10-K 1 tv487515_10k.htm FORM 10-K

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

(Mark One)

 

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from __________ to __________.

 

Commission File Number 1-37836-1

 

INTERNATIONAL SEAWAYS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Marshall Islands   98-0467117
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
     
600 Third Avenue, 39th Floor, New York, New York   10016
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: 212-578-1600

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class   Name of each exchange on which registered
Common Stock (no par value)   New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  o  No  x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o Accelerated filer  x Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  o
Emerging growth company  x      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  x  No  o

 

The aggregate market value of the common equity held by non-affiliates of the registrant on June 30, 2017, the last business day of the registrant’s most recently completed second quarter, was $345,830,880, based on the closing price of $21.67 per share of common stock on the NYSE on that date. For this purpose, all outstanding shares of common stock have been considered held by non-affiliates, other than the shares beneficially owned by directors, officers and certain 5% shareholders of the registrant; certain of such persons disclaim that they are affiliates of the registrant.

 

The number of shares outstanding of the issuer’s common stock, as of March 7, 2018: common stock, no par value, 29,107,398 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be filed by the registrant in connection with its 2018 Annual Meeting of Shareholders are incorporated by reference in Part III

 

 

 

 

 

  

TABLE OF CONTENTS

 

  Available Information i
  Forward-Looking Statements i
  Supplementary Financial Information ii
  Glossary iii
PART I    
Item 1. Business 1
  Overview and Recent Developments 1
  Fleet Operations 3
  Employees 6
  Competition 6
  Environmental and Security Matters Relating to Bulk Shipping 7
  Inspection by Classification Societies 14
  Insurance 15
  Taxation of the Company 15
Item 1A. Risk Factors 17
Item 1B. Unresolved Staff Comments 33
Item 2. Properties 33
Item 3. Legal Proceedings 33
Item 4. Mine Safety Disclosures 33
     
PART II    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34
Item 6. Selected Financial Data 37
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 55
Item 8. Financial Statements and Supplementary Data 56
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 102
Item 9A. Controls and Procedures 102
Item 9B. Other Information 102
     
PART III    
Item 10. Directors, Executive Officers and Corporate Governance 103
Item 11. Executive Compensation 104
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 104
Item 13. Certain Relationships and Related Transactions, and Director Independence 105
Item 14. Principal Accounting Fees and Services 105
     
PART IV    
Item 15. Exhibits, Financial Statement Schedules 105
Item 16. Form 10-K Summary 107
Signatures 108

 

 

 

 

References in this Annual Report on Form 10-K to the “Company”, “INSW”, “we”, “us”, or “our” refer to International Seaways, Inc. and, unless the context otherwise requires or otherwise is expressly stated, its subsidiaries. References to “OSG” refer to Overseas Shipholding Group, Inc., our former parent company, prior to our spin-off on November 30, 2016.

 

A glossary of shipping terms (the “Glossary”) that should be used as a reference when reading this Annual Report on Form 10-K can be found immediately prior to Part I. Capitalized terms that are used in this Annual Report are either defined when they are first used or in the Glossary.

 

All dollar amounts are stated in thousands of U.S. dollars unless otherwise stated.

   

AVAILABLE INFORMATION

 

The Company makes available free of charge through its internet website www.intlseas.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”). Our website and the information contained on that site, or connected to that site, are not incorporated by reference in this Annual Report on Form 10-K.

 

The public may also read and copy any materials the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 (information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330). The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at https://www.sec.gov.

 

The Company also makes available on its website, its corporate governance guidelines, its code of business conduct, insider trading policy, anti-bribery and corruption policy and charters of the Audit Committee, Human Resources and Compensation Committee and Corporate Governance and Risk Assessment Committee of the Board of Directors. Neither our website nor the information contained on that site, or connected to that site, is incorporated by reference into this Annual Report on Form 10-K.

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward looking statements. In addition, we may make or approve certain statements in future filings with the SEC, in press releases, or oral or written presentations by representatives of the Company. All statements other than statements of historical facts should be considered forward-looking statements. Words such as “may”, “will”, “should”, “would”, “could”, “appears”, “believe”, “intends”, “expects”, “estimates”, “targeted”, “plans”, “anticipates”, “goal”, and similar expressions are intended to identify forward-looking statements but should not be considered as the only means through which these statements may be made. Such forward-looking statements represent the Company’s reasonable expectation with respect to future events or circumstances based on various factors and are subject to various risks and uncertainties and assumptions relating to the Company’s operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors, many of which are beyond the control of the Company that could cause the Company’s actual results to differ materially from the expectations expressed or implied in these statements. Undue reliance should not be placed on any forward-looking statements and consideration should be given to the following factors when reviewing such statements. Such factors include, but are not limited to:

 

·the highly cyclical nature of INSW’s industry
·fluctuations in the market value of vessels;
·declines in charter rates, including spot charter rates or other market deterioration;
·an increase in the supply of vessels without a commensurate increase in demand;
·the impact of adverse weather and natural disasters;
·the adequacy of INSW’s insurance to cover its losses, including in connection with maritime accidents or spill events;
·constraints on capital availability;
·changing economic, political and governmental conditions in the United States and/or abroad and general conditions in the oil and natural gas industry;
·changes in fuel prices;
·acts of piracy on ocean-going vessels;
·terrorist attacks and international hostilities and instability;
·the impact of public health threats and outbreaks of highly communicable diseases;
·the effect of the Company’s indebtedness on its ability to finance operations, pursue desirable business operations and successfully run its business in the future;

 

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·the Company’s ability to generate sufficient cash to service its indebtedness and to comply with debt covenants;
·the Company’s ability to make additional capital expenditures to expand the number of vessels in its fleet, and to maintain all of its vessels and to comply with existing and new regulatory standards;
·the availability and cost of third party service providers for technical and commercial management of the Company’s fleet;
·fluctuations in the contributions of the Company’s joint ventures to its profits and losses;
·the Company’s ability to renew its time charters when they expire or to enter into new time charters;
·termination or change in the nature of the Company’s relationship with any of the commercial pools in which it participates and the ability of such commercial pools to pursue a profitable chartering strategy;
·competition within the Company’s industry and INSW’s ability to compete effectively for charters with companies with greater resources;
·the loss of a large customer or significant business relationship;
·the Company’s ability to realize benefits from its past acquisitions or acquisitions or other strategic transactions it may make in the future;
·increasing operating costs and capital expenses as the Company’s vessels age, including increases due to limited shipbuilder warranties or the consolidation of suppliers;
·the Company’s ability to replace its operating leases on favorable terms, or at all;
·changes in credit risk with respect to the Company’s counterparties on contracts;
·the failure of contract counterparties to meet their obligations;
·the Company’s ability to attract, retain and motivate key employees;
·work stoppages or other labor disruptions by employees of INSW or other companies in related industries;
·unexpected drydock costs;
·the potential for technological innovation to reduce the value of the Company’s vessels and charter income derived therefrom;
·the impact of an interruption in or failure of the Company’s information technology and communication systems upon the Company’s ability to operate;
·seasonal variations in INSW’s revenues;
·government requisition of the Company’s vessels during a period of war or emergency;
·the Company’s compliance with complex laws, regulations and in particular, environmental laws and regulations, including those relating to the emission of greenhouse gases and ballast water treatment;
·any non-compliance with the U.S. Foreign Corrupt Practices Act of 1977 or other applicable regulations relating to bribery or corruption;
·the impact of litigation, government inquiries and investigations;
·governmental claims against the Company;
·the arrest of INSW’s vessels by maritime claimants;
·changes in laws, treaties or regulations;
·the impact that Brexit might have on global trading parties.

 

Investors should carefully consider these risk factors and the additional risk factors outlined in more detail in this Annual Report on Form 10-K and in other reports hereafter filed by the Company with the SEC under the caption “Risk Factors.” The Company assumes no obligation to update or revise any forward looking statements. Forward looking statements in this Annual Report on Form 10-K and written and oral forward looking statements attributable to the Company or its representatives after the date of this Annual Report on Form 10-K are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports hereafter filed by the Company with the SEC.

 

SUPPLEMENTARY FINANCIAL INFORMATION

 

The Company reports its financial results in accordance with generally accepted accounting principles of the United States of America (“GAAP”). However, the Company has included certain non-GAAP financial measures and ratios, which it believes provide useful information to both management and readers of this report in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other titled measures determined in accordance with GAAP.

 

The Company presents three non-GAAP financial measures: time charter equivalent revenues, EBITDA and Adjusted EBITDA. Time charter equivalent revenues represent shipping revenues less voyage expenses, as a measure to compare revenue generated from a voyage charter to revenue generated from a time charter. EBITDA represents net income/(loss) before interest expense and income taxes and depreciation and amortization expense. Adjusted EBITDA consists of EBITDA adjusted for the impact of certain items that we do not consider indicative of our ongoing operating performance.

 

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This Annual Report on Form 10-K includes industry data and forecasts that we have prepared based, in part, on information obtained from industry publications and surveys. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. In addition, certain statements regarding our market position in this report are based on information derived from the Company’s market studies and research reports. Unless we state otherwise, statements about the Company’s relative competitive position in this report are based on our management's beliefs, internal studies and management's knowledge of industry trends.

 

GLOSSARY

 

Unless otherwise noted or indicated by the context, the following terms used in the Annual Report on Form 10-K have the following meanings:

 

Aframax—A medium size crude oil tanker of approximately 80,000 to 120,000 deadweight tons. Aframaxes can generally transport from 500,000 to 800,000 barrels of crude oil and are also used in Lightering. A coated Aframax operating in the refined petroleum products trades may be referred to as an LR2.

 

Ballast — Any heavy material, including water, carried temporarily or permanently in a vessel to provide desired draft and stability.

 

Bareboat charter—A charter under which a customer pays a fixed daily or monthly rate for a fixed period of time for use of the vessel. The customer pays all costs of operating the vessel, including voyage and vessel expenses. Bareboat charters are usually long term.

 

b/d—Barrels per day.

 

Charter—Contract entered into with a customer for the use of the vessel for a specific voyage at a specific rate per unit of cargo (“Voyage Charter”), or for a specific period of time at a specific rate per unit (day or month) of time (“Time Charter”).

  

Classification Societies—Organizations that establish and administer standards for the design, construction and operational maintenance of vessels. As a practical matter, vessels cannot trade unless they meet these standards.

 

Commercial management or commercially managed—The management of the employment, or chartering, of a vessel and associated functions, including seeking and negotiating employment for vessels, billing and collecting revenues, issuing voyage instructions, purchasing fuel, and appointing port agents.

 

Commercial management agreements or CMA — A contract under which the commercial management of a vessel is outsourced to a third-party service provider.

 

Commercial pool—A commercial pool is a group of similar size and quality vessels with different shipowners that are placed under one administrator or manager. Pools allow for scheduling and other operating efficiencies such as multi-legged charters and contracts of affreightment and other operating efficiencies.

 

Contract of affreightment or COA—An agreement providing for the transportation between specified points for a specific quantity of cargo over a specific time period but without designating specific vessels or voyage schedules, thereby allowing flexibility in scheduling since no vessel designation is required. COAs can either have a fixed rate or a market-related rate. One example would be two shipments of 70,000 tons per month for two years at the prevailing spot rate at the time of each loading.

  

Crude oil—Oil in its natural state that has not been refined or altered.

 

Cubic meters or cbm—The industry standard for measuring the carrying capacity of an LNG Carrier.

 

Deadweight tons or dwt—The unit of measurement used to represent cargo carrying capacity of a vessel, but including the weight of consumables such as fuel, lube oil, drinking water and stores.

 

Demurrage—Additional revenue paid to the shipowner on its Voyage Charters for delays experienced in loading and/or unloading cargo that are not deemed to be the responsibility of the shipowner, calculated in accordance with specific Charter terms.

 

Double hull—A hull construction design in which a vessel has an inner and an outer side and bottom separated by void space, usually two meters in width.

 

Drydocking—An out-of-service period during which planned repairs and maintenance are carried out, including all underwater maintenance such as external hull painting. During the drydocking, certain mandatory Classification Society inspections are carried out and relevant certifications issued. Normally, as the age of a vessel increases, the cost and frequency of drydockings increase.

 

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Exclusive Economic Zone—An area that extends up to 200 nautical miles beyond the territorial sea of a state’s coastline (land at lowest tide) over which the state has sovereign rights for the purpose of exploring, exploiting, conserving and managing natural resources.

 

Floating Storage Offloading Unit or FSO—A converted or new build barge or tanker, moored at a location to receive crude or other products for storage and transfer purposes. FSOs are not equipped with processing facilities.

 

Handysize Product Carrier—A small size Product Carrier of approximately 29,000 to 45,000 deadweight tons. This type of vessel generally operates on shorter routes (short haul).

 

International Energy Agency or IEA — An intergovernmental organization established in the framework of the Organization for Economic Co-operation and Development in 1974. Among other things, the IEA provides research, statistics, analysis and recommendations relating to energy.

 

International Maritime Organization or IMO—An agency of the United Nations, which is the body that is responsible for the administration of internationally developed maritime safety and pollution treaties, including MARPOL.

 

International Flag—International law requires that every merchant vessel be registered in a country. International Flag vessel refers to those vessels that are registered under a flag other that of the United States.

 

International Flag fleet—Our fleet.

 

Lightering—The process of off-loading crude oil or petroleum products from large size tankers, typically VLCCs, into smaller tankers and/or barges for discharge in ports from which the larger tankers are restricted due to the depth of the water, narrow entrances or small berths.

 

LNG carrier—A vessel designed to carry liquefied natural gas, that is, natural gas cooled to −163° centigrade, turning it into a liquid and reducing its volume to 1/600 of its volume in gaseous form. LNG is the abbreviation for liquefied natural gas.

 

LR1—A coated Panamax tanker. LR is an abbreviation of Long Range.

 

LR2—A coated Aframax tanker.

 

MARPOL—International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto. This convention includes regulations aimed at preventing and minimizing pollution from ships by accident and by routine operations.

 

MR—An abbreviation for Medium Range. Certain types of vessel, such as a Product Carrier of approximately 45,000 to 53,000 deadweight tons, generally operate on medium-range routes.

 

OECD—Organization for Economic Cooperation and Development is a group of developed countries in North America, Europe and Asia.

 

OPEC—Organization of Petroleum Exporting Countries, which is an international organization established to coordinate and unify the petroleum policies of its members.

 

P&I insurance or P&I—Protection and indemnity insurance, commonly known as P&I insurance, is a form of marine insurance provided by a P&I club. A P&I club is a mutual (i.e., a co-operative) insurance association that provides cover for its members, who will typically be ship-owners, ship-operators or demise charterers.

 

Panamax—A medium size vessel of approximately 53,000 to 80,000 deadweight tons. A coated Panamax operating in the refined petroleum products trades may be referred to as an LR1.

 

Product Carrier—General term that applies to any tanker that is used to transport refined oil products, such as gasoline, jet fuel or heating oil.

 

Safety Management System or SMS—A framework of processes and procedures that addresses a spectrum of operational risks associated with quality, environment, health and safety. The SMS is certified by ISM (International Safety Management Code), ISO 9001 (Quality Management) and ISO 14001 (Environmental Management).

 

Scrapping—The disposal of vessels by demolition for scrap metal.

 

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Special Survey—An extensive inspection of a vessel by classification society surveyors that must be completed once within every five year period. Special surveys require a vessel to be drydocked.

