Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004
Commission file number 1- 12874
TEEKAY SHIPPING CORPORATION
(Exact name of Registrant as specified in its charter)
TK House
Bayside Executive Park
West Bay Street & Blake Road
P.O. Box AP-59212, Nassau, Bahamas
(Address of principal executive office)
[Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.]
Form 20-F X Form 40- F
[Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ]
Yes No X
[Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ]
Yes No X
[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.]
Yes No X
[If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82- ]
| PART I: | FINANCIAL INFORMATION | PAGE | |||
| Item 1. | Financial Statements (Unaudited) | ||||
| Report of Independent Registered Public Accounting Firm | 3 | |||
| Consolidated Statements of Income | ||||
| for the three and nine months ended September 30, 2004 and 2003 | 4 | |||
| Consolidated Balance Sheets | ||||
| as at September 30, 2004 and December 31, 2003 | 5 | |||
| Consolidated Statements of Cash Flows | ||||
| for the nine months ended September 30, 2004 and 2003 | 6 | |||
| Notes to the Consolidated Financial Statements | 7 | |||
| Schedule A to the Consolidated Financial Statements | 23 | |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
27 |
|||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 40 | |||
| PART II: | OTHER INFORMATION | 42 | |||
| SIGNATURES | 43 | ||||
To the Shareholders and Board of
Directors of
Teekay Shipping Corporation
We have reviewed the accompanying consolidated balance sheet of Teekay Shipping Corporation and subsidiaries as of September 30, 2004, the related consolidated statements of income for the three and nine-month periods ended September 30, 2004 and 2003, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2004 and 2003. Our review also included Schedule A as of September 30, 2004 and for the three and nine-month periods ended September 30, 2004 and 2003 listed in Index Item 1. These consolidated interim financial statements and schedule are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements and schedule referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Teekay Shipping Corporation and subsidiaries as of December 31, 2003, the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended, and the related schedule as of and for the year ended December 31, 2003 (not presented herein) and in our report dated February 18, 2004 (except for Note 20(b) which is as of March 15, 2004) we expressed an unqualified opinion on those consolidated financial statements and related schedule when considered in relation to the financial statements taken as a whole. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Also, in our opinion, the information as of December 31, 2003 set forth in Schedule A referred to above, is fairly stated, in all material respects in relation to the consolidated balance sheet and related schedule from which it has been derived.
| Vancouver, Canada, October 19, 2004 |
/s/ ERNST & YOUNG LLP Chartered Accountants |
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
$ $ $ $
---------------- --------------- --------------- --------------
(unaudited) (unaudited)
VOYAGE REVENUES 520,612 380,544 1,549,685 1,125,047
------------------------------------------------------ ---------------- --------------- --------------- --------------
OPERATING EXPENSES
Voyage expenses 106,466 105,686 319,058 284,207
Vessel operating expenses 58,199 55,281 160,876 153,457
Time-charter hire expense 120,898 95,955 336,137 202,349
Depreciation and amortization 64,802 49,885 179,262 138,790
General and administrative 29,050 23,461 82,491 58,785
Vessel write-downs and (gain) loss on sale of
vessels (note 12) (53,512) 5,843 (54,565) 36,341
Restructuring charge (note 12) - 657 1,002 1,969
------------------------------------------------------ ---------------- --------------- --------------- --------------
325,903 336,768 1,024,261 875,898
------------------------------------------------------ ---------------- --------------- --------------- --------------
Income from vessel operations 194,709 43,776 525,424 249,149
------------------------------------------------------ ---------------- --------------- --------------- --------------
OTHER ITEMS
Interest expense (35,225) (21,827) (87,460) (57,913)
Interest income 5,900 799 12,038 2,932
Equity income from joint ventures 2,535 1,357 7,659 3,753
Gain (loss) on sale of marketable securities (note 5) 90,070 (28) 93,175 142
Write-down of marketable securities - - - (4,910)
Other - net (note 13) (12,657) (3,750) (17,952) (22,371)
------------------------------------------------------ ---------------- --------------- --------------- --------------
50,623 (23,449) 7,460 (78,367)
------------------------------------------------------ ---------------- --------------- --------------- --------------
Net income 245,332 20,327 532,884 170,782
====================================================== ================ =============== =============== ==============
Earnings per common share (note 16)
- Basic $2.94 $0.25 $6.46 $2.14
- Diluted $2.77 $0.25 $6.12 $2.11
Weighted average number of common shares
- Basic 83,317,200 80,085,404 82,516,723 79,741,480
- Diluted 88,718,531 81,884,344 87,110,068 81,120,206
====================================================== ================ =============== =============== ==============
The accompanying notes are an integral part of the unaudited interim consolidated financial statements.
As at As at
September 30, December 31,
2004 2003
$ $
---------------- -----------------
(unaudited)
ASSETS
Current
Cash and cash equivalents (note 8) 308,034 292,284
Restricted cash - current (note 9) 76,361 2,672
Accounts receivable 139,289 146,523
Prepaid expenses and other assets 66,337 39,054
----------------------------------------------------------------------------- ---------------- -----------------
Total current assets 590,021 480,533
----------------------------------------------------------------------------- ---------------- -----------------
- 95,511
Marketable securities (note 5)
Restricted cash - long term (note 9) 337,345 -
Vessels and equipment (note 8)
At cost, less accumulated depreciation of $1,046,245
(December 31, 2003 - $1,034,747) 2,915,913 2,386,642
Vessels under capital leases, at cost, less accumulated
depreciation of $6,985 (December 31, 2003 - $438) 384,706 37,562
Advances on newbuilding contracts (note 11) 240,317 150,656
----------------------------------------------------------------------------- ---------------- -----------------
Total vessels and equipment 3,540,936 2,574,860
----------------------------------------------------------------------------- ---------------- -----------------
Net investment in direct financing leases 96,456 73,073
Investment in joint ventures 53,906 54,392
Other assets 68,799 60,333
Intangible assets - net (note 6) 282,217 118,588
Goodwill (note 6) 169,590 130,754
----------------------------------------------------------------------------- ---------------- -----------------
5,139,270 3,588,044
============================================================================= ================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable 41,790 51,817
Accrued liabilities 113,083 119,594
Current portion of long-term debt (note 8) 137,181 102,062
Current obligation under capital leases (note 9) 62,214 1,159
----------------------------------------------------------------------------- ---------------- -----------------
Total current liabilities 354,268 274,632
Long-term debt (note 8) 2,091,983 1,498,044
Obligation under capital leases (note 9) 355,912 35,493
Other long-term liabilities 245,798 112,726
----------------------------------------------------------------------------- ---------------- -----------------
Total liabilities 3,047,961 1,920,895
----------------------------------------------------------------------------- ---------------- -----------------
Minority interest 14,563 15,322
Stockholders' equity
Capital stock (note 10) 531,408 492,653
Retained earnings 1,597,629 1,095,650
Accumulated other comprehensive income (loss) (52,291) 63,524
----------------------------------------------------------------------------- ---------------- -----------------
Total stockholders' equity 2,076,746 1,651,827
----------------------------------------------------------------------------- ---------------- -----------------
5,139,270 3,588,044
============================================================================= ================ =================
Commitments and contingencies (note 11 and 15)
The accompanying notes are an integral part of the unaudited interim consolidated financial statements.
Nine Months Ended September 30,
2004 2003
$ $
----------------------- -----------------------
(unaudited)
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income 532,884 170,782
Non-cash items:
Depreciation and amortization 179,262 138,790
Vessel write-downs and (gain) loss on sale of vessels (54,565) 36,341
Gain on sale of marketable securities (93,175) (142)
Write-down of marketable securities - 4,910
Equity income (net of dividends received: September 30, 2004 -
$9,005; September 30, 2003 - $5,657) 1,346 1,904
Income taxes 16,301 23,186
Other - net (9,991) (7,421)
Change in non-cash working capital items related to operating activities (33,170) (14,532)
Expenditures for drydocking (18,668) (23,191)
-------------------------------------------------------------------------- ----------------------- -----------------------
Net operating cash flow 520,224 330,627
-------------------------------------------------------------------------- ----------------------- -----------------------
FINANCING ACTIVITIES
Net proceeds from long-term debt 1,469,670 1,679,297
Scheduled repayments of long-term debt (86,376) (49,114)
Prepayments of long-term debt (1,462,439) (1,023,000)
Repayments of capital lease obligations (2,861) (68)
(Increase) decrease in restricted cash (1,969) 8,012
Proceeds from issuance of Common Stock 38,645 11,757
Cash dividends paid (30,862) (25,678)
-------------------------------------------------------------------------- ----------------------- -----------------------
Net financing cash flow (76,192) 601,206
-------------------------------------------------------------------------- ----------------------- -----------------------
INVESTING ACTIVITIES
Expenditures for vessels and equipment (465,227) (227,070)
Proceeds from sale of vessels and equipment 220,917 91,080
Proceeds from sale of marketable securities 135,357 2,954
Purchase of marketable securities - (37,291)
Purchase of Teekay Shipping Spain S.A., net of cash acquired of $11,191
(note 3) (286,854) -
Purchase of Navion AS (note 4) - (704,734)
Proceeds from joint venture - 25,500
Other (32,475) (30,946)
-------------------------------------------------------------------------- ----------------------- -----------------------
Net investing cash flow (428,282) (880,507)
-------------------------------------------------------------------------- ----------------------- -----------------------
Increase in cash and cash equivalents 15,750 51,326
Cash and cash equivalents, beginning of the period 292,284 284,625
-------------------------------------------------------------------------- ----------------------- -----------------------
Cash and cash equivalents, end of the period 308,034 335,951
========================================================================== ======================= =======================
The accompanying notes are an integral part of the unaudited interim consolidated financial statements.
| 1. | Basis of Presentation |
| The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. They include the accounts of Teekay Shipping Corporation (“Teekay”), which is incorporated under the laws of the Republic of the Marshall Islands, and its wholly owned or controlled subsidiaries (collectively, the “Company”). Certain information and footnote disclosures required by generally accepted accounting principles for complete annual financial statements have been omitted and, therefore, it is suggested that these interim financial statements be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003. In the opinion of management, these statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, and cash flows for the interim periods presented. The results of operations for the three and nine-month periods ended September 30, 2004 are not necessarily indicative of those for a full fiscal year. |
| Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period. |
| 2. | Segment Reporting |
| The Company has three reportable segments: its spot tanker segment, its fixed-rate tanker segment and its fixed-rate liquefied natural gas (“LNG”) segment. The Company’s spot tanker segment consists of conventional crude oil tankers, oil bulk ore carriers, and product carriers operating in the spot market or subject to time charters or contracts of affreightment priced on a spot-market basis or on short-term fixed-rate contracts. The Company considers contracts that have an original term of less than three years in duration to be short-term. The Company’s fixed-rate tanker segment consists of shuttle tankers, floating storage and offtake vessels, liquid petroleum gas carriers and conventional crude oil and product tankers subject to long-term fixed-rate time-charter contracts or contracts of affreightment. The Company’s fixed-rate LNG segment consists of LNG carriers subject to long-term fixed-rate time-charter contracts. The Company had no LNG operations prior to the acquisition of Naviera F. Tapias, S.A. (renamed Teekay Shipping Spain S.A.) on April 30, 2004 (see Note 3 – Acquisition of Teekay Shipping Spain S.A.). Segment results are evaluated based on income from vessel operations. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Company’s annual audited consolidated financial statements. |
| The following tables present results for these segments for the three and nine-month periods ended September 30, 2004 and 2003. |
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Segment Segment Segment Total
Three-months ended September 30, 2004 $ $ $ $
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Voyage revenues - external............. 326,287 177,000 17,325 520,612
Voyage expenses........................ 88,444 17,967 55 106,466
Vessel operating expenses.............. 23,457 31,635 3,107 58,199
Time-charter hire expense.............. 71,346 49,552 - 120,898
Depreciation and amortization.......... 24,913 34,739 5,150 64,802
General and administrative (1) ........ 13,580 14,212 1,258 29,050
Vessel write-downs/(gain) loss on
sale of vessels..................... (49,821) (3,691) - (53,512)
---------------- ---------------- ---------------- ----------------
Income from vessel operations.......... 154,368 32,586 7,755 194,709
================ ================ ================ ================
Voyage revenues - intersegment....... - 1,158 - 1,158
Total assets at September 30, 2004..... 1,182,320 2,089,147 1,280,209 4,551,676
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Segment Segment Segment Total
Three-months ended September 30, 2003 $ $ $ $
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Voyage revenues - external............. 240,852 139,692 - 380,544
Voyage expenses........................ 90,381 15,305 - 105,686
Vessel operating expenses.............. 31,793 23,488 - 55,281
Time-charter hire expense.............. 50,112 45,843 - 95,955
Depreciation and amortization.......... 27,004 22,881 - 49,885
General and administrative (1) ........ 14,489 8,972 - 23,461
Vessel write-downs/(gain) loss on
sale of vessels..................... 5,843 - - 5,843
Restructuring charge................... 350 307 - 657
---------------- ----------------- --------------- ----------------
Income from vessel operations.......... 20,880 22,896 - 43,776
================ ================= =============== ================
Voyage revenues - intersegment....... - 4,986 - 4,986
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Segment Segment Segment Total
Nine-months ended September 30, 2004 $ $ $ $
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Voyage revenues - external............. 992,809 531,552 25,324 1,549,685
Voyage expenses........................ 263,920 54,968 170 319,058
Vessel operating expenses.............. 70,663 85,469 4,744 160,876
Time-charter hire expense.............. 191,271 144,866 - 336,137
Depreciation and amortization.......... 75,775 95,960 7,527 179,262
General and administrative (1) ........ 38,679 41,813 1,999 82,491
Vessel write-downs/(gain) loss on
sale of vessels..................... (50,874) (3,691) - (54,565)
Restructuring charge................... 1,002 - - 1,002
----------------- ----------------- --------------- ----------------
Income from vessel operations.......... 402,373 112,167 10,884 525,424
================= ================= =============== ================
Voyage revenues - intersegment....... - 3,449 - 3,449
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Segment Segment Segment Total
Nine-months ended September 30, 2003 $ $ $ $
----------------------------------------- ---------------- ---------------- ---------------- ----------------
Voyage revenues - external............. 796,935 328,112 - 1,125,047
Voyage expenses........................ 250,810 33,397 - 284,207
Vessel operating expenses.............. 95,821 57,636 - 153,457
Time-charter hire expense.............. 113,851 88,498 - 202,349
Depreciation and amortization.......... 81,671 57,119 - 138,790
General and administrative (1)......... 39,071 19,714 - 58,785
Vessel write-downs/(gain) loss on
sale of vessels..................... 36,341 - - 36,341
Restructuring charge................... 350 1,619 - 1,969
---------------- ----------------- --------------- ----------------
Income from vessel operations.......... 179,020 70,129 - 249,149
================ ================= =============== ================
Voyage revenues - intersegment......... - 18,850 - 18,850
| (1) | Includes direct and indirect general and administrative expenses. Indirect expenses are allocated to each segment based on estimated use of corporate resources. |
| A reconciliation of total segment assets to amounts presented in the consolidated balance sheet is as follows: |
As at As at
September 30, December 31,
2004 2003
$ $
------------------- ------------------
(unaudited)
Total assets of all segments....................................... 4,551,676 2,942,704
Cash, restricted cash and marketable securities.................... 312,104 390,467
Accounts receivable and other assets............................... 275,490 254,873
------------------- ------------------
Consolidated total assets ......................................... 5,139,270 3,588,044
=================== ==================
| 3. | Acquisition of Teekay Shipping Spain S.A. |
|
On April 30, 2004, the Company acquired 100% of the issued and outstanding shares of Teekay Shipping
Spain S.A. for $298.2 million in cash, plus the assumption of debt and remaining newbuilding
commitments. Teekay Shipping Spain is engaged in the marine
transportation of crude oil and LNG. Management believes the acquisition of the Teekay Shipping Spain
business has provided the Company with a strategic platform from which to expand its presence in the LNG
shipping sector and immediate access to reputable LNG operations. The Company anticipates this will
benefit it when bidding on future LNG projects. These benefits contributed to the recognition of
goodwill. In the transaction, Teekay also entered into an agreement with an entity controlled by the
former controlling shareholder of Teekay Shipping Spain to establish a 50/50 joint venture that will
pursue new business in the oil and gas shipping sectors that relate only to the Spanish market or are
led by Spanish entities or entities controlled by a Spanish company. See Note 11 for additional
information about the joint venture. The acquisition of Teekay Shipping Spain was funded by a
combination of cash, cash generated from operations, and borrowings under existing credit facilities.
