions of the purchase or newbuilding contracts.
In the case of a purchase of a vessel, each broker involved will receive commissions from the seller generally at the industry standard rate of one percent of the purchase price, but subject to negotiation. In the case of a sale of a vessel, each broker involved will receive a commission generally at the industry standard rate of one percent of the sale price, but subject to negotiation. In accordance with the management agreement, Tsakos Energy Management is entitled to charge for sale and purchase brokerage commission, but to date has not done so.
Pursuant to a technical management agreement, Tsakos Energy Management employs TST to manage the day-to-day aspects of tanker operations, including maintenance and repair, provisioning, and crewing of the vessels in the fleet. We benefit from the economies of scale of having our subsidiaries’ vessels managed as part of the TST managed fleet. On occasion, TST subcontracts the technical management and manning responsibilities of our subsidiaries’ vessels to third parties. The executive and commercial management of our subsidiaries’ vessels, however, is not subcontracted to third parties. TST employs full-time superintendents, technical experts and marine engineers and has expertise in inspecting second-hand vessels for purchase and sale, and in fleet maintenance and repair. They have approximately 189 employees engaged in ship management and approximately 2,917 seafaring employees, of whom approximately 1,364 are employed at sea and the remainder is on leave at any given time. Their principal office is in Athens, Greece. The vessels managed by TST on our behalf consists of tankers.
Tsakos Energy Management pays TST a fee per vessel per month for technical management of operating vessels and vessels under construction. This fee was determined by comparison to the rates charged by other major independent vessel managers. We generally pay all monthly operating requirements of our fleet in advance.
TST performs the technical management of the vessels under the supervision of Tsakos Energy Management. Tsakos Energy Management approves the appointment of fleet supervisors and oversees the establishment of operating budgets and the review of actual operating expenses against budgeted amounts. Technical management of the LNG carriers Neo Energy, Maria Energy and Tenergy, the VLCCs Hercules I, Ulysses and Dias I, the suezmax Eurochampion 2004 and Decathlon, and the aframaxes Maria Princess, Sapporo Princess and Ise Princess, is subcontracted to unaffiliated third-party ship managers.
Maintenance and Repair. Each of the vessels is dry-docked once every five years in connection with special surveys and, after the vessel is fifteen years old, the vessel is dry-docked every two and one-half years after a special survey (referred to as an intermediate survey), or as necessary to ensure the safe and efficient operation of such vessels and their compliance with applicable regulations. TST arranges dry-dockings and repairs under instructions and supervision from Tsakos Energy Management. We believe that the continuous maintenance program we conduct results in a reduction of the time periods during which our vessels are in dry-dock.
TST routinely employs on each vessel additional crew members whose primary responsibility is the performance of maintenance while the vessel is in operation. Tsakos Energy Management awards and, directly or through TST, negotiates contracts with shipyards to conduct such maintenance and repair work. They seek competitive tender bids in order to minimize charges to us, subject to the location of our vessels and any time constraints imposed by a vessel’s charter commitments. In addition to dry-dockings, TST, where necessary, utilizes superintendents to conduct periodic physical inspections of our vessels.
Crewing and Employees
We do not employ personnel to run our business on a day-to-day basis. We outsource substantially all our executive, commercial and technical management functions.
TST arranges employment of captains, officers, engineers and other crew who serve on the vessels. TST ensures that all seamen have the qualifications and licenses required to comply with international regulations and shipping conventions and that experienced and competent personnel are employed for the vessels.
Several of the world’s major oil companies are among our regular customers. The table below shows the approximate percentage of revenues we earned from some of our customers in 2022.
December 31, 2022
|Maersk Pool||8.2 %|
|BP Shipping||3.3 %|
|ST Shipping||1.0 %|
Our business and the operation of our vessels are significantly affected by government regulation in the form of international conventions and national, state and local laws and regulations in force in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. Because these conventions, laws, and regulations change frequently, we cannot predict the ultimate cost of compliance or their impact on the resale price and/or the useful lives of our vessels. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may have a material adverse effect on our operations. We are required by various governmental and quasi-governmental agencies to obtain permits, licenses, certificates, and financial assurances with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits, licenses, certificates and financial assurances required for the operation of our vessels will depend upon a number of factors, we believe that we have been and will be able to obtain all permits, licenses, certificates and financial assurances material to the conduct of our operations.
The heightened environmental and quality concerns of classification societies, insurance underwriters, regulators and charterers has led to the imposition of increased inspection and safety requirements on all vessels in the tanker market and the scrapping of older vessels throughout the industry has been accelerated.
IMO. The International Maritime Organization (“IMO”) has adopted international conventions that impose liability for oil pollution in international waters and in a signatory’s territorial waters, including amendments to Annex I of the 1973 International Convention for the Prevention of Pollution from Ships (“MARPOL”) which set forth upgraded requirements for oil pollution prevention for tankers. These regulations are effective in relation to tankers in many of the jurisdictions in which our tanker fleet operates. They provide that: (1) tankers 25 years old and older must be of double-hull construction and (2) all tankers will be subject to enhanced inspections. All of the vessels in our fleet are of double hull construction. The regulations are intended to reduce the likelihood of oil pollution in international waters. These amendments became effective on April 5, 2005.
On January 1, 2007, Annex I of MARPOL was revised to incorporate all amendments since the MARPOL Convention entered into force in 1983 and to clarify the requirements for new and existing tankers.
Regulation 12A of MARPOL Annex I came into force on August 1, 2007 and governs oil fuel tank protection. The requirements apply to oil fuel tanks on all ships with an aggregate capacity of 600 cubic meters and above which are delivered on or after August 1, 2010, and all ships for which shipbuilding contracts were placed on or after August 1, 2007. Since March 1, 2018, Form B of the Supplement to the International Oil Pollution Prevention Certificate contained in MARPOL Annex I has been amended to simplify its completion with respect to segregated ballast tanks. Segregated ballast tanks use ballast water that is completely separate from the cargo oil and oil fuel system. Segregated ballast tanks are currently required by the IMO on crude oil tankers of 20,000 tons deadweight or more constructed after 1982.
MARPOL Annex IV entered into force on September 27, 2003, and a revised Annex IV was adopted on April 1, 2004 and entered into force on August 1, 2005. It requires ships engaged in international voyages, of 400 gross tonnage and above, and certified to carry more than 15 persons to have systems and controls in place to deal with human sewage, for governments to have port reception facilities, and a requirement for survey and certification. Annex IV prohibits the discharge of sewage into the sea, except when the ship has an approved sewage treatment plant in operation or when the ship is discharging comminuted and disinfected sewage using an approved system at a distance of three nautical miles from the nearest land.
In September 1997, the IMO adopted Annex VI to MARPOL to address air pollution from ships. Annex VI came into force on May 19, 2005. It set limits on sulfur oxide and nitrogen oxide (“NOx”) emissions from ship exhausts and prohibited deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also included a global cap on the sulfur content of fuel oil and allowed for the designation of special areas known as Emission Control Areas (“ECAs”) where more stringent controls on sulfur emissions would apply. Annex VI has been ratified by some, but not all IMO member states. All vessels subject to Annex VI and built after May 19, 2005 must carry an International Air Pollution Prevention (“IAPP”) Certificate evidencing compliance with Annex VI. In October 2008, the Marine Environment Protection Committee (“MEPC”) of the IMO adopted amendments to Annex VI regarding particulate matter, NOx and sulfur oxide emissions standards. These amendments, which entered into force in July 2010, seek to reduce air pollution from vessels by establishing a series of progressive standards to further limit the sulfur content in fuel oil, which were fully phased in at the beginning of 2020, and by establishing three tiers of NOx emission standards for new marine diesel engines, depending on their date of installation. Additionally, more stringent emission standards apply in ECAs. The U.S. ratified the amendments in October 2008. Annex VI was implemented in the U.S. through the Act to Prevent Pollution from Ships (“APPS”). Annex VI, APPS and implementing regulations promulgated by the U.S. Environmental Protection Agency (“EPA”) under the Clean Air Act (“CAA”) impose engine-based and fuel-based standards that apply to U.S. flagged ships wherever located, and to non-U.S. flagged ships operating in U.S. waters, as well as ships operating within the 200 nautical mile border around the U.S., including the North American ECA and the U.S. Caribbean ECA, which encompasses waters around Puerto Rico and the U.S. Virgin Islands. The APPS statute requires engine manufacturers, owners and operators of vessels, and other persons to comply with Annex VI of MARPOL. The EPA and the U.S. Coast Guard (the “USCG”) enforce these requirements pursuant to authority under APPS, the CAA and a 2011 Memorandum of Understanding between the EPA and the USCG setting forth the terms by which the EPA and the USCG mutually cooperate in enforcement and implementation.
Amendments to Annex VI to address greenhouse gas (“GHG”) emissions from shipping came into force on January 1, 2013. New vessels of 400 tons or greater are required to meet minimum energy efficiency levels per capacity mile (the Energy Efficient Design Index (“EEDI”)), while existing vessels were required to implement Ship Energy Efficiency Management Plans (“SEEMPs”). All our vessels have SEEMPs. The EEDI requirements do not apply to a liquefied natural gas (“LNG”) carrier unless the construction contract for the carrier was placed on or after September 1, 2015. Our LNG carriers comply with EEDI requirements as indicated in vessels International Energy Efficiency (IEE) Certificate. Implementing the requirements of Annex VI may require modifications to vessel engines or the addition of post combustion emission controls, or both, as well as the use of lower sulfur fuels. In April 2016, the IMO adopted an amendment to Annex VI regarding requirements for recording operational compliance with NOx Tier III ECAs (discussed in further detail below) and a further amendment to the NOx Technical Code 2008 to facilitate the testing of gas and dual fuel engines. This amendment entered into force on September 1, 2017. We believe that maintaining compliance with Annex VI will not have a significantly adverse financial impact on the operation of our vessels.
Further amendments to Annex VI of MARPOL were adopted by the MEPC in October 2016. Beginning on January 1, 2019, the new Regulation 22A of chapter 4 of Annex VI added a requirement for ships of 5,000 gross tons and above to collect consumption data for each type of fuel oil used as well as other specified data. The collection method should be set out in the SEEMP and this information must have been submitted to the flag state no later than March 31, 2020. The flag state in turn must submit data to an IMO Ship Fuel Oil Consumption Database. Other regulations were amended to cater to this new requirement, including those related to certificates, surveys and port state control. The MEPC also adopted amendments to Annex VI setting the global limit for sulfur content of ships’ fuel oil to 0.5% mass by mass (“m/m”) as opposed to the former global limit of 3.5% m/m. The new sulfur limit entered into effect on January 1, 2020. From March 1, 2020, ships are not permitted to transport fuels containing more than 0.5% m/m sulfur content for use on board, regardless of whether a ship is operating outside a designated ECA, unless the ship has an approved exhaust cleaning system ("EGCS") or “scrubber” fitted. We do not believe compliance with such regulations will have a material effect on the operation or financial viability of our business. Amendments to Annex VI of MARPOL came into force on April 1, 2022, changing the required procedure in Regulation 14 for sampling and verification of the sulfur content of on-board fuel oil and installing an on board sampling point or points. From April 1, 2022, changes to the reporting requirements on the vessel's required and attained EEDI values contained in Regulation 20, brought forward the effective date of phase 3 requirements to 2022 for several ship types including gas carriers and LNG carriers. New ships built from April 1, 2022, are required to be significantly more energy efficient than the baseline.
In November 2021, draft amendments to Annex VI of MARPOL were agreed by the MEPC and were subsequently adopted at its 76th session in June 2021. On November 1, 2022, the amendments entered into force. The amendments impose mandatory goal based technical and operational measures designed to reduce the carbon intensity of international shipping, in line with the IMO's goal of reducing greenhouse gas emissions by at least 40% by 2030 and by 70% by 2050 (compared to 2008 levels). The Energy Efficiency Existing Ship Index (EEXI) effectively extends design requirements under the EEDI to all cargo and cruise ships above 400 GT falling under Annex VI (including tankers and LNG carriers). The vessel's EEXI technical file (proving that the vessel meets the required attained EEXI value) must be approved at the vessel's first annual survey after January 2023. The Carbon Intensity Indicator (CII) is a rating that will be given to all cargo and cruise ships above 5,000 GT falling under Annex VI. The CII rating relates to the carbon intensity of a vessel's operations. Vessels require an enhanced SEEMP that measures the vessel's CII and sets a mandatory annual CII target to be attained via operational compliance steps. The CII metric for calculating a vessel's annual operational carbon intensity is the annual efficiency ratio ("AER"), which considers a vessel's total CO2 emissions over the vessel's total distance sailed (as deadweight ton miles). A ship's carbon intensity will be rated by performance level A (best – major superior) to E (worst – inferior) which is recorded on the SEEMP. If a ship is rated D for three consecutive years or E for one year, it will have to submit a corrective action plan describing how it will achieve rating C or better. Administrations, port authorities and other stakeholders are encouraged by the MEPC to provide incentives to ships rated A or B. The MEPC is to review the effectiveness of these requirements by January 1, 2026 and develop further amendments as required. As a result the full financial impact of complying with these measures is not yet clear. In May 2022, the US Coast Guard proposed regulations to implement these new provisions of MARPOL Annex VI and to explain how the United States has chosen to carry out certain discretionary aspects of Annex VI.
