DIAMOND S SHIPPING INC. The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes which are included elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in "Item 1A. Risk Factors." This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under "Cautionary Note Regarding Forward-Looking Statements." Business OverviewDiamond S Shipping Inc. was formed onNovember 14, 2018 under the laws of the Republic of theMarshall Islands for the purpose of receiving, via contribution from CPLP, the Athena Vessels and combining that business with the business and operations ofDSS LP pursuant to the Transaction Agreement. 66
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OnMarch 27, 2019 ,Diamond S and DSS LP and all of its directly owned subsidiaries (the "DSS LP Subsidiaries") completed a merger pursuant to the Transaction Agreement. Pursuant to the terms of the Transaction Agreement, onMarch 27, 2019 , theDSS LP Subsidiaries merged with and into Diamond S, with Diamond S being the surviving corporation in the merger (the "Merger"). Diamond S and theDSS LP Subsidiaries, which are the consolidated accounts ofDiamond S Shipping Inc. , are hereinafter referred to collectively as "we," "us," "our" or the "Company." The Merger was accounted for as a reverse acquisition in accordance with theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, "Business Combinations" as theDSS LP Subsidiaries are the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of theDSS LP Subsidiaries for periods prior to the Merger are considered to be our predecessor financial statements. Refer to Note 3 - Merger Transaction in our consolidated financial statements. Further, the Merger was determined to be an asset acquisition as substantially all of the fair value of the gross assets acquired is concentrated in a group of similar identifiable assets. We provide seaborne transportation of crude oil, refined petroleum, and other products in the international shipping industry. As ofDecember 31, 2020 , through our wholly owned subsidiaries, we owned and operated 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 50 MR product carriers. As of the same date, we also controlled and operated two Suezmax vessels through a joint venture. Factors to Consider When Evaluating Our Results The Ongoing COVID-19 Pandemic OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") outbreak a pandemic. In response to the ongoing outbreak, many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented measures to combat the outbreak, such as quarantines and travel restrictions. Such measures have, and will likely continue to, negatively affect the global economy. In addition, the COVID-19 pandemic has resulted in increased vessel expenses, primarily due to crewing related matters and logistical challenges for delivery of services and materials to vessels. The extent to which COVID-19 will materially impact the Company's results of operations and financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including, among others, new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, or any resurgence or mutation of the virus, the availability of vaccines and their global deployment, the development of effective treatments, the imposition of effective public safety and other protective measures and the public's response to such measures. There continues to be a high level of uncertainty relating to how the pandemic will evolve, how governments and consumers will react and progress the approval and distribution of vaccines. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer period of time in response to the outbreak, it may have a material adverse effect on the Company's future results of operation and financial condition.Strategic Product Tanker Partnership OnJune 15, 2020 , the Company entered into an agreement with Dampskibsselskabet Norden A/S ("Norden"). During the term of this agreement, the Company and Norden have agreed to use commercially reasonable efforts to identify new projects in the product tanker industry that they may jointly pursue and develop. Pursuant to this agreement, Company agreed to initially contribute 28 of its MR vessels to theNorient Product Pool (the "Pool"). This agreement will terminate upon the occurrence of certain events, including when the Company no longer has vessels operating in the Pool. As ofDecember 31, 2020 , 28 of the Company's vessels are operating in the Pool. The Merger The Merger, as described above and in Note 3 - Merger Transaction in our consolidated financial statements, closed onMarch 27, 2019 . Our consolidated financial statements include operating results for 67
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the 25 acquiredAthena Vessels for 278 and 365 days during the fiscal year endedDecember 31, 2019 and 2020, respectively, in addition to the 41 vessels historically owned by us for the full period and the two vessels sold inSeptember 2019 . Credit Facilities and Refinancings In connection with the Merger, we entered into a$360 million five-year Credit Agreement (the "$360 Million Facility"), for the purposes of financing the Merger and refinancing a$30 million line of credit (the "$30Million Line of Credit"). The$360 Million Facility consists of a term loan of$300 million and a revolving loan of$60 million , and is collateralized by the Athena Vessels and three vessels that previously collateralized the $30Million Line of Credit, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the$360 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a margin of 2.65%. OnDecember 27, 2019 , we refinanced certain of our existing indebtedness with the proceeds of the$525 Million Facility, which consists of a$375 million term loan and a revolving loan of$150 million . The$525 Million Facility matures onDecember 27, 2024 and bears interest at the Eurodollar Rate for a three-month interest period, plus a margin of 2.5%. The repayment profile reflects a 17-year, age-adjusted amortization and the first amortization period begins onMarch 31, 2020 and is secured by, inter alia, mortgages over 10 Suezmax vessels and 26 MR vessels. The$525 Million Facility includes covenants relating to, among other things, our ability to incur indebtedness, our ability to pay dividends, maintaining a minimum cash balance, collateral maintenance, maintaining a net debt to capitalization ratio and other customary restrictions and provides for customary events of default. In connection with the Refinancing, effective as ofDecember 27, 2019 , we terminated