Teekay Shipping Spain's results of operations have been consolidated with Teekay's results commencing
May 1, 2004. As at September 30, 2004, Teekay Shipping Spain's fleet consisted of three LNG carriers (including one newbuilding delivered in July 2004) and six Suezmax class crude oil tankers. All of these vessels operate under long-term, fixed-rate time charters with major energy and utility companies, other than one Suezmax tanker that is on a short-term fixed-rate time charter. The average remaining term for the long-term charters is approximately 20 years for the LNG carriers and approximately 17 years for the Suezmax tankers, subject, in certain circumstances, to termination and vessel purchase rights and excluding term extensions exercisable by the charterer. Teekay Shipping Spain has also contracted to build an additional LNG carrier and three additional Suezmaz tankers, which are scheduled for delivery in the fourth quarter of 2004 and the third quarter of 2005, respectively. These newbuildings also will operate under long-term, fixed-rate time charters with major energy and utility companies. The term of each of the charters for the LNG and Suezmax newbuilding is 20 years from delivery of the vessel. |
| The following table summarizes the fair value of the assets acquired and liabilities assumed by the Company at April 30, 2004, the date of the Teekay Shipping Spain acquisition. The Company is in the process of finalizing certain elements of the purchase price allocation and, therefore, the allocation is subject to further refinement. |
As at
April 30, 2004
$
------------------
(unaudited)
ASSETS
Cash, cash equivalents and short-term restricted cash 85,092
Other current assets 7,415
Vessels and equipment 821,939
Restricted cash - long term 311,664
Other assets - long-term 15,355
Intangible assets subject to amortization:
Time-charter contracts (weighted average useful life of 19.2 years) 183,052
Goodwill ($3.6 million fixed-rate tanker segment and $35.7 million
fixed-rate LNG segment) 39,279
------------------------------------------------------------------------------------------ ------------------
Total assets acquired 1,463,796
========================================================================================== ==================
LIABILITIES
Current liabilities 98,428
Long-term debt 668,733
Obligations under capital leases 311,011
Other long-term liabilities 87,439
------------------------------------------------------------------------------------------ ------------------
Total liabilities assumed 1,165,611
========================================================================================== ==================
Net assets acquired (cash consideration) 298,185
========================================================================================== ==================
| The following table shows comparative summarized consolidated pro forma financial information for the Company for the nine-month periods ended September 30, 2004 and 2003, giving effect to the acquisition of 100% of the outstanding shares in Teekay Shipping Spain as if it had taken place on January 1 of each of the periods presented: |
Pro Forma Pro Forma
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
$ $
---------------------- -----------------------
(unaudited) (unaudited)
Voyage revenues............................................ 1,590,403 1,185,833
Net income (1)............................................. 545,815 100,173
Earnings per share
- Basic.................................................... 6.61 1.26
- Diluted.................................................. 6.27 1.23
------------------------------------------------------------- ---------------------- -----------------------
| (1) | The results of Teekay Shipping Spain for the nine months ended September 30, 2004 and 2003 included foreign exchange gains of $7.3 million and foreign exchange losses of $47.2 million, respectively. Substantially all of these foreign exchange gains and losses were unrealized. |
| 4. | Acquisition of Navion AS |
| In April 2003, Teekay completed its acquisition of 100% of the issued and outstanding shares of Navion AS for approximately $774.2 million in cash, including transaction costs of approximately $7.0 million. The Company made a deposit of $76.0 million towards the purchase price on December 16, 2002. The remaining portion of the purchase price was paid on closing. The Company funded its acquisition of Navion by borrowing under a $500 million 364-day facility (subsequently replaced by a $550 million revolving credit facility), together with available cash and borrowings under other existing revolving credit facilities. Navion’s results of operations have been consolidated with Teekay’s results commencing April 1, 2003. |
| Navion, based in Stavanger, Norway, operates primarily in the shuttle tanker and the conventional crude oil and product tanker markets. Its modern shuttle tanker fleet, which as of September 30, 2004, consisted of eight owned and 12 chartered-in vessels (excluding five vessels chartered-in from the Company’s shuttle tanker subsidiary Ugland Nordic Shipping AS (“UNS”)), provides logistical services to the Norwegian state-owned oil company, Statoil ASA, and other oil companies in the North Sea under fixed-rate, long-term contracts of affreightment. Subsequent to the acquisition, the operations of UNS and the shuttle tanker operations of Navion were combined into one business unit, Teekay Navion Shuttle Tankers. The projected benefits resulting from the combined operations as well as possible growth opportunities in the North Sea and elsewhere in the world resulted in the recognition of goodwill. Navion’s modern, chartered-in, conventional tanker fleet, which as of September 30, 2004, consisted of 13 crude oil tankers and 16 product tankers, operates primarily in the Atlantic region, providing services to Statoil and other oil companies. In addition, Navion owns two floating storage and offtake vessels currently trading as conventional crude oil tankers in the Atlantic region, one chartered-in methanol carrier and one liquid petroleum gas carrier on long-term charter to Statoil. Through Navion Chartering AS, an entity owned jointly with Statoil, Navion has a first right of refusal on Statoil’s oil transportation requirements at the prevailing market rate until December 31, 2007. In addition to tanker operations, Navion also constructs, installs, operates and leases equipment that reduces volatile organic compound emissions during loading, transportation and storage of oil and oil products. |
| The following table summarizes the fair value of the assets acquired and liabilities assumed by the Company at April 1, 2003, the date of the Navion acquisition. |
As at
April 1, 2003
$
------------------
ASSETS
Current assets 64,457
Vessels and equipment 543,003
Net investment in direct financing leases 45,558
Other assets - long-term 3,835
Intangible assets subject to amortization:
Contracts of affreightment (15-year sum-of-years declining balance and
10.2 years weighted-average amortization period) 117,000
Goodwill (fixed-rate tanker segment) 40,033
------------------------------------------------------------------------- --------------- ------------------
Total assets acquired 813,886
========================================================================= =============== ==================
LIABILITIES
Current liabilities 36,270
Other long-term liabilities 3,463
------------------------------------------------------------------------- --------------- ------------------
Total liabilities assumed 39,733
========================================================================= =============== ==================
Net assets acquired (cash consideration) 774,153
========================================================================= =============== ==================
| The following table shows summarized consolidated pro forma financial information for the Company for the nine-month period ended September 30, 2003, and gives effect to the acquisition of 100% of the outstanding shares in Navion as if it had taken place on January 1, 2003: |
Pro Forma
Nine Months Ended
September 30, 2003
$
--------------------------
(unaudited)
Voyage revenues................................................................. 1,353,480
Net income...................................................................... 216,821
Earnings per share..............................................................