In April 2016, a revised annex to the Convention on Facilitation of International Maritime Traffic (“FAL”) was adopted by the IMO. It contains revised mandatory requirements for the electronic exchange of information on cargo and crew. This electronic exchange of information was mandatory beginning April 9, 2019, with a transition period of no less than 12 months. Other revised standards cover discrimination in respect to shore leave and access to shore-side facilities and updates to recommended practice in relation to stowaways. The revised annex entered into force on January 1, 2018. We comply with these regulations. In May 2022, the IMO's Facilitation Committee adopted amendments to FAL expected to enter into force on January 1, 2024. These amendments make it mandatory for public authorities to establish, maintain and use single window systems for the electronic exchange of information required on arrival, stay and departure of ships in ports. Public authorities must combine or coordinate the electronic transmission of the data to ensure that information is submitted or provided only once and re-used to the maximum extent possible. The updated annex to the FAL Convention requires Contracting Governments and their relevant public authorities to allow ships and ports to remain fully operational during a public health emergency of international concern (PHEIC), in order to maintain complete functionality of global supply chains to the greatest extent possible. Public authorities are also required to designate port workers and ships' crew as key workers (or equivalent), regardless of their nationality or the flag of their ship, when in their territory.
In 2001, the IMO adopted the International Convention on the Control of Harmful Anti-fouling Systems on Ships (the “Anti-fouling Convention”) which prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels. The Anti-fouling Convention came into force on September 17, 2008 and applies to vessels constructed prior to January 1, 2003 that have not been in dry-dock since that date. Since January 1, 2008, under the Anti-fouling Convention, exteriors of vessels have had to be either free of the prohibited compounds or have had coatings applied that act as a barrier to the leaching of the prohibited compounds. Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and must undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. Draft amendments to the Anti-fouling Convention were approved by the MEPC in November 2020 and adopted at its 76th session in June 2021, which prohibits anti-fouling systems containing cybutryne (also known as Irgarol-1051) from January 1, 2023, or for ships which already have such an anti-fouling system, at the next scheduled renewal of the anti-fouling system after January 1, 2023, but no later than 60 months following the last application of the ship of such an anti-fouling system. We fully comply with the provisions of the “Anti-fouling Convention” and we do not believe that we will have an adverse financial impact on the operation of our vessels.
In addition, our LNG carriers meet IMO requirements for liquefied gas carriers including those contained in the International Code for the Construction and Equipment of Ships carrying Liquefied Gases in Bulk (“ICG Code”), the Existing Ships Carrying Liquefied Gases in Bulk (“EGC Code”) and the Code of the Construction and Equipment of Ships Carrying Liquefied Gases in Bulk (“IGC Code”). In order to operate in the navigable waters of the IMO’s member states, liquefied gas carriers must have an IMO Certificate of Fitness demonstrating compliance with construction codes for liquefied gas carriers. These codes, and similar regulations in individual member states, address fire and explosion risks posed by the transport of liquefied gases. Collectively, these standards and regulations impose detailed requirements relating to the design and arrangement of cargo tanks, vents, and pipes; construction materials and compatibility; cargo pressure; and temperature control. Liquefied gas carriers are also subject to international conventions that regulate pollution in international waters and a signatory’s territorial waters. Under the IMO regulations, gas carriers that comply with the IMO construction certification requirements are deemed to satisfy the requirements of Annex II of MARPOL applicable to transportation of chemicals at sea, which would otherwise apply to certain liquefied gases. With effect from January 1, 2007, the IMO revised the Annex II regulations that restrict discharges of “noxious liquid substances” during cleaning or de-ballasting operations. The revisions include significantly lower permitted discharge levels of noxious liquid substances for vessels constructed on or after the effective date, made possible by improvements in vessel technology. These discharge requirements apply to the Company’s LNG carriers. Since January 1, 2021, Annex II MARPOL has imposed stricter controls on the discharge of noxious liquid substances residues in specified areas (North West European waters, Baltic Sea area, Western European waters and the Norwegian Sea). In these areas prewash and discharge to a port reception facility are required for cargo residues and tank washings containing persistent floating products (for example, certain vegetable oils and paraffin-like cargoes).
On January 1, 2013, MARPOL Annex V regulations came into force with regard to the disposal of garbage from ships at sea. These regulations prohibit the disposal of garbage at sea other than certain defined permitted discharges or when outside one of the MARPOL Annex V “special areas” in which, for reasons relating to their oceanographical and ecological condition and/or their sea traffic, the adoption of special mandatory methods for the prevention of sea pollution is required. Under MARPOL, these special areas are provided with a higher level of protection than other areas of the sea. These areas are the: (i) Mediterranean Sea; (ii) Baltic Sea; (iii) Black Sea; (iv) Red Sea; (v) Gulfs area; (vi) North Sea; (vii) Antarctic sea; and (viii) Wider Caribbean region including the Gulf of Mexico and the Caribbean Sea. The regulations do not only impact the disposal of “traditional garbage” but also the disposal of harmful hold washing water and cargo residues. Products considered suitable for discharge are those not defined as harmful by the criteria set out in MARPOL Annex III and which do not contain carcinogenic, mutagenic or reprotoxic components. We have a protocol in place to ensure that (i) garbage is disposed of in accordance with the Annex V regulations and that the vessels in our fleet maintain records showing that any cleaning agent or additive used was not harmful to the marine environment and (ii) the supplier provides a signed and dated statement to this effect, either as part of a Material Safety Data Sheet (“MSDS”) or as a stand-alone document. Our protocol addresses the Annex V special areas and we do not consider them likely to adversely affect our ability to operate our vessels.
In October 2016, the IMO adopted amendments to Annex V which place responsibility on shippers to determine whether or not their cargo is hazardous to the marine environment (with such categorization to be carried out in accordance with the UN Globally Harmonized System of Classification and Labelling of Chemicals) and introduced a two-part garbage record book which splits cargo residues from garbage other than cargo residues. These amendments entered into force on March 1, 2018. This requirement was extended in December 2022 to vessels of 100 gross tonnage or above and less than 400 gross tonnage. The MEPC has also agreed that by 2025 this amendment will extend to all vessels, including fishing vessels, to support the IMO's commitment to addressing marine plastic litter from ships and the UN 2030 Sustainable Development Goal 14. We have policies and procedures in place to ensure compliance with these amendments to Annex V.
Tsakos Shipping, our technical manager, is ISO 14001 compliant. ISO 14001 requires companies to commit to the prevention of pollution as part of the normal management cycle. Additional or new conventions, laws and regulations may be adopted that could adversely affect our ability to manage our vessels.
In addition, the European Union and countries elsewhere have considered stricter technical and operational requirements for tankers and legislation that would affect the liability of tanker owners and operators for oil pollution. Any additional laws and regulations that are adopted could limit our ability to do business or increase our costs. The results of these or other potential future regulations could have a material adverse effect on our operations.
Under the current regulations, the vessels of our existing fleet will be able to operate for substantially all of their respective economic lives. However, compliance with the regulations regarding inspections of all vessels may adversely affect our operations. We cannot at the present time evaluate the likelihood or magnitude of any such adverse effect on our operations due to uncertainty of interpretation of the IMO regulations.
The operation of our vessels is also affected by the requirements set forth in the IMO’s International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention (“ISM Code”) which came into effect in relation to oil tankers in July 1998 and which was further amended on July 1, 2010. The ISM Code requires ship owners, ship managers and bareboat (or demise) charterers to develop and maintain an extensive “safety management system” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a shipowner, ship manager or bareboat charterer to comply with the ISM Code may subject that party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, some ports. All of our vessels are ISM Code certified.
The International Convention for the Safety of Life at Sea (“SOLAS”) was amended in November 2012 to incorporate mandatory maximum noise level limits for machinery spaces, control rooms, accommodation and other spaces on board vessels. The amendments came into force on July 1, 2014 and require ships of 1,600 gross tons or more, for which the building contract was placed on or after July 1, 2014 or were constructed on or after January 1, 2015 or will be delivered on or after July 1, 2018 to be constructed to reduce on-board noise and to protect personnel from noise on board ships. All of our vessels comply with existing guidelines, and our new buildings will meet the applicable requirements.
SOLAS Regulation II-2/4 has been amended to require that ships carrying oil fuel shall prior to bunkering with fuel be provided with a declaration signed and certified by the fuel oil supplier's representative that the oil fuel supplied is in conformity with regulation SOLAS II.2/4.2.1 and with the test method used for determining the flashpoint. These amendments come into effect on January 1, 2026. SOLAS Regulations II-2/4.5 and II-2/11.6 have been amended to clarify the provisions relating to the secondary means of venting cargo tanks in order to ensure adequate safety against over and under pressurization. SOLAS Regulation II-2/20 relating to the performance of ventilation systems was also amended. These changes apply to all tankers constructed on or after January 1, 2017. All of our tankers constructed on or after January 1, 2017 comply with, and our new buildings will meet, these requirements.
SOLAS Regulation II-2 10.10.1 and 10.10.3 have been amended and require ships constructed on or after July 1, 2014 to be fitted with the following by July 1, 2019: a) compressed air breathing apparatus fitted with an audible alarm and a visual or other device which will alert the user before the volume of the air in the cylinder has been reduced to no less than 200 liters; b) a minimum of two two-way portable radiotelephone apparatus for each fire party for fire-fighter’s communication. The two-way portable radiotelephone apparatus must be explosion-proof or intrinsically safe. Fire parties are individuals or groups listed on the muster list.
Performance standards for Enhanced Group Call (“EGC”) and NAVTEX Equipment have also been amended. Such equipment installed after July 1, 2019 must comply with SOLAS IV/7 and SOLAS IV/14. SOLAS Regulations III/3 and III/20 were amended effective January 1, 2020. From this time, all ships must comply with requirements for maintenance, thorough examination, operational testing, overhaul and repair of lifeboats and rescue boats, launching appliances and release gear contained in SOLAS Chapter III. Amendments to SOLAS Regulation II-1/3-8 requiring appropriate and safe-to-use designs of mooring arrangements, introduction of a maintenance and inspection regime and proper documentation are expected to enter into force on January 1, 2024. In addition, amendments to parts B-1, B-2 and B-4 of SOLAS chapter II-1 related to watertight integrity requirements are expected to enter into force on January 1, 2024.
The International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (“STCW Convention”) and its associated Code was amended in June 2010 (the “Manila Amendments”) with such amendments entering into force on January 1, 2012, with a five-year transitional period until January 1, 2017. As of 2018 all seafarers are required to meet the STCW standards and be fully certified in accordance with the revised STCW amendments. Flag states that have ratified SOLAS and STCW generally employ the classification societies, which have incorporated SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance. From January 1, 2017, all of our crew's STCW Convention certificates have been issued, renewed and revalidated in accordance with the provisions of the Manila Amendments.
The Nairobi Wreck Removal Convention 2007 (“Wreck Convention”) entered into force on April 14, 2015. The Wreck Convention provides a legal basis for sovereign states to remove, or have removed, shipwrecks that may have the potential to affect adversely the safety of lives, goods and property at sea, as well as the marine and coastal environment. Further, the Wreck Convention makes ship owners financially liable for wreck removal and requires them to take out insurance or provide other financial security to cover the costs of wreck removal. All of our fleet has complied with the certification requirements stipulated by the Wreck Convention with regards to financial security.
OPA 90. The U.S. Oil Pollution Act of 1990 (“OPA 90”) established an extensive regulatory and liability regime for the protection and clean-up of the environment from oil spills. OPA 90 affects all owners and operators whose vessels trade to the U.S. or its territories or possessions or whose vessels operate in U.S. waters, which include the U.S.’s territorial sea and its two hundred nautical mile exclusive economic zone. The USCG is the lead federal agency that enforces OPA 90.
Under OPA 90, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the oil spill results solely from the act or omission of a third party, an act of God or an act of war and the responsible party reports the incident and reasonably cooperates with the appropriate authorities) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. Tsakos Shipping and Tsakos Energy Management would not qualify as “third parties” because they perform under contracts with us. OPA 90 follows a “polluter pays” principle, and as such, the responsible party is liable for damages under OPA 90 up to statutory liability limits. OPA 90 does allow the responsible party to recover against a third party based on contractual indemnity or via contribution.
OPA 90 allows for the recovery of a broad category of damages, which are defined broadly to include (1) natural resources damages and the related assessment costs, (2) real and personal property damages, (3) net loss of taxes, royalties, rents, fees and other lost revenues, (4) lost profits or impairment of earning capacity due to property or natural resources damage, (5) net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and (6) loss of subsistence use of natural resources. OPA 90 also expressly excludes the economic loss rule that would normally require a proprietary interest in property before allowing for recovery of economic losses.
OPA 90 incorporates limits on the liability of responsible parties for a spill. OPA 90 adjusts the limits of liability, based on increases in the Consumer Price Index (“CPI”) at least every three years. From March 23, 2023, the limits of liability for a double-hulled tanker over 3,000 gross tons are currently the greater of $2,500 per gross ton or $21,521,000.
These limits of liability would not apply if the incident was proximately caused by violation of applicable U.S. federal safety, construction or operating regulations or by the responsible party (or its agents or employees or any person acting pursuant to a contractual relationship with the responsible party) or by gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the oil removal activities. We continue to maintain, for each of our vessels, pollution liability coverage in the amount of $1 billion per incident. A catastrophic spill could exceed the insurance coverage available, in which case there could be a material adverse effect on us.
Under OPA 90, with some limited exceptions, all newly built or converted tankers operating in U.S. waters must be built with double-hulls, and existing vessels which do not comply with the double-hull requirement should have been phased out by December 31, 2014. All of our fleet is of double-hull construction.
OPA 90 requires owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, letter of credit, self-insurance, guaranty or other satisfactory evidence. Under the self-insurance provisions, the ship owner or operator must have a net worth and working capital, measured in assets located in the U.S. against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. OPA 90 requires an owner or operator of a fleet of tankers only to demonstrate evidence of financial responsibility in an amount sufficient to cover the tanker in the fleet having the greatest maximum liability under OPA 90.