and repaid amounts outstanding under (i) the$460 Million Facility, (ii) the$235 Million Facility, and (iii) the$75 Million Facility. We incurred no termination penalties in connection with the early termination of these facilities but recognized a non-cash charge of approximately$4.0 million representing the write-off of deferred financing costs. Change to Fiscal Year End InJanuary 2019 ,DSS LP's board of directors approved changing its fiscal year end toDecember 31 of each calendar year fromMarch 31 . Vessel Dispositions InNovember 2018 , theDSS LP board of directors approved selling the Alpine Minute and Alpine Magic, both 2009-built MR vessels.DSS LP reached an agreement to sell the Alpine Minute for$17.8 million less a 1% broker commission payable to a third party, and reached a separate agreement to sell the Alpine Magic for$17.0 million less a 1% broker commission payable to a third party. InDecember 2018 ,DSS LP completed the sale of the Alpine Minute and Alpine Magic. InAugust 2019 , our Board of Directors approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. We reached an agreement to sell the Atlantic Aquarius and Atlantic Leo, for$31.8 million in aggregate gross proceeds less a 1% broker commission payable to a third party. InSeptember 2019 , we completed the sale of the Atlantic Aquarius and Atlantic Leo. InDecember 2020 , our Board of Directors approved selling the Aias and Amoureux, both 2008-built Suezmax vessels. We reached an agreement to sell the Aias and Amoureux for$22.6 million and$22.5 million , respectively, less a 1% broker commission payable to a third party. In January andFebruary 2021 , we completed the sale of the Aias and Amoureux, respectively. Share Repurchase Program OnMarch 4, 2020 , our Board of Directors approved a share repurchase program, providing authorization to repurchase up to$50 million of our common shares, effective for a period of one year, 68
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which has now expired. Shares we repurchased under this program could have been purchased in the open market or in privately negotiated transactions, at times and prices that we considered to be appropriate. Under the share repurchase program, we repurchased 137,289 shares for a total of$1.4 million . Other Trends and Factors Affecting Future Results of Operations The principal factors that have affected our results of operations, and may in the future affect results of operations, are the economic, regulatory, financial, credit, political and governmental conditions prevailing in the tanker market and shipping industry generally and in the countries and markets in which our vessels are chartered. The world economy has experienced significant economic and political upheavals in recent history. In addition, credit supply has been constrained and financial markets have been particularly turbulent. Protectionist trends, global growth and demand for the seaborne transportation of goods, including oil and oil products and overcapacity and deliveries of newly-built vessels have affected, and may further affect, the tanker market and shipping industry in general and the business, financial condition, results of operations and cash flows of the Company. Some of the key factors that have affected our business, financial condition, results of operations and cash flows include the following: • levels of oil product demand and inventories;
•
supply and demand for crude oil and oil products;
•
charter hire levels (under time and bareboat charters) and the ability to re-charter vessels at competitive rates as their current charters expire;
•
developments in vessel values, which may affect compliance with covenants under credit facilities and/or debt refinancing;
•
compliance with covenants in credit facilities, including covenants relating to the maintenance of vessel value ratios;
•
the level of debt and the related interest expense and amortization of principal;
•
access to debt and equity and the cost of capital required to acquire additional vessels;
•
supply and order-book of tanker vessels;
•
the ability to increase the size of the fleet and make additional acquisitions that are accretive to earnings;
•
the ability of the commercial and chartering operations to successfully employ vessels at economically attractive rates, particularly as charters expire and the fleet expands;
•
the continuing demand for crude oil and oil products from
•
the ability to comply with new maritime regulations, the more restrictive regulations for the transport of certain products and cargoes and the increased costs associated therewith;
•
changes in fuel prices, including as a result of the imposition of sulfur oxide emissions limits in 2020 under new regulations adopted by the IMO (for those vessels that are not retrofitted with scrubbers);
•
the effective and efficient technical management of the vessels;
•
the costs associated with upcoming drydocking of vessels;
•
the ability to obtain and maintain major international oil company approvals and to satisfy technical, health, safety and compliance standards;
•
the strength of and growth in the number of the customer relationships, especially with major international oil companies and major commodity traders;
•
the prevailing spot market rates and the number of vessels operating in the spot market;
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•
changes in laws, treaties or regulations applicable to the Company, including regulations relating to environmental compliance; and
•
the ability to acquire and sell vessels at satisfactory prices.
Year Ended
For the Year For the Year
Ended Ended
December 31, December 31,
2020 2019 Change % Change
(In Thousands, Except Per Share and Share Data)
Revenue:
Voyage revenue $ 465,383 $ 511,509 $ (46,126) (9.0)%
Time charter revenue 79,397 68,275 11,122 16.3%
Pool revenue 51,130 - 51,130 -
Total revenue 595,910 579,784 16,126 2.8%
Operating expenses:
Voyage expenses 188,581 230,675 (42,094) (18.2)%
Vessel expenses 171,193 153,662 17,531 11.4%
Depreciation and amortization expense 115,783 108,703 7,080 6.5%
Loss on sale of vessels and cancelled projects 29,551 18,344 11,207 61.1%
General and administrative expenses 30,005 26,794 3,211 12.0%
Other corporate expense - 2,657 (2,657) (100.0)%
Total operating expenses 535,113 540,835 (5,722) (1.1)%
Operating income (loss) 60,797 38,949 21,848 56.1%
Other (expense) income:
Total other expense - Net (34,401) (49,031) 14,630 (29.8)%
Net income (loss) 26,396 (10,082) 36,478 361.8%