 

Suezmax—A large crude oil tanker of approximately 120,000 to 200,000 deadweight tons. Suezmaxes can generally transport about one million barrels of crude oil.

 

Technical Management or technically managed—The management of the operation of a vessel, including physically maintaining the vessel, maintaining necessary certifications, and supplying necessary stores, spares, and lubricating oils. Responsibilities also generally include selecting, engaging and training crew, and arranging necessary insurance coverage.

 

Time Charter—A Charter under which a customer pays a fixed daily or monthly rate for a fixed period of time for use of the vessel. Subject to any restrictions in the Charter, the customer decides the type and quantity of cargo to be carried and the ports of loading and unloading. The customer pays all voyage expenses such as fuel, canal tolls, and port charges. The shipowner pays all vessel expenses such as the technical management expenses.

 

Time Charter Equivalent or TCE—TCE is the abbreviation for time charter equivalent. TCE revenues, which is voyage revenues less voyage expenses, serves as an industry standard for measuring and managing fleet revenue and comparing results between geographical regions and among competitors.

 

Ton-mile demand—A calculation that multiplies the average distance of each route a tanker travels by the volume of cargo moved. The greater the increase in long haul movement compared with shorter haul movements, the higher the increase in ton-mile demand.

 

ULCC—ULCC is an abbreviation for Ultra Large Crude Carrier, a crude oil tanker of more than 350,000 deadweight tons. ULCCs can transport approximately three million barrels of crude oil and are mainly used on the same long haul routes as VLCCs or for storage.

 

U.S. Coast Guard or USCG—The United States Coast Guard.

 

Vessel expenses—Includes crew costs, vessel stores and supplies, lubricating oils, maintenance and repairs, insurance and communication costs associated with the operations of vessels.

 

VLCC—VLCC is the abbreviation for Very Large Crude Carrier, a large crude oil tanker of approximately 200,000 to 320,000 deadweight tons. VLCCs can generally transport two million barrels or more of crude oil. These vessels are mainly used on the longest (long haul) routes from the Arabian Gulf to North America, Europe, and Asia, and from West Africa to the United States and Far Eastern destinations.

 

Voyage Charter—A Charter under which a customer pays a transportation charge for the movement of a specific cargo between two or more specified ports. The shipowner pays all Voyage Expenses, and all Vessel Expenses, unless the vessel to which the Charter relates has been time chartered in. The customer is liable for Demurrage, if incurred.

 

Voyage Expenses—Includes fuel, port charges, canal tolls, cargo handling operations and brokerage commissions paid by the Company under Voyage Charters. These expenses are subtracted from shipping revenues to calculate TCE revenues for Voyage Charters.

 

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PART I

 

ITEM 1. BUSINESS

 

OVERVIEW AND RECENT DEVELOPMENTS

 

International Seaways, Inc., a Marshall Islands corporation incorporated in 1999, and its wholly owned subsidiaries own and operate a fleet of oceangoing vessels engaged primarily in the transportation of crude oil and petroleum products in the International Flag trades. At December 31, 2017, the Company owned or operated a fleet of 55 vessels (totaling an aggregate of 7.0 million dwt and 864,800 cbm), all of which operated in the International Flag market. The Marshall Islands is the principal flag of registry of the Company’s vessels. Additional information about the Company’s fleet, including its ownership profile, is set forth under “— Fleet Operations — Fleet Summary,” as well as on the Company’s website, www.intlseas.com. Neither our website nor the information contained on that site, or connected to that site, is incorporated by reference in this Annual Report on Form 10-K, except to the extent otherwise included herein.

 

The Company’s vessel operations are organized into two segments: Crude Tankers and Product Carriers. Our 55-vessel fleet consists of ULCC, VLCC, Suezmax, Aframax, and Panamax crude tankers, as well as LR1, LR2 and MR product carriers. Through joint venture partnerships, our fleet also includes ownership interests in four LNG carriers and two FSO service vessels (together the “JV Vessels”).

 

INSW generally charters its vessels to customers either for specific voyages at spot rates through the services of pools or for specific periods of time at fixed daily amounts through time charters or bareboat charters. Spot market rates are highly volatile, while time charter and bareboat charter rates provide more predictable streams of TCE revenues because they are fixed for specific periods of time. For a more detailed discussion on factors influencing spot and time charter markets, see “— Fleet Operations — Commercial Management” below.

 

Fleet Renewal

 

In line with the Company’s overall fleet growth and renewal strategy, during 2017 the Company acquired two 2017-built Suezmax tankers and a 2010-built VLCC tanker and entered into agreements to sell four MRs with build dates ranging from 2001 to 2004 and an average age of 14.7 years. Two of these MRs were delivered to buyers during 2017 and the remaining two were delivered to buyers during the first quarter of 2018.

 

In December 2017, the Company entered into a binding Letter of Intent (“LOI”) to acquire the holding companies for six 300,000 DWT VLCCs with an average age of 1.7 years from Euronav NV (“Euronav”) in connection with the closing of Euronav’s announced acquisition of Gener8 Maritime, Inc. (“GNRT”). The purchase price for the six-vessel acquisition is $434,000, inclusive of assumed debt. The transaction is subject to a number of closing conditions, including (i) consummation of Euronav’s announced acquisition of GNRT, (ii) amendment of the Company’s existing credit facility as required to consummate the transaction, (iii) the Company’s receipt of financing necessary to consummate the transaction, (iv) completion of the Company’s due diligence to its reasonable satisfaction, (v) execution of a definitive stock purchase agreement and (vi) receipt of all required third-party consents, third-party approvals and regulatory approvals. The transaction is expected to close in the second quarter of 2018. Either party is permitted to terminate the LOI on or after March 31, 2018 if the parties have not entered into a definitive stock purchase agreement by such date and the party terminating the LOI is not otherwise in breach thereof. INSW intends to fund the transaction with a combination of available liquidity, the assumption of all or part of the debt currently secured by the vessels and/or new third-party financing.

 

Following the closing of the transaction, the Company is expected to have a total fleet of 59 vessels, which reflects the sales in 2018 of the two MRs discussed above.

 

Spin-off from OSG

 

On November 30, 2016 (the “Distribution Date”), OSG completed the separation of its business into two independent publicly-traded companies through the spinoff of INSW (the “Distribution”). The spin-off transaction was in the form of a pro rata dividend of 100% of the common stock of INSW to holders of OSG common stock and warrants. Effective as of 5:00 p.m., New York time, on the Distribution Date, our common stock was distributed, on a pro rata basis, to OSG’s stockholders and warrant holders of record as of 5:00 p.m., New York time, on November 18, 2016 (the “Record Date”). On the Distribution Date, each holder of OSG common stock received 0.3333 shares of our common stock for every share of OSG common stock held on the Record Date. Each holder of OSG warrants received 0.3333 shares of our common stock for every one share of OSG common stock they would have received if they exercised their warrants immediately prior to the Distribution (or 0.063327 INSW shares per warrant), treating such warrants on an as exercised basis without deduction for the exercise price of such warrants. Fractional shares of our common stock were not distributed in the spin-off. Holders of OSG common stock and warrants received cash in lieu of fractional shares of our common stock.

 

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International Seaways, Inc.  

 

  

Strategy

 

Our primary objective is to maximize stockholder value through the shipping industry cycles by generating strong cash flows through the combination of higher returns available from time to time in the spot market from our participation in commercial pools and with selective short term charters; maintaining cash flows from our joint venture investments; actively managing the size and composition of our fleet over the course of market cycles to increase investment returns and available capital; and entering into value-creating transactions. The key elements of our strategy are:

 

Generate strong cash flows by capitalizing on our long-standing customer relationships.

 

We believe we are well-positioned to generate strong cash flows by identifying and taking advantage of attractive chartering opportunities in the International Flag market. Our fleet maintains one of the largest global footprints in the tanker market. Our market position allows us or the commercial pools in which we participate to maintain our long-standing relationships with many of the largest energy companies, which in some cases date back for more than 17 years. We selectively seek out time charters on certain of our vessels, usually one to two years, to oil companies, traders and our partners to complement our spot market exposure. We will continue to pursue an overall chartering strategy which blends a substantial spot rate exposure that provides us with higher returns when the more volatile spot market is stronger with short-term time charters that provide more stable cash flows.

 

·Significantly enhance cash flows through spot market exposure and participation in commercial pools.

 

We expect to continue to deploy the majority of our fleet on a spot rate basis to benefit from market volatility and what we believe are the traditionally higher returns the spot market offers compared with time charters. We believe this strategy presently offers significant upside exposure to the spot market and an opportunity to capture enhanced profit margins at times when vessel demand exceeds supply. We also anticipate continuing to use commercial pools as our principal means of participation in the spot market. We currently participate in seven commercial pools — Tankers International (“TI”), Sigma Tankers (“SIGMA”), Blue Fin Tankers (“BLUE FIN”), Panamax International (“PI”), Clean Products Tankers Alliance (“CPTA”), Navig8 Tankers – Alpha 8 (“NAVIG8-ALPHA8”) and Navig8 Tankers – MR (“NAVIG8-MR”) — each selected for specific expertise in its respective market. Our continued participation in pools allows us to benefit from economies of scale and higher vessel utilization rates, resulting in TCE revenues that exceed those we believe could be achieved operating those vessels outside of a commercial pool.

 

·Generate stable cash flows through time charters.

 

We seek to selectively employ a portion of our vessels on short-term time charters that provide consistent cash flows. One of our VLCCs, the Overseas Sakura, is on charter to a major oil company through April 2018 and six of our Panamax/LR1s are on time charters to our partners in the PI pool that expire between June 2018 and August 2018. We may seek to place other tonnage on time charters, for storage or transport, when we can do so at attractive rates.

 

Actively manage our fleet to maximize return on capital over market cycles.

 

We will continue to actively manage the size and composition of our fleet through opportunistic accretive acquisitions and dispositions as part of our effort to achieve above-market returns on capital for our vessel assets and renew our fleet. Using our commercial, financial and operational expertise, we will continue to execute on our plan to opportunistically grow our fleet through the timely and selective acquisition of high-quality secondhand vessels or existing newbuild contracts when we believe those acquisitions will result in attractive returns on invested capital and increased cash flow. We also intend to continue to engage in opportunistic dispositions where we can achieve attractive values for our vessels relative to their anticipated future earnings from operations as we assess the market cycle. Taken together, we believe these activities have and will continue to help us maintain a diverse, high-quality and modern fleet of crude oil and refined product vessels with an enhanced return on invested capital. We believe our diverse and versatile fleet, our experience and our long-standing relationships with participants in the crude and refined product shipping industry, position us to identify and take advantage of attractive acquisition opportunities in any vessel class in the international market.

 

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Maintain a strong and flexible financial profile.

 

As of December 31, 2017, we had total liquidity on a consolidated basis of $91 million, comprised of $71 million of cash (including $11 million of restricted cash) and $20 million of remaining undrawn revolver capacity. We seek to maintain a strong balance sheet as we believe it will provide financial flexibility to take advantage of attractive strategic opportunities we may identify during the low end of the tanker cycle to increase our asset base and earnings potential.

 

Customers

 

INSW’s ultimate customers, including those of the pools in which we participate, include major independent and state-owned oil companies, oil traders, refinery operators and international government entities.

 

FLEET OPERATIONS

 

Fleet Summary

 

As of December 31, 2017, INSW’s operating fleet consisted of 55 vessels, 43 of which were owned and 6 of which were chartered in. In addition, through joint venture partnerships, INSW has ownership interests in six vessels. Vessels chartered-in include bareboat charters and time charters. The six chartered-in vessels are currently scheduled to be redelivered to their owners between April 2018 and July 2018. Certain of the charters provide INSW with renewal and purchase options, which are currently at above-market levels. See Note 15, “Leases,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data,” for additional information relating to the Company’s chartered-in vessels. The Company’s fleet list excludes vessels chartered-in where the duration of the charter was one year or less at inception.

 

   Vessels Owned   Vessels Chartered-in(1)   Total at December 31, 2017 
Vessel Fleet and Type  Number   Weighted
by
Ownership
   Number   Weighted
by
Ownership
   Total
Vessels
   Vessels
Weighted by
Ownership
   Total Dwt(2) 
International Flag Fleet                                   
Crude Tankers                                   
VLCC and ULCC   10    10.0    -    -    10    10.0    3,194,100 
Suezmax   2    2.0    -    -    2    2.0    316,864 
Aframax   7    7.0    -    -    7    7.0    787,859 
Panamax   8    8.0    -    -    8    8.0    555,504 
Total   27    27.0    -    -    27    27.0    4,854,327 
Product Carriers                                   
LR2   1    1.0    -    -    1    1.0    109,999 
LR1   4    4.0    -    -    4    4.0    297,710 
MR(3)   11    11.0    6    6.0    17    17.0    822,748 
Total   16    16    6    6.0    22    22.0    1,230,457 
Total Owned and Operated Fleet   43    43.0    6    6.0    49    49.0    6,084,784 
JV Vessels                                   
FSO   2    1.0    -    -    2    1.0    873,916 
LNG Fleet   4    2.0    -    -    4    2.0    864,800 cbm 
Total Operating Fleet   49    46.0    6    6.0    55    52.0    6,958,700
and 864,800 cbm
 

(1)Includes both bareboat charters and time charters, but excludes vessels chartered in where the duration of the charter was one year or less at inception.
(2)LNG Carrier capacity described in cbm.
(3)Includes a 2002-built MR which was held for sale as of December 31, 2017 and a 2004-built MR, both of which were delivered to buyers during the first quarter of 2018.

 

Business Segments

 

The bulk shipping of crude oil and refined petroleum products has many distinct market segments based largely on the size and design configuration of vessels required and, in some cases, on the flag of registry. Freight rates in each market segment are determined by a variety of factors affecting the supply and demand for suitable vessels. Tankers and Product Carriers are not bound to specific ports or schedules and therefore can respond to market opportunities by moving between trades and geographical areas. The Company has established two reportable business segments: Crude Tankers and Product Carriers.

 

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For additional information regarding the Company’s two reportable segments for the three years ended December 31, 2017, see Note 4, “Business and Segment Reporting,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data.”

 

Crude Tankers and Product Carriers

 

Our Crude Tankers reportable business segment is made up of a ULCC and a fleet of VLCCs, Suezmaxes, Aframaxes and Panamaxes engaged in the worldwide transportation of unrefined petroleum. This segment also includes our crude tankers lightering business. Our Product Carriers reportable business segment consists of a fleet of MRs, LR1s and an LR2 engaged in the worldwide transportation of crude and refined petroleum products. Our diverse fleet gives INSW the ability to provide a broad range of services to global customers.

 

Refined petroleum product cargoes are transported from refineries to consuming markets characterized by both long and short-haul routes. The market for these product cargoes is driven by global refinery capacity, changes in consumer demand and product specifications and cargo arbitrage opportunities. In contrast to the crude oil tanker market, the refined petroleum trades are more complex due to the diverse nature of product cargoes, which include gasoline, diesel and jet fuel, home heating oil, vegetable oils and organic chemicals (e.g., methanol and ethylene glycols). The trades require crews to have specialized certifications. Customer vetting requirements can be more rigorous and, in general, vessel operations are more complex due to the fact that refineries can be in closer proximity to importing nations, resulting in more frequent port calls and discharging, cleaning and loading operations than crude oil tankers. Most of the Company’s MR product carriers are IMO III compliant, allowing those vessels to carry edible oils, such as palm and vegetable oil, increasing flexibility when switching between cargo grades.