OPA 90 specifically permits individual U.S. coastal states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills.
Owners or operators of tankers operating in U.S. waters are required to file vessel response plans with the USCG for approval, and their tankers are required to operate in compliance with such approved plans. These response plans must, among other things, (1) address a “worst case” scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a “worst case discharge”, (2) describe crew training and drills, and (3) identify a qualified individual with full authority to implement removal actions. All our vessels have approved vessel response plans. We intend to comply with all applicable USCG and state regulations in the ports where our vessels call.
The U.S. Comprehensive Environmental Response, Compensation, and Liability Act. The U.S. Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) applies to spills or releases of hazardous substances other than petroleum or petroleum products, whether on land or at sea. CERCLA imposes joint and several liability, without regard to fault, on the owner or operator of a ship, vehicle or facility from which there has been a release, and on other specified parties. Liability under CERCLA is generally limited to the greater of $300 per gross ton or $500,000 per vessel carrying non-hazardous substances ($5.0 million for vessels carrying hazardous substances), unless the incident is caused by gross negligence, willful misconduct or a violation of certain regulations, in which case liability is unlimited.
U.S. Clean Water Act. The U.S. Clean Water Act of 1972 (“CWA”) prohibits the discharge of oil or hazardous substances in navigable waters and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90. Additionally, the CWA provides for the potential application of civil or criminal penalties for a pollution incident. Under EPA regulations, vessels must obtain CWA permits for the discharge of ballast water and other substances incidental to normal operation in U.S. territorial or inland waters. Commercial vessels greater than 79 feet in length are required to obtain coverage under the National Pollutant Discharge Elimination System (“NPDES”) Vessel General Permit (the “VGP”) to discharge ballast water and other wastewater into U.S. waters by submitting a Notice of Intent (a “NOI”). The most recent VGP (the “2013 VGP”) became effective in December 2013 and then expired on December 18, 2018, although its provisions remain in force, as described below. The 2013 VGP requires vessel owners and operators to comply with a range of best management practices, reporting, record keeping and other requirements for a number of incidental discharge types and incorporates current USCG requirements for ballast water management, as well as supplemental ballast water requirements. The 2013 VGP included ballast water numeric discharge limits and best management practices for certain discharges. On June 11, 2012 the USCG and the EPA published a memorandum of understanding which provides for collaboration on the enforcement of the VGP requirements, and the USCG routinely includes the VGP as part of its normal Port State Control inspections.
On December 4, 2018, the Vessel Incidental Discharge Act (“VIDA”) was signed into law establishing a new framework for the regulation of vessel incidental discharges under the CWA. VIDA requires the EPA to develop performance standards for those discharges within two years of enactment and requires the USCG to develop implementation, compliance, and enforcement regulations within two years of EPA’s promulgation of standards. Under VIDA, all provisions of the 2013 VGP will remain in force and effect until the USCG regulations are finalized. On October 26, 2020, the EPA published a Notice of Proposed Rulemaking – Vessel Incident Discharge National Standards of Performance in the Federal Register for public comment. The comment period closed on November 25, 2020.
We comply with the VGP and the record keeping requirements and we do not believe that the costs associated with obtaining such permits and complying with the associated obligations will have a material impact on our operations.
In August 2021, a Federal Judge in California ordered the EPA to update its regulations about the chemicals that can be used to disperse offshore oil spills. The EPA has a deadline of May 31, 2023, to take final action on listing and authorizing the chemicals and must submit regular status report in the meantime.
The Clean Air Act. The CAA requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to CAA vapor control and recovery standards for cleaning fuel tanks and conducting other operations in regulated port areas and emissions standards for so-called “Category 3” marine diesel engines operating in U.S. waters. On December 22, 2009, the EPA adopted final emission standards for Category 3 marine diesel engines equivalent to those adopted in the amendments to Annex VI to MARPOL. As a result, the most stringent engine emissions and marine fuel sulfur requirements of Annex VI will apply to all vessels regardless of flag entering U.S. ports or operating in U.S. waters, and to all U.S. flagged vessels regardless of location. The emission standards apply in two stages: near-term standards for newly-built engines, which have applied since the beginning of 2011, and long-term standards requiring an 80% reduction in NOx by 2030, which has applied from the beginning of 2016, requiring the use of emission control technology. In January 2021, the EPA expanded the availability of a proven, modern inspection method for finding and correcting air pollution leaks at large liquid storage tanks. These amendments allow owner/ operators of certain large tanks known as Volatile Organic Liquid Storage Vessels to conduct less cumbersome "in service" inspections of the tanks, without emptying and degassing the storage tank.
IMO Emission Control Areas. All vessels operating in the North American and Caribbean ECAs discussed above must use fuel with a sulfur content of 0.1%. Since January 1, 2016, NOx after-treatment requirements have also applied. California implemented a 24 nautical mile zone within which fuel must have a sulfur content of 0.1% or less on January 1, 2014. Currently, the California regulations run in parallel with the emissions requirements in the North American and Caribbean ECAs. Compliance with the North American and Caribbean ECA emission requirements, as well as the possibility that more stringent emissions requirements for marine diesel engines or port operations by vessels will be adopted by the EPA or the states where we operate, could entail significant capital expenditures or otherwise increase the costs of our operations. Similarly, the EU has ECAs in place in the Baltic Sea and the North Sea and English Channel, within which fuel with a sulfur content in excess of 0.1% has not been permitted since January 1, 2015. The MEPC has adopted amendments to MARPOL Annex VI to designate the Mediterranean Sea, as a whole, as an ECA within which sulfur in fuel oil used on board ships is limited to 0.1%. This amendment is expected to enter into force on 1 May 2024, taking effect from 1 May 2025.
The MEPC has agreed in principle to the designation of the North-Western Mediterranean Sea as a Particularly Sensitive Sea Area, meaning it can be protected by shipping route measures, subject to the further development and approval of the proposed associative protective measures by the Sub-Committee on Navigation, Communications and Search and Rescue (NCSR) and the Maritime Safety Committee.
In addition, the EU Sulphur directive has since January 1, 2010 banned inland waterway vessels and ships berthing in EU ports from using marine fuels with a sulfur content exceeding 0.1% by mass. The prohibition applies to use in all equipment including main and auxiliary engines and boilers. Some EU Member States also require vessels to record the times of any fuel-changeover operations in the ship’s logbook.
The MEPC in May 2013 voted to postpone the implementation of MARPOL Annex VI Tier III standards until 2021. However, as the MEPC subsequently agreed that Tier III standards shall apply to marine diesel engines that are installed on a ship constructed on or after January 1, 2016 which operates in the North American ECA or the Caribbean ECA, Tier III standards do apply now. Tier III limits are 80% below Tier I and these cannot be achieved without additional means such as Selective Catalytic Reduction (“SCR”).
In July 2017, the IMO adopted additional amendments to MARPOL Annex VI to introduce the Baltic Sea and the North Sea as ECAs in respect of the sulfur content of fuels. Both ECAs will be enforced for ships constructed on or after January 1, 2021, or existing ships which replace an engine with “non-identical” engines or install an “additional” engine. On January 1, 2019, the Baltic Sea and North Sea ECAs were extended to cover NOx. Regulation 13 of MARPOL Annex VI requires engines with a power output of more than 130 kilowatts installed or replaced on or after January 1, 2021 to be Tier III certified if operated in the Baltic Sea and North Sea (including the English Channel) NOx ECAs and requires the future trading area of a ship to be assessed at the contract stage. There is an exemption to the Tier III requirement to allow ships fitted with dual-fuel engines or only Tier II engines to be built, converted, repaired or maintained at shipyards located inside NOx ECAs if there is not an available, feasible Tier III engine and retrofitting the Tier II engine is not feasible.
Regulation 18.5 of MARPOL Annex VI requires ships of 400 gross tons and above to have on board a Bunker Delivery Note (“BDN”) which records details (as set forth in Appendix V) of fuel oil delivered and used on board for combustion purposes. The BDN also provides the designation requirements for refiners, importers and distributors. The BDN now includes a selection box obliging the purchaser to obtain a notification from the fuel supplier’s representative that fuel is intended to be used in compliance with MARPOL, if the fuel supplied exceeds the 0.5% sulfur limit. In November 2022, the MEPC adopted amendments to Annex V making it mandatory to include the flashpoint of fuel oil or a statement that the flashpoint has been measured at or above 70˚C in the BDN. This amendment is expected to enter into force on 1 May 2024.
Further, the MEPC adopted two other sets of amendments to MARPOL Annex VI related to carbon intensity regulations. The MEPC agreed on combining the technical and operational measures, which entered into force on January 1, 2023.
HNS Convention. Our vessels also may become subject to the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, created in 1996 and as amended by the Protocol adopted in April 2010 (as amended, the “HNS Convention”) if it enters into force. The HNS Convention would create a regime of liability and compensation for damage from hazardous and noxious substances (“HNS”), including a two-tier system of compensation composed of compulsory insurance taken out by shipowners and an HNS fund which comes into play when the insurance is insufficient to satisfy a claim or does not cover an incident. In March 2020, EU ministers signed a declaration highlighting the importance of the ratification of international maritime conventions, including the 2010 HNS Convention with a target of May 2021 for ratification by EU Member States. In May 2020 France passed legislation preparing for the ratification of the HNS Protocol 2010. In January 2022, Estonia became the sixth country to deposit instruments of ratification of the HNS Protocol 2010 (joining Canada, Denmark, Norway, South Africa and Turkey). To date however, the HNS Convention has not been ratified by a sufficient number of countries to enter into force.
The Maritime Labour Convention. The International Labour Organization’s Maritime Labour Convention was adopted in 2006 (“MLC 2006”). The basic aims of the MLC 2006 are to ensure comprehensive worldwide protection of the rights of seafarers (the MLC 2006 is sometimes called the Seafarers’ Bill of Rights) and to establish a level playing field for countries and ship owners committed to providing decent working and living conditions for seafarers, protecting them from unfair competition on the part of substandard ships. The MLC 2006 was ratified on August 20, 2012, and all our vessels were certified by August 2013, as required. Since January 18, 2017, all ships which are subject to the MLC have been required to carry and display on board two certificates confirming that financial security is in place for a) shipowners’ liabilities in the event of abandonment and b) contractual payments for death or long-term disability, as set out in relevant the employment agreement. As of December 26, 2020, shipowners are obliged to pay wages and other entitlements to seafarers where the seafarer is held captive as a result of piracy or armed robbery. The MLC imposes obligations on owners that are relevant to protection of seafarers during the COVID-19 pandemic. The Officers of the Special Tripartite Committee issued a statement in 2020 drawing attention to the need for a pragmatic approach in issues such as facilitating the return home of seafarers who have completed their contracts. The MLC 2006 requirements have not had, and we do not expect that the MLC 2006 requirements will have, a material effect on our operations.
European Union Initiatives. In September 2005, the European Union adopted legislation to incorporate international standards for ship-source pollution into European Community law and to establish penalties for discharge of polluting substances from ships (irrespective of flag). Since April 1, 2007, Member States of the European Union have had to ensure that illegal discharges of polluting substances, participation in and incitement to carry out such discharges are penalized as criminal offences and that sanctions can be applied against any person, including the master, owner and/or operator of the polluting ship, found to have caused or contributed to ship-source pollution “with intent, recklessly or with serious negligence” (this is a lower threshold for liability than that applied by MARPOL, upon which the ship-source pollution legislation is partly based). In the most serious cases, infringements will be regarded as criminal offences (where sanctions include imprisonment) and will carry fines of up to Euro 1.5 million. On November 23, 2005 the European Commission published its Third Maritime Safety Package, commonly referred to as the Erika III proposals, and two bills (dealing with the obligation of Member States to exchange information among themselves and to check that vessels comply with international rules, and with the allocation of responsibility in the case of accident) were adopted in March 2007. The Treaty of Lisbon entered into force on December 1, 2009 following ratification by all 27 European Union member states and identifies protection and improvement of the environment as an explicit objective of the European Union. The European Union adopted its Charter of Fundamental Rights at the same time, declaring high levels of environmental protection as a fundamental right of European Union citizens. Additionally, the sinking of the Prestige in 2002 has led to the adoption of other environmental regulations by certain European Union Member States. It is impossible to predict what legislation or additional regulations, if any, may be promulgated by the European Union or any other country or authority.
The EU has also adopted legislation that (1) requires member states to refuse access to their ports by certain substandard vessels, according to vessel type, flag and number of previous detentions; (2) obliges member states to inspect at least 25.0% of vessels using their ports annually and increase surveillance of vessels posing a high risk to maritime safety or the marine environment; (3) provides the EU with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of negligent societies; and (4) requires member states to impose criminal sanctions for certain pollution events, such as the unauthorized discharge of tank washings. It is also considering legislation that will affect the operation of vessels and the liability of owners for oil pollution.
The Council of the EU has approved the implementation of its 2013 strategy for integrating maritime transport emissions into the EU’s GHG reduction policies, and Regulation (EU) 2015/757 of the European Parliament and of the Council on the monitoring, reporting and verification of carbon dioxide (“CO2”) emissions from maritime transport was adopted on April 29, 2015. It obliges owners of vessels over 5,000 gross tons to monitor emissions for each ship on a per voyage and annual basis, from January 1, 2018. There are provisions for monitoring, reporting and verifying (“MRV”) of CO2 emissions from vessels using EU ports, to apply from January 1, 2018. From 2019, by April 30 each year all ships above 5,000 gross tons, regardless of flag, calling at EU ports must submit a verified emissions report annually to the European Commission and the vessel’s flag state. From 2019, by June 30 each year vessels must carry a valid Document of Compliance (“DOC”) confirming compliance with Regulation (EU) 2015/757 for the prior reporting period. This DOC must be made available for inspection at EU ports. Individual Member States have started to introduce CO2 emissions legislation for vessels. The French Transport Code has required vessel operators to record and disclose the level of CO2 emitted during the performance of voyages to or from a destination in France since October 1, 2013.