Less: Net loss attributable to noncontrolling
interest 3,079 (776) 3,855 496.8%
Net income (loss) attributable to
$ 23,317 $ (9,306) $ 32,623 350.6% Net earnings (loss) per share - basic$ 0.58 $ (0.25) $ 0.83 332.0)% Net earnings (loss) per share - diluted$ 0.58 $ (0.25) $ 0.83 332.0% Weighted average common shares outstanding - basic 39,896,339 36,857,615 3,038,724 8.2% Weighted average common shares outstanding - diluted 40,123,051 36,857,615 3,265,436 8.9% Results of Operations Total revenue Total revenue increased by$16.1 million to$595.9 million during the year endedDecember 31, 2020 as compared to$579.8 million for the year endedDecember 31, 2019 . The$16.1 million increase was principally 70
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driven by a 9.0% increase in total revenue days due to an additional 1,963 revenue days during the year endedDecember 31, 2020 , primarily due to the Merger coupled with stronger prevailing market conditions in both the crude tanker and product carrier segments during the first half of 2020, when compared with the market conditions during the first half of 2019. This is offset by a reduction of 513 revenue days as a result of the sale of the Atlantic Aquarius and Atlantic Leo inSeptember 2019 , and entering the 28 vessels into the Pool during the last half of 2020, as under the pool arrangements, voyage related costs, such as the cost of bunkers and port expenses, are borne by the pool. We recognize revenue from pool arrangements based on our portion of the net distributions reported by the pool, which represents the net voyage revenue of the pool after voyage expenses and certain pool manager fees. Voyage Expenses Voyage expenses primarily consist of bunkers, port expenses, canal dues and commissions. Commissions were paid to shipbrokers for negotiating and arranging charter party agreements on the Company's behalf. Voyage expenses incurred during time charters and while vessels are operating in pools are paid for by the charterer and pool, respectively, except for commissions to the initial brokers, which were paid for by the Company. Voyage expenses incurred during voyage charters were paid for by the Company. Voyage expenses decreased by$42.1 million to$188.6 million during the year endedDecember 31, 2020 as compared to$230.7 million for the year endedDecember 31, 2019 . The$42.1 million decrease in voyage expenses was predominantly driven by a reduction in bunker and port costs incurred as a result of operating 28 vessels in the Pool as ofDecember 31, 2020 , with all 28 of the vessels operating fully in the Pool as ofSeptember 30, 2020 . Vessel Expenses Vessel expenses include crew wages and associated costs, the cost of insurance premiums, expenses relating to repairs and maintenance, lubricants and spare parts, technical management fees and other miscellaneous expenses. Vessel expenses increased by$17.5 million to$171.2 million during the year endedDecember 31, 2020 as compared to$153.7 million for the year endedDecember 31, 2019 . The$17.5 million increase in vessel expenses was driven by a 7.6% increase in vessel operating days, which consists of an increase in 2,175 vessel operating days due to the Merger and a decrease in 513 days as a result of the sale of the Atlantic Aquarius and Atlantic Leo, and additional expenses incurred for crew bonuses, increased costs of crew reliefs, testing, quarantine and logistics for delivery of services and materials to the vessels as a result of the global pandemic. Vessel Depreciation and Amortization Expense Depreciation and amortization expense increased by$7.1 million to$115.8 million during the year endedDecember 31, 2020 as compared to$108.7 million during the year endedDecember 31, 2019 . The increase in depreciation and amortization expense is due to the added depreciation expense for the 25 vessels acquired in the Merger for 2,175 vessel operating days in the year endedDecember 31, 2020 coupled with vessel additions primarily related to the scrubber and ballast water treatment projects, offset by the decrease in the depreciation and amortization expense related to the sale of theAtlantic Aquarius and Atlantic Leo inSeptember 2019 . Loss on Sale of Vessels and Cancelled Projects The$29.6 million loss on sale of vessels and cancelled projects during the year endedDecember 31, 2020 is due to a$26.3 million loss on the sale of the Aias and Amoureux, which were contracted to be sold inDecember 2020 , and subsequent delivered to the purchaser in January andFebruary 2021 , respectively, and a loss of$3.3 million on the cancellation of the scrubber project for the Miltiadis M II. For the year endedDecember 31, 2019 , the$18.3 million loss on sale of vessels and cancelled projects is due to selling the Atlantic Aquarius and Atlantic Leo inSeptember 2019 . 71
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General and Administrative Expenses For the year endedDecember 31, 2020 and 2019, general and administrative expenses were$30.0 million and$26.8 million , respectively. The$3.2 million increase was primarily due to costs incurred in the first calendar quarter of 2020 when compared to the first quarter of 2019 that were attributable to stock-based compensation costs, legal fees in connection with the annual filings and an increase in headcount to maintain the infrastructure of a public company and to manage a larger fleet employed in the spot market. Other Corporate Expenses For the year endedDecember 31, 2019 , we incurred$2.7 million in other corporate expenses primarily for professional fees associated with theSEC filings in connection with the Transactions. There were no costs of this nature during the year endedDecember 31, 2020 . Total Other Expense, net Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was$34.4 million for the year endedDecember 31, 2020 compared to$49.0 million for the year endedDecember 31, 2019 . The decrease of$14.6 million was primarily driven by a$57.6 million decrease in the average debt balance in the two comparative periods, coupled with a decrease in the effective interest rate, and a$4.0 million loss on extinguishment of debt charge in 2019 in connection with terminating the$460 Million Facility, the$235 Million Facility and the$75 Million Facility to enter into the$525 Million Facility. Net Income (Loss) Attributable to Noncontrolling Interest The net income (loss) attributable to noncontrolling interest was net income of$3.1 million for year endedDecember 31, 2020 compared to a net loss of$0.8 million for the year endedDecember 31, 2019 . The net income attributable to noncontrolling interest primarily represents a 49% interest inNT Suez Holdco LLC , which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the net income of$3.9 million was mainly attributable to fixing these two Suezmax vessels on three-year time charter contracts, which began in the latter half of 2019, coupled with these two vessels having 132 off-hire days in the third calendar quarter of 2019 for the installation of their scrubbers. 72