- Basic......................................................................... 2.72
- Diluted....................................................................... 2.67
--------------------------------------------------------------------------------- --------------------------
| 5. | Investments in Marketable Securities |
Gross Approximate
Unrealized Market and
Cost Gains Carrying Values
$ $ $
---------------- ----------------- -------------------
September 30, 2004
Marketable securities.............................. - - -
December 31, 2003
Marketable securities.............................. 42,180 53,331 95,511
----------------------------------------------------- ---------------- ----------------- -------------------
| During the nine-month period ended September 30, 2004, the Company sold its investments in marketable securities for proceeds of $135.4 million which resulted in a gain on sale of marketable securities of $93.2 million. |
| Marketable securities at December 31, 2003 represent 5,812,000 shares in A/S Dampskibsselskabet TORM and 351,221 shares in Nordic American Tanker Shipping Ltd. |
| 6. | Goodwill and Intangible Assets |
| The changes in the carrying amount of goodwill for the nine-month period ended September 30, 2004 for the Company’s reporting segments, are as follows: |
Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG
Segment Segment Segment Other Total
$ $ $ $ $
-------------- ------------- ------------ ------------- -----------
Balance as of January 1, 2004.......... - 128,575 - 2,179 130,754
Goodwill acquired (note 3)............. - 3,648 35,631 137 39,416
Goodwill impairment.................... - - - (580) (580)
-------------- ------------- ------------ ------------- -----------
Balance as of September 30, 2004....... - 132,223 35,631 1,736 169,590
============== ============= ============ ============= ===========
| As at September 30, 2004, intangible assets consisted of: |
Weighted-
Average Gross Net
Amortization Carrying Accumulated Carrying
Period Amount Amortization Amount
(years) $ $ $
------------------ ------------ ----------------- --------------
Contracts of affreightment (note 4)...... 10.2 124,250 (26,271) 97,979
Time-charter contracts (note 3).......... 19.2 183,052 (4,773) 178,279
Intellectual property.................... 7.0 7,701 (1,742) 5,959
------------------ ------------ ----------------- --------------
15.4 315,003 (32,786) 282,217
================== ============ ================= ==============
| Aggregate amortization expense of intangible assets for the three and nine-month periods ended September 30, 2004 was approximately $8.0 million ($4.0 million – 2003) and $19.4 million ($8.2 million – 2003), respectively. |
| 7. | Cash Flows |
| Cash interest paid by the Company during the nine-month periods ended September 30, 2004 and 2003 approximated $106.8 million and $67.2 million, respectively. |
| 8. | Long-Term Debt |
September 30, December 31,
2004 2003
$ $
---------------- -----------------
Revolving Credit Facilities............................................. 662,215 430,000
First Preferred Ship Mortgage Notes (8.32%) due February 1, 2006........ 52,390 109,314
Premium Equity Participating Security Units (7.25%) due May 18, 2006 ... 143,750 143,750
Senior Notes (8.875%) due July 15, 2011 ................................ 351,589 351,765
USD denominated Term Loans due through 2029............................. 666,209 565,277
EURO denominated Term Loans due through 2023............................ 353,011 -
---------------- -----------------
2,229,164 1,600,106
Less current portion.................................................... 137,181 102,062
---------------- -----------------
2,091,983 1,498,044
================ =================
| As at September 30, 2004, the Company had eight long-term revolving credit facilities (the “Revolvers”) available, which, as at such date, provided for borrowings of up to $1,228.9 million, of which $566.7 million was undrawn. The amount available under the Revolvers reduces by $19.7 million (2004), $136.9 million (2005), $159.4 million (2006), $123.9 million (2007), $449.8 million (2008) and $339.2 million (thereafter). All of the Revolvers are collateralized by first priority mortgages granted on 54 of the Company’s vessels, together with other related collateral, and include a guarantee from Teekay for all amounts outstanding under the Revolvers. |
| The 8.32% First Preferred Ship Mortgage Notes due February 1, 2006 (the “8.32% Notes”) are collateralized by first preferred mortgages on three of the Company’s Aframax tankers, together with other related collateral, and are guaranteed by three subsidiaries of Teekay that own the mortgaged vessels (the “8.32% Notes Guarantor Subsidiaries”) to a maximum of 95% of the fair value of their net assets. These guarantees are full and unconditional and joint and several. As at September 30, 2004, the fair value of these net assets approximated $106.1 million. The 8.32% Notes are also subject to a sinking fund, which retires $45.0 million of the principal amount on each February 1, commencing 2004. |
| Condensed financial information regarding Teekay, the 8.32% Notes Guarantor Subsidiaries, and non-guarantor subsidiaries of Teekay is set out in Schedule A of these unaudited interim consolidated financial statements. |
| The 7.25% Premium Equity Participating Security Units due May 18, 2006 (the “Equity Units”) are unsecured and subordinated to all of the Company’s senior debt. The Equity Units are not guaranteed by any of the Company’s subsidiaries and effectively rank behind all existing and future secured debt. Each Equity Unit includes (a) a forward contract that requires the holder to purchase for $25 a specified fraction of a share of the Company’s Common Stock on February 16, 2006 and (b) a $25 principal amount, subordinated note due May 18, 2006. The forward contracts provide for contract adjustment payments of 1.25% annually and the notes bear interest at 6.0% annually. Upon settlement on February 16, 2006 of the $5.75 million forward contracts included in the Equity Units, the Company will issue between 6,534,300 and 7,982,150 shares of its Common Stock (depending on the average closing price of the Common Stock for the 20-trading day period ending on the third trading day prior to February 16, 2006). |
| The Company has several term loans outstanding, which, as at September 30, 2004, totaled $666.2 million (USD denominated) and 284.5 million Euros ($353.0 million US dollars). The Company has two long-term time-charter contracts that are denominated in Euros, the funds from which will be used to repay the associated Euro denominated term loans. Interest payments on the USD denominated term loans are based on LIBOR plus a margin. Interest payments on the EURO denominated term loans are based on EURIBOR plus a margin. At September 30, 2004, the margins ranged between 0.50% and 1.30%. The term loans reduce in monthly, quarterly or semi-annual payments with varying maturities through 2029. All term loans of the Company are collateralized by first preferred mortgages on the vessels to which the loans relate, together with certain other collateral and guarantees from Teekay. Certain term loans of UNS totaling $371.1 million and certain term loans of Teekay Shipping Spain totaling $754.8 million are not guaranteed by Teekay. |
| Pursuant to long-term debt agreements, the amount of Restricted Payments, as defined, that the Company can make, including dividends and purchases of its own capital stock, was limited as of September 30, 2004, to $717.8 million. Certain loan agreements require that a minimum level of free cash be maintained. As at September 30, 2004, this amount was $100.0 million. Certain of the loan agreements also require that a minimum level of free liquidity and undrawn revolving credit lines (excluding undrawn revolving credit lines with less than 6 months to maturity) be maintained. As at September 30, 2004, this amount was $198.5 million. |
| 9. | Capital Lease Obligations and Restricted Cash |
| Capital Leases |
| Aframax and Suezmax Tankers. As at September 30, 2004, the Company was party to capital leases on one Aframax tanker and three Suezmax tankers. Under the terms of the lease arrangements – which include the Company’s contractual right to full operation of the vessels pursuant to bareboat charters – the Company is required to purchase these vessels at the end of their respective lease terms for a fixed price. As at September 30, 2004, the remaining commitments under these capital leases, including the purchase obligations, approximated $225.5 million (including imputed interest of $51.5 million), repayable as follows: |
Year Commitment
2004......................................................................... $ 5.3 million
2005......................................................................... 21.1 million
2006......................................................................... 145.9 million
2007......................................................................... 4.1 million
2008......................................................................... 4.1 million
Thereafter................................................................... 45.0 million
| LNG Carriers. As at September 30, 2004, the Company was a party to capital leases on two LNG carriers (including one newbuilding on order), which are structured as “Spanish tax leases.” Under the terms of the Spanish tax leases, the Company will purchase these vessels at the end of their respective lease terms using restricted cash deposits described below. As at September 30, 2004, the remaining commitments under the capital lease for our existing LNG carrier, including the purchase obligation, approximated 213.1 million Euros ($264.4 million), including imputed interest of 16.3 million Euros ($20.3 million), repayable as follows: |
Year Commitment
2004.................................................. 56.0 million Euros ($69.5 million)
2005.................................................. 56.0 million Euros ($69.5 million)
2006.................................................. 101.1 million Euros ($125.4 million)
| Restricted Cash |
| Under the terms of the Spanish tax leases for the two LNG carriers, the Company is required to have on deposit with financial institutions an amount of cash equal to the present value of the remaining amounts owing under the leases, including the obligations to purchase the LNG carriers at the end of the lease periods. As at September 30, 2004, this amount was $398.6 million. These cash deposits are restricted to being used for capital lease payments and have been fully funded with term loans and a Spanish government grant of $49.2 million. The interest rates earned on the deposits are the same as the interest rates implicit in the lease agreements. The Company is committed to placing an additional 40.0 million Euros ($49.6 million) on deposit when the Company takes delivery of its LNG carrier newbuilding (financed under a capital lease) in the fourth quarter of 2004. This LNG carrier will commence service under a 20-year fixed-rate time-charter contract upon delivery. |
| The Company also maintains restricted cash deposits relating to certain term loans and other obligations. As at September 30, 2004 and December 31, 2003, these amounts were $15.1 million and $2.7 million, respectively. |
| 10. | Capital Stock |
| The authorized capital stock of Teekay at September 30, 2004 was 25,000,000 shares of Preferred Stock, with a par value of $1 per share, and 725,000,000 shares of Common Stock, with a par value of $0.001 per share. As at September 30, 2004, Teekay had 83,502,107 shares of Common Stock and no shares of Preferred Stock issued and outstanding. The Company’s Board of Directors authorized a two-for-one stock split relating to the Teekay’s common stock, which was effected in the form of a 100% stock dividend. All stockholders of record on May 3, 2004 received one additional share of common stock for each share held. The additional shares were distributed on or about May 17, 2004, the effective date of the stock dividend. All earnings per share and share capital amounts disclosed in these financial statements give effect to this stock split retroactively. |
| In September 2003, the Company’s 1995 Stock Option Plan was terminated with respect to new grants and the Company’s 2003 Equity Incentive Plan was adopted. As at September 30, 2004, the Company had reserved pursuant to its 1995 Stock Option Plan and 2003 Equity Incentive Plan (collectively referred to as the “Plans”) 7,565,012 shares of Common Stock for issuance upon exercise of options or equity awards granted or to be granted. As at September 30, 2004, the number of options available for issuance under the Plans was 1,955,640. As at September 30, 2004, options to purchase a total of 5,609,372 shares of Teekay’s Common Stock were outstanding, of which 2,828,177 options were then exercisable at prices ranging from $8.44 to $20.60 per share, with a weighted-average exercise price of $15.55 per share. All outstanding options have exercise prices ranging from $8.44 to $34.37 per share and a weighted-average exercise price of $19.63 per share. All outstanding options expire between July 19, 2005 and April 4, 2014, ten years after the date of each respective grant. |
| Under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure,” disclosures of stock-based compensation arrangements with employees are required and companies are encouraged (but not required) to record compensation costs associated with employee stock option awards, based on estimated fair values at the grant dates. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 (“APB 25”) “Accounting for Stock Issued to Employees.” As the exercise price of the Company’s employee stock options equals the market price of underlying stock on the date of grant, no compensation expense has been recognized under APB 25. The following table illustrates the effect on net income and earnings per share had the Company applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation. |
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
$ $ $ $
--------------- --------------- --------------- ---------------
Net income - as reported.................. 245,332 20,327 532,884 170,782
Less: Total stock-based compensation
expense................................. 2,084 2,060 6,294 6,185
--------------- --------------- --------------- ---------------
Net income - pro forma.................... 243,248 18,267 526,590 164,597
=============== =============== =============== ===============
Basic earnings per common share:
As reported............................. 2.94 0.25 6.46 2.14
Pro forma............................... 2.92 0.23 6.38 2.06
Diluted earnings per common share:
As reported............................. 2.77 0.25 6.12 2.11
Pro forma............................... 2.74 0.22 6.05 2.03
| For the purpose of the above pro forma calculation, the fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used in computing the fair value of the options granted: expected volatility of 35% in 2004 and 30% in 2003, expected life of five years, dividend yield of 2.0% in 2004 and 3.0% in 2003, and risk-free interest rate of 2.7% in 2004 and 2.5% in 2003. |
| 11. | Commitments and Contingencies |
| As at September 30, 2004, the Company was committed to the construction of three Suezmax tankers, seven Aframax tankers, three product tankers, and four LNG carriers scheduled for delivery between October 2004 and March 2008, at a total cost of approximately $1,283.9 million, excluding capitalized interest. As at September 30, 2004, payments made towards these commitments totaled $217.4 million, excluding $22.9 million of capitalized interest and other miscellaneous construction costs. Long-term financing arrangements existed for $1,005.9 million (including a capital lease for $192.0 million) of the unpaid cost of these vessels. It is the Company’s intention to finance the remaining unpaid amount of $60.6 million through incremental debt or surplus cash balances, or a combination thereof. As at September 30, 2004, the remaining payments required to be made under these newbuilding contracts were: $241.0 million in 2004, $377.9 million in 2005, $255.9 million in 2006, $141.0 million in 2007 and $50.7 million in 2008. Two of the Aframax tankers will be subject to 10-year long-term charters to Skaugen PetroTrans Inc, a joint venture of the Company, upon delivery in 2008. |
| Under the terms of the joint venture agreement with an entity controlled by the former controlling shareholder of Teekay Shipping Spain, Teekay will progressively contribute to the joint venture company $50.0 million in share premium. In the event that Teekay has not contributed the $50.0 million equity prior to April 30, 2007, it will be required to pay the other partner an amount no more than $25.0 million calculated by a pre-determined formula based on the occurrence of certain future events. |