 

In order to enhance vessel utilization and TCE revenues, the Company has deployed its International Crude Tankers and Product Carriers into various commercial pools, commercial management agreements and time charters. See “— Commercial Pools and other Commercial Management Arrangements” below.

 

Commercial Management

 

Spot Market

 

Voyage charters, including vessels operating in commercial pools that predominantly operate in the spot market, constituted 80% of the Company’s aggregate TCE revenues in 2017, 76% in 2016 and 90% in 2015. Accordingly, the Company’s shipping revenues are significantly affected by the amount of available tonnage both at the time such tonnage is required and over the period of projected use, and the levels of seaborne and shore-based inventories of crude oil and refined products.

 

Seasonal trends affect world oil consumption and consequently vessel demand. While trends in consumption vary with seasons, peaks in demand quite often precede the seasonal consumption peaks as refiners and suppliers try to anticipate consumer demand. Seasonal peaks in oil demand have been principally driven by increased demand prior to Northern Hemisphere winters and increased demand for gasoline prior to the summer driving season in the United States. Available tonnage is affected over time by the volume of newbuilding deliveries, the number of tankers used to store clean products and crude oil, and the removal (principally through scrapping or conversion) of existing vessels from service. Scrapping is affected by the level of freight rates, scrap prices, vetting standards established by charterers and terminals and by international and U.S. governmental regulations that establish maintenance standards and regulatory compliance standards.

 

Time and Bareboat Charter Market

 

The Company’s operating fleet currently includes a number of vessels that operate on time charters. Within a contract period, time charters provide a predictable level of revenues without the fluctuations inherent in spot-market rates. Once a time charter expires, however, the ability to secure a new time charter may be uncertain and subject to market conditions at such time. Time and bareboat charters constituted 20% of the Company’s TCE revenues in 2017, 24% in 2016, and 10% in 2015. In 2017, our two FSO joint venture vessels commenced five-year service contracts expiring 2022 and our four LNG joint venture vessels are employed under 25-year time charters that expire between 2032 and 2033, with two five-year option periods thereafter.

 

Commercial Pools and other Commercial Management Arrangements

 

The Company currently utilizes third-party managed pools as the principal commercial strategy for its vessels. By operating a large number of vessels as an integrated transportation system, commercial pools offer customers greater flexibility and a higher level of service while achieving scheduling efficiencies. Pools are commercially managed by experienced commercial operators that, among other things, arrange charters for the vessels participating in the pool in exchange for an administrative fee. Technical management is performed or outsourced by each shipowner. The pools collect revenue from customers, pay voyage-related expenses, and distribute TCE revenues to the participants after deducting administrative fees, according to formulas that capture the contribution of each vessel to the pool by:

 

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·first summarizing the earnings capacity of each vessel (as determined by the pool operator based largely on the physical characteristics and fuel consumption) to a number of “points;”
·second, multiplying each vessel’s “points” by the number of days that vessel operated during a specified period (the “Vessel Contribution”);
·third, multiplying the total number of points of all vessels in the pool by the total number of days all vessels in the pool operated (the “Total Earnings”); and
·fourth, dividing the Vessel Contribution by the Total Earnings.

 

Pools negotiate charters with customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization for pool vessels by securing backhaul voyages and Contracts of Affreightment (“COAs”), thereby reducing wait time, generating higher effective TCE revenues than might be otherwise obtainable in the spot market and providing a higher level of service to customers.

 

The Company also employs third-party commercial managers on a limited basis for some of its ships in the spot market through Commercial Management Agreements (“CMAs”). Under the CMAs, the manager collects revenue, pays for voyage related expenses and distributes the actual voyage results for each individual ship under management and receives a management fee.

 

The table below summarizes the commercial deployment of INSW’s conventional tanker fleet as of December 31, 2017. This table excludes (i) a 2002-built MR, which was held for sale as of December 31, 2017 and subsequently delivered to its buyer in January 2018; and (ii) a ULCC, which was redelivered from an expired time charter-out in December 2017 and seeking new employment as of December 31, 2017.

 

   Vessel Class 
   ULCC /                             
Commercial Deployment  VLCC   Suezmax   Aframax   Panamax   LR2   LR1   MR   Total 
Tankers International (1)   7    -    -    -    -    -    -    7 
Sigma Tankers   -    -    7    -    -    -    -    7 
Blue Fin Tankers   -    2    -    -    -    -    -    2 
Panamax International   -    -    -    2    -    4    -    6 
Navig8 Tankers - Alpha8   -    -    -    -    1    -    -    1 
Navig8 Tankers - MR   -    -    -    -    -    -    2    2 
Clean Product Tankers Alliance   -    -    -    -    -    -    13    13 
Time / Bareboat charter-out   1    -    -    6    -    -    1    8 
Commercial Management Agreements   1    -    -    -    -    -    -    1 
Total   9    2    7    8    1    4    16    47 

 

(1)Assuming all the VLCCs to be acquired upon the completion of the proposed Euronav-GNRT merger transaction (including the 6 vessels we intend to acquire) are added to the TI Pool, we believe the increased size of TI Pool’s fleet and the resulting fleet efficiencies gained will provide greater options for cargo end-users and enhance pool earnings by increasing cargo triangulation opportunities.

 

Technical Management

 

We have agreements with a third-party manager to outsource the technical management of the Company’s conventional tanker fleet. The manager supervises the technical management of our vessels to ensure consistent quality and integrity of our operations. Experienced crews are dedicated within the technical manager’s organization to serve only on our vessels. We continue to hire the crew, with the manager acting as agent on our behalf.

 

In addition to regular maintenance and repair, crews onboard each vessel and shore side personnel must ensure that the vessels in the Company’s fleet meet or exceed regulatory standards established by organizations such as the International Maritime Organization and the U.S. Coast Guard.

 

The JV Vessels are technically managed by the Company’s joint venture partners.

 

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Joint Ventures

 

The Company also has interests in the following joint ventures:

 

·The Company has a 50% interest in two joint ventures with Euronav NV, each of which owns an FSO service vessel (collectively the “FSO Joint Venture”). North Oil Company (“NOC”) awarded service contracts for the joint venture to provide two vessels to NOC to perform FSO services in the Al Shaheen Field off the shore of Qatar until 2022. The two custom-made FSO service vessels, each having a capacity of three million barrels, have been serving the Al Shaheen field without interruption since 2010. In accordance with the terms of the service contracts under which the two FSO vessels currently operate, the daily rate of hire during the charter term is the sum of the capital expenditure element of hire plus the operating expenditure element of hire. The operating expenditure element of hire is subject to escalation, as provided in the charter. The long-term bank financing obtained by the FSO Joint Venture was paid off at maturity in July 2017.

 

·The Company has a 49.9% interest in a joint venture with Qatar Gas Transport Company Limited (Nakilat), which owns four 216,000 cbm LNG Carriers (the “LNG Joint Venture”). These LNG Carriers are chartered out to Qatar Liquefied Gas Company Limited (2) under 25-year time charters that expire between 2032 and 2033. Each charter provides the charterer with options to (i) extend the respective charter for up to ten additional years at amounts set in the charter and (ii) purchase the vessel during the charter term at amounts set in the charter which decline over the period of the charter. In accordance with the terms of the charter, the daily rate of hire during the charter term is the sum of the capital expenditure element of hire plus the operating expenditure element of hire. The operating expenditure element of hire is subject to escalation, as provided in the charter.

 

The long-term bank financing obtained by the LNG Joint Venture is secured by the joint venture’s vessels and bears interest at LIBOR plus a margin of 67.5 or 90 basis points. The loans are repayable in equal quarterly installments with a final balloon payment of $85 million (per LNG Carrier) due on the fifteenth anniversary of such vessel delivery, which occurred between 2007 and 2008.

 

See Item 1A, “Risk Factors — Risks Related to Our Company — The contribution of the Company’s joint ventures to its profits and losses may fluctuate, which could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows” for a discussion of certain risks and uncertainties involving the joint venture operations.

 

Safety

 

The Company is committed to providing safe, reliable and environmentally sound transportation to its customers. Integral to meeting standards mandated by worldwide regulators and customers is the ship manager’s use of robust Safety Management Systems (“SMS”). The SMS is a framework of processes and procedures that addresses a spectrum of operational risks associated with quality, environment, health and safety. The SMS is certified by the International Safety Management Code (“ISM Code”), promulgated by the IMO and the International Standards Organization (“ISO”), ISO 9001 (Quality Management) and ISO 14001 (Environmental Management). To support a culture of compliance and transparency, INSW has an open reporting system on all of its ships, whereby seafarers can anonymously report possible violations of INSW’s or its third-party technical manager’s policies and procedures. All open reports are investigated and appropriate actions are taken when necessary.

 

EMPLOYEES

 

As of December 31, 2017, the Company had approximately 1,577 employees comprised of 1,536 seafarers employed on INSW’s fleet and 41 shore side staff. The seafarers are hired by the technical manager acting as agent for the individual ship owning companies, each of which is a subsidiary of INSW.

 

COMPETITION

 

The shipping industry is highly competitive and fragmented. INSW competes with other owners of International Flag tankers, including other independent shipowners, integrated oil companies and state-owned entities with their own fleets, and oil traders with logistical operations and pipelines. INSW’s vessels compete with all other vessels of a size and type required by the customer that can be available at the date and location specified. In the spot market, competition is based primarily on price, cargo quantity and cargo type, although charterers are selective with respect to the quality of the vessels they hire considering other key factors such as the reliability, quality and efficiency of operations. In the time charter market, factors such as the age and quality of the vessel and reputation of its owner and operator tend to be even more significant when competing for business.

 

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ENVIRONMENTAL AND SECURITY MATTERS RELATING TO BULK SHIPPING

 

Government regulation significantly affects the operation of the Company's vessels. INSW’s vessels operate in a heavily regulated environment and are subject to international conventions and international, national, state and local laws and regulations in force in the countries in which such vessels operate or are registered.

 

The Company's vessels undergo regular and rigorous safety inspections and audits which are conducted by the ships’ third party managers. In addition, a variety of governmental and private entities subject the Company's vessels to both scheduled and unscheduled inspections. These entities include USCG, local port state control authorities (harbor master or equivalent), coastal states, Classification Societies, flag state administration (country of registry) and customers, particularly major oil companies and petroleum terminal operators. Certain of these entities require INSW to obtain permits, licenses and certificates for the operation of the Company's vessels. Failure to maintain necessary permits or approvals could require INSW to incur substantial costs or temporarily suspend operation of one or more of the Company's vessels.

 

The Company believes that the heightened level of environmental, health, safety and quality awareness among various stakeholders, including insurance underwriters, regulators and charterers, is leading to greater safety and other regulatory requirements and a more stringent inspection regime on all vessels. The Company is required to maintain operating standards for all of its vessels emphasizing operational safety and quality, environmental stewardship, preventive planned maintenance, continuous training of its officers and crews and compliance with international and U.S. regulations. INSW believes that the operation of its vessels is in compliance with applicable environmental laws and regulations. However, because such laws and regulations are changed frequently, and new laws and regulations impose new or increasingly stringent requirements, INSW cannot predict the cost of complying with requirements beyond those that are currently in force. The impact of future regulatory requirements on operations or the resale value or useful lives of its vessels may result in substantial additional costs in meeting new legal and regulatory requirements. See Item 1A, “Risk Factors-Risks relating to legal and regulatory matters, compliance with complex laws, regulations and, in particular, environmental laws or regulations, including those relating to the emission of greenhouse gases, may adversely affect INSW’s business.”

 

International and U.S. Greenhouse Gas Regulations

 

In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (commonly called the Kyoto Protocol) became effective. Pursuant to the Kyoto Protocol, adopting countries are required to implement national programs to reduce emissions of certain gases, generally referred to as greenhouse gases (“GHGs”), which contribute to global warming. The Kyoto Protocol, which was adopted by about 190 countries, commits its parties by setting internationally binding emission reduction targets. In December 2012, the Doha Amendment to the Kyoto Protocol was adopted to further extend the Kyoto Protocol’s GHG emissions reductions through 2020. In December 2015, the United Nations Framework Convention on Climate Change forged a new international framework in December 2015 (the “Paris Agreement”) that became effective in November 2016, after it had been ratified by a sufficient number of countries. The Paris Agreement sets a goal of holding the increase in global average temperature to well below 2 degrees Celsius and pursuing efforts to limit the increase to 1.5 degrees Celsius, to be achieved by aiming to reach a global peaking of GHG emissions as soon as possible. To meet these objectives, the participating countries, acting individually or jointly, are to develop and implement successive “nationally determined contributions.” The countries will assess their collective programs toward achieving the goals of the Paris Agreement every five years beginning in 2023, referred to as the global stocktake, and subsequently are to update and enhance their actions on climate change. The Paris Agreement does not specifically require controls on shipping or other industries, but it is possible that countries or groups of countries will seek to impose such controls as they implement the Paris Agreement.

 

The IMO’s third study of GHG emissions from the global shipping fleet which concluded in 2014 predicted that, in the absence of appropriate policies, greenhouse emissions from ships may increase by 50% to 250% by 2050 due to expected growth in international seaborne trade. Methane emissions are projected to increase rapidly (albeit from a low-base) as the share of LNG in the fuel mix increases. With respect to energy efficiency measures, the Marine Environmental Protection Committee (“MEPC”) adopted guidelines on the Energy Efficiency Design Index (“EEDI”), which reflects the primary fuel for the calculation of the attained EEDI for ships having dual fuel engines using LNG and liquid fuel oil (see discussion below). The IMO is committed to developing limits on greenhouse gases from international shipping and is working on proposed mandatory technical and operational measures to achieve these limits.

 

In 2011, the European Commission established a working group on shipping to provide input to the European Commission in its work to develop and assess options for the inclusion of international maritime transport in the GHG reduction commitment of the EU. The Measure, Report and Verify (“MRV”) Regulation was adopted on April 29, 2015 and creates an EU-wide framework for the monitoring, reporting and verification of carbon dioxide emissions from maritime transport. The MRV Regulation requires large ships (over 5,000 gross tons) calling at EU ports from January 1, 2018, to collect and later publish verified annual data on carbon dioxide emissions. IMO has developed similar MRV regulations that became effective on March 1, 2018 and the first reporting period will be for the full year 2019.

 

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In the United States, pursuant to an April 2007 U.S. Supreme Court decision, the U.S. Environmental Protection Agency (“EPA”) was required to consider whether carbon dioxide should be considered a pollutant that endangers public health and welfare, and thus subject to regulation under the U.S. Clean Air Act. On December 1, 2009, the EPA issued an “endangerment finding” regarding GHGs under the Clean Air Act. This finding in itself does not impose any requirements on industry or other entities. Although the EPA has promulgated certain regulations to restrict GHG emissions, subject to review and possible revocation by the current administration, to date, the regulations proposed and enacted by the EPA have not involved ocean-going vessels.

 

Future passage of climate control legislation or other regulatory initiatives by the IMO, EU, United States or other countries where INSW operates that restrict emissions of GHGs could require significant additional capital and/or operating expenditures and could have operational impacts on INSW’s business. Although we cannot predict such expenditures and impacts with certainty at this time, they may be material to INSW’s results of operations.