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Year EndedDecember 31, 2019 Compared to the Nine Months EndedDecember 31, 2018 Operating Data The following tables represent the operating data for the year endedDecember 31, 2019 and the nine months endedDecember 31, 2018 on a consolidated basis. For the Year For the Nine Ended Months Ended December 31, December 31, 2019 2018 Change % Change (In Thousands, Except Per Share and Share Data) Revenue: Voyage revenue$ 511,509 $ 262,281 $ 249,228 95.0% Time charter revenue 68,275 13,192 55,082 417.5% Total revenue 579,784 275,473 304,311 110.5% Operating expenses: Voyage expenses 230,675 137,774 92,901 67.4% Vessel expenses 153,662 85,206 68,456 80.3% Depreciation and amortization expense 108,703 66,101 42,602 64.4% Loss on sale of vessels and cancelled projects 18,344 19,970 (1,626) (8.1)% General and administrative expenses 26,794 11,384 15,410 135.4% Other corporate expense 2,657 678 1,979 291.9% Total operating expenses 540,835 321,113 219,722 68.4% Operating income (loss) 38,949 (45,640) 84,589 (185.3)% Other (expense) income: Total other expense - Net (49,031) (26,874) (22,157) 82.4% Net loss (10,082) (72,514) 62,432 (86.1)% Less: Net loss attributable to noncontrolling interest (776) (135) (641) 474.8%
Net loss attributable to
(87.1)%
Net loss per share - basic $ (0.25) $ (2.66) $ 2.41 (90.6)%
Net loss per share - diluted $ (0.25) $ (2.66) $ 2.41 (90.6)%
Weighted average common shares outstanding -
basic 36,857,615 27,165,696 9,691,919 35.7%
Weighted average common shares outstanding -
diluted 36,857,615 27,165,696 9,691,919 35.7%
Results of Operations
Total revenue
Total revenue increased by $304.3 million to $579.8 million during the year
ended December 31, 2019 as compared to the nine months ended December 31, 2018 .
The $304.3 million increase was principally driven by a 75.8% increase in
revenue days due to an additional 9,134 revenue days during the year ended
December 31, 2019 , primarily driven by the impact of the acquisition of the
Athena Vessels and the additional fiscal quarter of data for the year ended
December 31, 2019 compared to the nine months ended December 31, 2018 , which
only includes three fiscal quarters. Further, freight rates in the crude oil
transportation market improved in the fourth quarter of 2019.
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Voyage Expenses Voyage expenses increased by$92.9 million to$230.7 million during the year endedDecember 31, 2019 as compared to$137.8 million for the nine months endedDecember 31, 2018 . The$92.9 million increase in voyage expenses was driven by a 52.5% increase in voyage revenue days due to the Merger and change in year-end, offset by an increase in short-term time charter activity in the Suezmax fleet during the year endedDecember 31, 2019 , as the bunker and port costs were borne by the charterer. Vessel Expenses Vessel expenses increased by$68.5 million to$153.7 million during the year endedDecember 31, 2019 as compared to$85.2 million for the nine months endedDecember 31, 2018 . The$68.5 million increase in vessel expenses was driven by an 84.8% increase in vessel operating days, which consists of an increase of 4,177 vessel operating days due to the Merger and an increase of 6,975 vessel operating days due to the change in year-end, offset by a decrease of 198 vessel operating days as a result of the four vessel sales that occurred inDecember 2018 andSeptember 2019 . Vessel Depreciation and Amortization Expense Depreciation and amortization expense increased by$42.6 million to$108.7 million during the year endedDecember 31, 2019 as compared to$66.1 million during the nine months endedDecember 31, 2018 . The increase in depreciation and amortization expense is due to the increase of 10,467 days in the comparable periods. The increase is primarily due to change in year-end (4,177 vessel operating days), the added depreciation expense for the 25 vessels acquired in the Merger (6,975 vessel operating days), offset by the decrease in the depreciation and amortization expense related to the four vessel sales that occurred inDecember 2018 andSeptember 2019 (198 vessel operating days). Loss on Sale of Vessels and Cancelled Projects The$18.3 million loss on sale of vessels and cancelled projects during the year endedDecember 31, 2019 is due to selling the Atlantic Aquarius and Atlantic Leo inSeptember 2019 . During the nine months endedDecember 31, 2018 , the$20.0 million loss on sale of vessels was due to selling the Alpine Magic and Alpine Minute inDecember 2018 . General and Administrative Expenses For the year endedDecember 31, 2019 and the nine months endedDecember 30, 2018 , general and administrative expenses were$26.8 million and$11.4 million , respectively. The$15.4 million increase was primarily due to the increase in days in the comparable periods, coupled with having a larger fleet to support and incurring public company-related costs. The main differences are the following costs incurred during the year endedDecember 31, 2019 :$2.2 million related to professional fees in connection withSEC filings,$3.5 million in stock-based compensation expense incurred due to the granting of restricted stock and restricted stock units during the year endedDecember 31, 2019 ,$3.3 million incurred for Directors and Officers insurance and related board costs, and$1.5 million in commercial management consultancy fees incurred on the 25 Athena Vessels acquired in the Merger. Other Corporate Expenses Other corporate expenses increased by$2.0 million to$2.7 million in the year endedDecember 31, 2019 from$0.7 million for the nine months endedDecember 31, 2018 . The increase was primarily driven by professional fees associated with theSEC filings in connection with the Transactions. Total Other Expense, net Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees, loss on extinguishment, net of interest income, was$49.0 million for the year endedDecember 31, 2019 compared to$26.9 million for the nine months endedDecember 31, 2018 . The increase of$22.1 million was driven by the change in year-end, as an additional quarter is included in the year ended 74