The European Green Deal, details of which were issued in December 2019, included proposals to include emissions from the shipping sector into the EU Emissions Trading System (“ETS”). In March 2020 the European Commission proposed a draft European Climate Law which sets out a proposed framework to implement the EU’s aim of being climate neutral by 2050. In December 2020 the European Council agreed on a general approach on the European Climate Law. According to Directive (EU) 2018/2021 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources, in order to mainstream the use of renewable energy in the transport sector the share of renewable energy within the final consumption of energy in the transport sector is set to be at least 14 % by 2030 (minimum share). This objective is likely to be increased soon, with the "Fit for 55" package.
In July 2021, the EU Commission submitted its 'Fit for 55' package, consisting of several legislative proposals to ensure EU legislation is in line with the EU's climate goals under the European Green Deal. Two key proposals are the inclusion of carbon emissions from maritime transport in the EU ETS from 2023 and FuelEU Maritime, a new proposal targeting the carbon intensity of a ship's fuel. If adopted as per the Commission's proposal, the EU ETS will apply to 100% of carbon emissions from ship voyages between EU ports and 50% of emissions from voyages between an EU port and a non-EU port. The EU ETS is a 'cap and trade' carbon market, where participants purchase allowances that can be traded with other participants. An allowance entitles the holder to emit one tonne of CO2 and each year participants must surrender the requisite amount of allowances corresponding to their verified annual emissions for the previous calendar year or face paying a financial penalty. If adopted as per the Commission's proposal, the FuelEU Maritime Regulation would apply to all ships above 5,000GT arriving at or departing from EU ports and compliance obligations would be phased in from January 1, 2025. The proposed FuelEU Maritime Regulation would require a ship's fuel consumption and the fuel's average GHG intensity to be monitored, verified and calculated. The regulation would set an annual limit on the GHG intensity of maritime fuels used by a ship, with a financial penalty imposed for any 'compliance deficit'. In addition, the proposed FuelEU Maritime Regulation would require containerships and passenger ships calling at EEA ports to connect to and use on-shore power at berth from January 1, 2030. The European Council adopted its general approach on June 29, 2022 and a political agreement as reached in December 2022 on the proposals, which are currently pending formal adoption in both the European Council and the European Parliament.
Vessel Recycling Regulations. The EU has introduced the European Ship Recycling Regulation, aimed at minimizing adverse effects on health and the environment caused by ship recycling, as well as enhancing safety, protecting the marine environment and ensuring the sound management of hazardous waste. The Regulation entered into force on November 20, 2013 and anticipates the international ratification of the IMO’s Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships 2009 (“Hong Kong Convention”). The Hong Kong Convention will enter into force 24 months after the following conditions are met: (1) not less than 15 IMO member states have become signatories, (2) the signatories represent at least 40% of the gross tonnage of the world’s merchant shipping, and (3) the combined maximum annual ship recycling volume of the signatories during the preceding 10 years constitutes at least 3% of the gross tonnage of the combined merchant shipping of the signatories. The Hong Kong Convention has been adopted by the necessary number of member states; however, those states do not represent the required minimum 40% of the world merchant shipping for the Hong Kong Convention to enter into force.
By December 31, 2020, the Ship Recycling Regulation requires vessels flying the flag of EU Member States to maintain detailed records of hazardous materials on board, with some materials such as asbestos being restricted or prohibited. This obligation is extended to all non-EU flagged vessels calling at a port or anchorage in an EU Member State. A certified inventory of hazardous materials (“IHM”) first requires a survey carried out by the shipowner or a hazardous materials experts, and then the relevant flag state administration will issue a statement of compliance to the vessel after verifying the IHM. The IHM will be subject to periodic checks during renewal surveys every five years and during port state control inspections. The European Ship Recycling Regulation also requires EU-flagged vessels to be scrapped only in approved recycling facilities and grants an EU Member State the right to detain, dismiss or exclude non-compliant vessels from their ports or offshore terminals.
Other Environmental Initiatives. Many countries have ratified and follow the liability scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (“CLC”), and the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage of 1971, as amended (“Fund Convention”). The U.S. is not a party to these conventions. Under these conventions, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. The liability regime was increased (in limit and scope) in 1992 by the adoption of Protocols to the CLC and Fund Convention which became effective in 1996. The Fund Convention was terminated in 2002, but the Supplementary Fund Protocol was adopted in 2003 and entered into force in March 2005. The liability limit in the countries that have ratified the 1992 CLC Protocol is tied to a unit of account which varies according to a basket of currencies. Under an amendment to the 1992 CLC Protocol that became effective on November 1, 2003, for vessels of 5,000 to 140,000 gross tons, liability is limited to approximately $3.4 million plus approximately $0.0005 million for each additional gross ton over 5,000. For vessels of over 140,000 gross tons, liability is limited to approximately $66.7 million. As the Convention calculates liability in terms of IMF Special Drawing Rights, these figures are based on currency exchange rates on March 31, 2023. From May 1998, parties to the 1992 CLC Protocol ceased to be parties to the CLC due to a mechanism established in the 1992 CLC Protocol for compulsory denunciation of the “old” regime; however, the two regimes will co-exist until the 1992 CLC Protocol has been ratified by all original parties to the CLC. The right to limit liability is forfeited under the CLC where the spill is caused by the owner’s actual fault and under the 1992 CLC Protocol where the spill is caused by the owner’s intentional or reckless conduct. The 1992 CLC Protocol channels more of the liability to the owner by exempting other groups from this exposure. Vessels trading to states that are parties to these conventions must provide evidence of insurance covering the liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. We believe that our protection and indemnity insurance will cover the liability under the plan adopted by IMO.
The U.S. National Invasive Species Act (“NISA”) was enacted in 1996 in response to growing reports of harmful organisms being released into U.S. ports through ballast water taken on by ships in foreign ports. Under NISA, the USCG adopted regulations in July 2004 establishing a national mandatory ballast water management program for all vessels equipped with ballast water tanks that enter or operate in U.S. waters. These regulations require vessels to maintain a specific ballast water management plan. The requirements can be met by performing mid-ocean ballast exchange, by retaining ballast water on board the ship, or by using environmentally sound alternative ballast water management methods approved by the USCG. However, mid-ocean ballast exchange is mandatory for ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope crude oil. Mid-ocean ballast exchange is the primary method for compliance with the USCG regulations, since holding ballast water can prevent ships from performing cargo operations upon arrival in the U.S., and alternative methods are still under development. Vessels that are unable to conduct mid-ocean ballast exchange due to voyage or safety concerns may discharge minimum amounts of ballast water (in areas other than the Great Lakes and the Hudson River), provided that they comply with record keeping requirements and document the reasons they could not follow the required ballast water management requirements. The USCG adopted allowable concentration limits for living organisms in ballast water discharges in U.S. waters, effective June 21, 2012. All newly constructed vessels must be compliant on delivery. All existing vessels must be compliant at their first scheduled drydock after January 1, 2016 or, in the case of vessels with ballast water capacity of 1,500 – 5,000 cubic meters, their first scheduled drydock after January 1, 2014. The USCG must approve any ballast water management technology before it can be placed on a vessel, and a list of approved equipment can be found on the Coast Guard Maritime Information Exchange (“CGMIX”) web page. As of March 13, 2023, there were fifty treatment systems which have obtained USCG type approval. Several U.S. states, such as California, have also adopted more stringent legislation or regulations relating to the permitting and management of ballast water discharges compared to EPA regulations.
At the international level, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments in February 2004 (the “BWM Convention”). The BWM Convention entered into force on September 8, 2017. Under the BWM Convention, all ships in international traffic are required to manage their ballast water on every voyage by either exchanging it or treating it using an approved ballast water treatment system. All ships have to carry an approved Ballast Water Management Plan and a Ballast Water Record Book, and all ships of 400 gross tons and above have to be surveyed and issued with an International Ballast Water Management Certificate. The BWM Convention sets out two standards of compliance, D1 and D2. The D1 standard requires ships to exchange ballast water in open seas away from coastal areas. The D2 standard in Regulation D-2 of the BWM Convention outlines the standard that ballast water treatment systems must meet. The standards involve maximum levels of certain microorganisms, such as plankton and intestinal enterococci, for given amounts of ballast water. All ships must maintain the D1 standard until required to comply with the D2 standard. All ships constructed after entry into force of the BWM Convention (September 8, 2017) will have to be compliant on delivery with the D2 standard. Existing ships are required to be compliant with the D2 standard by their first International Oil Pollution Prevention (“IOPP”) renewal survey on or after September 8, 2017. Ships constructed before September 8, 2017 are required to comply with the D2 standard at the first IOPP renewal survey on or after September 8, 2019. All ships must have installed a ballast water treatment system which is compliant with the D2 standard by September 8, 2024. The IOPP renewal survey refers to the renewal survey associated with the IOPP Certificate required under MARPOL Annex I. The BWM Convention does not apply to ships not carrying ballast water, domestic ships, ships that only operate in waters under the jurisdiction of one party to the BWM Convention and on the high seas, warships, naval auxiliary or other ships owned or operated by a state, or permanent ballast water in sealed tanks on ships. Furthermore, flag administrators may issue exemptions from the BWM Convention for ships engaged on occasional or one-off voyages between specified ports or locations, or ships that operate exclusively between specified ports or locations, such as ferries. Amendments to the BWM Convention came into force on June 1, 2022. These include changes to the form of the IBWM certificate and rules requiring commissioning testing of ballast water management systems at the ship's initial survey or during an additional survey for retrofits. This test is required before the BWM certificate for D-2 is issued, but does not apply to ships that already have a certified ballast water management system installed.
Our vessels comply with the BWM Convention in accordance with its terms, though the cost of compliance has resulted in us incurring costs to install approved ballast water treatment systems on our vessels.
Polar Regulations. In November 2014 the IMO adopted the International Code for Ships Operating in Polar Waters (the “Polar Code”) and related amendments to SOLAS to make it mandatory. The Polar Code comprises of detailed requirements relating to safety, design, construction, operations, training and the prevention of environmental pollution. The Polar Code applies to all shipping and maritime operations in the defined waters of the Antarctic and Arctic, apart from fishing boats, ships under 500 tons and fixed structures. The Polar Code entered into force on January 1, 2017 and applies to new ships constructed after that date. Ships constructed before January 1, 2017 are required to meet the relevant requirements of the Polar Code by their first intermediate or renewal survey, whichever occurs first, after January 1, 2018. The Polar Code brings with it numerous requirements and necessities for all ships trading in the polar regions and therefore a great deal of investment will be needed to operate in this region. It is our intention to comply with the Polar Code as implemented through MARPOL and SOLAS and with the applicable training requirements of the STCW Convention.
MARPOL Annex I regulation 43 concerning special requirements for the use or carriage of oils in the Antarctic area to prohibit ships from carrying heavy grade oil on board as ballast, came into force on March 1, 2016. In June 2021 the MEPC adopted draft amendments to MARPOL Annex I, which add a new Regulation 43A introducing a prohibition on the use and carriage of heavy fuel oil by ships in Arctic waters on and after July 1 2024. Ships with fuel oil tanks located inside the double hull would need to comply on and after July 1 2029.
In December 2022, the MEPC also adopted amendments to MARPOL Annex I, Annex II, Annex IV, Annex V, and Annex VI to allow States with ports in the Arctic region to enter into regional arrangements for port reception facilities. These amendments are expected to enter into force on May 1, 2024.
Greenhouse Gases. In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into force. Although the Kyoto Protocol required adopting countries to implement national programs to reduce emissions of GHGs, emissions of GHGs from international shipping are not subject to the Kyoto Protocol. No new treaty was adopted at the United Nations’ climate change conference in Cancun in December 2010. The Kyoto Protocol was extended to 2020 at the 2012 United Nations Climate Change Conference, with the hope that a new treaty would be adopted in 2015 to come into effect in 2020. The second commitment period of the Kyoto Protocol expired in 2020. We refer to the discussion above of the regulation of GHG emissions from ocean-going vessels under the CAA and EU GHG emissions regulations. The IMO, the EU or individual countries in which we operate could pass climate control legislation or implement other regulatory initiatives to control GHG emissions from vessels that could require us to make significant financial expenditures or otherwise limit our operations. Even in the absence of climate control legislation and regulations, our business may be materially affected to the extent that climate change may result in sea level changes or more intense weather events.
The Hong Kong Air Pollution Control (Marine Light Diesel) Regulations, which entered into force on April 1, 2014, provide that the sulfur content of marine light diesel supplied to vessels in Hong Kong must contain 0.05% sulfur content or less. From January 1, 2019, the Hong Kong Air Pollution Control (Fuel for Vessels) Regulation has required all vessels, irrespective of whether they are sailing or berthing, to use fuel containing 0.5% sulfur content or less or any other fuel approved by the Director of Environment Protection. Vessels equipped with scrubbers may apply for an exemption.