 

International Environmental and Safety Regulations and Standards

 

Liability Standards and Limits

 

Many countries have ratified and follow the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969 (the "1969 Convention"). Some of these countries have also adopted the 1992 Protocol to the 1969 Convention (the "1992 Protocol"). Under both the 1969 Convention and the 1992 Protocol, a vessel's registered owner is strictly liable for pollution damage caused in the territory, including the territorial waters (and in the exclusive economic zone under the 1992 Protocol) of a contracting state by discharge of persistent oil, subject to certain complete defenses. Both instruments apply to all seagoing vessels carrying oil in bulk as cargo. These instruments also limit the liability of the shipowner under certain circumstances. As these instruments calculate liability in terms of a basket of currencies, the figures in this section are converted into U.S. dollars based on currency exchange rates on March 1, 2018 and are approximate. Actual dollar amounts are used in this section “-Liability Standards and Limits” and in “-U.S. Environmental and Safety Regulations and Standards-Liability Standards and Limits” below.

 

Under the 1969 Convention, except where the pollution damage resulted from the actual fault or privity of the owner, its liability is limited to $192 per ton of the vessel’s tonnage, with a maximum liability of $20.2 million. Under the 1992 Protocol, the liability of the owner is limited to $4.3 million for a ship not exceeding 5,000 units of tonnage (a unit of measurement for the total enclosed spaces within a vessel) and $606 per gross ton thereafter, with a maximum liability of $86.1 million. Under the 1992 Protocol, the owner's liability is limited except where the pollution damage results from its personal act or omission, committed with the intent to cause such damage, or recklessly and with knowledge that such damage would probably result. Under the 2000 amendments to the 1992 Protocol, which became effective on November 1, 2003, liability is limited to $6.5 million plus $910 for each additional gross ton over 5,000 for vessels of 5,000 to 140,000 gross tons, and $129.5 million for vessels over 140,000 gross tons, subject to the exceptions discussed above for the 1992 Protocol.

 

Vessels trading to states that are parties to these instruments must provide evidence of insurance covering the liability of the owner. The Company believes that its P&I insurance will cover any liability under the plan adopted by the IMO. See the discussion of insurance in “-U.S. Environmental and Safety Regulations and Standards-Liability Standards and Limits” below.

 

The United States is not a party to the 1969 Convention or the 1992 Protocol. See “- U.S. Environmental and Safety Restrictions and Regulations” below. In other jurisdictions where the 1969 Convention has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. 

 

The International Convention on Civil Liability for Bunker Oil Pollution Damage, 2001, which was adopted on March 23, 2001 and became effective on November 21, 2008, is a separate convention adopted to ensure that adequate, prompt and effective compensation is available to persons who suffer damage caused by spills of oil when used as fuel by vessels. The convention applies to damage caused to the territory, including the territorial sea, and exclusive economic zones, of states that are party to it. Vessels operating internationally are subject to it, if sailing within the territories of those countries that have implemented its provisions (which does not include the United States). Key features of this convention are compulsory insurance or other financial security for vessels over 1,000 gross tons to cover the liability of the registered owner for pollution damage and direct action against the insurer. The Company believes that its vessels comply with these requirements.

 

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Other International Environmental and Safety Regulations and Standards

 

Under the International Safety Management Code (“ISM Code”), promulgated by the IMO, vessel operators are required to develop a safety management system that includes, among other things, the adoption of a safety and environmental protection policy describing how the objectives of a functional safety management system will be met. The third party managers of INSW’s vessels, have safety management systems for the Company’s fleet, with instructions and procedures for the safe operation of its vessels, reporting accidents and non-conformities, internal audits and management reviews and responding to emergencies, as well as defined levels of responsibility. The ISM Code requires a Document of Compliance (“DoC”) to be obtained for the company responsible for operating the vessel and a Safety Management Certificate (“SMC”) to be obtained for each vessel that such company operates. Once issued, these certificates are valid for a maximum of five years. The company operating the vessel in turn must undergo an annual internal audit and an external verification audit in order to maintain the DoC. In accordance with the ISM Code, each vessel must also undergo an annual internal audit at intervals not to exceed twelve months and vessels must undergo an external verification audit twice in a five-year period. The Company’s third party managers have a DoC for their offices.

 

The SMC is issued after verifying that the company responsible for operating the vessel and its shipboard management operate in accordance with the approved safety management system. No vessel can obtain a certificate unless its operator has been awarded a DoC issued by the administration of that vessel’s flag state or as otherwise permitted under the International Convention for the Safety of Life at Sea, 1974, as amended (“SOLAS”).

 

IMO regulations also require owners and operators of vessels to adopt Shipboard Oil Pollution Emergency Plans (“SOPEPs”). Periodic training and drills for response personnel and for vessels and their crews are required. In addition to SOPEPs, INSW has adopted Shipboard Marine Pollution Emergency Plans , which cover potential releases not only of oil but of any noxious liquid substances . Noncompliance with the ISM Code and other IMO regulations may subject the shipowner or charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. For example, the USCG and EU authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading to United States and EU ports.

 

The International Convention for the Control and Management of Ships' Ballast Water and Sediments (“BWM Convention”) is designed to protect the marine environment from the introduction of non-native (alien) species as a result of the carrying of ships’ ballast water from one place to another. The introduction of non-native species has been identified as one of the top five threats to biological diversity. Expanding seaborne trade and traffic have exacerbated the threat. Tankers must take on ballast water in order to maintain their stability and draft, and must discharge the ballast water when they load their next cargo. When emptying the ballast water, which they carried from the previous port, they may release organisms and pathogens that have been identified as being potentially harmful in the new environment.

 

The BWM Convention was adopted in 2004 and became effective on September 8, 2017. The BWM Convention is applicable to new and existing vessels that are designed to carry ballast water. It defines a discharge standard consisting of maximum allowable levels of critical invasive species. This standard is met by installing treatment systems that render the invasive species non-viable. In addition, each vessel is required to have on board a valid International Ballast Water Management Certificate, a Ballast Water Management Plan and a Ballast Water Record Book.

 

INSW’s vessels are subject to other international, national and local ballast water management regulations (including those described below under “U.S. Environmental and Safety Regulations and Standards”). INSW complies with these regulations through ballast water management plans implemented on each of the vessels in its fleet. To meet existing and anticipated ballast water treatment requirements, including those contained in the BWM Convention, INSW has a fleetwide action plan to comply with IMO, EPA, USCG and possibly more stringent U.S. state mandates as they are implemented and become effective, which may require the installation and use of costly control technologies. Compliance with the ballast water requirements effective under the BWM Convention and other regulations may have material impacts on INSW’s operations and financial results, as discussed below under “-U.S. Environmental and Safety Regulations and Standards-Other U.S. Environmental and Safety Regulations and Standards.” 

 

Other EU Legislation and Regulations

 

The EU has adopted legislation that: (1) bans manifestly sub-standard vessels (defined as those over 15 years old that have been detained by port authorities at least twice in the course of the preceding 24 months) from European waters, creates an obligation for port states to inspect at least 25% of vessels using their ports annually and provides for increased surveillance of vessels posing a high risk to maritime safety or the marine environment, and (2) provides the EU with greater authority and control over Classification Societies, including the ability to seek to suspend or revoke the authority of negligent societies. INSW believes that none of its vessels meet the definitions of a "sub-standard" vessel contained in the EU legislation. EU directives enacted in 2005 and amended in 2009 require EU member states to introduce criminal sanctions for illicit ship-source discharges of polluting substances (e.g., from tank cleaning operations) which result in deterioration in the quality of water and has been committed with intent, recklessness or serious negligence. Certain member states of the EU, by virtue of their national legislation, already impose criminal sanctions for pollution events under certain circumstances. The Company cannot predict what additional legislation or regulations, if any, may be promulgated by the EU or any other country or authority, or how these might impact INSW.

 

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International Air Emission Standards

 

Annex VI to MARPOL (“Annex VI”), which was designed to address air pollution from vessels and which became effective internationally on May 19, 2005, sets limits on sulfur oxide (“SOx”) and nitrogen oxide (“NOx”) emissions from ship exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also regulated shipboard incineration and the emission of volatile organic compounds from tankers. Annex VI was amended in 2008 to provide for a progressive and substantial reduction in SOx and NOx emissions from vessels and allow for the designation of Emission Control Areas (“ECAs”) in which more stringent controls would apply. The primary changes were that the global cap on the sulfur content of fuel oil was reduced to 3.50% from 4.50% effective from January 1, 2012, and such cap is further reduced to 0.50% effective from January 1, 2020. Further, the sulfur content of fuel oil for vessels operating in designated ECAs was progressively reduced from 1.5% to 1.0% effective July 2010 and further reduced to 0.1% effective January 2015. Currently designated ECAs are: the Baltic Sea area, the North Sea area, the North American area (covering designated coastal areas off the United States and Canada) and the United States Caribbean Sea area (around Puerto Rico and the United States Virgin Islands). For vessels over 400 gross tons, Annex VI imposes various survey and certification requirements. The U.S. Maritime Pollution Prevention Act of 2008 amended the U.S. Act to Prevent Pollution from Ships to provide for the adoption of Annex VI. In October 2008, the U.S. ratified Annex VI, which came into force in the United States on January 8, 2009.

 

In addition to Annex VI, there are regional mandates in ports and certain territorial waters within the EU, Turkey and Norway regarding reduced SOx emissions. These requirements establish maximum allowable limits for sulfur content in fuel oils used by vessels when operating within certain areas and waters and while “at berth.” In December 2012, an EU directive that aligned the EU requirements with Annex VI entered into force. For vessels at berth in EU ports, sulfur content of fuel oil is limited to 0.1%. For vessels operating in SOx Emission Control Areas (“SECAs”), sulfur content of fuel oil is limited to 0.1% as of January 1, 2015. For vessels operating outside SECAs, sulfur content of fuel oil is limited to 3.5% as of June 18, 2014, further reducing to 0.5% as of January 1, 2020. Alternatively, emission abatement methods are permitted as long as they continuously achieve reductions of SOx emissions that are at least equivalent to those obtained using compliant marine fuels.

 

More stringent Tier III emission limits are applicable to engines installed on a ship constructed on or after January 1, 2016 operating in ECAs. NOx emission Tier III standards came into force on January 1, 2016 in ECAs.

 

China has published new regulations designating three areas (Pearl River Delta, Yangtze River Delta and the Bohai Sea) as sulfur control areas effective January 1, 2019. Eleven key ports within the designated areas apply the requirement for ships to use fuel containing less than 0.5% sulfur to ships at berth, effective from January 1, 2016. This is a mandatory requirement for all ships at berth in ports within the designated areas from January 1, 2017.

 

Additional air emission requirements under Annex VI became effective on July 1, 2010 mandating the development of Volatile Organic Compound (“VOC”) Management Plans for tank vessels and certain gas ships.

 

In July 2011, the IMO further amended Annex VI to include energy efficiency standards for “new ships” through the designation of an EEDI. The EEDI standards apply to new ships of 400 gross tons or above (except those with diesel-electric, turbine or hybrid propulsion systems). “New ships” for purposes of this standard are those for which the building contract was placed on or after January 1, 2013; or in the absence of a building contract, the keel of which is laid or which is at a similar stage of construction on or after July 1, 2013; or the delivery of which is on or after July 1, 2015. The EEDI standards phase in from 2013 to 2025 and are anticipated to result in significant reductions in fuel consumption, as well as air and marine pollution. In 2011, IMO’s Greenhouse Gas Work Group agreed on Ship Energy Efficiency Management Plan (“SEEMP”) development guidelines, which were provided by the MEPC, Resolution MEPC.213 (63), which adopted the 2012 development guidelines on March 2, 2012, entered into force on January 1, 2013. The SEEMP, unlike the EEDI, applies to all ships of 400 gross tons and above. The verification of the requirement to have a SEEMP on board shall take place at the first or intermediate or renewal survey, whichever is the first, on or after January 1, 2013. As of December 31, 2018, the SEEMP must include the methodologies to be used for collecting and reported the data required by the IMO’s MRV requirements. Each of the vessels technically managed by the Company has a SEEMP, which was prepared in accordance with these development guidelines and addresses technically viable options that create value added strategies to reduce the vessels’ energy footprint through the implementation of specific energy saving measures. An Energy Efficiency Certificate (“IEEC”) is to be issued for both new and existing ships of 400 gross tons or above. The IEEC shall be issued once for each ship and shall be valid throughout its lifetime, until the ship is withdrawn from service or unless a new certificate is issued following a major conversion of the ship, or until transfer of the ship to the flag of another state. 

 

The Company believes that its vessels are compliant with the current requirements of Annex VI and that those of its vessels that operate in the EU, Turkey, China and Norway are also compliant with the regional mandates applicable there. However, the Company anticipates that, in the next several years, compliance with the increasingly stringent requirements of Annex VI and other conventions, laws and regulations imposing air emission standards that have already been adopted or that may be adopted will require substantial additional capital and/or operating expenditures and could have operational impacts on INSW’s business. Although INSW cannot predict such expenditures and impacts with certainty at this time, they may be material to INSW’s financial statements. 

 

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SOLAS

 

From January 1, 2014, various amendments to the SOLAS conventions came into force, including an amendment to Chapter VI of SOLAS, which prohibits the blending of bulk liquid cargoes during sea passage and the production process on board ships. This prohibition does not preclude the master of the vessel from undertaking cargo transfers for the safety of the ship or protection of the marine environment.

 

The International Code on the Enhanced Program of inspections during surveys of Bulk Carriers and Oil Tankers, 2011 has been made mandatory (“ESP Code”) pursuant to an amendment to SOLAS. The ESP Code provides requirements for an enhanced program of inspection during surveys of tankers.

 

MARPOL

 

Effective March 1, 2018, pursuant to an amendment to MARPOL Annex V, shippers are required to determine whether or not their cargo is hazardous and classify it in line with the criteria of the United Nations Globally Harmonized System of Classification. Vessels are required to maintain a new format garbage record book, which is divided into two parts: cargo residues and garbage other than cargo residues. The cargo residues part must be further divided into hazardous and non-hazardous to the marine environment cargo. More stringent discharge requirements apply to the former category of cargo residues.

 

U.S. Environmental and Safety Regulations and Standards

 

The United States regulates the shipping industry with an extensive regulatory and liability regime for environmental protection and cleanup of oil spills, consisting primarily of the Oil Pollution Act of 1990 (“OPA 90”), and the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). OPA 90 affects all owners and operators whose vessels trade with the United States or its territories or possessions, or whose vessels operate in the waters of the United States, which include the U.S. territorial sea and the 200 nautical mile Exclusive Economic Zone around the United States. CERCLA applies to the discharge of hazardous substances (other than oil) whether on land or at sea. Both OPA 90 and CERCLA impact the Company's operations.

 

Liability Standards and Limits

 

Under OPA 90, vessel owners, operators and bareboat or demise charterers are "responsible parties" who are liable, without regard to fault, for all containment and clean-up costs and other damages, including property and natural resource damages and economic loss without physical damage to property, arising from oil spills and pollution from their vessels. Currently, the limits of OPA 90 liability with respect to (i) tanker vessels with a qualifying double hull are the greater of $2,200 per gross ton or approximately $18.8 million per vessel that is over 3,000 gross tons; and (ii) non-tanker vessels, the greater of $1,100 per gross ton or $939,800 per vessel. The statute specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for discharge of pollutants within their waters. In some cases, states that have enacted this type of legislation have not yet issued implementing regulations defining vessel owners' responsibilities under these laws. CERCLA, which applies to owners and operators of vessels, contains a similar liability regime and provides for cleanup, removal and natural resource damages associated with discharges of hazardous substances (other than oil). Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million.