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December 31, 2019 when compared to the prior nine-month period, an increase in the average debt balance due to entering into the$360 Million Facility in connection with the Merger, and a$4.0 million loss on extinguishment of debt charge in connection with terminating the$460 Million Facility, the$235 Million Facility and the$75 Million Facility to enter into the$525 Million Facility. Net Loss Attributable to Noncontrolling Interest The net loss attributable to noncontrolling interest was$0.8 million for the year endedDecember 31, 2019 compared to$0.1 million for the nine months endedDecember 31, 2018 . The net loss attributable to noncontrolling interest primarily represents a 49% interest inNT Suez Holdco LLC , which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the net loss of$0.7 million was mainly due to incurring 132 days of off hire during the year endedDecember 31, 2019 , as the two Suezmax vessels owned byNT Suez Holdco LLC were laid up for scrubber installations during the third quarter of 2019, before beginning three-year time charter contracts in lateSeptember 2019 . Liquidity and Capital Resources As ofDecember 31, 2020 and 2019, total cash, cash equivalents and restricted cash were$104.2 million and$89.2 million , inclusive of restricted cash of$6.1 million and$5.6 million , respectively. As ofDecember 31, 2020 andDecember 31, 2019 , we had$60 million and$15 million available and undrawn under our credit facilities, respectively. Generally, our primary sources of funds have been cash from operations, undrawn amounts under our credit facilities and vessel sales. OnDecember 27, 2019 , we refinanced (i) the$460 Million Facility, (ii) the$235 Million Facility, and (iii) the$75 Million Facility with the proceeds of the$525 Million Facility. AtDecember 31, 2020 , we were in compliance with all financial covenants under each of our credit facilities. Passage of environmental legislation or other regulatory initiatives have in the past had, and may in the future may have, a significant impact on our operations. Regulatory measures can increase required costs related to operating and maintaining our vessels and may require us to retrofit our vessels with new equipment to comply with new or existing regulations. Among other capital expenditures, in connection with theInternational Maritime Organization's new limits for sulfur oxide emissions effectiveJanuary 1, 2020 , we contracted for the purchase and installation of scrubbers on five of our Suezmax vessels. As ofDecember 31, 2020 , four of these scrubbers have been installed and fully paid, with two of these scrubbers having been installed on the Aias and Amoureux, which were sold and delivered to the buyer in January andFebruary 2021 , respectively. The installation of the fifth scrubber has been cancelled, effectuating a$3.3 million loss due to the cancelled project. We may, in the future, determine to purchase additional scrubbers for installation on other vessels that we own or operate. In addition, with respect to vessels that are not retrofitted with scrubbers, we expect to incur expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel, which expenditures are not expected to be significant or which have not yet been determined. We have installed ballast water treatment systems on 22 of our 64 vessels. We expect to install 16 ballast water treatment systems in 2021, of which we have 13 contracts currently in place with a total contract value of$11.4 million , where$1.9 million has been paid as ofDecember 31, 2020 . InDecember 2020 , we contracted to sell two of our sold two of our 2008-built Suezmax vessels, the Aias and Amoureux, and delivered the two vessels to the purchaser in January andFebruary 2021 , respectively. The sale of these two vessels generated gross cash proceeds to us of$45.1 million before our repayment of the related debt of$25.3 million on the two vessels. Cash Flows The following table summarizes our cash and cash equivalents provided by or used in operating, financing and investing activities for the periods presented below (presented in millions): 75
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For the Year For the Year For the Nine
Ended Ended Months Ended
December 31, December 31, December 31,
(in millions) 2020 2019 2018
Net Cash Provided by Operating Activities $ 213.0 $ 63.4 $ 23.5 $ (294.5) $ 28.0
$ 232.2 $ (47.7) Net Cash Provided by Operating Activities Net cash provided by operating activities during the year endedDecember 31, 2020 and 2019 was$213.0 million and$63.4 million , respectively. The increase of$149.6 million was mainly attributable to more revenue days and higher charter rates that increased our revenues and overall net income by$36.5 million for the year endedDecember 31, 2020 , when compared to the year endedDecember 31, 2019 , and an increase of$91.70 million in cash provided by the changes in assets and liabilities for the comparative periods. Net cash provided by operating activities during the year endedDecember 31, 2019 and the nine months endedDecember 31, 2018 was$63.4 million and$23.5 million , respectively. The increase of$39.9 million was mainly attributable to, among other factors, higher charter rates increasing our revenues offset by the negative effect of the changes in our operating assets and liabilities of$61.7 million . The changes in operating assets and liabilities were driven mainly by increases in trade accounts receivable during the year endedDecember 31, 2019 .Net Cash (Used in) Provided by Investing Activities Net cash used in investing activities refers primarily to cash used for vessel acquisitions or dispositions and improvements. Net cash used in investing activities refers primarily to cash used for vessel acquisitions and improvements, and the Merger. Net cash used by investing activities during the years endedDecember 31, 2020 and 2019 was$13.3 million and$294.5 million , respectively. The$13.3 million net cash used by investing activities during the year endedDecember 31, 2020 was mainly for scrubber and ballast water treatment system additions to vessels, while the$294.5 million net cash used by investing activities during the year endedDecember 31, 2019 included the consideration paid in connection with the Merger, with$292.7 million paid to CPLP to acquire the vessels,$19.1 million paid in