From January 1, 2019, vessels must switch to fuel with a sulfur content not exceeding 0.5% prior to entering China’s territorial sea. From March 1, 2020 vessels in Chinese waters must not carry fuel oil with a sulfur content exceeding 0.5%. From July 1, 2019, vessels other than tankers capable of receiving shore power must use shore power whilst in China’s coastal and inland ECAs (the Yangtze and Xi Jiang Rivers) if berthing for more than 3 hours and 2 hours, respectively. While in China’s coastal and inland ECAs, vessels may not discharge effluent from open loop exhaust gas cleaning systems. From January 1, 2020, vessels entering China’s inland ECAs must use fuel with a sulfur content not exceeding 0.1% while operating within the inland ECA. From January 1, 2022, vessels must use fuel with a sulfur content not exceeding 0.1% while operating within the Hainan Coastal ECA. Ships of over 400 gross tons or more or powered by engines of 750 kilowatts or more calling at a port in China must report the energy consumption data of their last voyage to the China Maritime Safety Administration before leaving port.
From January 1, 2019, ships not fitted with scrubbers are required to burn fuel with a sulfur content not exceeding 0.5% when entering Taiwan’s international commercial port areas.
In December 2015, representatives of 195 countries met at the Paris Climate Conference (“COP 21”) and adopted a universal and legally binding climate deal commonly known as the Paris Agreement. The Paris Agreement contemplates commitments from each nation party thereto to take action to reduce GHG emissions and limit increases in global temperatures but did not include any restrictions or other measures specific to shipping emissions. The governments agreed to the goal of keeping the increase in global average temperature to below 2 degrees Celsius and to aim, if possible, to limit the increase to 1.5 degrees Celsius. Governments also agreed to reconvene every 5 years to reassess the targets. Governments will be required to report to each other on their progress and the steps they have taken to reach their targets. The Paris Agreement came into force on November 4, 2016, and as of March 2023, 194 of the 197 countries who were party to the Paris Agreement have ratified it. On June 1, 2017, the U.S. President announced that the U.S. intended to withdraw from the Paris Agreement. On November 4, 2019, the U.S. submitted formal notification of its withdrawal from the Paris Agreement, which took effect on November 4, 2020. On February 19, 2021, the U.S. re-entered the Paris Agreement. With growing pressure being placed on the IMO to implement measures to aid the objectives agreed at the COP 21, the shipping industry has been subject to further regulation as a result of COP 21 and subsequent COP meetings. This has included initiatives from both the shipping industry and national governments, such as the Call to Action for Shipping Decarbonization (which more than 200 companies has signed), the Clydebank Declaration for Green Shipping Corridors (signed by over 20 countries) and the proposal from the International Chamber of Shipping for an IMO Maritime Research Fund to invest in research and development of zero-carbon technologies for ships.
COP27 held in Egypt in November 2022 was the last COP before the IMO's MEPC met in December 2022 for its 79th session and before it meets in Spring 2023 to decide its final GHG emissions strategy (see below). Prior to this, in April 2018 the MEPC adopted an initial strategy on the reduction of GHG emissions from ships. The initial strategy aims to reduce the total GHG emissions from ships, based upon emissions in 2008, by at least 50% by 2050, while at the same time pursuing efforts towards phasing them out entirely. In keeping with IMO’s initial strategy, IMO has committed to having in place by 2023 short-term measures (such as the EEXI, CII rating and enhanced SEEMP as set out above) and by 2030 mid-term measures intended to meet the stated goals of reducing carbon dioxide emissions from shipping by 40% by 2030 and 70% by 2050, and GHG emissions from shipping by 50% by 2050. .
A follow up program approved by the MEPC in October 2018 is intended to act as a three-stage planning tool in meeting the timelines identified in the initial strategy. The January 1, 2019, amendments to Regulation 22A of chapter 4 of MARPOL Annex VI, discussed above, requiring ships of 5,000 gross tons and above to collect consumption data for each type of fuel oil they use, are part of these initiatives. The proposed amendments to Regulations 20A, 21A, 22 of chapter 4 of MARPOL Annex VI imposing mandatory goal based measures to reduce the cargo intensity of international shipping, as discussed above, are part of these initiatives. There have also been proposals (to be further developed as a priority after the MEPC's 80th session in July 2023) for a form of emissions levy or tax, with the funds raised being used to support either development of new emissions reducing technologies and alternative fuels or a climate change mitigation fund for vulnerable countries. A number of proposals were discussed at MEPC77 in November 2021 and were referred to the Intersessional Working Group on Reduction of GHG Emissions from Ships for further review. This Intersessional Working Group met in December 2022 and established a Working Group on Reduction of GHG emissions from ships (the "Working Group"). The Working Group committed to a strengthened level of ambition for the IMO's revised Strategy for Reduction of GHG Emissions from Ships by MEPC 80. The MEPC also invited and encouraged voluntary action plans and cooperation to contribute to reducing GHG emissions from ships. The Company is monitoring these developments and their potential impact. The Biden Administration in April 2021 announced that the United States will support a net-zero emissions goal, and the U.S. has pushed and is expected to continue pushing for more aggressive emissions requirements going forward.
On June 29, 2017, the Global Industry Alliance (the “GIA”) was officially inaugurated. The GIA was a program, under the Global Environmental Facility-United Nations Development Program-IMO project, which supports shipping, and related industries, as they move towards a low carbon future. The GIA includes 18 members including, but not limited to, shipowners, operators, classification societies, and oil companies. The GIA has concluded.
In June 2017, the IMO’s Maritime Safety Committee adopted requirements for cyber-risk management systems to be incorporated and implemented by ship owners and managers by 2021. U.S. agencies have indicated that cybersecurity regulations for the maritime industry are likely to be further developed in the near future in an attempt to combat cybersecurity threats. Compliance might require companies to cultivate additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures. However, the impact of such IMO requirements or potential regulations is hard to predict currently.
Trading Restrictions. The Company is aware of the international sanctions applicable to trading with non-government controlled regions of Ukraine (including the so-called Donetsk People’s Republic, the so-called Luhansk People’s Republic, Crimea, Zaporizhzhia and Kherson), Cuba, Iran, North Korea, Syria, Venezuela and, in prior periods, Sudan, and it has complied with those restrictions and intends to continue to so comply in all respects. The Company has not, nor does it intend to, provide any goods, fees or services to the referenced countries, and has had no contacts with governmental entities in these countries nor does it intend to have any in the future.
Its vessels are not chartered to any Crimean, Cuban, Iranian, North Korean, Sudanese, Syrian or Venezuelan companies. The voyage charter parties and all time-charter agreements relating to the vessels in the fleet generally preclude Iran, non-government controlled regions of Ukraine (including the so-called Donetsk People’s Republic, the so-called Luhansk People’s Republic, Crimea, Zaporizhzhia and Kherson), Cuba, North Korea, Syria or Venezuela from the vessels’ trading unless agreed between owner and charterer after considering all relevant sanctions legislation, including any applicable general licenses, and obtaining legal advice as to the potential sanctions implications of the proposed trade. In addition all charter parties exclude trading with any entities or countries in contradiction of any sanctions as applicable from time to time.
None of the vessels the Company owns, operates or charters have provided, or are anticipated to provide in contradiction to sanctions as applicable from time to time, any U.S.-origin goods, or goods of any origin which would contravene sanctions restrictions, to these countries, or involve employees who are U.S. nationals in operations associated with these countries. No U.S. companies or U.S. dollar payments are involved in any operations associated with these countries. The Company has no relationships with governmental entities in those countries, nor does it charter its vessels to companies based in those countries. The Company derives its revenue directly from the charterers.
The Company is also aware of the less restrictive sanctions on trading with other countries, including but not limited to Libya, and Myanmar/ Burma, and the restrictions on trading with Russia, certain Russian entities and Russian origin goods. It has complied with those restrictions and intends to continue to so comply in all respects.
Between January 1, 2022, and March 31, 2023, the Company’s vessels made 2,582 port calls around the world, none of which were in breach of any sanctions regulations.
We operate in markets that are highly competitive and where no owner controlled more than 5% of the world tanker fleet as of April 3, 2023. Ownership of tankers is divided among independent tanker owners and national and independent oil companies. Many oil companies and other oil trading companies, the principal charterers of our fleet, also operate their own vessels and transport oil for themselves and third-party charterers in direct competition with independent owners and operators. We compete for charters based on price, vessel location, size, age, condition, and acceptability of the vessel, as well as our reputation as a tanker operator and our managers reputation for meeting the standards required by charterers and port authorities. Currently we compete primarily with owners of tankers in the ULCCs, VLCCs, suezmax, suezmax shuttle tankers, aframax, panamax, handymax and handysize class sizes, and we also compete with owners of LNG carriers.
Although we do not actively trade to a significant extent in Middle East trade routes, disruptions in those routes as a result of international hostilities, including those in Syria, Iraq and between Russia and Ukraine, economic sanctions, including those with respect to Iran, Russia and Ukraine, and terrorist attacks such as those made in various international locations (Somalia, Kenya, Yemen, Nigeria) and pirate attacks repeatedly made upon shipping in the Indian Ocean, off West Africa and in South East Asia, may affect our business. We may face increased competition if tanker companies that trade in Middle East trade routes seek to employ their vessels in other trade routes in which we actively trade. Other significant operators of multiple aframax and suezmax tankers in the Atlantic basin that compete with us include public companies such as Euronav, Teekay Tankers, Frontline, International Seaways, Inc., Double Hull Tankers and Nordic American Tankers. There are also numerous smaller tanker operators in the Atlantic basin.
We have no salaried employees. See “—Management Contract—Crewing and Employees.”
We operate out of Tsakos Energy Management offices in the building also occupied by Tsakos Shipping at Megaron Makedonia, 367 Syngrou Avenue, Athens, Greece.
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
As of April 3, 2023, the fleet consisted of 58 double-hull vessels with an average age of 10.3 years, comprised of 51 conventional tankers, three LNG carriers and four suezmax DP2 shuttle tankers providing world-wide marine transportation services for national, major and other independent oil companies and refiners under long, medium and short-term charters. We also have two DP2 suezmax shuttle tankers, four LNG dual fuel aframax tankers and two suezmax tankers under construction with expected deliveries in 2023, 2024 and 2025. The current operational fleet consists of three VLCCs, eighteen suezmaxes (including four DP2 shuttle tankers), nineteen aframaxes, two aframax LR2s, nine panamax LR1s, four handysize tankers and three LNG carriers. All vessels are owned by our subsidiaries, other than four suezmax tankers, one aframax tanker and one LNG carrier, which are bareboat chartered-in by our subsidiaries. The charter rates that we obtain for these services are determined in a highly competitive global tanker charter market. The tankers operate in markets that have historically exhibited both cyclical and seasonal variations in demand and corresponding fluctuations in charter rates. Tanker markets are typically stronger in the winter months because of increased oil consumption in the northern hemisphere. In addition, unpredictable weather conditions in the winter months in various regions around the world tend to disrupt vessel scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities. Changes in available vessel supply are also a contributing factor in affecting the cyclicality and overall volatility present in the tanker sector which is reflected both in charter rates and asset values.
Results from Operations—2022
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Annual Report our actual results may differ materially from those anticipated in these forward-looking statements.
In 2022, the Company has experienced the largest change in trade flows relating to the carriage of crude and oil product movements arising from geopolitical events. The actions put in place by the West, and others, to penalize Russian activities, unintentionally gave all tanker operators a positive thrust to the commercial activities of their vessels and created changes that may actually become permanent, as Europe, the major client of Russian oil allowed them to be replaced with barrels from the USA, Guyana, West Africa, and the Middle East, which, in turn, created a situation in which tankers, including ours, could participate in enjoying the benefits of long distance voyages providing a positive ton-mile effect for tanker demand and rates. These changes started before the war. At the same time, tanker new buildings have not seen such a lack of new buildings for over thirty years, despite an ageing fleet world-wide.
Global oil demand is coming back after the COVID pandemic, despite the ongoing energy transition to renewables. In this respect the world appears to understand that, for the time being, it will be necessarily reliant on oil and LNG and may possibly last longer at least, until 2050. If this is achieved, it will be a record amount as according to the International Energy Agency demand is expected to grow by two million barrels daily in 2023.
China has relaxed its punitive zero COVID policy in the latter part of 2022, having caused, by its previous policy, a period of growth deterioration. The new policy should now allow a more active environment, as global growth will most likely come from Asia, despite global difficulties generating from high inflation, squeezed liquidity, and the serious situation of continuous war in the Ukraine. Nevertheless, the world economy still remains relatively buoyant. The recent concern relating to potential bank collapses appears to have been contained, although could potentially re-emerge if appropriate measures by the FED and global central banks are not implemented. Otherwise, the U.S. is in a good shape, and still guiding the world economy with the possibility of relaxing rate increases, and with indications that inflation is cooling down at an encouraging pace, creating a more favorable environment for the world economy, including shipping.
The global economy is expected to grow 2.9% in 2023 and 3.1% in 2024 as per the latest IMF projections.
Specifically, to our industry, the impact of the pandemic had left a heavy toll over the past two years, with global oil demand and tanker demand falling to low levels. However, by contrast, tanker fleet supply fundamentals continued to look very positive due to a lack of newbuilding ordering, a diminishing tanker orderbook, and higher scrapping prices. At the end of 2022, the tanker orderbook stood at about 4.11%of the existing fleet size, the lowest since 1996 and well below the 2010 peak of over 22%. The level of new tanker orders will remain low in the near-term due to rising newbuild prices, mainly due to steel prices and ongoing uncertainty over vessel propulsion technology and alternative bunker fuels. Scrapping should remain elevated due to the combination of an ageing world tanker fleet and higher tanker scrap prices that have now reached over $650 per ton, providing incentive for owners with vessels over 20 years old to scrap their vessels.