| The Company has been awarded a contract by a consortium of major oil companies to construct and install on five of its shuttle tankers volatile compound emissions plants, which reduce emissions during cargo operations. These plants are leased to the consortium of major oil companies. The construction and installation of these plants are expected to be completed by the end of 2005 at a total cost of approximately $88.5 million. As at September 30, 2004, the Company had made payments towards these commitments of approximately $53.2 million. As at September 30, 2004, the remaining payments required to be made towards these commitments were $14.2 million in 2004, and $21.1 million in 2005. |
| Teekay and certain subsidiaries of Teekay have guaranteed their share of the outstanding mortgage debt in five 50%-owned joint venture companies. As at September 30, 2004, Teekay and these subsidiaries had guaranteed $124.9 million, or 50% of the total $249.8 million, in outstanding mortgage debt of the joint venture companies. These joint venture companies own an aggregate of five shuttle tankers. |
| The Company enters into indemnification agreements with certain officers and directors. In addition, the Company enters into other indemnification agreements in the ordinary course of business. The maximum potential amount of future payments required under these indemnification agreements is unlimited. However, the Company maintains appropriate liability insurance that limits the exposure and enables the Company to recover future amounts paid up to the maximum amount of the insurance coverage, less any deductible amounts pursuant to the terms of the respective policies, the amounts of which are not considered material. |
| 12. | Gain on Sale of Vessels and Restructuring Charge |
| During the third quarter of 2004, the Company sold six Aframax tankers built between 1988 and 1990, one 1990‘s built very large crude carrier, and one 1980‘s built shuttle tanker. The results for both the three and nine-month periods ended September 30, 2004 include gains on sale from these vessels totaling $52.8 million. |
| During December 2003, the Company sold and leased back three Aframax tankers which are accounted for as vessel operating leases. The sale generated a $16.8 million deferred gain, which has been included in other long-term liabilities and is being amortized over the 7-year term of the leases. The amortization of this deferred gain for the three and nine-month periods ended September 30, 2004 was $0.6 million and $1.8 million, respectively. |
| During the nine-month period ended September 30, 2004, the Company incurred $1.0 million of restructuring costs associated with the closure of the Company’s office in Oslo, Norway. There were no restructuring costs in the three-month period ended September 30, 2004. |
| 13. | Other - Net |
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
$ $ $ $
--------------- -------------- ------------- --------------
Income tax expense........................... (8,066) (6,000) (16,301) (23,186)
Dividend income.............................. 3 692 5,679 2,891
Miscellaneous................................ (4,594) 1,558 (7,330) (2,076)
--------------- -------------- ------------- --------------
(12,657) (3,750) (17,952) (22,371)
=============== ============== ============= ==============
| 14. | Comprehensive Income |
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
$ $ $ $
--------------- -------------- ------------- --------------
Net income.................................... 245,332 20,327 532,884 170,782
Other comprehensive income:
Unrealized gain (loss) on marketable
securities................................ (12,020) 22,577 39,369 23,007
Reclassification adjustment for (gain)
loss on marketable securities included in
net income................................ (91,153) 31 (92,588) 4,971
Unrealized gain (loss) on derivative
instruments............................... (43,191) 6,644 (67,645) (4,938)
Reclassification adjustment for (gain)
loss on derivative instruments............ (1,098) 2,441 5,048 2,078
--------------- -------------- ------------- --------------
Comprehensive income.......................... 97,871 52,020 417,069 195,900
=============== ============== ============= ==============
| 15. | Derivative Instruments and Hedging Activities |
| The Company uses derivatives only for hedging purposes. The following summarizes the Company’s risk strategies with respect to market risk from foreign currency fluctuations, changes in interest rates, spot market rates for vessels, bunker fuel prices, and the effect of these strategies on the Company’s financial statements. |
| The Company hedges portions of its forecasted expenditures denominated in foreign currencies with forward contracts. As at September 30, 2004, the Company was committed to foreign exchange contracts for the forward purchase of approximately Norwegian Kroner 603.9 million, Canadian Dollars 31.5 million and Singapore Dollars 2.4 million and Euro 0.2 million for U.S. Dollars at an average rate of 7.4409 Norwegian Kroner per U.S. Dollar, 1.4427 Canadian Dollar per U.S. Dollar, 1.7191 Singapore Dollar per U.S. Dollar and 0.8090 Euro per U.S. Dollar, respectively. The foreign exchange forward contracts mature as follows: $30.3 million in 2004, $69.3 million in 2005 and $5.0 million in 2006. |
| The Company hedges a portion of its bunker fuel expenditures with bunker fuel swap contracts. As at September 30, 2004, the Company was committed to bunker fuel swap contracts totaling 17,400 metric tonnes, with a weighted-average price of $141.50 per tonne. The fuel swap contracts expire between October 2004 and September 2005. |
| As at September 30, 2004, the Company was committed to the following interest rate swap agreements related to its LIBOR and EURIBOR based debt, whereby certain of the Company’s floating-rate debt was swapped with fixed-rate obligations: |
Weighted-
Interest Average Fixed
Rate Principal Remaining Interest
Index Amount Term Rate
(years) (%) (5)
-------------- -------------- ------------ --------------
U.S. Dollar denominated interest rate swaps LIBOR 600,000 1.1 2.7
U.S. Dollar denominated interest rate swaps (1) LIBOR 434,000 7.9 5.3
U.S. Dollar denominated interest rate swaps (2) LIBOR 329,837 21.6 6.7
Euro denominated interest rate swaps (3) (4) EURIBOR 353,011 20.0 5.9
_______________________________________________
| (1) | Inception date of swaps is 2006 ($200.0 million) and 2007 ($234.0 million). |
| (2) | Principal amounts reduce monthly to zero by the maturity dates of the swap agreements. |
| (3) | Principal amounts increases to 325.1 million Euros ($403.4 million) by December 2004, and then reduces monthly to 70.1 million Euros ($87.0 million) by the maturity dates of the swap agreements. |
| (4) | Principal amount is the U.S. Dollar equivalent of 324.5 million Euros. |
| (5) | Excludes the margin the Company pays on its variable-rate debt. |
| The Company hedges certain of its voyage revenues through the use of forward freight agreements. Forward freight agreements involve contracts to provide a fixed number of theoretical voyages at fixed rates, thus hedging a portion of the Company’s exposure to the spot charter market. As at September 30, 2004, the Company was committed to forward freight agreements totaling 3.1 million metric tonnes with a notional principal amount of $26.2 million. The forward freight agreements expire between October 2004 and September 2005. |
| During the three and nine-month periods ended September 30, 2004, the Company recognized a net gain of $0.4 million (net loss $0.9 million – 2003) and a net loss of $0.7 million ($1.0 million – 2003), respectively, relating to the ineffective portion of its interest rate swap agreements and foreign currency forward contracts. The ineffective portion of these derivative instruments is presented as interest expense and other — net. |
| The Company is exposed to credit loss in the event of non-performance by the counter parties to the interest rate swap agreements, foreign exchange forward contracts, and forward freight agreements; however, the Company does not anticipate non-performance by any of the counter parties. |
| 16. | Earnings Per Share |
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
$ $ $ $
--------------- -------------- --------------- ---------------
Net income available for common
stockholders................................ 245,332 20,327 532,884 170,782
--------------- -------------- --------------- ---------------
Weighted average number of common
shares...................................... 83,317,200 80,085,404 82,516,723 79,741,480
Dilutive effect of employee stock options..... 2,675,439 1,798,940 2,222,783 1,378,726
Dilutive effect of Equity Units............... 2,725,892 - 2,370,562 -
--------------- -------------- --------------- ---------------
Common stock and common stock
equivalents................................. 88,718,531 81,884,344 87,110,068 81,120,206
=============== ============== =============== ===============
Earnings per common share:
- Basic....................................... $2.94 $0.25 $6.46 $2.14
- Diluted..................................... $2.77 $0.25 $6.12 $2.11
| For the three and nine-month periods ended September 30, 2003, the anti-dilutive effect of 3.3 million shares and 4.0 million shares, respectively, attributable to outstanding stock options and Equity Units were excluded from the calculations of diluted earnings per share. All outstanding stock options and Equity Units were dilutive for the three and nine-month periods ended September 30, 2004. |
| 17. | Subsequent Events |
| a) The Company has entered into agreements to sell two Suezmax and four Aframax tankers built between 1989 and 1993. The Company expects that the total proceeds from the sale of these six vessels will be approximately $176.0 million. These vessels are scheduled to be delivered to the buyers during the fourth quarter, at which time the Company expects to record a gain of approximately $23.0 million relating to the sale of these vessels. |
| b) In October 2004, the Company entered into $500.0 million of interest rate swap agreements related to its LIBOR-based debt whereby certain of the Company’s floating-rate debt will be swapped with fixed-rate obligations with a weighted-average interest rate of approximately 5.1% commencing between January 2006 and January 2007, with $300.0 million maturing in January 2016, $100.0 million maturing in July 2016 and $200.0 million maturing in January 2017. |
| c) In November 2004, the Company announced that its Board of Directors has authorized the repurchase of up to 3.0 million shares of its common stock in the open market. |
| d) In November 2004, the Company announced that its wholly-owned subsidiary, Teekay LNG Partners L.P. (“the Partnership”), has filed a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of its common units. The Partnership is a Marshall Islands partnership recently formed by the Company as part of its strategy to expand its operations in the LNG sector. Upon the closing of the offering, the Partnership will provide LNG and crude oil marine transportation services through a fleet of LNG carriers and Suezmax class crude oil tankers, primarily consisting of vessels the Company obtained through its acquisition of Teekay Shipping Spain. The initial public offering will include 5,500,000 common units, representing an aggregate ownership of approximately 22 percent of the Partnership. After the offering, the Company will own an approximate 78 percent interest in the Partnership, including its 2 percent general partner interest. The size of the offering will increase to a total of 6,325,000 common units if the underwriters exercise their over-allotment option in full, which would reduce the Company’s ownership interest from approximately 78 percent to approximately 75 percent. Proceeds from the offering will be used to repay debt that the Partnership will owe to the Company and to pay offering expenses. Proceeds of any exercise of the over-allotment option will be used to repay debt under ship financing arrangements of the Partnership. |
| 18. | Recent Pronouncements |
| On March 31, 2004, the Financial Accounting Standards Board published an Exposure Draft, “Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.” The proposed change in accounting would replace the existing requirements under FAS 123 and APB 25. Under the proposal, all forms of share-based payments to employees, including employee stock options and employee stock purchase plans, would be treated the same as other forms of compensation by recognizing the related cost in the statements of income. This proposed Statement would eliminate the ability to account for stock-based compensation transactions using APB 25 and generally would require instead that such transactions be accounted for using a fair-value based method. The FASB has concluded that a binomial model such as a lattice model is preferred over the Black-Scholes valuation model in determining the fair value of an option at a grant date. The comment period for the exposure draft ended on June 30, 2004. The Company is investigating what impact the adoption of the exposure draft will have on its financial position and results of operations. |
SCHEDULE A
Three Months Ended September 30, 2004
-------------------------------------------------------------------------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
-------------------------------------------------------------------------------
Voyage revenues - 14,382 520,669 (14,439) 520,612
Operating expenses 2,655 3,765 333,922 (14,439) 325,903
-------------------------------------------------------------------------------
Income (loss) from vessel operations (2,655) 10,617 186,747 - 194,709
Net interest expense (3,412) - (25,913) - (29,325)
Equity in net income of subsidiaries 242,037 - - (242,037) -
Other income (loss) 9,362 (2) 70,588 - 79,948
-------------------------------------------------------------------------------
Net income 245,332 10,615 231,422 (242,037) 245,332
Retained earnings, beginning of the period 1,362,704 16,578 1,651,031 (1,667,609) 1,362,704
Dividends declared (10,407) - - - (10,407)
-------------------------------------------------------------------------------
Retained earnings, end of the period 1,597,629 27,193 1,882,453 (1,909,646) 1,597,629
===============================================================================
Three Months Ended September 30, 2003
-------------------------------------------------------------------------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
-------------------------------------------------------------------------------
Voyage revenues - 17,203 381,156 (17,815) 380,544
Operating expenses 2,916 8,786 342,881 (17,815) 336,768
-------------------------------------------------------------------------------
Income (loss) from vessel operations (2,916) 8,417 38,275 - 43,776
Net interest expense (16,063) - (4,965) - (21,028)
Equity in net income of subsidiaries 51,427 - - (51,427) -
Other income (loss) (12,121) - 9,700 - (2,421)
-------------------------------------------------------------------------------
Net income 20,327 8,417 43,010 (51,427) 20,327
Retained earnings (deficit), beginning of
the period 1,087,367 (11,617) 1,326,299 (1,314,682) 1,087,367
Dividends declared (8,588) - - - (8,588)
-------------------------------------------------------------------------------
Retained earnings (deficit), end of the
period 1,099,106 (3,200) 1,369,309 1,366,109 1,099,106
===============================================================================
___________________
(See Note 8)
SCHEDULE A
Nine Months Ended September 30, 2004
-------------------------------------------------------------------------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
-------------------------------------------------------------------------------
Voyage revenues - 47,687 1,549,742 (47,744) 1,549,685
Operating expenses 10,399 16,055 1,045,551 (47,744) 1,024,261
-------------------------------------------------------------------------------
Income (loss) from vessel operations (10,399) 31,632 504,191 - 525,424
Net interest expense (22,642) - (52,780) - (75,422)
Equity in net income of subsidiaries 560,656 - - (560,656) -
Other (loss) income 5,269 (2) 77,615 82,882
-------------------------------------------------------------------------------
Net income 532,884 31,630 529,026 (560,656) 532,884
Retained earnings, beginning of the period 1,095,650 5,107 1,343,883 (1,348,990) 1,095,650
Retained earnings adjustment (1) - (9,544) 9,544 - -
Dividends declared (30,905) - - - (30,905)
-------------------------------------------------------------------------------
Retained earnings, end of the period 1,597,629 27,193 1,882,453 1,909,646 1,597,629
===============================================================================
(1) During 2003 and the nine-month period ended September 30, 2004, the Company has repurchased $127.6 million of the 8.32% Notes. Consequently, four of the Company’s guarantor subsidiaries were released from the guarantee of the 8.32% Notes during the second quarter of 2004.