transaction costs, and$14.6 million paid for additions to vessels and other property, offset by cash proceeds of$31.8 million provided by the sale of the Atlantic Aquarius and Atlantic Leo inSeptember 2019 . Net cash (used in) provided by investing activities during the year endedDecember 31, 2019 and the nine months endedDecember 31, 2018 was($294.5) million and$28.0 million , respectively. The increase in cash used in investing activities was primarily driven by the consideration paid in connection with the Merger, with$292.8 million paid to CPLP to acquire the Athena Vessels, and$18.9 million paid in transaction costs during the year endedDecember 31, 2019 .Net Cash (Used in) Provided by Financing Activities Net cash (used in) provided by financing activities during the year endedDecember 31, 2020 and 2019 was($184.7) million and$232.2 million , respectively. The change in cash (used in) provided by financing activities was due to the financing activities that we engaged in during the two comparable periods. During the year endedDecember 31, 2020 , the main outflows of cash for financing activities consisted of debt payments of$179.4 million , a$2.5 million distribution to the noncontrolling interest in theNT Suez Holdco LLC entity, and paying$1.4 million to repurchase shares under the share repurchase program. During the year endedDecember 31, 2019 , the net cash provided by financing activities was primarily driven by: (i) borrowings under the$360 Million Facility, the$525 Million Facility and the$235 Million Facility, which totaled$876.0 million , offset by$500.6 million repaid to extinguish the$460 Million Facility, the$235 Million Facility and the$75 Million Facility, (ii)$26.3 million repaid on lines of credit that were cancelled in connection with the Merger, and (iii)$16.4 million in deferred financing costs paid in connection with the$360 Million Facility and the$525 Million Facility. 76
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Net cash (used in) provided by financing activities during the year endedDecember 31, 2019 and the nine months endedDecember 31, 2018 was$232.2 million and($47.7) million , respectively. The increase in cash provided by financing activities was primarily driven by the following occurrences during the year endedDecember 31, 2019 : (i) borrowings under the$360 Million Facility, the$525 Million Facility and the$235 Million Facility, which totaled$876.0 million , offset by$500.6 million repaid to extinguish the$460 Million Facility, the$235 Million Facility and the$75 Million Facility, (ii)$26.3 million repaid on lines of credit that were cancelled in connection with the Merger, and (iii)$16.4 million in deferred financing costs paid in connection with the$360 Million Facility and the$525 Million Facility. Off-Balance Sheet Arrangements As ofDecember 31, 2020 andDecember 31, 2019 , we had not entered into any off-balance sheet arrangements that have had or are reasonably likely to have current or future material effects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations and Contingencies The following table summarizes our long-term contractual obligations as ofDecember 31, 2020 (in thousands ofU.S. dollars). Payment due by period Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years Long-term Debt Obligations$ 714,921 $ 196,325 $ 247,200 $ 271,396 $ - Interest Obligations(1) 46,077 17,940 22,537 5,600 - Capital Obligations (ballast water treatment systems) 9,521 9,521 - - - Office Lease Obligations 6,250 874 2,229 2,428 719 Total:$ 776,769 $ 224,660 $ 271,966 $ 279,424 $ 719 (1) Interest has been estimated based on the LIBOR forward rates and the prescribed margin for each of our facilities. Please see Note 9 - Long-Term Debt to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Related Party Transactions For a discussion of the Company's transactions with related parties, see Note 14 - Related Party Transactions to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Critical Accounting Policies Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are those that reflect significant judgments or uncertainties, and which could potentially result in materially different results under different assumptions and conditions. We have described below what our management believes are our most critical accounting policies. For a description of all of our significant accounting policies, see Note 2 - Significant Accounting Policies in our consolidated financial statements. 77
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Revenue Recognition During the years endedDecember 31, 2020 and 2019, and the nine months endedDecember 31, 2018 , revenues were generated from time charters, pool arrangements and voyage charters. We recognize revenues over the term of the time charter when there is a time charter agreement, where the rate is fixed or determinable, service is provided and collection of the related revenue is reasonably assured. We do not recognize revenue during days the vessel is off-hire. Revenues from pool arrangements are recognized based on our portion of the net distributions reported by the relevant pool, which represents the net voyage revenue of the pool after voyage expenses and pool manager fees. For the nine months endedDecember 31, 2018 , under a voyage charter agreement, the revenues are recognized on a pro rata basis based on the relative transit time in each period. The period over which voyage revenues are recognized commences at the time the vessel departs from its last discharge port and ends at the time the discharge of cargo at the next discharge port is completed. We do not begin recognizing revenue until a charter has been agreed to by us and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. We do not recognize revenue when a vessel is off-hire. Estimated losses on voyages are provided for in full at the time such losses become evident. For the years endedDecember 31, 2020 and 2019, pursuant to the new revenue recognition guidance, which was adopted as ofJanuary 1, 2019 , revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Previously, revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by us when the vessels are engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters. Vessel Impairment We follow Accounting Standards Codification ("ASC") Subtopic 360-10-05, "Accounting for the Impairment or Disposal of Long-lived Assets," which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We evaluate the carrying amounts and periods over which long-lived