As the new paradigm shift in international relations, driven by the war in Ukraine which continues to shape the global oil trade with expected lasting effects, China, at long last, dismantled its zero-covid policy which led to an increase in oil demand as the economy reopened and the travelling habits of the population gradually started to resurface. This pick-up in demand has led to higher oil imports as new refineries have come onstream, to facilitate the expected increase in consumption, and to recommence the export of oil products to the international markets. With Chinese oil imports anticipated to reach and possibly surpass the pre-Covid levels of 10.8mbpd and Chinese oil consumption expected by many consultants, to expand in 2023 by approximately 1.0mbpd, the strength of the current oil market, enhanced by the EU ban and the G7 price cap on Russian oil imports, seems to be on solid foundations. The tanker sector is set to be a prime beneficiary of this trend as the orderbook is at historical lows, at about 4.11%, and close to 35% of the fleet is over 15 years of age making these vessels less attractive to high-end oil concerns particularly for longer-term contracts.
Our fleet achieved voyage revenues of $860.4 million in 2022, an increase of 57.6% from $546.1 million in 2021. The average size of our fleet remained at similar levels in 2022 to 65.5 vessels from 65.4 vessels in 2021, and while fleet utilization increased to 94.7% during 2022 compared to 92.6% 2021. In 2022, geopolitical events lead to large changes in trade flows, creating a situation in which tankers participated in long distance voyages providing positive ton-mile effect for tanker demand and rates. Our average daily time charter rate per vessel, after deducting voyage expenses, increased to $30,399 in 2022 from $17,037 in 2021, mainly due to strong market rates and decreased number of vessels that underwent their dry dockings. Operating expenses increased by 9.8% to $190.3 million in 2022 from $173.3 million in 2021, mainly due to increased cost of lubricants and higher costs for routine repairs and maintenance due to increased inflation throughout the world economy in 2022.
Depreciation and amortization totaled $140.8 million in 2022 compared to $143.3 million in 2021 due to decreased depreciation expenses from $126.8 million in 2021 to $120.5 million in 2022, mainly due to revised scrap value per light weight ton (LWT) to $430 from $390 effective as of October 1, 2021. General and administrative expenses, which include management fees and incentive awards were $29.9 million in 2022 and $29.1 million in 2021, a slight increase mainly due to increased management fees.
In 2022, the review of the carrying amounts in connection with the estimated recoverable amount and the probability of sale for certain of the Company’s vessels as of December 31, 2022, indicated no impairment charge. In 2021, the Company recognized a $86.4 million impairment charge, due to probability of sale for certain of the Company’s vessels.
There was operating income of $256.4 million in 2022 compared to $119.9 million operating loss in 2021. Interest and finance costs, net, increased by 60.0% in 2022 or $18.8 million, mainly due to increased interest rates and increased level of average debt during the year.
Net income attributable to the Company was $204.2 million in 2022 compared to $151.4 million net loss in 2021. The effect of preferred dividends in 2022, inclusive of deemed dividends and undistributed income to Series G participants, was $36.0 million compared to $35.8 million in 2021. Net income per share was $6.02 basic and $6.01 diluted, in 2022, including the effect of preferred dividends, based on 27,970,799 weighted average shares outstanding basic and 28,188,064 weighted average shares outstanding diluted, compared to a net loss of $9.53 (basic and diluted) per share in 2021 based on 19,650,307 weighted average shares outstanding (basic and diluted).
Some of the more significant developments for the Company during 2022 were:
the issuance of 4,633,473 common shares and 165 Series D Preferred Shares 2,239 Series E and 5,888 Series F Preferred Share issuances;
the dry-docking of Marathon TS, Sola TS, Oslo TS, Stavanger TS, Euro, Bergen TS, Aegeas, Lisboa, Arctic, Antarctic, Arion, Decathlon, Neo Energy, Andromeda, Sakura Princess, Izumo Princess, for their mandatory special or intermediate survey;
the deliveries of three new vessels, the LNG carrier Tenergy, the VLCC Dias I and the DP2 shuttle tanker, Porto;
the sale of Inca and Proteas;
the payment to holders of Class B Preferred Shares of dividends totaling $1.7 million in aggregate;
the payment to holders of Series D preferred shares of dividends totaling $7.7 million in aggregate;
the payment to holders of Series E preferred shares of dividends totaling $11.0 million in aggregate;
the payment to holders of Series F preferred shares of dividends totaling $16.0 million in aggregate;
the payment to holders of Series G Convertible Preferred Shares of dividends totaling $0.03 million in aggregate; and
dividends to holders of common shares totaling $0.25 per share with or $7.3 million in aggregate.
The Company operated the following types of vessels during and at the end of 2022:
|Vessel Type||LNG carrier||VLCC||Suezmax||Suezmax DP2 shuttle||Aframax||Panamax||Handymax MR2||Handysize MR1||Total Fleet|
|Average number of vessels||3.0||2.1||14.0||3.5||21.3||9.6||6.0||6.0||65.5|
|Number of vessels at end of year||3.0||3.0||14.0||4.0||21.0||9.0||6.0||6.0||66.0|
|Dwt at end of year (in thousands)||273.0||900.0||2,245||623.0||2,326||662.0||318.5||223.0||7,570|
|Percentage of total fleet (by dwt at year end)||3.6%||11.9%||29.7%||8.2%||30.7%||8.7%||4.2%||3.0%||100.0%|
|Average age, in years, at end of year||7.5||5.2||12.4||6.5||9.6||12.9||17.5||15.9||10.4|
We believe that the key factors which determined our financial performance in 2022, within the given freight rate environment in which we operated, were:
|•||the diversified aspect of the fleet, including purpose-built vessels to access ice-bound ports, carry LNG and operate shuttle tankers between offshore installations and on-shore terminals, which allowed us to take advantage of all tanker sectors;|
|•||the benefits of the new vessels acquired in recent years in terms of operating efficiencies and desirability on the part of charterers;|
|•||our balanced chartering strategy (discussed further below), which ensured a stable cash flow while allowing us to take advantage of potential upside in the freight market;|
|•||the long-established relationships with our chartering clients and the development of new relationships with renowned oil-majors;|
|•||the level of utilization for our vessels;|
|•||the continued control over costs by our technical managers despite pressures caused by rising operating costs;|
|•||our ability to mitigate financial costs by negotiating competitive terms with reputable banks;|
|•||our ability to manage leverage levels through cash generation and repayment/prepayment of debt;|
|•||our ability to comply with the terms of our financing arrangements, including loan-to-value requirements;|
|•||our ability to reward our shareholders through cash dividends;|
|•||our ability to raise new financing through bank debt at competitive terms despite a generally tight credit environment;|
|•||our ability to access the capital markets and raise new financing on competitive terms; and|
|•||the sale of vessels when attractive opportunities arise.|
We believe that the above factors will also influence our future financial performance and will play a significant role in the current world economic climate as we proceed through 2022 and into 2023. To these may be added:
|•||continued strength or any decline in the product and crude oil tanker charter markets during the year;|
|•||our sale of eight vessels for an aggregate sale price of $169.5 million in the first quarter of 2023, which is expected to generate a book gain on sale of approximately $80 million, and reduced the size of our operating fleet;|
|•||any additional vessel sales;|
|•||any additional vessel acquisitions or newbuildings;|
|•||the appetite of oil majors to fix vessels on medium to long term charters at attractive rates; and|
|•||our ability to build our cash reserves through operations, vessel sales and capital market products.|
Below please see data regarding our fleet for the years ended December 31, 2022, 2021 and 2020, which we use in analyzing our performance.
|Average number of vessels||65.5||65.4||65.0|
|Number of vessels (at end of period)||66.0||65.0||66.0|
|Average age of fleet (in years)(1)||10.4||10.2||9.3|
|Earnings capacity days(2)||23,919||23,864||23,781|
|Net earnings days(4)||22,640||22,090||22,394|
|Average TCE per vessel per day(6)||$||30,399||$||17,037||$||23,638|
|Vessel operating expenses per ship per day(7)||$||8,467||$||7,728||$||7,821|
|Vessel overhead burden per ship per day(8)||$||1,248||$||1,221||$||1,221|
|(1)||The average age of our fleet is the age of each vessel in each year from its delivery from the builder, weighted by the vessel’s deadweight tonnage (“dwt”) in proportion to the total dwt of the fleet for each respective year.|
|(2)||Earnings capacity days are the total number of days in a given period that we own or control vessels.|
|(3)||Off-hire days are days related to repairs, dry-dockings and special surveys, vessel upgrades and initial positioning after delivery of new vessels.|
|(4)||Net earnings days are the total number of days in any given period that we own vessels less the total number of off-hire days for that period.|
|(5)||Percentage utilization represents the percentage of earnings capacity days that the vessels were actually employed, i.e., net earnings days as a percentage of earnings capacity days.|
|(6)||The shipping industry uses time charter equivalent, or TCE, to calculate revenues per vessel in dollars per day for vessels on voyage charters. The industry does this because it does not commonly express charter rates for vessels on voyage charters in dollars per day. TCE allows vessel operators to compare the revenues of vessels that are on voyage charters with those on time charters. TCE is a non-GAAP measure. For vessels on voyage charters, we calculate TCE by taking revenues earned on the voyage and deducting voyage expenses (bunker fuel, port expenses, canal dues, charter commissions) and dividing by the actual number of voyage days. For the year ended December 31, 2022, and 2021, TCE is calculated by taking voyage revenue less voyage costs divided by the number of revenue days less 761 days and 805 days, respectively, lost as a result of calculating revenue on a loading to discharge basis. For vessels on bareboat charter, for which we do not incur either voyage or operation costs, we calculate TCE by taking revenues earned on the charter and adding a representative amount for vessel operating expenses. TCE differs from average daily revenue earned in that TCE is based on revenues after voyage expenses and does not take into account off-hire days.|
|(7)||Vessel operating expenses per ship per day represents vessel operating expenses divided by the earnings capacity days of vessels incurring operating expenses. Earnings capacity days of vessels on bareboat charters have been excluded.|
|(8)||Vessel overhead burden per ship per day is the total of management fees, management incentive awards, stock compensation expense and general and administrative expenses divided by the total number of earnings capacity days.|
Derivation of time charter equivalent per day (amounts in thousands of U.S. dollars except for days and per day amounts):
|Less: Voyage expenses||(209,890)||(198,078)||(145,267)|
|Add: Representative operating expenses for bareboat charter ($10,000 daily)||14,600||14,600||8,800|
|Time charter equivalent revenues||665,110||362,642||507,668|
|Net earnings days||21,879||21,285||21,477|
|Average TCE per vessel per day||$||30,399||$||17,037||$||23,638|
Impact of COVID-19 on our Business
The impact of the COVID-19 pandemic continues to unfold and it may continue to negatively affect the global economy and energy consumption which may have a negative effect on the Company’s business, financial performance and the results of its operations. As discussed above, the impact of the COVID-19 pandemic has negatively impacted demand for oil in 2020, 2021 and in early 2022. In the first half of 2020, while LNG charter rates weakened, crude and product tanker freight and charter rates remained strong, in part due to off-shore oil storage and longer-haul voyages reducing the number of vessels available for trade; however, the COVID-19 pandemic contributed to a continued slowdown in the global economy and demand for oil which resulted in decreased demand for seaborne transportation of oil and oil products, beginning in the third quarter of 2020, and a continued decline in demand for seaborne transportation of LNG, and in turn charter rates for our vessels not fixed on long-term fixed-rate charters, which dynamics continued into early 2022, when the conflict in the Ukraine also began to have a significant impact, since which time tanker charter rates have increased significantly. Travel restrictions imposed on a global level also caused disruptions in scheduled crew changes on our vessels and delays in carrying out of certain hull repairs and maintenance during 2020 and 2021 before dissipating in 2022, which disruptions could also continue to affect our operations. The extent to which these circumstances continue to affect us will depend largely on future developments.
The ongoing war in Ukraine has had a significant direct and indirect impact on the trade of crude oil and refined petroleum products. This conflict has resulted in the United States, United Kingdom, and the European Union, among other countries, implementing sanctions and executive orders against individuals, entities, and activities connected to Russia. Some of these sanctions and executive orders target the Russian oil sector, including a prohibition on the import of oil from Russia to the United States or the United Kingdom, and the European Union's recent ban on Russian crude oil and petroleum products which took effect in December 2022 and February 2023, respectively.
Russia’s invasion of Ukraine also led to a disruption in supply chains for crude oil and refined petroleum products, changing volumes and trade routes, thus increasing ton-mile demand for the seaborne transportation of refined petroleum products, which resulted in a prolonged spike in freight rates. Boycotts by Western oil majors and many ship owners resulted in lower product flows from Russia to Europe, while high arbitrage spreads incentivized Middle Eastern and U.S. diesel flows to Europe, increasing ton-mile demand for vessels.
The U.S., EU nations and other countries could impose wider sanctions and take other actions. Further sanctions imposed or actions taken by the U.S., EU nations or other countries, and retaliatory measures by Russia in response, could lead to increased volatility in global oil demand, which could have a material impact on our business, results of operations and financial condition. In addition, it is possible that third parties with which we do business may be impacted by events in Russia and Ukraine, which could adversely affect us.
Impact of Inflation and Interest Rates
Inflation has increased significantly on a worldwide basis since mid-2021, with many countries facing their highest inflation rates in decades and could adversely affect our business and financial results. Inflation has had a moderate impact on operating expenses, dry-docking expenses, with main engine overhauls and higher costs for routine repairs and maintenance increasing costs of maintenance, and corporate overhead in 2022. Interest rates have increased rapidly and substantially as central banks in developed countries raise interest rates in an effort to subdue inflation. The eventual implications of tighter monetary policy, and higher long-term interest rates has and may continue to drive a higher cost of capital for our business.