 

These limits of liability do not apply, however, where the incident is caused by violation of applicable U.S. federal safety, construction or operating regulations, or by the responsible party's gross negligence or willful misconduct. Similarly, these limits do not apply if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the substance removal activities. OPA 90 and CERCLA each preserve the right to recover damages under existing law, including maritime tort law. 

 

OPA 90 also requires owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet the limit of their potential strict liability under the statute. The USCG enacted regulations requiring evidence of financial responsibility consistent with the previous limits of liability described above for OPA 90 and CERCLA. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance, guaranty or an alternative method subject to approval by the Director of the USCG National Pollution Funds Center. Under OPA 90 regulations, an owner or operator of more than one vessel is required to demonstrate evidence of financial responsibility for the entire fleet in an amount equal only to the financial responsibility requirement of the vessel having the greatest maximum strict liability under OPA 90 and CERCLA. INSW has provided the requisite guarantees and has received certificates of financial responsibility from the USCG for each of its vessels required to have one.

 

INSW has insurance for each of its vessels with pollution liability insurance in the amount of $1 billion. However, a catastrophic spill could exceed the insurance coverage available, in which event there could be a material adverse effect on the Company's business.

 

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In response to the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, the U.S. Congress proposed legislation to create more stringent requirements related to the prevention and response to oil spills in U.S. waters and to increase both financial responsibility requirements and the limits in liability under OPA 90, although Congress has not yet enacted any such legislation. In addition to potential liability under OPA 90, vessel owners may in some instances incur liability on an even more stringent basis under state law in the particular state where the spillage occurred.

 

Other U.S. Environmental and Safety Regulations and Standards

 

OPA 90 also amended the Federal Water Pollution Control Act to require owners and operators of vessels to adopt vessel response plans, including marine salvage and firefighting plans, for reporting and responding to vessel emergencies and oil spill scenarios up to a "worst case" scenario and to identify and ensure, through contracts or other approved means, the availability of necessary private response resources to respond to a “worst case discharge.” The plans must include contractual commitments with clean-up response contractors and salvage and marine firefighters in order to ensure an immediate response to an oil spill/vessel emergency. Each vessel has an USCG approved plan on file with the USCG and onboard the vessel. These plans are regularly reviewed and updated.

 

OPA 90 requires training programs and periodic drills for shore side staff and response personnel and for vessels and their crews. INSW’s third party technical managers conduct such required training programs and periodic drills.

 

OPA 90 does not prevent individual U.S. states from imposing their own liability regimes with respect to oil pollution incidents occurring within their boundaries. In fact, most U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws are in some cases more stringent than U.S. federal law.

 

In addition, the U.S. Clean Water Act (“CWA”) prohibits the discharge of oil or hazardous substances in U.S. navigable waters and imposes strict liability in the form of penalties for unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under the more recent OPA 90 and CERCLA, discussed above.

 

At the federal level in the United States, ballast water management is subject to two separate, partially interrelated regulatory regimes. One is administered by the USCG under the National Aquatic Nuisance and Control Act and National Invasive Species Act, and the other is administered by the EPA under the CWA.

 

In March 2012, the USCG promulgated its final rule on ballast water management for the control of nonindigenous species in U.S. waters. While generally in line with the requirements set out in the BWM Convention, the final rule requires that treatment systems for domestic and foreign vessels operating in U.S. waters must be Type Approved by the USCG. The USCG first approved a treatment system as Type Approved in December 2016, and accordingly before such date the USCG had a policy to issue temporary extensions of the compliance dates for the implementation of approved treatment systems. INSW has obtained extensions from the USCG of the treatment system requirement and its first compliance date for any of its vessels is in 2018. INSW expects that its vessels discharging ballast in U.S. waters will have Type Approved treatment systems by their extended compliance dates.

 

The discharge of ballast water and other substances incidental to the normal operation of vessels in U.S. ports also is subject to CWA permitting requirements. In accordance with the EPA’s National Pollutant Discharge Elimination System, the Company is subject to a Vessel General Permit (“VGP”), which addresses, among other matters, the discharge of ballast water and effluents. The current VGP, which was issued in 2013, identifies twenty-six vessel discharge streams and establishes numeric ballast water discharge limits that generally align with the treatment technologies to be implemented under USCG’s 2012 final rule, requirements to ensure that the ballast water treatment systems are functioning correctly, and more stringent effluent limits for oil to sea interfaces and exhaust gas scrubber wastewater. The VGP contains a compliance date schedule for these requirements. The VGP standards and requirements are due for modification and renewal in 2018. 

 

Certain of the Company’s vessels are subject to more stringent numeric discharge limits under the EPA’s VGP, even though those vessels have obtained a valid extension from the USCG for implementation of treatment technology under its 2012 final rule. The EPA has determined that it will not issue extensions under the VGP, but in December 2013 it issued an Enforcement Response Policy (“ERP”) to address this industry-wide issue. Under the ERP, the EPA states that vessels that have received an extension from the USCG, are in compliance with all of the VGP’s requirements other than the numeric discharge limits, and meet certain other requirements will be entitled to a “low enforcement priority.” While INSW believes that any vessel that is or may become subject to the VGP’s numeric discharge limits during the pendency of a USCG extension will be entitled to such low priority treatment under the ERP no assurance can be given that they will do so.

 

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Legislation has also been proposed in the U.S. Congress to amend the federal regimes for regulation of ballast water discharges. However, it cannot currently be determined whether such legislation will eventually be enacted, and if enacted, how the Company’s operations might be impacted under such legislation.

 

The VGP system also permits individual states and territories to impose more stringent requirements for discharges into the navigable waters of such state or territory. Certain individual states have enacted legislation or regulations addressing hull cleaning and ballast water management. For example, on October 10, 2007, California enacted law AB 740, legislation expanding regulation of ballast water discharges and the management of hull-fouling organisms. California has extensive requirements for more stringent effluent limits and discharge monitoring and testing requirements with respect to discharges in its waters. Due to delays by manufacturers in developing ballast water treatment systems that are able to comply with these effluent limits and in creating equipment to reliably test such compliance, the compliance date for all vessels making ballast water discharges in California waters have been deferred to the first scheduled drydocking after January 1, 2020. INSW’s vessels and systems are currently in compliance with the California discharge standards.

 

Following an assessment by the California State Lands Commission of the current technology for meeting ballast water management standards, the deadline for compliance for interim standards has been extended from 2016 to 2020 and the deadline for final “zero detect” standards has been extended from 2020 to 2030.

 

New York State has imposed a more stringent bilge water discharge requirement for vessels in its waters than what is required by the VGP or IMO. Through its Section 401 Certification of the VGP, New York prohibits the discharge of all bilge water in its waters. New York State also requires that vessels entering its waters from outside the Exclusive Economic Zone must perform ballast water exchange in addition to treating it with a ballast water treatment system.

 

The Company anticipates that, in the next several years, compliance with the various conventions, laws and regulations relating to ballast water management that have already been adopted or that may be adopted in the future will require substantial additional capital and/or operating expenditures and could have operational impacts on INSW’s business. Although INSW cannot predict such expenditures and impacts with certainty at this time, they may be material to INSW’s financial statements.

 

U.S. Air Emissions Standards

 

As discussed above, MARPOL Annex VI came into force in the United States in January 2009. In April 2010, EPA adopted regulations implementing the provisions of Annex VI. Under these regulations, vessels subject to the engine and fuel standards of Annex VI must comply with the applicable Annex VI provisions when they enter U.S. ports or operate in most internal U.S. waters. The Company's vessels are currently Annex VI compliant. Accordingly, absent any new and onerous Annex VI implementing regulations, the Company does not expect to incur material additional costs in order to comply with this convention. 

 

The U.S. Clean Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990 (“CAA”), requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. INSW’s vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas. Each of the Company's vessels operating in the transport of clean petroleum products in regulated port areas where vapor control standards are required has been outfitted with a vapor recovery system that satisfies these requirements. In addition, the EPA issued emissions standards for marine diesel engines. The EPA has implemented rules comparable to those of Annex VI to increase the control of air pollutant emissions from certain large marine engines by requiring certain new marine-diesel engines installed on U.S. registered ships to meet lower NOx standards which will be implemented in two phases. The newly built engine standards that became effective in 2011 require more efficient use of current engine technologies, including engine timing, engine cooling, and advanced computer controls to achieve a 15 to 25 percent NOx reduction below previous levels. The new long-term standards for newly built engines apply beginning in 2016 and require the use of high efficiency emission control technology such as selective catalytic reduction to achieve NOx reductions 80 percent below the pre-2016 levels. The North American ECA, encompassing the area extending 200 miles from the coastlines of the Atlantic, Gulf and Pacific coasts and the eight main Hawaiian Islands, became effective on August 1, 2012, and the United States Caribbean Sea ECA, encompassing water around Puerto Rico and the U.S. Virgin Islands, became effective on January 1, 2014. Fuel used by all vessels operating in the ECA cannot exceed 0.1% sulfur, effective January 1, 2015. The Company believes that its vessels are in compliance with the current requirements of the ECAs. From 2016, NOx after-treatment requirements also apply. If other ECAs are approved by the IMO or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the EPA or the states where INSW operates, compliance could require or affect the timing of significant capital and/or operating expenditures that could be material to INSW’s consolidated financial statements.

 

The CAA also requires states to draft State Implementation Plans (“SIPs”), designed to attain national health-based air quality standards in major metropolitan and industrial areas. Where states fail to present approvable SIPs, or SIP revisions by certain statutory deadlines, the EPA is required to draft a Federal Implementation Plan. Several SIPs regulate emissions resulting from barge loading and degassing operations by requiring the installation of vapor control equipment. Where required, the Company's vessels are already equipped with vapor control systems that satisfy these requirements. Although a risk exists that new regulations could require significant capital expenditures and otherwise increase its costs, the Company believes, based upon the regulations that have been proposed to date, that no material capital expenditures beyond those currently contemplated and no material increase in costs are likely to be required as a result of the SIPs program.

 

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Individual states have been considering their own restrictions on air emissions from engines on vessels operating within state waters. California requires certain ocean going vessels operating within 24 nautical miles of the Californian coast to reduce air pollution by using only low-sulfur marine distillate fuel rather than bunker fuel in auxiliary diesel and diesel-electric engines, main propulsion diesel engines and auxiliary boilers. Vessels sailing within 24 miles of the California coastline whose itineraries call for them to enter any California ports, terminal facilities, or internal or estuarine waters must use marine gas oil or marine diesel oil with a sulfur content at or below 0.1% sulfur. The Company believes that its vessels that operate in California waters are in compliance with these regulations.

 

Security Regulations and Practices

 

Security at sea has been a concern to governments, shipping lines, port authorities and importers and exporters for years. Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. In 2002, the U.S. Maritime Transportation Security Act of 2002 (“MTSA”) came into effect and the USCG issued regulations in 2003 implementing certain portions of the MTSA by requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, a coalition of 150 IMO contracting states drafted amendments to SOLAS by creating a new subchapter dealing specifically with maritime security. This new subchapter, which became effective in July 2004, imposes various detailed security obligations on vessels and port authorities, most of which are contained in the International Ship and Port Facilities Security Code (the “ISPS Code”). The ISPS Code is applicable to all cargo vessels of 500 gross tons plus all passenger ships operating on international voyages, mobile offshore drilling units, as well as port facilities that service them. The objective of the ISPS Code is to establish the framework that allows detection of security threats and implementation of preventive measures against security incidents that can affect ships or port facilities used in international trade. Among other things, the ISPS Code requires the development of vessel security plans and compliance with flag state security certification requirements. To trade internationally, a vessel must attain an International Ship Security Certificate (“ISSC”) from a recognized security organization approved by the vessel's flag state.

 

The USCG regulations, intended to align with international maritime security standards, exempt from MTSA vessel security measures for non-U.S. vessels that have on board a valid ISSC attesting to the vessel’s compliance with SOLAS security requirements and the ISPS Code.

 

All of INSW’s vessels have developed and implemented vessel security plans that have been approved by the appropriate regulatory authorities, have obtained ISSCs and comply with applicable security requirements.

 

The Company monitors the waters in which its vessels operate for pirate activity. Company vessels that transit areas where there is a high risk of pirate activity follow best management practices for reducing risk and preventing pirate attacks and are in compliance with protocols established by the naval coalition protective forces operating in such areas.

 

INSPECTION BY CLASSIFICATION SOCIETIES

 

Every oceangoing vessel must be “classed” by a Classification Society. The Classification Society certifies that the vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the Classification Society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the Classification Society will undertake them on application or by official order, acting on behalf of the authorities concerned.

The Classification Society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.

For maintenance of the class certification, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed are required to be performed as follows:

 

·Annual Surveys.  For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant and where applicable for special equipment classed, at intervals of 12 months from the date of commencement of the class period indicated in the certificate.

 

·Intermediate Surveys.  Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual survey.

 

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·Class Renewal Surveys.  Class renewal surveys, also known as Special Surveys, are carried out for the ship’s hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the Classification Society would prescribe steel renewals. The Classification Society may grant a one-year grace period for completion of the special survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a shipowner has the option of arranging with the Classification Society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. Upon a shipowner’s request, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class survey period. This process is referred to as continuous class renewal.

 

Vessels are required to dry dock for inspection of the underwater hull at each intermediate survey and at each class renewal survey. For vessels less than 15 years old, Classification Societies permit for intermediate surveys in water inspections by divers in lieu of dry docking, subject to other requirements of such Classification Societies.

 

If defects are found during any survey, the Classification Society surveyor will issue a “recommendation” which must be rectified by the vessel owner within prescribed time limits.

 

Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a Classification Society that is a member of the International Association of Classification Societies, or the IACS. In December 2013, the IACS adopted new harmonized Common Structure Rules, which apply to crude oil tankers and dry bulk carriers to be constructed on or after July 1, 2015. All our vessels are currently, and we expect will be, certified as being “in class” by the American Bureau of Shipping, Lloyd’s Register and DnV GL, which are major classification societies. All new and secondhand vessels that we acquire must be certified prior to their delivery under our standard purchase contracts and memorandum of agreement. If the vessel is not certified on the date of closing, we have no obligation to take delivery of the vessel.

 

INSURANCE

 

Consistent with the currently prevailing practice in the industry, the Company presently carries protection and indemnity (“P&I”) insurance coverage for pollution of $1.0 billion per occurrence on every vessel in its fleet. P&I insurance is provided by mutual protection and indemnity associations (“P&I Associations”). The P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. Each P&I Association has capped its exposure to each of its members at approximately $7.75 billion. As a member of a P&I Association that is a member of the International Group, the Company is subject to calls payable to the P&I Associations based on its claim record as well as the claim records of all other members of the individual Associations of which it is a member, and the members of the pool of P&I Associations comprising the International Group. As of December 31, 2017, the Company was a member of three P&I Associations. Each of the Company’s vessels is insured by one of these three Associations with deductibles ranging from $0.025 million to $0.1 million per vessel per incident. While the Company has historically been able to obtain pollution coverage at commercially reasonable rates, no assurances can be given that such insurance will continue to be available in the future.