assets are depreciated to determine if events have occurred that would require modification to the carrying values or their useful lives. In evaluating useful lives and carrying values of long-lived assets, management reviews certain indicators of potential impairment, such as undiscounted projected cash flows, appraisals, business plans and overall market conditions. An impairment charge is recognized if the carrying value is in excess of the estimated future undiscounted net operating cash flows. The impairment loss is measured based on the excess of the carrying amount over the fair market value of the asset. Various factors, including forecasted future charter rates, estimated scrap values, future drydocking and operating costs are included in the analysis. In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels' future performance, with the significant assumptions being related to charter rates, fleet utilization, vessels' operating expenses, vessels' capital expenditures and drydocking requirements, vessels' residual value and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect for the duration of their current time charters, without assuming additional profit-sharing. For periods of time where our vessels are not fixed on time charters, we utilize an estimated daily time charter equivalent for our vessels' unfixed days based on the fifteen-year historical average. Although management believes that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they were made, such assumptions are highly subjective and likely to change, possibly materially, in the future. There can be no assurance as to how long charter rates and 78
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vessel values will remain at their current low levels or whether they will improve by a significant degree. If charter rates were to remain at depressed levels, future assessments of vessel impairment would be adversely affected. In recent years, the market values of vessels have experienced particular volatility, with substantial declines in many of the charter-free market value, or basic market value, of various vessel classes. As a result, the market value of our vessels may have declined below their carrying values, even though we did not impair their carrying values under our impairment accounting policy. This is due to our belief that future undiscounted cash flows expected to be earned by such vessels over their operating lives would exceed such vessels' carrying amounts. Our estimates of basic market value assume that our vessels are all in good and seaworthy condition without need for repair and, if inspected, would be certified in class without notations of any kind. Our estimates are based on the estimated market values for our vessels that we have received from independent ship brokers, reports by industry analysts and data providers that focus on our industry and related dynamics affecting vessel values and news and industry reports of similar vessel sales. Vessel values are highly volatile and as such, our estimates may not be indicative of the current or future market value of our vessels or prices that we could achieve if we were to sell them. The table set forth below indicates the carrying value of each of our owned vessels as ofDecember 31, 2020 andDecember 31, 2019 . At these balance sheet dates, we were not holding any of the vessels listed in the table below as held for sale. We believe that the future undiscounted cash flows expected to be earned by those vessels, which have experienced a decline in charter-free market value below such vessels' carrying values, over their operating lives would exceed their carrying values as ofDecember 31, 2020 , and accordingly, have not recorded an impairment charge. The following table summarizes key information about our MR product tankers and their associated carrying values as ofDecember 31, 2020 andDecember 31, 2019 : Carrying Value (U.S dollars in thousands) as of December 31, Vessel Year Built Year Acquired DWT 2020 2019 Active 2015 2019 50,136 28,755 30,062 Adriatic Wave 2009 2011 51,549 24,749 26,353 Aegean Wave 2009 2011 51,510 24,814 26,414 Agisilaos 2006 2019 36,760 10,860 11,633 Aiolos 2007 2019 36,725 11,816 12,637 Akeraios 2007 2019 47,781 15,158 16,222 Aktoras 2006 2019 36,759 10,853 11,630 Alexandros II 2008 2019 51,258 15,982 17,021 Alkiviadis 2006 2019 36,721 10,817 11,614 Alpine Madeleine 2008 2011 49,999 21,737 23,243 Alpine Mathilde 2008 2011 49,999 21,644 23,109 Alpine Maya 2010 2011 51,501 25,769 26,091 Alpine Melina 2010 2011 51,483 25,751 26,098 Alpine Mia 2008 2011 49,999 22,048 23,512 Alpine Moment 2009 2011 49,999 24,065 25,701 Alpine Mystery 2009 2011 49,999 24,461 26,030 Amadeus 2015 2019 50,108 28,812 30,074 Amor 2015 2019 49,999 28,840 30,086 Anemos I 2007 2019 47,782 15,186 16,234 Anikitos 2016 2019 50,082 30,540 31,876 79
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Carrying Value
(U.S dollars in thousands)
as of December 31 ,
Vessel Year Built Year Acquired DWT 2020 2019
Apostolos 2007 2019 47,782 15,184 16,233
Arionas 2006 2019 36,725 10,885 11,644
Aris II 2008 2019 51,218 16,002 17,030
Aristotelis II 2008 2019 51,226 15,979 17,020
Assos 2006 2019 47,872 13,753 14,803
Atlantas II 2006 2019 36,760 10,827 11,619
Atlantic Breeze 2007 2013 49,999 18,165 19,473
Atlantic Frontier 2007 2011 49,999 20,338 21,805
Atlantic Gemini 2008 2011 49,999 21,556 23,115
Atlantic Grace 2008 2011 49,999 21,604 23,147
Atlantic Lily 2008 2011 49,999 21,866 23,380
Atlantic Mirage 2009 2011 51,476 24,424 25,998
Atlantic Muse 2009 2011 51,498 24,213 25,824
Atlantic Olive 2008 2011 49,999 22,007 23,510
Atlantic Pisces 2009 2011 49,999 24,548 26,125
Atlantic Polaris 2009 2011 49,999 24,220 25,825
Atlantic Rose 2008 2011 49,999 21,947 23,439
Atlantic Star 2008 2011 49,999 21,609 23,145
Atlantic Titan 2008 2011 49,999 21,950 23,419
Atrotos 2007 2019 47,786 15,132 16,211
Avax 2007 2019 47,834 15,083 16,189
Axios 2007 2019 47,872 15,105 16,199
Ayrton II 2009 2019 51,260 18,187 19,301
Citron 2007 2013 49,999 17,802 19,042
Citrus 2008 2013 49,995 19,270 20,583
High Jupiter 2008 2011 51,603 21,992 23,477
High Mars 2008 2011 51,542 21,925 23,415
High Mercury 2008 2011 51,501 21,932 23,402
High Saturn 2008 2011 51,527 21,765 23,239
Pacific Jewel 2009 2011 48,012 23,831 25,350
Aristaios 2017 2019 113,689 44,355 46,189
Brazos 2012 2012 158,537 48,819 51,420
Colorado 2012 2012 158,615 51,037 53,638
Frio 2012 2012 159,000 50,785 53,351
Miltiadis M II 2006 2019 162,397 26,877 28,743