Nine Months Ended September 30, 2003
-------------------------------------------------------------------------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
-------------------------------------------------------------------------------
Voyage revenues - 35,104 1,125,659 (35,716) 1,125,047
Operating expenses 9,380 25,192 877,042 (35,716) 875,898
-------------------------------------------------------------------------------
Income (loss) from vessel operations (9,380) 9,912 248,617 - 249,149
Net interest expense (40,790) - (14,191) - (54,981)
Equity in net income of subsidiaries 233,809 - - (233,809) -
Other loss (12,857) - (10,529) - (23,386)
-------------------------------------------------------------------------------
Net income 170,782 9,912 223,897 (233,809) 170,782
Retained earnings (deficit), beginning of
the period 954,005 (13,112) 1,145,412 (1,132,300) 954,005
Dividends declared (25,681) - - - (25,681)
-------------------------------------------------------------------------------
Retained earnings (deficit), end of the
period 1,099,106 (3,200) 1,369,309 (1,366,109) 1,099,106
===============================================================================
___________________
(See Note 8)
SCHEDULE A
As at September 30, 2004
---------------------------------------------------------------------------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
---------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents - - 308,034 - 308,034
Other current assets 5,535 177 421,275 (145,000) 281,987
---------------------------------------------------------------------------------
Total current assets 5,535 177 729,309 (145,000) 590,021
Vessels and equipment (net) - 88,251 3,540,936 (88,251) 3,540,936
Advances due from subsidiaries 214,037 - - (214,037) -
Investment in direct financing leases - - 96,456 - 96,456
Other assets (principally restricted
cash and investments in subsidiaries) 2,472,140 - 399,514 (2,472,140) 399,514
Investment in joint ventures - - 53,906 - 53,906
Intangible assets - net - - 282,217 - 282,217
Goodwill - - 176,220 - 176,220
---------------------------------------------------------------------------------
2,691,712 88,428 5,278,558 (2,919,428) 5,139,270
=================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities 12,647 769 485,852 (145,000) 354,268
Long-term debt and other long-term
liabilities 550,028 - 2,143,665 - 2,693,693
Due (from) to affiliates - (85,462) 661,595 (576,133) -
---------------------------------------------------------------------------------
Total liabilities 562,675 (84,693) 3,291,112 (721,133) 3,047,961
---------------------------------------------------------------------------------
Minority interest - - 14,563 - 14,563
Stockholders' Equity
Capital stock 531,408 11 5,955 (5,966) 531,408
Contributed capital - 145,917 136,766 (282,683) -
Retained earnings 1,597,629 27,193 1,882,453 (1,909,646) 1,597,629
Accumulated other comprehensive income
(loss) - - (52,291) - (52,291)
---------------------------------------------------------------------------------
Total stockholders' equity 2,129,037 173,121 1,972,883 (2,198,295) 2,076,746
---------------------------------------------------------------------------------
2,691,712 88,428 5,278,558 (2,919,428) 5,139,270
=================================================================================
As at December 31, 2003
---------------------------------------------------------------------------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
------------------ ------------ ----------------- --------------- ----------------
ASSETS - - 292,284 - 292,284
Cash and cash equivalents
Other current assets 1,429 344 282,476 (96,000) 188,249
------------------ ------------ ----------------- --------------- ----------------
Total current assets 1,429 344 574,760 (96,000) 480,533
Vessels and equipment (net) - 242,182 2,332,678 - 2,574,860
Advances due from subsidiaries 309,071 - - (309,071) -
Investment in direct financing leases - - 73,073 - 73,073
Other assets (principally marketable
securities and investments in
subsidiaries) 1,911,491 - 155,844 (1,911,491) 155,844
Investment in joint ventures - - 54,392 - 54,392
Intangible assets - net - - 118,588 - 118,588
Goodwill - - 130,754 - 130,754
------------------ ------------ ----------------- --------------- ----------------
2,221,991 242,526 3,440,089 (2,316,562) 3,588,044
================== ============ ================= =============== ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities 25,371 1,746 343,515 (96,000) 274,632
Long-term debt and other long-term
liabilities 608,317 - 1,037,946 - 1,646,263
Due (from) to affiliates - (133,657) 493,190 (359,533) -
------------------ ------------ ----------------- --------------- ----------------
Total liabilities 633,688 (131,911) 1,874,651 (455,533) 1,920,895
------------------ ------------ ----------------- --------------- ----------------
Minority Interest - - 15,322 - 15,322
Stockholders' Equity
Capital stock 492,653 23 5,943 (5,966) 492,653
Contributed capital - 369,307 136,766 (506,073) -
Retained earnings 1,095,650 5,107 1,343,883 (1,348,990) 1,095,650
Accumulated other comprehensive loss - - 63,524 - 63,524
------------------ ------------ ----------------- --------------- ----------------
Total stockholders' equity 1,588,303 374,437 1,550,116 (1,861,029) 1,651,827
------------------ ------------ ----------------- --------------- ----------------
2,221,991 242,526 3,440,089 (2,316,562) 3,588,044
================== ============ ================= =============== ================
___________________
(See Note 8)
SCHEDULE A
Nine Months Ended September 30, 2004
----------------- ------------- --------------- ------------ ----------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
----------------- ------------- --------------- ------------ ----------------
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
----------------- ------------- --------------- ------------ ----------------
Net cash flow from (used for)
operating activities (45,893) 39,220 526,897 - 520,224
----------------- ------------- --------------- ------------ ----------------
FINANCING ACTIVITIES
Net proceeds from long-term debt - - 1,469,670 - 1,469,670
Scheduled repayments of long-term debt (59,924) - (29,452) - (86,376)
Prepayments of long-term debt - - (1,462,439) - (1,462,439)
Other 102,817 (39,028) (60,836) - 2,953
----------------- ------------- --------------- ------------ ----------------
Net cash flow from (used for)
financing activities 45,893 (39,028) (83,057) - (76,192)
----------------- ------------- --------------- ------------ ----------------
INVESTING ACTIVITIES
Expenditures for vessels and equipment - (192) (465,035) - (465,227)
Proceeds from sale of vessels and equipment - - 220,917 - 220,917
Purchase of Teekay Shipping Spain, S.A. - - (286,854) - (286,854)
Proceeds from sale of marketable securities - - 135,357 - 135,357
Other - - (32,475) - (32,475)
----------------- ------------- --------------- ------------ ----------------
Net cash flow used for investing
activities - (192) (428,090) - (428,282)
----------------- ------------- --------------- ------------ ----------------
Increase in cash and cash equivalents - - 15,750 - 15,750
Cash and cash equivalents, beginning of the
period - - 292,284 - 292,284
----------------- ------------- --------------- ------------ ----------------
Cash and cash equivalents, end of the period - - 308,034 - 308,034
================= ============= =============== ============ ================
Nine Months Ended September 30, 2003
----------------- ------------- --------------- ------------ ----------------
8.32% Notes Teekay
Teekay Guarantor Non-Guarantor Shipping Corp.
Shipping Corp. Subsidiaries Subsidiaries Eliminations & Subsidiaries
$ $ $ $ $
----------------- ------------- --------------- ------------ ----------------
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
----------------- ------------- --------------- ------------ ----------------
Net cash flow from (used for)
operating activities (52,434) 16,048 367,013 - 330,627
----------------- ------------- --------------- ------------ ----------------
FINANCING ACTIVITIES
Net proceeds from long-term debt 138,509 - 1,540,788 - 1,679,297
Scheduled repayments of long-term debt - - (49,114) - (49,1114)
Prepayments of long-term debt - - (1,023,000) - (1,023,000)
Other (86,075) (15,702) 95,800 - (5,977)
----------------- ------------- --------------- ------------ ----------------
Net cash flow from (used for)
financing activities 52,434 (15,702) 564,474 - 601,206
----------------- ------------- --------------- ------------ ----------------
INVESTING ACTIVITIES
Expenditures for vessels and equipment - (346) (226,724) - (227,070)
Proceeds from sale of vessels and equipment - - (704,734) - (704,734)
Purchase of Navion AS - - 91,080 - 91,080
Other - - (39,783) - (39,783)
----------------- ------------- --------------- ------------ ----------------
Net cash flow used for investing
activities - (346) (880,161) - (880,507)
----------------- ------------- --------------- ------------ ----------------
Increase in cash and cash equivalents - - 51,326 - 51,326
Cash and cash equivalents, beginning of the
period - - 284,625 - 284,625
----------------- ------------- --------------- ------------ ----------------
Cash and cash equivalents, end of the period - - 335,951 - 335,951
================= ============= =============== ============ ================
___________________
(See Note 8)
General
Teekay is one of the world’s leading providers of international crude oil and petroleum product transportation services. We estimate that we transported more than 10 percent of the world’s seaborne oil in 2003. Through our recent acquisition of Naviera F. Tapias S.A. (renamed Teekay Shipping Spain S.A.), we have also expanded into the liquefied natural gas (LNG) shipping sector. As at September 30, 2004, our fleet (excluding vessels managed for third parties) consisted of 161 vessels (including 17 newbuildings on order, 52 vessels time-chartered-in and five vessels owned through joint ventures). Our conventional tankers provide for a total cargo-carrying capacity of approximately 16.4 million deadweight tonnes (mdwt), and our LNG fleet capacity totals approximately 1.0 million cubic meters.
Our voyage revenues are derived from:
| • | Voyage or “spot” charters, which are charters priced on a current, or “spot,” market rate; |
| • | Time charters, whereby vessels are chartered to customers for a fixed period of time at rates that are generally fixed, but may contain a variable component; and |
| • | Contracts of affreightment, where we carry an agreed quantity of cargo for a customer over a specified trade route within a given period of time. |
The table below illustrates the primary distinctions among these types of charters and contracts:
Contract of
Voyage Charter(1) Time Charter Affreightment
Typical contract length............... Single voyage One year or more One year or more
Hire rate (2) basis................... Varies Daily Per barrel of cargo carried
Voyage expenses (3)................... We pay Customer pays We pay
Vessel operating expenses (3)......... We pay We pay We pay
Off-hire (4).......................... Customer does not Varies Customer does not
pay pay
________________________
(1) Under a consecutive voyage charter, the customer pays for idle time.
(2) “Hire” rate refers to the basic payment from the charterer for the use
of the vessel.
(3) Defined below under “Important Financial and Operational
Terms and Concepts.”
(4) “Off-hire” refers to the time a vessel is not available for service.
Segments
Our fleet is divided into three main segments, the spot tanker segment, the fixed-rate tanker segment and the fixed-rate LNG segment.
Spot Tanker Segment
Our spot tanker segment consists of conventional crude oil tankers and product carriers operating on the spot market or subject to time charters or contracts of affreightment priced on a spot-market basis or short-term fixed-rate contracts. We consider contracts that have an original term of less than three years in duration to be short-term. All of our very large crude carrier (VLCC) fleet and substantially all of our conventional Aframax, large product and small product tanker fleets are among the vessels included in the spot tanker segment. Our spot market operations contribute to the volatility of our revenues, cash flow from operations and net income. Historically, the tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, tanker spot markets historically have exhibited seasonal variations in charter rates. Tanker spot markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling. During the third quarter, we took delivery of two Aframax tanker newbuildings trading on the spot market, and sold six older Aframax tankers and one VLCC. As at September 30, 2004, we had five Aframax tankers on order in our spot tanker segment scheduled to be delivered between January 2005 and March 2007, three large product tankers scheduled to be delivered between August 2005 and December 2006, and one Suezmax tanker scheduled to be delivered in March 2005.
Fixed-Rate Tanker Segment
Our fixed-rate tanker segment includes our shuttle tanker operations, floating storage and offtake (FSO) vessels, liquid petroleum gas carriers, and conventional crude oil, methanol and product tankers on long-term fixed-rate time-charter contracts or contracts of affreightment. Our shuttle tanker business, which is operated through our subsidiaries Navion AS (or Navion) and Ugland Nordic Shipping, (or UNS) provides services to oil companies, primarily in the North Sea, under long-term fixed-rate contracts of affreightment or time-charter agreements. Historically, the utilization of shuttle tankers in the North Sea is higher in the winter months as favorable weather conditions in the summer months provide opportunities for repairs and maintenance to the offshore oil platforms, which generally reduces oil production. During the third quarter, we sold one older shuttle tanker. As at September 30, 2004, we had four newbuilding conventional crude oil Aframax tankers on order in our fixed-rate tanker segment (including two acquired as part of our acquisition of Teekay Shipping Spain, discussed below), which are scheduled to be delivered between October 2004 and March 2008. Upon delivery, two of the Aframax tankers will commence 10-year long-term charters to our joint venture, Skaugen PetroTrans Inc. (SPT). In April 2004, we commenced a charter contract to provide Unocal Thailand with an FSO vessel (the Pattani Spirit) for a minimum period of 10 years.
Fixed-Rate LNG Segment
Our fixed-rate LNG segment consists of LNG carriers subject to long-term, fixed-rate time-charter contracts. The acquisition of Teekay Shipping Spain on April 30, 2004 established our entry into the LNG shipping sector. Our fixed-rate LNG segment includes three LNG carriers acquired as part of the Teekay Shipping Spain acquisition. Two of the LNG carriers have been included from the date of the Teekay Shipping Spain acquisition. We took delivery of one LNG carrier in July 2004, which commenced service under a 25-year time-charter contract (with a charterer’s option to extend an additional five years). As at September 30, 2004, we had four newbuilding LNG carriers on order. One newbuilding LNG carrier is expected to deliver in the fourth quarter of 2004, when it will commence service under a 20-year time-charter contract (with a charterer’s option to extend an additional ten years). Three newbuilding LNG carriers will commence service under long-term contracts with Ras Lafan Liquefied Natural Gas Co. Limited (RasGas II), a joint venture company between ExxonMobil Corporation and Qatar Petroleum upon delivery in the fourth quarter of 2006 and the first half of 2007. The vessels will be time-chartered to RasGas II for a period of 20 years (with a charterer’s option to extend for periods up to an additional 15 years). These LNG charter contracts are subject, in certain circumstances, to termination and vessel purchase rights.
Acquisition of Teekay Shipping Spain, S.A.
On April 30, 2004, we acquired 100% of the issued and outstanding shares of Teekay Shipping Spain, S.A. (formerly Naviera F. Tapias, S.A.) for $298.2 million in cash and the assumption of existing debt. Please see Item 1 — Financial Statements: Note 3 – Acquisition of Teekay Shipping Spain, S.A. We believe the long-term, fixed-rate nature of Teekay Shipping Spain’s charter contracts will add stability to our cash flow and earnings throughout the tanker market cycle.
Acquisition of Navion AS
In April 2003, we acquired 100% of the issued and outstanding shares of Navion for approximately $774.2 million in cash, including transaction costs of approximately $7.0 million. Please see Item 1 — Financial Statements: Note 4 — Acquisition of Navion AS.
Proposed Initial Public Offering by Teekay LNG Partners L.P.
In November 2004, our wholly-owned subsidiary, Teekay LNG Partners L.P. (Teekay LNG Partners), filed a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of its common units. Teekay LNG Partners is a Marshall Islands partnership recently formed by us as part of our strategy to expand our operations in the LNG sector. Upon the closing of the offering, Teekay LNG Partners will provide LNG and crude oil marine transportation services through a fleet of LNG carriers and Suezmaz class crude oil tankers, primarily consisting of vessels we obtained through our acquisition of Teekay Shipping Spain. Please see Item 1 – Financial Statements: Note 17 – Subsequent Events.
Important Financial and Operational Terms and Concepts
We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:
Voyage Revenues. Voyage revenues primarily include revenues from voyage charters, time charters and contracts of affreightment. Voyage revenues are affected by hire rates and the number of calendar-ship-days a vessel operates. Voyage revenues are also affected by the mix of business between time charters, voyage charters and contracts of affreightment. Hire rates for voyage charters are more volatile, as they are typically tied to prevailing market rates at the time of a voyage.
Voyage Expenses. Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the customer under time charters and by us under voyage charters and contracts of affreightment. When we pay voyage expenses, we typically add them to our hire rates at an approximate cost.
Net Voyage Revenues. Net voyage revenues represent voyage revenues less voyage expenses. Because the amount of voyage expenses we incur for a particular charter depends upon the form of the charter, we use net voyage revenues to improve the comparability between periods of reported revenues that are generated by the different forms of charters. We principally use net voyage revenues, a non-GAAP financial measure, because it provides more meaningful information to us than voyage revenues, the most directly comparable financial measure under accounting principles generally accepted in the U.S. (GAAP).