We typically charter our subsidiaries’ vessels to third parties on any of five basic types of charter. First are “voyage charters” or “spot voyages,” under which a shipowner is paid freight on the basis of moving cargo from a loading port to a discharging port at a given rate per ton or other unit of cargo. Port charges, bunkers and other voyage expenses (in addition to normal vessel operating expenses) are the responsibility of the shipowner.
Second are “time charters,” under which a shipowner is paid hire on a per day basis for a given period. Normal vessel operating expenses, such as stores, spares, repair and maintenance, crew wages and insurance premiums, are incurred by the shipowner, while voyage expenses, including bunkers and port charges, are the responsibility of the charterer. The time charterer decides the destination and types of cargoes to be transported, subject to the terms of the charter. Time charters can be for periods of time ranging from one or two months to more than three years. The agreed hire may be for a fixed daily rate throughout the period or may be at a guaranteed minimum fixed daily rate plus a share of a determined daily rate above the minimum, based on a given variable charter index or on a decision by an independent brokers’ panel for a defined period. Many of our charters have been renewed on this time charter with profit share basis over the past years. Time charters can also be “evergreen,” which means that they automatically renew for successive terms unless the shipowner or the charterer gives notice to the other party to terminate the charter.
Third are “bareboat charters” under which the shipowner is paid a fixed amount of hire for a given period. The charterer is responsible for substantially all the costs of operating the vessel including voyage expenses, vessel operating expenses, dry-docking costs and technical and commercial management. Longer-term time charters and bareboat charters are sometimes known as “period charters.”
Fourth are “contracts of affreightment” which are contracts for multiple employments that provide for periodic market related adjustments, sometimes within prescribed ranges, to the charter rates.
Fifth are “pools”. Where one or more of our subsidiaries’ vessel may also operate within a pool of similar vessels for part of the year whereby all income (less voyage expenses) is earned on a market basis and shared between pool participants on the basis of a formula which takes into account the vessel’s age, size and technical features. During 2022 and 2021, seven of our subsidiaries had vessels operating in a pool.
Our chartering strategy continues to be one of fixing the greater portion of our fleet on medium to long-term employment to secure a stable income flow, but one which also ensures a satisfactory return. This strategy has enabled us to smooth the effects of the cyclical nature of the tanker industry, achieving almost optimal utilization of the fleet. In order to capitalize on possible upturns in rates, we have chartered out several of our vessels at a fixed minimum rate plus an extra agreed percentage of an amount based on market spot or time-charter rates (“profit-share”).
Our Board of Directors, through its Business Development and Capital Markets Committee, formulates our chartering strategy and our commercial manager Tsakos Energy Management implements this strategy through the Chartering Department of Tsakos Shipping, which evaluates the opportunities for each type of vessel, taking into consideration the strategic preference for medium and long-term charters and ensure optimal positioning to take account of redelivery opportunities at advantageous rates.
The cooperation with Tsakos Shipping, which provides the fleet with chartering services, enables us to take advantage of the long-established relationships Tsakos Shipping has built with many of the world’s major oil companies and refiners over 50 years of existence and high quality commercial and technical service.
Critical Accounting Estimates
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Significant accounting policies are described in Note 1 of the consolidated financial statements included elsewhere in this annual report. The application of such policies may require management to make estimates and assumptions. We believe that the following are the more critical accounting estimates used in the preparation of our consolidated financial statements that involve a higher degree of judgment and could have a significant impact on our future consolidated results of operations and financial position:
Impairment. The carrying value of the Company’s vessels includes the original cost of the vessels plus capitalized expenses since acquisition relating to improvements and upgrading of the vessel, less accumulated depreciation. Carrying value also includes the unamortized portion of deferred special survey and dry-docking costs. For right-of-use assets under finance leases, the carrying value includes the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and any initial direct costs incurred by the lessee. Carrying value of right-of-use assets under finance leases also includes the unamortized portion of leasehold improvements. The carrying value of vessels usually differs from the fair market value applicable to any vessel, as market values fluctuate continuously depending on the market supply and demand conditions for vessels, as determined primarily by prevailing freight rates and newbuilding costs.
The Company reviews and tests all vessels, vessels under construction and right-of-use assets under finance leases for impairment at each quarter-end when indications of impairment are present and- at any time that specific vessels may be affected by events or changes in circumstances indicating that the carrying amount of the vessel including any unamortized dry-docking costs or the right-of-use assets under finance leases including any unamortized leasehold improvements may not be recoverable, such as during severe disruptions in global economic and market conditions, and unexpected changes in employment. A vessel to be held and used is tested for recoverability by comparing the estimate of future undiscounted net operating cash flows expected to be generated by the use of the vessel over its remaining useful life and its eventual disposition to its carrying amount including any unamortized dry-docking costs. The average age of our vessels is approximately 10.3 years as of April 3, 2023. The average remaining operational life is, therefore, 13.9 years, excluding the LNG carriers. Given the extensive remaining lives, we do not believe that there is a significant risk of not generating future undiscounted net operating cash flows in excess of carrying values including any unamortized dry-docking costs or right-of-use assets under finance leases including any unamortized leasehold improvements, however, as indicated above, circumstances may change at any time which would oblige us to reconsider the extent of risk of impairment.
Future undiscounted net operating cash flows are determined by applying various assumptions regarding future revenues net of commissions, operating expenses, scheduled dry-dockings and expected off-hire and scrap values. Our projections for charter revenues are based on existing charter agreements for the fixed fleet days and an estimated daily average hire rate per vessel category for the unfixed days based on the most recent ten-year historical averages publicly provided by major brokers, which, given the wide spread of annual rates between the peaks and troughs over the decade, we believe provides as fair as any other assumption that could be used in determining a rate for a long-term forecast. In addition, we apply a 2% annual escalation in rates to take account of published long-term growth and inflation expectations in the developed world. Future operating costs are based on the 2022 average per individual vessel and vessel type to which we also apply an annual escalation. As at December 31, 2022, given the increase in inflation rates, we increased the annual escalation applied on operating costs from 2% to 2.8%. Residual or scrap value is based on the same scrap price used for depreciation purposes as described above. All such estimations are inevitably subjective. In addition, the Company performs sensitivity analyses on the key parameters of the exercise by making use of publicly available market forecasts. Actual freight rates, industry costs and scrap prices may be volatile. As a consequence, estimations may differ considerably from actual results.
Where a vessel is deemed to be a risk, we also take into account the age, condition, specifications, marketability and likely trading pattern of each such vessel, and apply various possible scenarios for employment of the vessel during its remaining life. We prepare cash flows for each scenario and apply a percentage possibility to each scenario to calculate a weighted average expected cash flow for the vessel for assessing whether an impairment charge is required. The estimations also take into account regulations regarding the permissible trading of tankers depending on their structure and age.
While management, therefore, is of the opinion that the assumptions it has used in assessing whether there are grounds for impairment are justifiable and reasonable, the possibility remains that conditions in future periods may vary significantly from current assumptions, which may result in a material impairment loss. If current economic conditions stall, worsen or if the upward trend in oil prices continues rise for an extended period, oil demand could be negatively impacted over an extended period of time. This would exacerbate the consequences of overcapacity in the tanker sector. In such circumstances, the possibility will increase that both the market value of the older vessels of our fleet and the future cash flow they are likely to earn over their remaining lives will be less than their carrying value and an impairment loss will occur.
Should the carrying value of the vessel, including any unamortized dry-docking costs or right-of-use assets under finance leases including any unamortized leasehold improvements exceed its estimated undiscounted cash flows, impairment is measured based on the excess of the carrying amount over the fair value of the asset. The fair values are determined based principally on or by corroborated observable market data. Inputs considered by management in determining the fair value include independent brokers’ valuations. As vessel values are also volatile, the actual market value of a vessel may differ significantly from estimated values within a short period of time.
The Company would not record an impairment charge for any of the vessels or right-of-use assets under finance leases for which the fair market value is below its carrying value including any unamortized dry-docking costs or any unamortized leasehold improvements for finance leases unless and until the Company either determines to sell the vessel for a loss or determines that the vessel’s carrying amount including any unamortized dry-docking costs or right-of-use assets under finance leases including any unamortized leasehold improvements is not recoverable.
For the impairment of right-of-use assets under operating leases, we compare the carrying amount including any leasehold improvements, with the estimated future undiscounted net operating cash flows expected to be generated by the use of the vessels, considering three-year charter rates estimates for the unfixed days and the average of those, over the remaining lease term.
As noted above, for vessels, vessels under construction and right-of-use assets under finance leases, we determine projected cash flows for unfixed days using an estimated daily time charter rate based on the most recent ten-year historical average rates, inflated annually by a 2.0% growth rate. We consider this approach to be reasonable and appropriate. However, charter rates are subject to change based on a variety of factors that we cannot control and we note that charter rates over the last few years have been, on average, below their historical ten year average. If as at December 31, 2022 and 2021, we were to utilize an estimated daily time charter equivalent for our vessels’ unfixed days based on the most recent five year, three year or one year historical average rates for one-year time charters, the impairment results would be the following:
|As of December 31, 2022||As of December 31, 2021|
|Number of Vessels||Amount (U.S.$ millions) (**)||Number of Vessels(*)||Amount (U.S.$ millions)(**)|
|5-year historical average rate||0||0||0||0|
|3-year historical average rate||0||0||0||0|
|1-year historical average rate||0||0||10||136.7|
|(*)||Number of vessels the carrying value of which would not have been recovered, other than the seven vessels for which we recorded an impairment charge as of December 31, 2021.|
|(**)||Aggregate carrying value that would not have been recovered.|
Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. There can be no assurance as to how long charter rates and vessel values will remain at their current levels or whether they will again decline or improve by any significant degree. Charter rates decreased to historically low levels during 2021 before improving in March and April of 2022 and improving through the date of this annual report. However, the effects of the conflict in Ukraine may have a negative effect on our revenue and profitability, and future assessments of vessel impairment.
At December 31, 2022, the market value of the fleet owned by our subsidiary companies, as determined based on management estimates and assumptions and by making use of available market data and taking into consideration third party valuations, was $3.2 billion, compared to a total carrying value of $2.7 billion. There were seven vessels in our fleet, whose carrying values exceeded their market values. The future undiscounted net operating cash flows expected to be generated by each of these vessels in the fleet was comfortably in excess of its respective carrying value. As determined at December 31, 2022, the aggregate carrying value of these seven vessels was $0.5 billion, and the aggregate market value of these vessels was $0.4 billion. These vessels were:
|•||LNG: Neo Energy, Maria Energy|
|•||Panamax: Selecao, Socrates, World Harmony, Chantal,|
In addition, at December 31, 2022, the Company reviewed and tested its five right-of-use assets under operating leases for impairment by comparing their carrying amount plus any unamortized leasehold improvements with the estimated future undiscounted net operating cash flows expected to be generated by the use of the vessel, which were comfortably in excess of their respective carrying value.
At December 31, 2022, our review of the carrying amounts of the vessels, including advances for vessels under construction and right-of-use assets under operating and finance leases in connection with the estimated recoverable amount did not result in an impairment of their carrying values.
Critical Accounting Policies
Critical accounting policies are those that are both most important to the portrayal of the company’s financial condition and results, and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Together with critical accounting estimates above, we have also described below our critical accounting policies, because they potentially result in material different results under different assumptions and conditions. Significant accounting policies are described in Note 1 of the consolidated financial statements included elsewhere in this annual report.
Accounting for Leases (Company acts as lessee). Leases, where the Company is regarded as the lessee, are classified as either operating leases or finance leases, based on an assessment of the terms of the lease. According to the provisions of ASC 842-20-30-1, at the commencement date, a lessee shall measure both of the following: a) The lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement and b) The right-of-use assets, which shall consist of all of the following: i) The amount of the initial measurement of the lease liability, ii) Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and iii) Any initial direct costs incurred by the lessee. After lease commencement, the Company measures the lease liability for an operating lease at the present value of the remaining lease payments using the discount rate determined at lease commencement. The right-of-use assets is subsequently measured at the amount of the remeasured lease liability, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term and any unamortized initial direct costs. After lease commencement, the Company measures the lease liability for finance leases by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect the lease payments made during the period. The right-of-use asset is amortized from the lease commencement date to the remaining useful life of the underlying asset since the Company has either the obligation or is reasonably certain to exercise its option to purchase the underlying asset. For finance leases, interest expense is determined using the effective interest method and is included under interest and finance cost, net in the consolidated statements of comprehensive income (loss). Any changes made to leased assets to customize it for a particular use or need of the lessee are capitalized as leasehold improvements. Amounts attributable to leasehold improvements are presented separately from the related right-of-use assets, whereas amortization on the leasehold improvements is recognized on a straight-line basis and is included under depreciation and amortization in the consolidated statements of comprehensive income (loss). Sale and Leaseback transactions: In accordance with ASC 842, the Company, as seller-lessee, determines whether the transfer of an asset should be accounted as a sale in accordance with ASC 606. The existence of an option for the seller-lessee to repurchase the asset precludes the accounting for the transfer of the asset as a sale unless both of the following criteria are met: (1) the exercise price of the option is the fair value of the asset at the time the option is exercised and (2) there are alternative assets, substantially the same as the transferred asset, readily available in the marketplace; and the classification of the leaseback as a finance lease or a sales-type lease, precludes the buyer-lessor from obtaining control of the asset. The existence of an obligation for the Company, as seller-lessee, to repurchase the asset precludes accounting for the transfer of the asset as sale as the transaction would be classified as a financing arrangement by the Company as it effectively retains control of the underlying asset. If the transfer of the asset meets the criteria of sale, the Company, as seller-lessee recognizes the proceeds from the sale when the buyer-lessor obtains control of the asset, derecognizes the carrying amount of the underlying asset and accounts for the lease in accordance with ASC 842. If the transfer does not meet the criteria of sale, the Company does not derecognize the transferred asset, accounts for any amounts received as a financing arrangement and recognizes the difference between the amount of consideration received and the amount of consideration to be paid as interest.