 

The Company carries marine hull and machinery and war risk (including piracy) insurance, which includes the risk of actual or constructive total loss, for all of its vessels. The vessels are each covered up to at least their fair market value, with deductibles ranging from $0.125 million to $0.5 million per vessel per incident. The Company is self-insured for hull and machinery claims in amounts in excess of the individual vessel deductibles up to a maximum aggregate loss of $1.5 million per policy year for its vessels.

 

The Company currently maintains loss of hire insurance to cover loss of charter income resulting from accidents or breakdowns of its vessels, and the bareboat chartered vessels that are covered under the vessels’ marine hull and machinery insurance. Loss of hire insurance covers up to 120 or 180 days lost charter income per vessel per incident in excess of the first 21, 45 or 60 days (which depends on the particular vessel covered) lost for each covered incident, which is borne by the Company.

 

TAXATION OF THE COMPANY

 

INSW is incorporated in the Republic of the Marshall Islands and pursuant to the laws of the Marshall Islands, the Company is not subject to income tax.

 

The following summary of the principal U.S. tax laws applicable to the Company, as well as the conclusions regarding certain issues of tax law, are based on the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing and proposed U.S. Treasury Department regulations, administrative rulings, pronouncements and judicial decisions, all as of the date of this Annual Report on Form 10-K. No assurance can be given that changes in or interpretation of existing laws will not occur or will not be retroactive or that anticipated future circumstances will in fact occur.

 

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All of the Company’s vessels are owned or operated by foreign corporations that are subsidiaries of INSW.

 

Taxation to INSW of its Shipping Income

 

INSW derives substantially all of its gross income from the use and operation of vessels in international commerce. This income principally consists of hire from time and voyage charters for the transportation of cargoes and the performance of services directly related thereto, which is referred to herein as “shipping income.”

 

In 2017 and 2016, INSW was exempt from taxation on its U.S. source shipping income under Section 883 of the Code and Treasury regulations. For 2018 and future years, INSW will need to evaluate its qualification for exemption under Section 883 and there can be no assurance that INSW will continue to qualify for the exemption. Our qualification for the exemption under Section 883 is described in more detail under “Risk Factors – We may be subject to U.S. federal income tax on U.S. source shipping income, which would reduce our net income and cash flows.” To the extent INSW is unable to qualify for exemption from tax under Section 883, INSW will be subject to U.S. federal income taxation of 4% of its U.S. source shipping income on a gross basis without the benefit of deductions.

 

Shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States will be considered to be 50% derived from sources within the United States. Shipping income attributable to transportation that both begins and ends in the U.S. will be considered to be 100% derived from sources within the United States. INSW does not engage in transportation that gives rise to 100% U.S. source income. Shipping income attributable to transportation exclusively between non-U.S. ports will be considered to be 100% derived from sources outside the United States and will generally not be subject to any U.S. federal income tax. INSW’s vessels operate in various parts of the world, including to or from U.S. ports.

 

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ITEM 1A. RISK FACTORS

 

The following important risk factors could cause actual results to differ materially from those contained in the forward-looking statements made in this report or presented elsewhere by management from time to time. If any of the circumstances or events described below actually arise or occur, the Company’s business, results of operations and financial condition could be materially adversely affected. Actual dollar amounts are used in this Item 1A. “Risk Factors” section.

 

Risks Related to Our Industry

 

The highly cyclical nature of the industry may lead to volatile changes in charter rates and vessel values, which could adversely affect the Company’s earnings and available cash.

 

The tanker industry is both cyclical and volatile in terms of charter rates and profitability. Fluctuations in charter rates and vessel values result from changes in supply and demand both for tanker capacity and for oil and oil products. Factors affecting these changes in supply and demand are generally outside of the Company’s control. The nature, timing and degree of changes in industry conditions are unpredictable and could adversely affect the values of the Company’s vessels or result in significant fluctuations in the amount of charter revenues the Company earns, which could result in significant volatility in INSW’s quarterly results and cash flows. Factors influencing the demand for tanker capacity include:

 

·supply and demand for, and availability of, energy resources such as oil, oil products and natural gas, which affect customers’ need for vessel capacity;
·global and regional economic and political conditions, including armed conflicts, terrorist activities and strikes, that among other things could impact the supply of oil, as well as trading patterns and the demand for various vessel types;
·regional availability of refining capacity and inventories;
·changes in the production levels of crude oil (including in particular production by OPEC, the United States and other key producers);
·developments in international trade generally;
·changes in seaborne and other transportation patterns, including changes in the distances that cargoes are transported, changes in the price of crude oil and changes to the West Texas Intermediate and Brent Crude Oil pricing benchmarks;
·environmental and other legal and regulatory developments and concerns;
·construction or expansion of new or existing pipelines or railways;
·weather and natural disasters;
·competition from alternative sources of energy; and
·international sanctions, embargoes, import and export restrictions or nationalizations and wars.

 

Factors influencing the supply of vessel capacity include:

 

·the number of newbuilding deliveries;
·the scrapping rate of older vessels;
·environmental and maritime regulations;
·the number of vessels being used for storage or as FSO service vessels;
·the number of vessels that are removed from service;
·availability and pricing of other energy sources such as natural gas for which tankers can be used or to which construction capacity may be dedicated; and
·port or canal congestion.

 

Many of the factors that influence the demand for tanker capacity will also, in the longer term, effectively influence the supply of tanker capacity, since decisions to build new capacity, invest in capital repairs, or to retain in service older obsolescent capacity are influenced by the general state of the marine transportation industry from time to time.

 

The market value of vessels fluctuates significantly, which could adversely affect INSW’s liquidity or otherwise adversely affect its financial condition.

 

The market value of vessels has fluctuated over time. The fluctuation in market value of vessels over time is based upon various factors, including:

 

·age of the vessel;
·general economic and market conditions affecting the tanker industry, including the availability of vessel financing;

 

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·number of vessels in the world fleet;
·types and sizes of vessels available;
·changes in trading patterns affecting demand for particular sizes and types of vessels;
·cost of newbuildings;
·prevailing level of charter rates;
·competition from other shipping companies and from other modes of transportation; and
·technological advances in vessel design and propulsion.

 

Crude vessel values generally rose throughout 2014 and 2015, reflecting the higher TCE rates in the market. During 2016 and 2017, vessel sales were sporadic and financing was difficult for many companies to obtain. This resulted in downward pressure on vessel values throughout 2016 and the first half of 2017, while at the same time limiting new orders for newbuildings that would be delivered after 2017. These factors will affect the value of the Company’s vessels at the time of any vessel sale. If INSW sells a vessel at a sale price that is less than the vessel’s carrying amount on the Company’s financial statements, INSW will incur a loss on the sale and a reduction in earnings and surplus. In addition, declining values of the Company’s vessels could adversely affect the Company’s liquidity by limiting its ability to raise cash through refinancing.

 

Declines in charter rates and other market deterioration could cause INSW to incur impairment charges.

 

The Company evaluates events and changes in circumstances that have occurred to determine whether they indicate that the carrying amounts of the vessel assets might not be recoverable. This review for potential impairment indicators and projection of future cash flows related to the vessels is complex and requires the Company to make various estimates, including future freight rates, earnings from the vessels, market appraisals and discount rates. All of these items have historically been volatile. The Company evaluates the recoverable amount of a vessel asset as the sum of its undiscounted estimated future cash flows. If the recoverable amount is less than the vessel’s carrying amount, the vessel’s carrying amount is then compared to its estimated fair value. If the vessel’s carrying amount is less than its fair value, it is deemed impaired. The carrying values of the Company’s vessels may differ significantly from their fair market value. The Company recorded vessel impairment charges aggregating approximately $88.4 million during 2017 as a result of (i) declines in valuations during 2017 for vessels of certain sizes and ages, (ii) negative changes in forecasted near term charter rates, and (iii) an increase in the likelihood that the Company will sell certain of its vessels before the end of their estimated useful lives in conjunction with the Company’s fleet renewal program.

 

An increase in the supply of vessels without a commensurate increase in demand for such vessels could cause charter rates to decline, which could adversely affect INSW’s revenues, profitability and cash flows, as well as the value of its vessels.

 

INSW depends on short term duration, or “spot,” charters, for a significant portion of its revenues, which exposes INSW to fluctuations in market conditions. In the years ended December 31, 2017, 2016 and 2015, INSW derived approximately 80%, 76% and 90%, respectively, of its TCE revenues in the spot market.

 

The marine transportation industry has historically been highly cyclical, as the profitability and asset values of companies in the industry have fluctuated based on changes in the supply and demand of vessels. If the number of new ships of a particular class delivered exceeds the number of vessels of that class being scrapped, available capacity in that class will increase. The newbuilding order book (representing vessels in various stages of planning or construction) equaled 12%, 14% and 19% of the existing world tanker fleet as of December 31, 2017, 2016 and 2015, respectively.

 

Vessel supply is also affected by the number of vessels being used for floating storage, since vessels used for storage are not available to transport crude oil or petroleum products. Utilization of vessels for storage is affected by expectations of changes in the price of oil and petroleum products, with utilization generally increasing if prices are expected to increase more than storage costs and generally decreasing if they are not. A reduction in vessel utilization for storage will generally increase vessel supply. From December 2014 through much of 2016, current prices of crude oil were generally below future prices, resulting in an increase in vessels engaged in storage. During the latter portion of 2016 and 2017, current prices of crude oil have generally been the same or less than future prices, contributing to a decline in storage of oil at sea which, if sustained over a long period of time, could have a material adverse effect on INSW’s revenues, profitability and cash flows.

 

Shipping is a business with inherent risks, and INSW’s insurance may not be adequate to cover its losses.

 

INSW’s vessels and their cargoes are at risk of being damaged or lost and its vessel crews and shoreside employees are at risk of injury or death because of events including, but not limited to:

 

·marine disasters;
·bad weather;

 

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·mechanical failures;
·human error;
·war, terrorism and piracy;
·grounding, fire, explosions and collisions; and
·other unforeseen circumstances or events.

 

These hazards may result in death or injury to persons; loss of revenues or property; demand for the payment of ransoms; environmental damage; higher insurance rates; damage to INSW’s customer relationships; and market disruptions, delay or rerouting, any or all of which may also subject INSW to litigation. In addition, transporting crude oil and refined petroleum products creates a risk of business interruptions due to political circumstances in foreign countries, hostilities, labor strikes, port closings and boycotts. The operation of tankers also has unique operational risks associated with the transportation of oil. An oil spill may cause significant environmental damage and the associated costs could exceed the insurance coverage available to the Company. Compared to other types of vessels, tankers are also exposed to a higher risk of damage and loss by fire, whether ignited by a terrorist attack, collision, or other cause, due to the high flammability and high volume of the oil transported in tankers. Furthermore, any such incident could seriously damage INSW’s reputation and cause INSW either to lose business or to be less likely to enter into new business (either because of customer concerns or changes in customer vetting processes). Any of these events could result in loss of revenues, decreased cash flows and increased costs.

 

While the Company carries insurance to protect against certain risks involved in the conduct of its business, risks may arise against which the Company is not adequately insured. For example, a catastrophic spill could exceed INSW’s $1 billion per vessel insurance coverage and have a material adverse effect on its operations. In addition, INSW may not be able to procure adequate insurance coverage at commercially reasonable rates in the future, and INSW cannot guarantee that any particular claim will be paid by its insurers. In the past, new and stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable. Furthermore, even if insurance coverage is adequate to cover the Company’s losses, INSW may not be able to timely obtain a replacement ship or may suffer other consequential harm or difficulty in the event of a loss. INSW may also be subject to calls, or premiums, in amounts based not only on its own claim records but also the claim records of all other members of the protection and indemnity associations through which INSW obtains insurance coverage for tort liability. INSW’s payment of these calls could result in significant expenses which would reduce its profits and cash flows or cause losses.

 

Constraints on capital availability have adversely affected the tanker industry and INSW’s business.

 

Certain of the Company’s customers, financial lenders and suppliers may suffer material adverse impacts on their financial condition that could make them unable or unwilling to comply with their contractual commitments, including the refusal or inability to pay charter hire to INSW or an inability or unwillingness to lend funds. While INSW seeks to monitor the financial condition of its customers, financial lenders and suppliers, the availability and accuracy of information about the financial condition of such entities and the actions that INSW may take to reduce possible losses resulting from the failure of such entities to comply with their contractual obligations is limited. Any such failure could have a material adverse effect on INSW’s revenues, profitability and cash flows.

 

The Company also faces other potential constraints on capital relating to counterparty credit risk and constraints on INSW’s ability to borrow funds. See also “— Risks Related to Our Company — The Company is subject to credit risks with respect to its counterparties on contracts and any failure by those counterparties to meet their obligations could cause the Company to suffer losses on such contracts, decreasing revenues and earnings” and “— Risks Related to Our Company — INSW has incurred significant indebtedness which could affect its ability to finance its operations, pursue desirable business opportunities and successfully run its business in the future, all of which could affect INSW’s ability to fulfill its obligations under that indebtedness.”

 

The current state of the global financial markets may adversely impact the Company’s ability to obtain additional financing on acceptable terms and otherwise negatively impact the Company’s business.

 

Global financial markets have been, and continue to be, volatile. In recent years, businesses in the global economy have faced tightening credit, deteriorating international liquidity conditions and volatile interest rates. There has been a general decline in the willingness of banks and other financial institutions to extend credit, particularly in the shipping industry, due to the historically volatile asset values of vessels. As the shipping industry is highly dependent on the availability of credit to finance and expand operations, it has been negatively affected by this decline.

 

Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at all or on terms similar to current debt and reduced, and in some cases ceased to provide, funding to borrowers. Due to these factors, additional financing may not be available if needed and to the extent required, on acceptable terms or at all. If additional financing is not available when needed, or is available only on unfavorable terms, the Company may be unable to meet its obligations as they come due or the Company may be unable to execute its business strategy, complete additional vessel acquisitions, or otherwise take advantage of potential business opportunities as they arise.

 

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INSW conducts its operations internationally, which subjects it to changing economic, political and governmental conditions abroad that may adversely affect its business.

 

The Company conducts its operations internationally, and its business, financial condition, results of operations and cash flows may be adversely affected by changing economic, political and government conditions in the countries and regions where its vessels are employed, including:

 

·regional or local economic downturns;
·changes in governmental policy or regulation;
·restrictions on the transfer of funds into or out of countries in which INSW or its customers operate;
·difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations;
·trade relations with foreign countries in which INSW’s customers and suppliers have operations, including protectionist measures such as tariffs and import or export licensing requirements;
·general economic and political conditions, which may interfere with, among other things, the Company’s supply chain, its customers and all of INSW’s activities in a particular location;
·difficulty in enforcing contractual obligations in non-U.S. jurisdictions and the collection of accounts receivable from foreign accounts;
·different regulatory regimes in the various countries in which INSW operates;
·inadequate intellectual property protection in foreign countries;
·the difficulties and increased expenses in complying with multiple and potentially conflicting U.S. and foreign laws, regulations, security, product approvals and trade standards, anti-bribery laws, government sanctions and restrictions on doing business with certain nations or specially designated nationals;
·import and export duties and quotas;
·demands for improper payments from port officials or other government officials;
·U.S. and foreign customs, tariffs and taxes;
·currency exchange controls, restrictions and fluctuations, which could result in reduced revenue and increased operating expense;
·international incidents;
·transportation delays or interruptions;
·local conflicts, acts of war, terrorist attacks or military conflicts;
·changes in oil prices or disruptions in oil supplies that could substantially affect global trade, the Company’s customers’ operations and the Company’s business;
·the imposition of taxes by flag states, port states and jurisdictions in which INSW or its subsidiaries are incorporated or where its vessels operate; and
·expropriation of INSW’s vessels.