Time Charter Equivalent (TCE) Rates. Bulk shipping industry freight rates are commonly measured in the shipping industry at the net voyage revenues level in terms of “time-charter equivalent” (or TCE) rates, which represent net voyage revenues divided by calendar-ship-days.
Vessel Operating Expenses. We are responsible for vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses.
Income from Vessel Operations. To assist us in evaluating our operations by segment, we sometimes analyze our income from vessel operations for each segment, which represents the income we receive from the segment after deducting operating expenses and depreciation and amortization, but prior to the deduction of interest expenses, taxes, foreign currency and interest rate swap gains or losses and other income and losses.
Drydocking. We must periodically drydock each of our vessels for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. Generally, we drydock each of our vessels every two and a half to five years, depending upon the type of vessel and its age. We capitalize a substantial portion of the costs we incur during drydocking and amortize those costs on a straight-line basis from the completion of a drydocking to the estimated completion of the next drydocking. We expense costs related to routine repairs and maintenance incurred during drydocking that do not improve or extend the useful lives of the assets. The number of drydockings undertaken in a given period, the size of the vessels and the nature of the work performed determine the level of drydocking expenditures.
Depreciation and Amortization. Our depreciation and amortization expense typically consists of the following three components:
| • | charges related to the depreciation of the historical cost of our fleet (less an estimated residual value) over the estimated useful lives of our vessels; |
| • | charges related to the amortization of drydocking expenditures over the estimated number of years to the next scheduled drydocking; and |
| • | charges related to the amortization of the fair value of the time charters, contracts of affreightment and intellectual property over the period over which the asset is expected to contribute to the future cash flows of the Company. |
Calendar-ship-days. Calendar-ship-days are equal to the aggregate number of calendar days in a period that our vessels operate during that period.
Restricted Cash Deposits. Under capital lease arrangements for two of our LNG carriers, we (a) borrow under term loans and deposit the proceeds into restricted cash accounts and (b) enter into capital leases, also referred to as bareboat charters, for the vessels. The restricted cash deposits equal the present value of the remaining amounts we owe under the leases arrangements, including our obligation to purchase the vessels at the end of the leases terms. During vessel construction, we borrow under the term loans and make restricted cash deposits that approximate the construction installment payments. We also maintain cash on deposit relating to certain term loans and other obligations. Please see Item 1 – Notes to the Consolidated Financial Statements: Note 9 – Capital Lease Obligations and Restricted Cash.
Tanker Market Overview
During the third quarter of 2004, spot tanker freight rates increased further from the already firm levels experienced in the prior quarter. This was due primarily to increased oil production in response to global oil demand growth, led by Asia and North America. Subsequent to the end of the quarter, spot tanker rates have surged to their highest levels experienced in the last three decades due to the cumulative effect of positive tanker market fundamentals.
Global oil demand, an underlying driver of tanker demand, continued to be strong, averaging 81.9 million barrels per day (mb/d) during the third quarter of 2004, a 0.7 mb/d rise from the previous quarter and 2.6 mb/d higher than the third quarter of 2003. Increased oil consumption in China and North America, combined with higher oil-based electricity generation in Japan as a result of safety-related nuclear reactor shutdowns, were among the key factors driving growth in global oil demand. On November 10, 2004, the International Energy Agency's (IEA) forecast for 2004 global oil demand was 82.4 mb/d, representing the highest level of annual demand since the 1970‘s. The IEA is forecasting an increase in global demand for 2005 of 1.4 mb/d, or 1.7%.
Global oil supply grew to 83.3 mb/d in the third quarter of 2004, an increase of 1.0 mb/d over the prior quarter and 3.9 mb/d higher than the third quarter of 2003. Continuing a recent trend, tanker tonne-mile demand growth was further amplified as all of the increase in oil production was from long-haul OPEC sources. OPEC production rose by 1.2 mb/d during the quarter, while non-OPEC production declined slightly due to scheduled field maintenance in the North Sea and hurricanes in the United States. At its September 15, 2004 meeting, OPEC (excluding Iraq) raised its oil production quota by 1.0 mb/d to 27.0 mb/d, effective on November 1, 2004, although actual current OPEC production remains above this level.
The size of the world tanker fleet rose to 330.0 mdwt as of September 30, 2004, up 1.5% from the end of the previous quarter. Deletions totaled 1.4 mdwt in the third quarter of 2004, down from 2.8 mdwt in the previous quarter. Deliveries of tanker newbuildings during the third quarter of 2004 totaled 6.2 mdwt compared to the 6.6 mdwt in the previous quarter.
As of September 30, 2004, the world tanker orderbook stood at 86.8 mdwt, or 26.3% of the world tanker fleet, the same percentage as at the end of the previous quarter.
Results of Operations
In accordance with GAAP, we report gross voyage revenues in our income statements and include voyage expenses among our operating expenses. However, shipowners base economic decisions regarding the deployment of their vessels upon anticipated TCE rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time charter contracts the customer usually pays the voyage expenses whereas under voyage charters and contracts of affreightment the shipowner usually pays the voyage expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net voyage revenues (i.e. voyage revenues less voyage expenses) and TCE rates of our three reportable segments where applicable. Please see Item 1 — Financial Statements: Note 2 – Segment Reporting.
The following tables compare our net voyage revenues (which is a non-GAAP financial measure) by reportable segment for the three and nine-month periods ended September 30, 2004, and September 30, 2003 to the most directly comparable GAAP financial measure:
------------------------ ------------------------------------------------- -------------------------------------------------
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
------------------------------------------------- -------------------------------------------------
Spot Fixed-Rate Fixed-Rate Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG Tanker Tanker LNG
Segment Segment Segment Total Segment Segment Segment Total
($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's)
------------------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Voyage revenues........ 326,287 177,000 17,325 520,612 240,852 139,692 - 380,544
Voyage expenses........ 88,444 17,967 55 106,466 90,381 15,305 - 105,686
------------------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Net voyage revenues.... 237,843 159,033 17,270 414,146 150,471 124,387 - 274,858
------------------------ ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
------------------------ ------------------------------------------------- -------------------------------------------------
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
------------------------------------------------- -------------------------------------------------
Spot Fixed-Rate Fixed-Rate Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG Tanker Tanker LNG
Segment Segment Segment Total Segment Segment Segment Total
(%) (%) (%) (%) (%) (%) (%) (%)
------------------------ ----------- ------------ ----------- ------------ ----------- ----------- ------------ ------------
Voyage revenues........ 62.7 34.0 3.3 100.0 63.3 36.7 - 100.0
Voyage expenses........ 83.0 16.9 0.1 100.0 85.5 14.5 - 100.0
------------------------ ----------- ------------ ----------- ------------ ----------- ----------- ------------ ------------
Net voyage revenues.... 57.4 38.4 4.2 100.0 54.7 45.3 - 100.0
------------------------ ----------- ------------ ----------- ------------ ----------- ----------- ------------ ------------
------------------------ ------------------------------------------------- -------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------------------------------------- -------------------------------------------------
Spot Fixed-Rate Fixed-Rate Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG Tanker Tanker LNG
Segment Segment Segment Total Segment Segment Segment Total
($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's) ($000's)
------------------------ ------------------------------------------------- -------------------------------------------------
Voyage revenues........ 992,809 531,552 25,324 1,549,685 796,935 328,112 - 1,125,047
Voyage expenses........ 263,920 54,968 170 319,058 250,810 33,397 - 284,207
------------------------ ------------------------------------------------- -------------------------------------------------
Net voyage revenues.... 728,889 476,584 25,154 1,230,627 546,125 294,715 - 840,840
------------------------ ------------------------------------------------- -------------------------------------------------
------------------------ ------------------------------------------------- -------------------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------------------------------------- -------------------------------------------------
Spot Fixed-Rate Fixed-Rate Spot Fixed-Rate Fixed-Rate
Tanker Tanker LNG Tanker Tanker LNG
Segment Segment Segment Total Segment Segment Segment Total
(%) (%) (%) (%) (%) (%) (%) (%)
------------------------ ----------- ------------ ----------- ------------ ----------- ----------- ------------ ------------
Voyage revenues........ 64.1 34.3 1.6 100.0 70.8 29.2 - 100.0
Voyage expenses........ 82.7 17.2 0.1 100.0 88.2 11.8 - 100.0
------------------------ ------------------------------------------------- -------------------------------------------------
Net voyage revenues.... 59.2 38.8 2.0 100.0 64.9 35.1 - 100.0
------------------------ ------------------------------------------------- -------------------------------------------------
The following tables outline the TCE rates earned by the vessels in our spot tanker segment for the three and nine-month periods ended September 30, 2004, and September 30, 2003:
------------------------------------------- -------------------------------------- -------------------------------------
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
-------------------------------------- --------------------------------------
Net Voyage TCE per Net Voyage TCE per
Revenues Calendar calendar- Revenues Calendar calendar-
Vessel Type ($000's) Days ship-day ($) ($000's) Days ship-day ($)
------------------------------------------- ------------ ----------- ------------- ------------ ---------- --------------
Very Large Crude Carriers................. 15,848 210 75,467 9,423 277 34,018
Suezmax Tankers........................... 28,282 620 45,616 15,323 644 23,793
Aframax Tankers........................... 168,640 5,426 31,080 100,328 5,477 18,318
Oil/Bulk/Ore Carriers (1)................. (23) - - 8,364 625 13,382
Large Product Tankers..................... 13,104 558 23,484 3,994 184 21,707
Small Product Tankers..................... 11,992 863 13,896 8,138 710 11,462
------------------------------------------- ------------ ----------- ------------- ------------ ---------- --------------
Totals.................................... 237,843 7,677 30,984 145,570 7,917 18,387
=========================================== ============ =========== ============= ============ ========== ==============
------------------------------------------- -------------------------------------- --------------------------------------
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-------------------------------------- --------------------------------------
Net Voyage TCE per Net Voyage TCE per
Revenues Calendar calendar- Revenues Calendar calendar-
Vessel Type ($000's) Days ship-day ($) ($000's) Days ship-day ($)
------------------------------------------- ------------ ----------- ------------- ------------ ---------- --------------
Very Large Crude Carriers................. 50,205 756 66,409 24,073 543 44,333
Suezmax Tankers........................... 88,618 1,828 48,478 42,973 1,256 34,214
Aframax Tankers........................... 516,750 15,700 32,914 401,678 16,234 24,743
Oil/Bulk/Ore Carriers(1).................. 3,225 157 20,688 32,278 1,991 16,212
Large Product Tankers..................... 34,185 1,456 23,479 11,584 361 32,089
Small Product Tankers..................... 35,330 2,612 13,526 19,806 1,670 11,860
------------------------------------------- ------------ ----------- ------------- ------------ ---------- --------------
Totals.................................... 728,313 22,509 32,357 532,392 22,055 24,139
=========================================== ============ =========== ============= ============ ========== ==============
| (1) | The oil/bulk/ore fleet’s net voyage revenues exclude $4.9 million (three-month period ended September 30, 2003), $0.5 million (nine-month period ended September 30, 2004) and $13.7 million (nine-month period ended September 30, 2003) of net voyage revenues earned by the minority pool participants in the Panamax oil/bulk/ore pool that we operated prior to our disposition of all of our oil/bulk/ore carriers and the termination of the pool. |
Our acquisition of Teekay Shipping Spain was completed on April 30, 2004. Consequently, our 2004 financial results for our segments only reflect Teekay Shipping Spain’s results of operations commencing May 1, 2004. Our acquisition of Navion was completed during April 2003. Consequently, our 2003 financial results for our segments only reflect Navion’s results of operations commencing April 1, 2003.
Spot Tanker Segment
TCE rates for the vessels in our spot tanker segment primarily depend on oil production and consumption levels, the number of vessels scrapped, the number of newbuildings delivered and charterers’ preference for modern tankers. As a result of our dependence on the tanker spot market, any fluctuations in TCE rates will impact our revenues and earnings. Our average TCE rate for the vessels in our spot tanker segment increased 68.5% and 34.0%, respectively, to $30,984 and $32,357 for the three and nine-month periods ended September 30, 2004, from $18,387 and $24,139 for the same periods last year.
The following table provides a summary of the change in fleet size of our spot tanker segment by owned and chartered-in vessels:
--------------------------- -------------------------------------- --------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
2004 2003 Percentage 2004 2003 Percentage
Change Change
(Calendar (Calendar (Calendar (Calendar
Days) Days) (%) Days) Days) (%)
--------------------------- ------------ ----------- ------------- ------------ ---------- --------------
Owned Vessels 4,170 5,344 (22.0) 12,489 16,334 (23.5)
Chartered-in Vessels 3,507 2,573 36.3 10,020 5,721 75.1
--------------------------- ------------ ----------- ------------- ------------ ---------- --------------
Total 7,677 7,917 3.0 22,509 22,055 2.1
=========================== ============ =========== ============= ============ ========== ==============
The average fleet size of our spot tanker fleet (including vessels chartered-in) decreased 3.0% for the three-month period ended September 30, 2004 from the same period last year, primarily due to the sale of a number of older single-hull vessels during the last 12 months, partially offset by newbuilding deliveries and additional chartered-in vessels. The average fleet size of our spot tanker fleet (including vessels chartered-in) increased 2.1% for the nine-month period ended September 30, 2004 from the same period last year, primarily due to the acquisition of Navion, and an increase in the number of vessels chartered-in, partially offset by the sale of older vessels in the fourth quarter of 2003 and the first nine months of 2004.