Accounting for Revenue. The Company’s subsidiaries’ vessels are employed under a variety of charter contracts, including voyage charters and contracts of affreightment, time charter, bareboat charter agreements (including profit sharing clauses) or pooling arrangements. Time and bareboat charter revenues are accounted as operating leases in accordance with ASC 842 (Company acts as lessor) and are recorded ratably over the term of the charter as the service is provided. Revenue under pooling arrangements is accounted for as a variable rate operating leases and is recognized for the applicable period, when the collectability is reasonably assured, based on the net revenue distributed by the pool. Revenues from profit sharing arrangements are recognized to the extent the variable amounts earned beyond an agreed fixed minimum hire at the reporting date and all other revenue recognition criteria are met. Revenues generated under voyage charter agreements and contracts of affreightment are recognized ratably from the date of loading (Notice of Readiness to the charterer, that the vessel is available for loading) to discharge of cargo (loading-to-discharge), in accordance with ASC 606.
Basis of Presentation and General Information
Voyage revenues. Revenues are generated from freight billings and time charters. Time and bareboat charter revenues are recorded over the term of the charter as the service is provided. Revenues from voyage charters on the spot market or under contracts of affreightment are recognized from the date of loading (Notice of Readiness to the charterer, that the vessel is available for loading) to discharge date of cargo (loading-to-discharge). The operating revenues of vessels operating under a tanker pool are pooled and are allocated to the pool participants on a time charter equivalent basis according to an agreed upon formula. Revenues from profit sharing arrangements are accounted for as a variable consideration and included in the transaction price to the extent that variable amounts earned beyond an agreed fixed minimum hire are determinable at the reporting date and when there is no uncertainty associated with the variable consideration. Profit sharing revenues are calculated at an agreed percentage of the excess of the charter’s average daily income over an agreed amount. Unearned revenue represents cash received prior to the year-end for which related service has not been provided, primarily relating to charter hire paid in advance to be earned over the applicable charter period and to revenue resulting from charter agreements with varying rates.
Time Charter Equivalent (“TCE”) allows vessel operators to compare the revenues of vessels that are on voyage charters with those on time charters. For vessels on voyage charters, we calculate TCE by taking revenues earned on the voyage (on a loading to discharge basis) and deducting the voyage costs and dividing by the actual number of net earning days, which does not take into account off-hire days. For vessels on bareboat charters, for which we do not incur either voyage or operating costs, we calculate TCE by taking revenues earned on the charter and adding a representative amount for the vessels’ operating expenses. TCE differs from average daily revenue earned in that TCE is based on revenues after commissions less voyage expenses and does not take into account off-hire days.
Commissions. We pay commissions on all chartering arrangements to Tsakos Shipping, as our broker, and to any other broker we employ. Each of these commissions generally amounts to around 1.25%, although there can be some limited variance, particularly for charters involving multiple brokers, of the daily charter hire or lump sum amount payable under the charter. In addition, on some trade routes, certain charterers may include in the charter agreement an address commission which is a payment due to the charterer, usually ranging from 1.25% to 3.75% of the daily charter hire or freight payable under the relevant charter. These commissions, as well as changes in prevailing charter rates, will cause our commission expenses to fluctuate from period to period. Commissions are expensed as incurred.
Voyage expenses. Voyage expenses include all our costs, other than vessel operating expenses, that are related to a voyage, including charter commissions, port charges, canal dues and bunker fuel costs. Voyage expenses that qualify as contract fulfillment costs and are incurred from the latter of the end of the previous vessel employment, provided that the vessel is fixed, or from the date of inception of a voyage charter contract until the arrival at the loading port, are capitalized and amortized ratably over the total transit time of the voyage (loading-to-discharge) when the relevant criteria under ASC 340-40 are met.
Charter hire expense. We hire certain vessels from third-party owners or operators for a contracted period and rate in order to charter the vessels to our customers. These vessels may be hired when an appropriate market opportunity arises or as part of a sale and lease back transaction or on a short-term basis to cover the time-charter obligations of one of our vessels in dry-dock. Since December 31, 2010, the Company had not had any vessels under hire from a third-party, until December 2017, when two vessels were sold and chartered back to the Company for five years. As of December 31, 2022, the Company had five and two vessels which were sold and chartered back to the Company for five years and for less than a year, respectively. Following adoption of ASC 842 and the package of practical expedients, the Company continues to account five of these transactions as operating leases and two as finance leases, recognizing right-of-use asset and corresponding lease liability.
Vessel operating expenses. These expenses consist primarily of manning, hull and machinery insurance, P&I and other vessel insurance, repairs and maintenance, spares, stores and lubricant costs. All vessel operating expenses are expensed as incurred.
Depreciation and Amortization of deferred charges and leasehold improvements. We depreciate our vessels on a straight-line basis over their estimated useful lives, after considering their estimated scrap values. Since steel prices have increased significantly during the last years and are expected to be at high levels for the coming years, effective October 1, 2021, our estimate for scrap values was increased from $390 to $430 per lightweight ton. This change in estimation resulted in positive impact of $0.7 million to our 2021 financial results. The decrease in depreciation expense for the year ended December 31, 2022, was approximately $3.0 million. In assessing the useful lives of vessels, we have estimated them to be 25 years (40 years for the LNG carriers), which is in line with the industry wide accepted practice, assuming that all classification society rules have been adhered to concerning survey certification and statutory regulations are followed. Useful life is ultimately dependent on customer demand and if customers were to reject our vessels, either because of new regulations or internal specifications, then the useful life of the vessel will require revision.
We amortize the costs of dry-docking and special surveys of each of our ships over the period up to the ship’s next scheduled dry-docking (generally every 5 years for vessels aged up to 15 years and every 2.5 years thereafter). These charges are part of the normal costs we incur in connection with the operation of our fleet.
We amortize the costs of leasehold improvement costs on a straight-line basis over the shorter of the useful life of those leasehold improvements and the remaining lease term, unless the lease transfers ownership of the underlying asset to us or it is reasonably certain that we will exercise an option to purchase the underlying asset, in which case we amortize the leasehold improvements to the end of their useful life.
Impairment loss. An impairment loss for an asset held for use, for advances for vessels under construction and for right-of-use assets under operating and finance leases should be recognized when indicators of impairment exist and when the estimate of undiscounted cash flows expected to be generated by the use of the asset is less than its carrying amount (the vessel’s net book value plus any unamortized deferred dry-docking charges or leasehold improvements). Measurement of the impairment loss is based on the fair value of the asset as determined by reference to available market data and considering valuations provided by third parties. An impairment loss for an asset held for sale is recognized when its fair value less cost to sell is lower than its carrying value at the date it meets the held for sale criteria and at subsequent measurement dates. In this respect, management reviews regularly the carrying amount of the vessels in connection with the estimated recoverable amount for each of the Company’s vessels. As a result of such reviews, there was no impairment charge as of December 31, 2022. In 2021, there was an impairment charge for seven vessels, Aris, Ajax, Afrodite, Apollon, Artemis, Ariadne, and Proteas. In 2020, there was an impairment charge for four vessels, Arctic, Antarctic, Izumo Princess and Sakura Princess.
General and administrative expenses. These expenses consist primarily of professional fees, office supplies, investor relations, advertising costs, directors’ and officers’ liability insurance, directors’ fees, reimbursement of our directors’ and officers’ travel-related expenses and incentive awards and management fees. Management fees are the fixed fees we pay to Tsakos Energy Management under our management agreement with them. Monthly management fees remained the same (apart from third-party managed vessels) as in 2021, 2020 and until May 1, 2022, where monthly fees increased to $28.5 thousand ($27.5 thousand for 2021 and 2020) for all conventional vessels, for third-party managed vessels, the suezmax Eurochampion 2004, the aframaxes Maria Princess and Sapporo Princess, the VLCCs Ulysses, Hercules I increased to $29.1 thousand, for the handymaxes Afrodite and Ariadne remained at $27.5 thousand, for the suezmax tanker Decathlon $28.5 thousand (from August 1, 2022). For chartered in vessels or chartered out on a bare-boat basis and for vessels under construction, monthly fees increased to $21.0 thousand, $36.0 thousand for the DP2 shuttle tankers, while the monthly fees for LNG carriers, Neo Energy and Maria Energy increased to $42.4 thousand and $34.3 thousand for the LNG carrier Tenergy. For 2023, no increase has been agreed by March 31, 2023, apart from eleven vessels managed by third party managers. The fees are recorded under “General and Administrative Expenses.”
Insurance claim proceeds. In the event of an incident involving one of our vessels, where the repair costs or loss of hire is insurable, we immediately initiate an insurance claim and account for such claim when it is determined that recovery of such costs or loss of hire is probable and collectability is reasonably assured within the terms of the relevant policy. Depending on the complexity of the claim, we would generally expect to receive the proceeds from claims within a twelve-month period. During the 2022 /23 policy year, we received approximately $11.8 million in net proceeds from hull and machinery and loss of hire claims arising from incidents where damage was incurred by six of our vessels in a previous policy year. Such settlements were generally received as credit-notes from our insurer, Argosy Insurance Company Limited, and set off against insurance premiums due to that company. Therefore, within the consolidated statements of cash flows, these proceeds are included in decreases in receivables and in decreases in accounts payable. There is no material impact on reported earnings arising from these settlements.
(Percentage calculations are based on the actual amounts shown in the accompanying consolidated financial statements)
Year ended December 31, 2022 versus year ended December 31, 2021
Voyage revenues earned in 2022 and 2021 per charter category were as follows:
|U.S. $ million||% of total||U.S. $ million||% of total|
|Time charter-fixed rate||205.6||24%||191.4||35%|
|Time charter-variable rate (profit share)||153.3||18%||67.0||12%|
|Voyage charter-contract of affreightment||32.1||4%||9.0||2%|
|Voyage charter-spot market||372.9||43%||246.0||45%|
|Total voyage revenue||860.4||100 %||546.1||100 %|
Revenue from vessels amounted to $860.4 million during the year ended December 31, 2022, compared to $546.1 million during 2021, a 57.6% increase mainly due to the strengthening of market conditions during 2022 compared to 2021. There was an average of 65.5 vessels operating in 2022 compared to an average of 65.4 vessels in 2021. Based on the total days that the vessels were actually employed as a percentage of the days owned or chartered-in, the fleet had 94.7% employment in 2022 compared to 92.6% in 2021, the increase in operating days being mainly due to the delivery of vessels Tenergy, Porto and Dias I, compared to no vessel deliveries in 2021. However, this increase was counterbalanced by the sale of vessels Proteas and Inca during 2022 compared to the sale of vessel Maya in 2021. In addition, the decreased number of ballast days, for which we do not receive charter hire payments, under spot voyages during 2022 compared to 2021, also resulted in a total number of increased operating days.
Market conditions for tankers during 2022 were significantly strengthened mostly due to high demand for crude oil and low supply that pushed gas prices upward, which combined with the shortage of refining capacity, also caused crude oil price increases in many parts of the world. In addition, the upturn of the market, affected by seasonal factors and global oil demand, indicated post Covid-19 pandemic recovery, which, combined with the current crisis in the Ukraine has created a redrawing of global trade routes that has resulted in an increase in oil tanker voyages.
The average time charter equivalent rate per vessel in 2022 was $30,399 per day, an increase of 78.4% from $17,037 per day in 2021 due to the overall improvement of the market during 2022, positively affecting all vessel types and sizes in our fleet apart from our DP2 shuttle vessels which showed a slight decrease of 5%. The average daily TCE per vessel for the remaining categories were well above the prior year’s average levels, with increases ranging from 19% to 249% in 2022 compared to the equivalent period of 2021.
Average daily TCE rates earned for the years ended December 31, 2022 and 2021, were as follows:
|Year ended December 31,|
|U.S. $||U.S. $|
TCE is calculated by taking voyage revenues less voyage costs divided by the number of revenue days less 761 days lost as a result of calculating revenue on a loading to discharge basis for the year ended December 31, 2022 compared to 805 days lost for the year ended December 31, 2021. In the case of a bare-boat charter, we add an estimate of operating expenses of $10,000 per day in order to render the bare-boat charter comparable to a time-charter. Time charter equivalent revenue and TCE rate are not measures of financial performance under U.S. GAAP and may not be comparable to similarly titled measures of other companies. However, TCE is a standard shipping industry performance measure used primarily to compare period-to-period changes in shipping performance despite changes in the mix of charter types (i.e. spot voyage charters, time charters and bare-boat charters) under which the vessels may be employed between the periods. The following table reflects the calculation of our TCE rates for the periods presented (amount in thousands of U.S. dollars, except for TCE rate, which is expressed in U.S. dollars, and operating days):
|Year ended December 31,|
|Less: Voyage expenses||(209,890)||(198,078)|
|Add: Representative operating expenses for Bareboat charter ($10,000 daily)||14,600||14,600|
|Time charter equivalent revenues||$||665,110||$||362,642|
|Divided by: net earnings (operating) days||21,879||21,285|
|Average TCE per vessel per day||$||30,399||$||17,037|
|Total voyage expenses per category||Average daily voyage expenses per relevant vessel|
|Year ended December 31,||Year ended December 31,|
|U.S.$ million||U.S.$ million||U.S.$||U.S.$|
|Port and other expenses||36.8||63.3||(41.9)%||5,969||7,137||(16.4)%|
|Total voyage expenses||209.9||198.1||6.0%||34,006||22,348||52.2%|
|Days on spot and Contract of Affreightment (COA)employment|