 

The occurrence of any such event could have a material adverse effect on the Company’s business.

 

INSW must comply with complex non-U.S. and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to government officials; anti-money laundering laws; and competition regulations. Moreover, the shipping industry is generally considered to present elevated risks in these areas. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on the Company’s business operations and on the Company’s ability to transport cargo to one or more countries, and could also materially affect the Company’s brand, ability to attract and retain employees, international operations, business and operating results. Although INSW has policies and procedures designed to achieve compliance with these laws and regulations, INSW cannot be certain that its employees, contractors, joint venture partners or agents will not violate these policies and procedures. INSW’s operations may also subject its employees and agents to extortion attempts.

 

The vote by the United Kingdom to leave the European Union could adversely affect us.

 

The United Kingdom referendum held in 2016 on its membership in the European Union (“E.U.”) resulted in a majority of U.K. voters voting to exit the E.U. (“Brexit”). INSW has operations in the United Kingdom and the E.U., and as a result, INSW faces risks associated with the potential uncertainty and disruptions that may follow Brexit, including with respect to volatility in exchange rates and interest rates, and potential material changes to the regulatory regime applicable to its business or global trading parties. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. Any of these effects of Brexit, and others INSW cannot anticipate or that may evolve over time, could have a material adverse effect on INSW’s business, financial condition, results of operations and cash flows.

 

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Changes in fuel prices may adversely affect profits.

 

Fuel is a significant, if not the largest, expense in the Company’s shipping operations when vessels are under voyage charter. Accordingly, an increase in the price of fuel may adversely affect the Company’s profitability if these increases cannot be passed onto customers. The price and supply of fuel is unpredictable and fluctuates based on events outside the Company’s control, including geopolitical developments; supply and demand for oil and gas; actions by OPEC, and other oil and gas producers; war and unrest in oil producing countries and regions; regional production patterns; and environmental concerns and regulations, including requirements to use certain fuels which are more costly. Fuel may become much more expensive in the future, which could reduce the profitability and competitiveness of the Company’s business compared to other forms of transportation.

 

Acts of piracy on ocean-going vessels could adversely affect the Company’s business.

 

The frequency of pirate attacks on seagoing vessels remains relatively high, particularly in the western part of the Indian Ocean, off the west coast of Africa and in the South China Sea. If piracy attacks result in regions in which the Company’s vessels are deployed being characterized by insurers as “war risk” zones, as the Gulf of Aden has been, or Joint War Committee “war and strikes” listed areas, premiums payable for insurance coverage could increase significantly, and such insurance coverage may become difficult to obtain. Crew costs could also increase in such circumstances due to risks of piracy attacks.

 

In addition, while INSW believes the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and it is therefore entitled to cancel the charter party, a claim the Company would dispute. The Company may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on the Company. In addition, hijacking as a result of an act of piracy against the Company’s vessels, or an increase in the cost (or unavailability) of insurance for those vessels, could have a material adverse impact on INSW’s business, financial condition, results of operations and cash flows. Such attacks may also impact the Company’s customers, which could impair their ability to make payments to the Company under their charters.

 

Terrorist attacks and international hostilities and instability can affect the tanker industry, which could adversely affect INSW’s business.

 

Terrorist attacks, the outbreak of war, or the existence of international hostilities could damage the world economy, adversely affect the availability of and demand for crude oil and petroleum products and adversely affect both the Company’s ability to charter its vessels and the charter rates payable under any such charters. In addition, INSW operates in a sector of the economy that is likely to be adversely impacted by the effects of political instability, terrorist or other attacks, war or international hostilities. In the past, political instability has also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. These factors could also increase the costs to the Company of conducting its business, particularly crew, insurance and security costs, and prevent or restrict the Company from obtaining insurance coverage, all of which could have a material adverse effect on INSW’s business, financial condition, results of operations and cash flows.

 

Public health threats could have an adverse effect on the Company’s operations and financial results.

 

Public health threats and other highly communicable diseases, outbreaks of which have already occurred in various parts of the world near where INSW operates, could adversely impact the Company’s operations, the operations of the Company’s customers and the global economy, including the worldwide demand for crude oil and the level of demand for INSW’s services. Any quarantine of personnel, restrictions on travel to or from countries in which INSW operates, or inability to access certain areas could adversely affect the Company’s operations. Travel restrictions, operational problems or large-scale social unrest in any part of the world in which INSW operates, or any reduction in the demand for tanker services caused by public health threats in the future, may impact INSW’s operations and adversely affect the Company’s financial results.

 

Risks Related to Our Company

 

INSW’s historical financial information for periods prior to November 30, 2016 is not necessarily representative of the results that INSW would have achieved as a separate, publicly traded company and may not be a reliable indicator of INSW’s future financial results.

 

The historical information about INSW contained in this Annual Report on Form 10-K for periods prior to November 30, 2016 refers to its business as operated and integrated with OSG through the date of the spin-off of INSW on November 30, 2016. Such historical financial information included herein is derived from the historical financial statements and accounting records of OSG. Accordingly, such historical financial information included in this Annual Report on Form 10-K does not necessarily reflect the financial condition, operating performance or cash flows that INSW would have achieved as a separate publicly traded company during the periods presented or those that the Company will achieve in the future.

 

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INSW has incurred significant indebtedness which could affect its ability to finance its operations, pursue desirable business opportunities and successfully run its business in the future, all of which could affect INSW’s ability to fulfill its obligations under that indebtedness.

 

As of December 31, 2017, INSW had approximately $553 million of outstanding indebtedness, net of discounts and deferred finance costs. INSW’s substantial indebtedness and interest expense could have important consequences, including:

 

·Limiting INSW’s ability to use a substantial portion of its cash flow from operations in other areas of its business, including for working capital, capital expenditures and other general business activities, because INSW must dedicate a substantial portion of these funds to service its debt;
·to the extent INSW’s future cash flows are insufficient, requiring the Company to seek to incur additional indebtedness in order to make planned capital expenditures and other expenses or investments;
·limiting INSW’s ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions, and other expenses or investments planned by the Company;
·limiting the Company’s flexibility and ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in government regulation, and INSW’s business and industry;
·limiting INSW’s ability to satisfy its obligations under its indebtedness;
·increasing INSW’s vulnerability to a downturn in its business and to adverse economic and industry conditions generally;
·placing INSW at a competitive disadvantage as compared to its less-leveraged competitors;
·potentially limiting the Company’s ability to enter certain commercial pools;
·limiting the Company’s ability, or increasing the costs, to refinance indebtedness; and
·limiting the Company’s ability to enter into hedging transactions by reducing the number of counterparties with whom INSW can enter into such transactions as well as the volume of those transactions.

 

INSW’s ability to continue to fund its obligations and to reduce or refinance debt may be affected by among other things, the age of the Company’s fleet and general economic, financial market, competitive, legislative and regulatory factors. An inability to fund the Company’s debt requirements or reduce or refinance debt could have a material adverse effect on INSW’s business, financial condition, results of operations and cash flows.

 

Additionally, the actual or perceived credit quality of the Company’s or its pools’ charterers (as well as any defaults by them) could materially affect the Company’s ability to obtain the additional capital resources that it will require to purchase additional vessels or significantly increase the costs of obtaining such capital. The Company’s inability to obtain additional financing at an acceptable cost, or at all, could materially affect the Company’s results of operation and its ability to implement its business strategy.

 

The Company may not be able to generate sufficient cash to service all of its indebtedness, and could in the future breach covenants in its credit facilities and term loans.

 

The Company’s earnings, cash flow and the market value of its vessels vary significantly over time due to the cyclical nature of the tanker industry, as well as general economic and market conditions affecting the industry. As a result, the amount of debt that INSW can manage in some periods may not be appropriate in other periods and its ability to meet the financial covenants to which it is subject or may be subject in the future may vary. Additionally, future cash flow may be insufficient to meet the Company’s debt obligations and commitments. Any insufficiency could negatively impact INSW’s business.

 

The 2017 Debt Facilities contain certain restrictions relating to new borrowings as set forth in the loan agreement. In addition, the 2017 Debt Facilities have a covenant to maintain the aggregate Fair Market Value of the Collateral Vessels (each as defined in that loan agreement) at greater than or equal to $300.0 million at the end of each fiscal quarter and to ensure that at any time, the outstanding principal amounts of the 2017 Debt Facilities and certain other secured indebtedness permitted under credit agreement minus the amount of unrestricted cash and cash equivalents does not exceed 65% of the aggregate Fair Market Value of the Collateral Vessels plus the Fair Market Value of certain joint venture equity interests. While the Company was in compliance with these requirements as of December 31, 2017, a decrease in vessel values or a failure to meet this ratio could cause the Company to breach certain covenants in its existing credit facilities and term loans, or in future financing agreements that the Company may enter into from time to time. If the Company breaches such covenants and is unable to remedy the relevant breach or obtain a waiver, the Company’s lenders could accelerate its debt and foreclose on the Company’s owned vessels.

 

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A range of economic, competitive, financial, business, industry and other factors will affect future financial performance, and, accordingly, the Company’s ability to generate cash flow from operations and to pay debt and to meet the financial covenants under the INSW Facilities. Many of these factors, such as charter rates, economic and financial conditions in the tanker industry and the global economy or competitive initiatives of competitors, are beyond the Company’s control. If INSW does not generate sufficient cash flow from operations to satisfy its debt obligations, it may have to undertake alternative financing plans, such as:

 

·refinancing or restructuring its debt;
·selling tankers or other assets;
·reducing or delaying investments and capital expenditures; or
·seeking to raise additional capital.

 

Undertaking alternative financing plans, if necessary, might not allow INSW to meet its debt obligations. The Company’s ability to restructure or refinance its debt will depend on the condition of the capital markets, its access to such markets and its financial condition at that time. Any refinancing of debt could be at higher interest rates and might require the Company to comply with more onerous covenants, which could further restrict INSW’s business operations. In addition, the terms of existing or future debt instruments may restrict INSW from adopting some alternative measures. These alternative measures may not be successful and may not permit INSW to meet its scheduled debt service obligations. The Company’s inability to generate sufficient cash flow to satisfy its debt obligations, to meet the covenants of its credit agreements and term loans and/or to obtain alternative financing in such circumstances, could materially and adversely affect INSW’s business, financial condition, results of operations and cash flows.

 

The Company will be required to make additional capital expenditures to expand the number of vessels in its fleet and to maintain all of its vessels, which depend on additional financing.

 

The Company’s business strategy is based in part upon the expansion of its fleet through the purchase of additional vessels at attractive points. In 2017, INSW purchased three vessels. If INSW is unable to fulfill its obligations under any memorandum of agreement or newbuilding construction contract for future vessel acquisitions, the sellers of such vessels may be permitted to terminate such contracts and the Company may be required to forfeit all or a portion of the down payments it made under such contracts and it may also be sued for any outstanding balance. In addition, as a newbuilding vessel must be drydocked within five years of its delivery from a shipyard, with survey cycles of no more than 60 months for the first three surveys, and 30 months thereafter, not including any unexpected repairs, the Company will incur significant maintenance costs for its existing and any newly-acquired vessels. As a result, if the Company does not utilize its vessels as planned, these maintenance costs could have material adverse effects on the Company’s business, financial condition, results of operations and cash flows.

 

The Company depends on third party service providers for technical and commercial management of its fleet.

 

The Company currently outsources to third party service providers, certain management services of its fleet, including technical management, certain aspects of commercial management and crew management. In particular, the Company has entered into ship management agreements that assign technical management responsibilities to a third party technical manager for each conventional tanker in the Company’s fleet (collectively, the “Ship Management Agreements”). The Company has also transferred commercial management of much of its fleet to certain other third party service providers, principally commercial pools.

 

In such outsourcing arrangements, the Company has transferred direct control over technical and commercial management of the relevant vessels, while maintaining significant oversight and audit rights, and must rely on third party service providers to, among other things:

 

·comply with contractual commitments to the Company, including with respect to safety, quality and environmental compliance of the operations of the Company’s vessels;
·comply with requirements imposed by the U.S. government, the United Nations (“U.N.”) and the E.U. (i) restricting calls on ports located in countries that are subject to sanctions and embargoes and (ii) prohibiting bribery and other corrupt practices;
·respond to changes in customer demands for the Company’s vessels;
·obtain supplies and materials necessary for the operation and maintenance of the Company’s vessels; and
·mitigate the impact of labor shortages and/or disruptions relating to crews on the Company’s vessels.

 

The failure of third-party service providers to meet such commitments could lead to legal liability or other damages to the Company. The third-party service providers the Company has selected may not provide a standard of service comparable to that the Company provided for such vessels prior to any outsourcing. The Company relies on its third-party service providers to comply with applicable law, and a failure by such providers to comply with such laws may subject the Company to liability or damage its reputation even if the Company did not engage in the conduct itself. Furthermore, damage to any such third party’s reputation, relationships or business may reflect on the Company directly or indirectly, and could have a material adverse effect on the Company’s reputation and business.

 

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The third-party technical manager has the right to terminate the Ship Management Agreements at any time with 90 days’ notice. If the third-party technical manager exercises that right, the Company will be required either to enter into substitute agreements with other third parties or to assume those management duties. The Company may not succeed in negotiating and entering into such agreements with other third parties and, even if it does so, the terms and conditions of such agreements may be less favorable to the Company. Furthermore, if the Company is required to dedicate internal resources to managing its fleet (including, but not limited to, hiring additional qualified personnel or diverting existing resources), that could result in increased costs and reduced efficiency and profitability. Any such changes could disrupt the Company’s business and have a material adverse effect on the Company’s business, results of operations and financial condition.

 

The contribution of the Company’s joint ventures to its profits and losses may fluctuate, which could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

 

The Company currently owns an interest in six of its vessels through three joint ventures, two in which the Company has a 50% ownership interest and a third in which the Company has a 49.9% ownership interest, together with other third-party vessel owners and operators in the Company’s industry. See Item 1, “Business — Fleet Operations.” The Company’s ownership in these joint ventures is accounted for using the equity method, which means that the Company’s allocation of profits and losses of the applicable joint venture is included in its consolidated financial statements. The contribution of the Company’s joint ventures to the Company’s profits and losses may fluctuate, including the distributions that it may receive from such entities, which could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. Further, the carrying values of the Company’s investments in its joint ventures may differ significantly from their fair market value.

 

A joint venture involves certain risks such as:

 

·INSW may not have voting control over the joint venture;
·INSW may not be able to maintain good relationships with its joint venture partner;
·The joint venture partner at any time may have economic or business interests that are inconsistent with INSW’s and may seek concessions from INSW;
·The joint venture partner may fail to fund its share of capital for operations or to fulfill its other commitments, including providing accurate and timely accounting and financial information to INSW;
·The joint venture may experience operating difficulties and financial losses, which may lead to asset write-downs or impairment charges that could negatively impact the operating results of the joint venture and INSW;
·The joint venture or venture partner could lose key personnel; and
·The joint venture partner could become bankrupt requiring INSW to assume all risks and capital requirements related to the joint venture project, and the related bankruptcy proceedings could have an adverse impact on the operation of the partnership or joint venture.