Net voyage revenues for the spot tanker segment increased 58.1% and 33.5% to $237.8 million and $728.9 million, respectively, for the three and nine-month periods ended September 30, 2004, from $150.5 million and $546.1 million for the same periods last year, primarily due to the significant increase in spot tanker charter rates.
Vessel operating expenses, decreased 26.2% and 26.3% to $23.5 million and $70.7 million, respectively, for the three and nine-month periods ended September 30, 2004, from $31.8 million and $95.8 million in the same periods last year. The decreases in vessel operating expenses were mainly attributable to the sale of the older vessels in the fourth quarter of 2003 and lower repairs and maintenance activity, partially offset by the increase from newbuilding deliveries.
Time-charter hire expense increased 42.4% and 68.0% to $71.3 million and $191.3 million, respectively, for the three and nine-month periods ended September 30, 2004, from $50.1 million and $113.9 million for the same periods last year. The increases were due primarily to the sale and leaseback of three Aframax vessels in December 2003 and an increase in the average number of other chartered-in vessels.
Depreciation and amortization expense decreased 7.7% and 7.2% to $24.9 million and $75.8 million, respectively, for the three and nine-month periods ended September 30, 2004, from $27.0 million and $81.7 million for the same periods last year. The decreases in depreciation and amortization were primarily attributable to the previously mentioned sale of older vessels. Drydock amortization was $4.3 million and $13.2 million, respectively, for the three and nine-month periods ended September 30, 2004, compared to $6.0 million and $17.1 million for the same periods last year. The decreases in drydock amortization were primarily due to the previously mentioned dispositions of older vessels.
Write-downs and (gain) loss on sale of vessels for the three and nine-month periods ended September 30, 2004 reflects gains of $49.8 million and $50.9 million, respectively, which include gains on the sale of seven older vessels, as well as amortization of a deferred gain on the sale and leaseback of the three Aframax tankers in December 2003. The write-downs and (gain) loss on sale of vessels for the three and nine-month periods ended September 30, 2003 reflect losses of $5.8 million and $36.3 million, respectively, which are primarily comprised of the writedown of vessel values in connection with their dispositions.
Restructuring charges of $1.0 million were incurred for the nine-month period ended September 30, 2004 relating to the closure of our Oslo office. We had no restructuring charges in the three-month period ended September 30, 2004. Restructuring charges of $0.4 million were incurred in both the three and nine-month periods ended September 30, 2003 relating to the closure of our Oslo office.
Fixed-Rate Tanker Segment
The average fleet size of our fixed-rate tanker segment (including vessels chartered-in) increased 28.8% for the three-month period ended September 30, 2004 compared to the same period last year, primarily due to the delivery of five conventional tankers on charter to ConocoPhillips, the acquisition of Teekay Shipping Spain, the delivery of three Suezmax shuttle tankers, and one FSO unit, which occurred at various times between the latter half of 2003 and early 2004. The average fleet size of our fixed rate tanker segment (including vessels chartered-in) increased 59.0% for the nine-month period ended September 30, 2004, compared to the same period last year, primarily due to the aforementioned reasons and the acquisition of Navion.
Net voyage revenues increased 27.9% and 61.7% to $159.0 million and $476.6 million, respectively, for the three and nine-month periods ended September 30, 2004, from $124.4 million and $294.7 million for the same periods last year, due primarily to the increases in fleet size.
Vessel operating expenses increased 34.7% and 48.3% to $31.6 million and $85.5 million, respectively, for the three and nine-month periods ended September 30, 2004, from $23.5 million and $57.6 million for the same periods last year, due primarily to the increase in fleet size as mentioned above.
Time-charter hire expense increased 8.1% and 63.7% to $49.6 million and $144.9 million, respectively, for the three and nine-month periods ended September 30, 2004, compared to $45.8 million and $88.5 million for the same periods last year. We did not have any chartered-in tankers in the fixed-rate tanker segment prior to the acquisition of Navion in April 2003.
Depreciation and amortization expense increased 51.8% and 68.0% to $34.7 million and $96.0 million, respectively, for the three and nine-month periods ended September 30, 2004, from $22.9 million and $57.1 million for the same periods last year. These increases were due primarily to the previously mentioned increases in fleet size and the amortization of the fair value of the time-charter contracts that were acquired as part of the Teekay Shipping Spain acquisition. Depreciation and amortization expense included amortization of contracts of affreightment and time charter contracts of $6.2 million and $16.4 million, respectively, in the three and nine-month periods ended September 30, 2004, compared to $3.8 million and $7.5 million for the same periods last year. Depreciation and amortization expense included amortization of drydocking costs of $2.1 million and $5.1 million, respectively, in the three and nine-month periods ended September 30, 2004, compared to $1.0 million and $2.9 million for the same periods last year.
No restructuring charges were incurred in the three and nine-month periods ended September 30, 2004. Restructuring charges of $0.3 million and $1.6 million, respectively, were incurred in the three and nine-month periods ended September 30, 2003 relating to the closure of our Melbourne office.
Fixed-Rate LNG Segment
The results of our fixed-rate LNG segment reflect the operations of our three LNG carriers (including one newbuilding that delivered in July 2004) acquired as part of the acquisition of Teekay Shipping Spain from May 1, 2004. A fourth newbuilding is scheduled to be delivered in December 2004, which will commence service under a 20-year charter contract upon delivery. We had no LNG shipping operations prior to the Teekay Shipping Spain acquisition.
Net voyage revenues totaled $17.3 million and $25.2 million, respectively for the three and nine-month periods ended September 30, 2004.
Vessel operating expenses totaled $3.1 million and $4.7 million, respectively, for the three and nine-month periods ended September 30, 2004.
Depreciation and amortization was $5.2 million and $7.5 million, respectively, for the three and nine-month periods ended September 30, 2004, which includes $1.5 million and $2.2 million, respectively, of amortization of time-charter contracts acquired as part of the Teekay Shipping Spain acquisition.
Other Operating Results
General and administrative expenses increased 23.8% to $29.1 million and 40.3% to $82.5 million, respectively, for the three and nine-month periods ended September 30, 2004, from $23.5 million and $58.8 million for the same periods last year. The increase for the three-month period ended September 30, 2004 is attributed primarily to our acquisition of Teekay Shipping Spain and an increase in the accrual for performance-based compensation to our shore based employees due to the Company's strong financial performance in 2004. The increase for the nine-month period ended September 30, 2004 reflects our acquisitions of Teekay Shipping Spain and Navion, underaccrued performance bonuses paid during the first quarter of 2004, which related to 2003 results, certain severance-related costs, primarily for a senior executive of one of our subsidiary companies, and an increase in the accrual for performance-based compensation for 2004 as discussed above.
Interest expense increased 61.4% to $35.2 million, and 51.0% to $87.5 million, respectively, for the three and nine-month periods ended September 30, 2004, from $21.8 million and $57.9 million for the same periods last year. The increases primarily reflect the additional debt resulting from the purchase of Navion and Teekay Shipping Spain.
Interest income increased 638.4% and 310.6% to $5.9 million and $12.0 million, respectively, for the three and nine-month periods ended September 30, 2004, from $0.8 million and $2.9 million in the same periods last year. These increases were primarily due to cash and restricted cash we acquired as part of our acquisition of Teekay Shipping Spain. Please see Item 1 – Notes to the Consolidated Financial Statements: Note 9 – Capital Lease Obligations and Restricted Cash.
Equity income from joint ventures was $2.5 million and $7.7 million, respectively, for the three and nine-month periods ended September 30, 2004, compared to $1.4 million and $3.8 million in the same periods last year. These increases are primarily the result of our 50% investment in SPT made during September 2003.
Gain on sale of marketable securities was $90.1 million and $93.2 million, respectively, for the three and nine-month periods ended September 30, 2004. During the three-month period ended September 30, 2004, we sold our remaining investment in A/S Dampskibsselskabet TORM (Torm), which accounts for most of the gain in 2004.
Other loss for the three and nine-month periods ended September 30, 2004 was $12.7 million and $18.0 million, respectively, and was primarily comprised of income tax expense, minority interest expense and foreign exchange loss, partially offset by dividend income and leasing income from our volatile organic compound emissions equipment. Other loss of $3.8 million for the three-month period ended September 30, 2003 was comprised primarily of income tax expense and minority interest expense, partially offset by dividend income from Nordic American Tanker Shipping Ltd. and foreign exchange gain. Other loss of $22.4 million for the nine-month period ended September 30, 2003 was comprised primarily of income tax expense and minority interest expense, partially offset by dividend income and leasing income from our volatile organic compound emissions equipment.
As a result of the foregoing factors, net income was $245.3 million and $532.9 million, respectively, for the three and nine-month periods ended September 30, 2004, compared to $20.3 million and $170.8 million for the same periods last year.
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2004, our total cash and cash equivalents was $308.0 million, compared to $292.3 million as at December 31, 2003. Our total liquidity, including cash and undrawn long-term borrowings, was $874.7 million as at September 30, 2004, up from $774.8 million as at December 31, 2003. The increase in liquidity was mainly the result of proceeds from the sale of our investment in Torm, and the sale of eight older vessels during the quarter, as well as cash generated by our operating activities, partially offset by our cash payment relating to the Teekay Shipping Spain acquisition, debt repayments, cash used for capital expenditures, and payment of dividends. In our opinion, working capital is sufficient for our present requirements.
Net cash flow from operating activities increased to $520.2 million in the nine-month period ended September 30, 2004, from $330.6 million in the same period last year, mainly reflecting the significant increase in our average spot TCE rates and the increase in our fleet size.
Scheduled debt repayments were $86.4 million during the nine-month period ended September 30, 2004, compared to $49.1 million during the same period last year. Debt prepayments were $1,462.4 million during the nine-month period ended September 30, 2004, compared to $1,023.0 million during the same period last year. Of our debt prepayments in the nine-month period ended September 30, 2004, $944.8 million resulted from our drawing down and subsequently prepaying under some of our eight long-term revolving credit facilities (the Revolvers) in anticipation of the closing of the Teekay Shipping Spain acquisition and for internal restructuring purposes. In addition, a total of $505.7 million of cash generated from operations and from proceeds of longer-term financings was used to prepay certain term loans and Revolvers, and $12.0 million was used to repurchase a portion of the 8.32% First Preferred Ship Mortgage Notes (the 8.32% Notes). Occasionally we use our Revolvers to temporarily finance capital expenditures until longer-term financing is obtained, at which time we typically use all or a portion of the proceeds from the longer-term financings to prepay outstanding amounts under the Revolvers. Please see Item 1 – Notes to Consolidated Financial Statements: Note 8 – Long-Term Debt.
As at September 30, 2004, our total debt was $2,229.2 million, compared to $1,600.1 million as at December 31, 2003. As at September 30, 2004, our Revolvers provided for borrowings of up to $1,228.9 million, of which $566.7 million was undrawn. The amount available under the Revolvers reduces by $19.7 million (2004), $136.9 million (2005), $159.4 million (2006), $123.9 million (2007), $449.8 million (2008) and $339.2 million (thereafter). All of the Revolvers are collateralized by first priority mortgages granted on 54 of the Company's vessels, together with other related collateral, and include a guarantee from Teekay for all amounts outstanding under the Revolvers. Our 8.32% Notes are due February 1, 2006 and are subject to a sinking fund which retires $45.0 million principal amount of the 8.32% Notes on February 1 of each year. Our 7.25% Premium Equity Participating Security Units (the Equity Units) are due May 18, 2006 and our unsecured 8.875% Senior Notes are due July 15, 2011. Our outstanding term loans reduce in monthly, quarterly or semi-annual payments with varying maturities through 2023. Please see Item 1 – Notes to Consolidated Financial Statements: Note 8 – Long-Term Debt.
Among other matters, our long-term debt agreements generally provide for maintenance of certain vessel market value-to-loan ratios and minimum consolidated financial covenants, prepayment privileges (in some cases with penalties), and restrictions against the incurrence of new investments by the individual subsidiaries without prior lender consent. The amount of Restricted Payments, as defined, that we can make, including dividends and purchases of our own capital stock, was limited to $717.8 million as at September 30, 2004. Certain of the loan agreements require that a minimum level of free cash be maintained. As at September 30, 2004, this amount was $100.0 million. Certain of the loan agreements also require that a minimum level of free liquidity and undrawn revolving credit lines (excluding undrawn revolving credit lines with less than 6 months to maturity) be maintained. As at September 30, 2004, this amount was $198.5 million.
Dividends declared during the nine-months ended September 30, 2004 were $30.9 million, or $0.375 cents per share. In October 2003, we increased our quarterly dividend from $0.1075 per share to $0.125 per share. In October 2004, we increased our quarterly dividend from $0.125 per share to $0.1375 per share.
In November 2004, we announced that our Board of Directors has authorized the repurchase of up to 3.0 million shares of our Common Stock in the open market.
In November 2004, our subsidiary Teekay LNG Partners filed a registration statement with the Securities and Exchange Commission for an initial public offering of its common units. Proceeds from the offering will be used to repay debt the partnership will owe to us and to pay offering expenses. Proceeds of any exercise of the over-allotment option will be used to repay debt under ship financing arrangements of the partnership. Please see Item 1 – Notes to the Consolidated Financial Statements: Note 17 – Subsequent Events.
During the nine months ended September 30, 2004, we incurred capital expenditures for vessels and equipment of $465.2 million. These capital expenditures primarily represented the installment payments on our newbuildings. As at September 30, 2004, we were committed to the construction of three Suezmax tankers, seven Aframax tankers, three product tankers, and four LNG carriers. Please see Item 1 — Notes to the Consolidated Financial Statements: Note 10 – Commitments and Contingencies.