Pecos 2012 2012 158,465 49,339 51,922
Red 2012 2012 159,068 50,366 52,933
Rio Grande 2012 2012 159,056 46,532 48,910
Sabine 2012 2012 158,493 50,040 52,634
San Jacinto 2016 2016 158,658 60,084 62,643
San Saba 2012 2012 159,018 46,340 48,712
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Carrying Value
(U.S dollars in thousands)
as of December 31,
Vessel Year Built Year Acquired DWT 2020 2019
Trinity 2016 2016 158,734 59,263 61,810
Loire 2016 2016 157,463 56,469 58,819
Namsen 2016 2016 157,543 56,685 59,001
Aias(1) 2008 2019 150,393 - 33,198
Amoureux(1) 2008 2019 149,993 - 33,213
Total 1,702,749 1,865,738
(1)
The M/T Aias and M/T Amoureux were contracted to be sold in
An impairment test was performed as ofDecember 31, 2020 , and the carrying values of the vessels as ofDecember 31, 2020 were not impaired. Of the inputs that we use for impairment tests, future time charter rates are the most significant and most volatile. Based on the sensitivity analysis that we performed, as ofDecember 31, 2020 , we would impair our vessels if our projected earnings, which incorporate the fifteen-year historical time charter averages, decline by more than approximately 20% for the product fleet and approximately 50% for the crude fleet. Deferred Drydocking Costs and Amortization We use the deferral method of accounting for drydocking costs. Under the deferral method, drydocking costs are deferred and amortized on a straight-line basis over the useful life of the drydock, which is estimated to be approximately 30 to 60 months. Management uses judgment when estimating the period between drydocks performed, which can result in adjustments to the estimated amortization of drydock expense if drydocks occur earlier or later than originally estimated. We update our estimate of a vessel's next scheduled drydock as necessary. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off as a component of the gain or loss upon disposal of vessels. We defer the costs associated with drydocking as they occur and amortize these costs on a straight-line basis over the period between drydocking. Deferred drydocking costs include actual costs incurred at the drydock yard, cost of travel, lodging and subsistence of our personnel sent to the drydocking site to supervise, and the cost of hiring a third party to oversee the drydocking. Expenditures for normal maintenance and repairs, whether incurred as part of the drydock or not, are expensed as incurred. If the vessel is drydocked earlier than originally anticipated, any remaining deferred drydock costs that have not been amortized are expensed at the beginning of the next drydock. Recent Accounting Pronouncements New Accounting Standard Adopted InMarch 2020 , the FASB issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applyingU.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or beforeDecember 31, 2022 . The Company adopted the guidance upon issuance, as required and there was no material impact on its Consolidated and Combined Financial Statements and related disclosures. 81
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New Accounting Standards to be Implemented InFebruary 2016 , the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning afterDecember 15, 2021 , and interim reporting periods within annual reporting periods beginning afterDecember 15, 2022 , with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about our leasing activities. We are currently analyzing our contracts and will then calculate the right-of-use assets and lease liabilities as ofJanuary 1, 2022 based on the present value of our remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases. InJune 2016 , the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods beginning afterDecember 15, 2020 , and interim reporting periods within annual reporting periods beginning afterDecember 15, 2021 , with early adoption permitted. We are currently evaluating the potential impact of this pronouncement on the consolidated financial statements. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We are exposed to the impact of interest rate changes primarily through floating-rate borrowings that require it to make interest payments based on the Eurodollar Rate. Significant increases in interest rates could adversely affect operating margins, results of operations and our ability to service debt. We use interest rate swaps to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with floating-rate debt. We are exposed to the risk of credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, the Company only entered into derivative transactions with counterparties that are rated A- or better byStandard & Poor's Financial Services LLC or A3 or better byMoody's Investors Service, Inc. at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk. From time to time, we enter into interest rate swap agreements to modify our exposure to interest rate movements and to manage our interest expense. As ofDecember 31, 2020 , 26.4% of the debt was fixed due to the interest rate swap agreements, and 73.6% was variable. Based on the Company'sDecember 31, 2020 outstanding variable rate debt balance, a one percentage point increase in annual Eurodollar Rates would increase its annual interest expense by approximately$4.7 million . Inflation Inflation has only a moderate effect on our expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase our operating, voyage, general and administrative and financing costs. Foreign Exchange Risk The shipping industry's functional currency is theU.S. dollar. All of our revenues and most of our operating costs are inU.S. dollars. We incur certain operating expenses, such as vessel and general and 82
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administrative expenses, in currencies other than theU.S. dollar, and the foreign exchange risk associated with these operating expenses has historically been immaterial. If foreign exchange risk becomes material in the future, we may seek to reduce our exposure to fluctuations in foreign exchange rates through the use of short-term currency forward contracts and through the purchase of bulk quantities of currencies at rates that management considers favorable. For contracts which qualify as cash flow hedges for accounting purposes, hedge effectiveness would be assessed based on changes in foreign exchange spot rates with the change in fair value of the effective portions being recorded in accumulated other comprehensive loss. ITEM 7A.
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