We are also committed to capital leases on three Suezmax tankers, two LNG carriers (including one newbuilding on order) and one Aframax tanker. Each capital lease requires us to purchase the vessel at the end of its respective lease term. Please see Item 1 – Notes to the Consolidated Financial Statements: Note 9 – Capital Lease Obligations and Restricted Cash.
The following table summarizes our long-term contractual obligations as at September 30, 2004 (in millions of U.S. dollars).
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
2004 2005 2006 2007 2008 There- Total
after
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
Long-term debt 37.6 155.0 251.8 63.0 325.7 1,396.1 2,229.2
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
Chartered-in vessels (operating leases) 107.7 352.7 286.4 192.9 117.0 273.5 1,330.2
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
Commitment for chartered-in vessels
(capital leases) 74.8 90.6 271.3 4.1 4.1 45.0 489.9
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
Newbuilding installments 241.0 377.9 255.9 141.0 50.7 - 1,066.5
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
Volatile organic compound emissions
equipment 14.2 21.0 - - - - 35.2
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
Total 475.3 997.2 1,065.4 401.0 497.5 1,714.6 5,151.0
------------------------------------------- ---------- --------- --------- ---------- --------- --------- ----------
We and certain of our subsidiaries have guaranteed our share of the outstanding mortgage debt in five 50%-owned joint venture companies. Please see Item 1 – Notes to Consolidated Financial Statements: Note 11 – Commitments and Contingencies.
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
As part of our growth strategy, we will continue to consider strategic opportunities, including the acquisition of additional vessels and expansion into new markets. We may choose to pursue such opportunities through internal growth, joint ventures, or business acquisitions. We intend to finance any future acquisitions through various sources of capital, including internally-generated cash flow, existing credit facilities, additional debt borrowings, and the issuance of additional shares of capital stock.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP, which require us to make estimates in the application of our accounting policies based on our best assumptions, judgments, and opinions. Following is a discussion of the accounting policies that involve a high degree of judgment and the methods of their application. For a further description of our material accounting policies, please see Note 1 to our consolidated financial statements for the year ended December 31, 2003 included in our Annual Report on Form 20-F filed with the SEC.
Revenue Recognition
We generate a majority of our revenues from spot voyages and voyages servicing contracts of affreightment. Within the shipping industry, the two methods used to account for voyage revenues and expenses are the percentage of completion and the completed voyage methods. Most shipping companies, including us, use the percentage of completion method. For each method, voyages may be calculated on either a load-to-load or discharge-to-discharge basis. In other words, revenues are recognized ratably either from the beginning of when product is loaded for one voyage to when it is loaded for another voyage, or from when product is discharged (unloaded) at the end of one voyage to when it is discharged after the next voyage.
In applying the percentage of completion method, we believe that in most cases the discharge-to-discharge basis of calculating voyages more accurately reflects voyage results than the load-to-load basis. At the time of cargo discharge, we generally have information about the next load port and expected discharge port, whereas at the time of loading we are normally less certain what the next load port will be. We use this method of revenue recognition for all spot voyages and voyages servicing contracts of affreightment, with an exception for our shuttle tankers servicing contracts of affreightment with offshore oil fields. In this case a voyage commences with tendering of notice of readiness at a field, within the agreed lifting range, and ends with tendering of notice of readiness at a field for the next lifting.
We recognize revenues from time charters daily over the term of the charter as the applicable vessel operates under the charter. We do not recognize revenues during days that the vessel is off-hire.
Vessel Lives and Impairment
The carrying value of each of our vessels represents its original cost at the time of delivery or purchase less depreciation or impairment charges. We depreciate our vessels on a straight-line basis over a vessel’s estimated useful life, less an estimated residual value. Depreciation is calculated using an estimated useful life of 25 years for Aframax, Suezmax, VLCC and product tankers, and 35 years for LNG carriers, from the date the vessel was originally delivered from the shipyard, or a shorter period if regulations prevent us from operating the vessels to 25 years or 35 years, respectively. In the shipping industry, the use of a 25-year vessel life for Aframax, Suezmax, VLCC and product tankers has become the prevailing standard. In addition, the use of a 30 to 40 year vessel life for LNG carriers is typical. However, the actual life of a vessel may be different, with a shorter life potentially resulting in an impairment loss. We have reduced the estimated useful lives from 25 years to an average of approximately 21 years for our 14 remaining vessels affected by the International Maritime Organization’s regulatory changes announced in 2003. We are not aware of any other regulatory changes or environmental liabilities that we anticipate will have a material impact on our current or future operations.
The carrying values of our vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Both charter rates and newbuilding costs tend to be cyclical in nature. We review vessels and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure the recoverability of an asset by comparing its carrying amount to future undiscounted cash flows that the asset is expected to generate over its remaining useful life. If we consider a vessel or equipment to be impaired, we recognize impairment in an amount equal to the excess of the carrying value of the asset over its fair market value.
Generally, we drydock each vessel every two and a half to five years. We capitalize a substantial portion of the costs we incur during drydocking and amortize those costs on a straight-line basis from the completion of a drydocking to the estimated completion of the next drydocking. We expense costs related to routine repairs and maintenance incurred during drydocking that do no improve or extend the useful lives of the assets. When significant drydocking expenditures occur prior to the expiration of this period, we expense the remaining unamortized balance of the original drydocking cost in the month of the subsequent drydocking.
Goodwill
Effective January 1, 2002, goodwill and indefinite lived intangible assets are not amortized, but reviewed for impairment annually, or more frequently if impairment indicators arise. An impairment test requires us to estimate future cash flows. If events or circumstances change, including reductions in anticipated cash flows generated by operations, goodwill could become impaired and require a charge to earnings.
FORWARD-LOOKING STATEMENTS
This Report on Form 6-K for the quarterly period ended September 30, 2004 contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) concerning future events and our operations, performance and financial condition, including, in particular, statements regarding: our future growth prospects; tanker market fundamentals, including the balance of supply and demand in the tanker market, and spot tanker charter rates; future capital expenditures; delivery dates of and financing for newbuildings, and the commencement of service of newbuildings under long-term contracts; the impact of the Teekay Shipping Spain acquisition to our earnings, future cash flow from vessel operations and strategic position; the growth prospects of the LNG shipping sector and the joint venture company with the Teekay Shipping Spain controlling shareholder; the initial public offering of Teekay LNG Partners L.P.; the Company’s share repurchase plan; and the gain in the fourth quarter of 2004 relating to the sale of five of our vessels. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, or words or phrases of similar meanings. These statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to: changes in production of or demand for oil, petroleum products and LNG, either generally or in particular regions; the cyclical nature of the tanker industry and our dependence on oil markets; greater or less than anticipated levels of tanker newbuilding orders or greater or less than anticipated rates of tanker scrapping; changes in trading patterns significantly impacting overall tanker tonnage requirements; changes in applicable industry laws and regulations and the timing of implementation of new laws and regulations; changes in typical seasonal variations in tanker charter rates; changes in the offshore production of oil; competitive factors in the markets in which we operate; our potential inability to integrate effectively the operations of Teekay Shipping Spain or any other future acquisitions; the potential for early termination of long-term contracts and inability of the Company to renew or replace long-term contracts; shipyard production delays; conditions in the public equity markets; the ultimate number of common units, if any, issued by Teekay LNG Partners L.P. in its proposed public offering; and other factors detailed from time to time in our periodic reports, including our Annual Report on Form 20-F for the year ended December 31, 2003, filed with the SEC. We do not intend to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with respect thereto or any change in events, conditions or circumstances on which any such statement is based.
We are exposed to market risk from foreign currency fluctuations, changes in interest rates, and bunker fuel prices and spot market rates for vessels. We use foreign currency forward contracts, interest rate swaps, bunker fuel swap contracts and forward freight agreements to manage currency, interest rate, bunker fuel price risks and spot market rates but do not use these financial instruments for trading or speculative purposes. Please see Item 1 — Notes to Consolidated Financial Statements: Note 15 — Derivative Instruments and Hedging Activities.
The following table sets forth further information on the magnitude of these foreign exchange forward contracts, interest rate swap agreements, bunker fuel swap contracts, and forward freight agreements:
Contract Carrying Amount Fair
(in USD 000's) Amount Asset Liability Value
--------------------------------------------- ---------------- -------------- ----------------- -----------------
September 30, 2004
Foreign Currency Forward Contracts $ 104,606 $ 11,902 $ $ 11,902
Interest Rate Swap Agreements (see note 1) 133,306 (133,306)
Bunker Fuel Swap Contracts 2,462 418 418
Forward Freight Agreements 26,206 19,465 (19,465)
Debt (including capital lease obligations) 2,647,290 (2,647,290) (2,697,600)
December 31, 2003
Foreign Currency Forward Contracts $ 146,912 $ 20,944 $ - $ 20,944
Interest Rate Swap Agreements 710,000 - 9,953 (9,953)
Bunker Fuel Swap Contracts 696 183 - 183
Forward Freight Agreements 13,385 - 1,178 (1,178)
Debt (including capital lease obligations) 1,636,758 - 1,636,758 (1,686,002)
--------------------------------------------- ---------------- -------------- ----------------- -----------------
| (1) | See table below for contract amount. |
The table below provides information about our financial instruments as at September 30, 2004, which are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected contractual maturity dates.
Expected Maturity Date
(in USD 000's) 2004 2005 2006 2007 2008 Thereafter
----------------------------------------- ----------- ------------ ----------- ------------ ----------- ------------
Long-Term Debt:
Fixed-Rate Debt - 45,000 151,140 - - 351,589
Average Interest Rate - 8.32% 7.30% - - 8.875%
Variable Rate Debt (1)
U.S. Dollar Denominated 36,736 102,375 92,157 53,830 315,906 727,421
Euro Denominated (3) 904 7,598 8,511 9,131 9,796 317,070
Interest Rate Swaps: (2) (4)
Contract Amount - 100,000 500,000 - - 434,000
Average Fixed Pay Rate - 2.25% 2.79% - - 5.30%
Contract Amount 1,514 6,485 7,023 7,605 8,200 299,010
Average Fixed Pay Rate 6.76% 6.76% 6.76% 6.76% 6.76% 6.67%
Contract Amount (3) 904 7,598 8,511 9,131 9,796 317,070
Average Fixed Pay Rate 6.20% 5.90% 5.90% 5.90% 5.90% 5.93%
----------------------------------------- ----------- ------------ ----------- ------------ ----------- ------------
| (1) | Interest payments are based on LIBOR (U.S. Dollar denominated debt) and EURIBOR (Euro denominated debt) plus a margin depending on our financial leverage. |
| (2) | The average variable receive rate for our interest rates swaps is set monthly at 1-month LIBOR or EURIBOR or semi-annually at 6-month LIBOR or EURIBOR. |
| (3) | Amounts are the U.S. Dollar equivalents of (in 000‘s of Euros) 729 Euros (2004), 6,123 Euros (2005), 6,859 Euros (2006), 7,358 Euros (2007), 7,894 Euros (2008), and 255,516 Euros (thereafter). |
| (4) | In November 2004, we entered into an additional $500.0 million of interest swap agreements. Please see Item 1 - Notes to Consolidated Financial Statements: Note 17 - Subsequent Events. |
For a more comprehensive discussion related to the general characteristics of Quantitative and Qualitative Disclosures about Market Risk, please refer to Item 11 — Quantitative and Qualitative Disclosures about Market Risk contained in our Annual Report on Form 20-F for the year ended December 31, 2003.
Item 1 – Legal Proceedings
None
Item 2 – Changes in Securities and Use of Proceeds
None
Item 3 – Defaults Upon Senior Securities
None
Item 4 – Submission of Matters to a Vote of Security Holders
None
Item 5 – Other Information
None
Item 6 – Exhibits
None
THIS REPORT ON FORM 6-K IS HEREBY INCORPORATED BY REFERENCE INTO THE FOLLOWING REGISTRATION STATEMENTS OF THE COMPANY.
• REGISTRATION STATEMENT ON FORM F-3 (NO. 33-97746) FILED WITH THE SEC ON OCTOBER 4, 1995;
• REGISTRATION STATEMENT ON FORM S-8 (NO. 333-42434) FILED WITH THE SEC ON JULY 28, 2000;
• REGISTRATION STATEMENT ON FORM F-3 (NO. 333-102594) FILED WITH THE SEC ON JANUARY 17, 2003; AND
• REGISTRATION STATEMENT ON FORM S-8 (NO. 333-119564) FILED WITH THE SEC ON OCTOBER 6, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 24, 2004 |
TEEKAY SHIPPING CORPORATION
By: /s/ Peter Evensen Peter Evensen Executive Vice-President and Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 15.1
We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 333-42434) pertaining to the Amended 1995 Stock Option Plan of Teekay Shipping Corporation (“Teekay”), in the Registration Statement (Form S-8 No. 333-119564) pertaining to the 2003 Equity Incentive Plan and the Amended 1995 Stock Option Plan of Teekay, in the Registration Statement (Form F-3 No. 333-102594) and related Prospectus of Teekay for the registration of up to $500,000,000 of its common stock, preferred stock, warrants, stock purchase contracts, stock purchase units or debt securities and in the Registration Statement (Form F-3 No. 33-97746) and related Prospectus of Teekay for the registration of 2,000,000 shares of Teekay common stock under its Dividend Reinvestment Plan of our report dated July 23, 2004, relating to the unaudited consolidated interim financial statements and the financial schedule listed in Index: Item 1 of Teekay and its subsidiaries that is included in its interim report (Form 6-K) for the three and nine months ended September 30, 2004.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933.
| Vancouver, Canada, October 19, 2004 |
/s/ ERNST & YOUNG LLP Chartered Accountants |