 

Furthermore, the Company monitors the fair value of its investments, and records an impairment charge if a decline in fair value of an investment below its carrying amount is determined to be other-than-temporary. The Company recorded impairment charges aggregating approximately $30 million in December 2016 as a result of a decline in the estimated fair value of its FSO joint ventures. In May 2017, the two FSO joint ventures signed five-year service contracts for continued use of the FSOs in the Al Shaheen oil field off the coast of Qatar. These contracts commenced during the third quarter of 2017.

 

INSW’s business depends on voyage charters, and any future decrease in spot charter rates could adversely affect its earnings.

 

Voyage charters, including vessels operating in commercial pools that predominantly operate in the spot market, constituted 80% of INSW’s aggregate TCE revenues in the year ended December 31, 2017, 76% in 2016 and 90% in 2015. Accordingly, INSW’s shipping revenues are significantly affected by prevailing spot rates for voyage charters in the markets in which the Company’s vessels operate. The spot charter market may fluctuate significantly from time to time based upon tanker and oil supply and demand. The spot market is very volatile, and, in the past, there have been periods when spot charter rates have declined below the operating cost of vessels. For example, over the past five years, VLCC spot market rates (expressed as a time charter equivalent), which have ranged from a high of $115,780 per day to negative values, averaged $13,743 per day in December 2017 on the benchmark route between the Middle East Gulf and Japan. The successful operation of INSW’s vessels in the competitive spot charter market depends on, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. If spot charter rates decline in the future, then INSW may be unable to operate its vessels trading in the spot market profitably, or meet its other obligations, including payments on indebtedness. Furthermore, as charter rates for spot charters are fixed for a single voyage, which may last up to several weeks during periods in which spot charter rates are rising or falling, INSW will generally experience delays in realizing the benefits from, or experiencing the detriments of those changes. See also Item 1, “Business — Fleet Operations — Commercial Management.”

 

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INSW may not be able to renew Time Charters when they expire or enter into new Time Charters.

 

INSW’s ability to renew expiring contracts or obtain new charters will depend on the prevailing market conditions at the time of renewal. As of December 31, 2017, INSW employed eight of its vessels on time or bareboat charters, with all of those charters expiring in 2018 (excluding the joint ventures). The Company’s existing time charters may not be renewed at comparable rates or if renewed or entered into, those new contracts may be at less favorable rates. In addition, there may be a gap in employment of vessels between current charters and subsequent charters. If at a time when INSW is seeking to arrange new charters for its vessels, market participants expect that less capacity will be necessary in the future (for example, if it is expected that oil and natural gas prices will decrease in the future, which could suggest that future oil and gas production levels will decline from then-current levels), INSW may not be able to obtain charters at attractive rates or at all and could be forced to lay up the vessel until market conditions become more favorable. If, upon expiration of the existing time charters, INSW is unable to obtain time charters or voyage charters at desirable rates, the Company’s business, financial condition, results of operations and cash flows may be adversely affected.

 

Termination of, or a change in the nature of, INSW’s relationship with any of the commercial pools in which it participates could adversely affect its business.

 

As of December 31, 2017, seven of the Company’s nine VLCCs participate in the TI pool; both of its Suezmaxes participate in the Blue Fin pool; all seven Aframaxes participate in the SIGMA pool; two of the Company’s eight crude Panamaxes and all four LR1s participate directly in the PI pool; its only LR2 participates in the Navig8 Alpha 8 pool; 13 of its MRs participate in the CPTA pool; and two of its MRs participate in the Navig8 MR pool (an aggregate of 15 MRs out of a total of 16 excluding a 2002-built MR which was held for sale as of December 31, 2017 and delivered to the buyer January 2018.). INSW’s participation in these pools is intended to enhance the financial performance of the Company’s vessels through higher vessel utilization. Any participant in any of these pools has the right to withdraw upon notice in accordance with the relevant pool agreement. Changes in the management of, and the terms of, these pools, decreases in the number of vessels participating in these pools, or the termination of these pools, could result in increased costs and reduced efficiency and profitability for the Company.

 

In addition, in recent years the E.U. has published guidelines on the application of the E.U. antitrust rules to traditional agreements for maritime services such as commercial pools. While the Company believes that all the commercial pools it participates in comply with E.U. rules, there has been limited administrative and judicial interpretation of the rules. Restrictive interpretations of the guidelines could adversely affect the ability to commercially market the respective types of vessels in commercial pools.

 

In the highly competitive international market, INSW may not be able to compete effectively for charters.

 

The Company’s vessels are employed in a highly competitive market. Competition arises from other vessel owners, including major oil companies, which may have substantially greater resources than INSW. Competition for the transportation of crude oil and other petroleum products depends on price, location, size, age, condition and the acceptability of the vessel operator to the charterer. The Company believes that because ownership of the world tanker fleet is highly fragmented, no single vessel owner is able to influence charter rates. To the extent INSW enters into new geographic regions or provides new services, it may not be able to compete profitably. New markets may involve competitive factors that differ from those of the Company’s current markets, and the competitors in those markets may have greater financial strength and capital resources than INSW does.

 

INSW may not realize the benefits it expects from past acquisitions or acquisitions or other strategic transactions it may make in the future.

 

INSW’s business strategy includes ongoing efforts to engage in material acquisitions of ownership interests in entities in the tanker industry and of individual tankers. The success of INSW’s acquisitions will depend upon a number of factors, some of which may not be within its control. These factors include INSW’s ability to:

 

·identify suitable tankers and/or shipping companies for acquisitions at attractive prices, which may not be possible if asset prices rise too quickly;
·obtain financing;
·identify businesses engaged in managing, operating or owning tankers for acquisitions or joint ventures;
·integrate any acquired tankers or businesses successfully with INSW’s then-existing operations; and
·enhance INSW’s customer base.

 

INSW intends to finance these acquisitions by using available cash from operations and through incurrence of debt, other financing sources or bridge financing, any of which may increase its leverage ratios, or by issuing equity, which may have a dilutive impact on its existing shareholders. At any given time INSW may be engaged in a number of discussions that may result in one or more acquisitions, some of which may be material to INSW as a whole. These opportunities require confidentiality and may involve negotiations that require quick responses by INSW. Although there can be no certainty that any of these discussions will result in definitive agreements or the completion of any transactions, the announcement of any such transaction may lead to increased volatility in the trading price of INSW’s securities.

 

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Acquisitions and other transactions can also involve a number of special risks and challenges, including:

 

·diversion of management time and attention from the Company’s existing business and other business opportunities;
·delays in closing or the inability to close an acquisition for any reason, including third-party consents or approvals;
·any unanticipated negative impact on the Company of disclosed or undisclosed matters relating to any vessels or operations acquired; and
·assumption of debt or other liabilities of the acquired business, including litigation related to the acquired business.

 

The success of acquisitions or strategic investments depends on the effective integration of newly acquired businesses or assets into INSW’s current operations. Such integration is subject to risks and uncertainties, including realization of anticipated synergies and cost savings, the ability to retain and attract personnel and clients, the diversion of management’s attention from other business concerns, and undisclosed or potential legal liabilities of the acquired company or asset. INSW may not realize the strategic and financial benefits that it expects from any of its past acquisitions, or any future acquisitions. Further, if a portion of the purchase price of a business is attributable to goodwill and if the acquired business does not perform up to expectations at the time of the acquisition, some or all of the goodwill may be written off, adversely affecting INSW’s earnings. INSW has recorded material write-offs of goodwill and intangible assets in prior years related to earlier acquisitions it consummated.

 

The smuggling or alleged smuggling of drugs or other contraband onto the Company’s vessels may lead to governmental claims against the Company.

 

The Company expects that its vessels will call in ports where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members. To the extent the Company’s vessels are found with or accused to be carrying contraband, whether inside or attached to the hull of our vessels and whether with or without the knowledge of any of its crew, the Company may face governmental or other regulatory claims which could have an adverse effect on the Company’s business, financial condition, results of operations and cash flows. Additionally, such events could have ancillary consequences under INSW’s financing and other agreements.

 

Operating costs and capital expenses will increase as the Company’s vessels age and may also increase due to unanticipated events relating to secondhand vessels and the consolidation of suppliers.

 

In general, capital expenditures and other costs necessary for maintaining a vessel in good operating condition increase as the age of the vessel increases. As of December 31, 2017, the weighted average age of the Company’s total owned and operated fleet was 11.7 years. In addition, older vessels are typically less fuel-efficient than more recently constructed vessels due to improvements in engine technology. Accordingly, it is likely that the operating costs of INSW’s currently operated vessels will increase. In addition, changes in governmental regulations and compliance with Classification Society standards may restrict the type of activities in which the vessels may engage and/or may require INSW to make additional expenditures for new equipment. Every commercial tanker must pass inspection by a Classification Society authorized by the vessel’s country of registry. The Classification Society certifies that a tanker is safe and seaworthy in accordance with the applicable rule and regulations of the country of registry of the tanker and the international conventions of which that country is a member. If a Classification Society requires the Company to add equipment, INSW may be required to incur substantial costs or take its vessels out of service. Market conditions may not justify such expenditures or permit INSW to operate its older vessels profitably even if those vessels remain operational. If a vessel in INSW’s fleet does not maintain its class and/or fails any survey, it will be unemployable and unable to trade between ports. This would negatively impact the Company’s results of operation.

 

In addition, the Company’s fleet includes a number of vessels purchased in the secondhand market. While the Company typically inspects secondhand vessels before it purchases them, those inspections do not necessarily provide INSW with the same level of knowledge about those vessels’ condition that INSW would have had if these vessels had been built for and operated exclusively by it. The Company may not discover defects or other problems with such vessels before purchase, which may lead to expensive, unanticipated repairs, and could even result in accidents or other incidents for which the Company could be liable.

 

Furthermore, recent mergers have reduced the number of available suppliers, resulting in fewer alternatives for sourcing key supplies. With respect to certain items, INSW is generally dependent upon the original equipment manufacturer for repair and replacement of the item or its spare parts. Supplier consolidation may result in a shortage of supplies and services, thereby increasing the cost of supplies or potentially inhibiting the ability of suppliers to deliver on time. These cost increases or delays could result in downtime, and delays in the repair and maintenance of the Company’s vessels and have a material adverse effect on INSW’s business, financial condition, results of operations and cash flows.

 

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The Company’s operating leases could be replaced on less favorable terms or may not be replaced.

 

The Company’s operating fleet includes six vessels that have been chartered-in under operating leases. The operating leases of the Company expire in 2018 and may not be replaced at all or on as favorable terms, which could have a material adverse effect on the Company’s future financial position, results of operations and cash flows.

 

The Company is subject to credit risks with respect to its counterparties on contracts, and any failure by those counterparties to meet their obligations could cause the Company to suffer losses on such contracts, decreasing revenues and earnings.

 

The Company has entered into, and in the future will enter into, various contracts, including charter agreements and other agreements associated with the operation of its vessels. The Company charters its vessels to other parties, who pay the Company a daily rate of hire. The Company also enters voyage charters. Historically, the Company has not experienced material problems collecting charter hire. The Company also Time Charters or bareboat charters some of its vessels from other parties and its continued use and operation of such vessels depends on the vessel owners’ compliance with the terms of the Time Charter or bareboat charter. Additionally, the Company enters into derivative contracts (interest rate swaps and caps) from time to time. As a result, the Company is subject to credit risks. The ability of each of the Company’s counterparties to perform its obligations under a contract with it will depend on a number of factors that are beyond the Company’s control and may include, among other things, general economic conditions; availability of debt or equity financing; the condition of the maritime and offshore industries; the overall financial condition of the counterparty; charter rates received for specific types of vessels; and various expenses. Charterers are sensitive to the commodity markets and may be impacted by market forces affecting commodities such as oil. In addition, in depressed market conditions, the Company’s charterers and customers may no longer need a vessel that is currently under charter or contract or may be able to obtain a comparable vessel at lower rates. As a result, the Company’s customers may fail to pay charter hire or attempt to renegotiate charter rates. If the counterparties fail to meet their obligations, the Company could suffer losses on such contracts which would decrease revenues, cash flows and earnings.

 

The Company relies on the skills of its senior management team, some of whom are relatively new to their current roles, and if the Company was required to replace them, it could negatively impact the effectiveness of management and the Company’s results of operations could be negatively impacted.

 

INSW’s success depends to a significant extent upon the expertise, capabilities and efforts of its senior executives in managing the Company’s activities.  While INSW is led by executives with significant experience in their respective areas of responsibility, certain members of the management team have limited experience acting in their current roles for a public company or in working together as a team for a significant period of time.  The loss or unavailability of one or more of INSW’s senior executives for an extended period of time could adversely affect the Company’s business and results of operations.

 

The Company may face unexpected drydock costs for its vessels.

 

Vessels must be drydocked periodically. The cost of repairs and renewals required at each drydock are difficult to predict with certainty, can be substantial and the Company’s insurance does not cover these costs. In addition, vessels may have to be drydocked in the event of accidents or other unforeseen damage, and INSW’s insurance may not cover all of these costs. Vessels in drydock will generally not generate any income. Large drydocking expenses could adversely affect the Company’s results of operations and cash flows. In addition, the time when a vessel is out of service for maintenance is determined by a number of factors including regulatory deadlines, market conditions, shipyard availability and customer requirements, and accordingly the length of time that a vessel may be off-hire may be longer than anticipated, which could adversely affect the Company’s business, financial condition, results of operations and cash flows.

 

Technological innovation could reduce the Company’s charter income and the value of the Company’s vessels.

 

The charter rates and the value and operational life of a vessel are determined by a number of factors including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge cargo quickly. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and straits. The length of a vessel’s physical life is related to its original design and construction, its maintenance and the impact of the stress of operations. If new tankers are built that are more efficient or more flexible or have longer physical lives than the Company’s vessels, competition from these more technologically advanced vessels could adversely affect the amount of charter payments the Company receives for its vessels once their initial charters expire and the resale value of the Company’s vessels could significantly decrease. As a result, the Company’s business, financial condition, results of operations and cash flows could be adversely affected.

 

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The Company stores, processes, maintains, and transmits confidential information through information technology (“IT”) systems. Cybersecurity issues, such as security breaches and computer viruses, affecting INSW’s IT systems or those of its third-party vendors, suppliers or counterparties, could disrupt INSW’s business, result in the unintended disclosure or misuse of confidential or proprietary information, damage its reputation, increase its costs, and cause losses.

 

The Company collects, stores and transmits sensitive data, including its own proprietary business information and that of its counterparties, and personally identifiable information of counterparties and employees, using both its own IT systems and those of third party vendors. In addition, we rely on the transmission of similarly sensitive data from the Company’s third-party suppliers and vendors. The secure storage, processing, maintenance and transmission of this information is critical to INSW’s operations. The Company’s dependency on IT systems includes accounting, billing, disbursement, cargo booking and tracking, vessel scheduling and stowage, equipment tracking, customer service, banking, payroll and communication systems. The Company’s IT network, or those of its customers or third-party vendors, suppliers or counterparties, could be vulnerable to unauthorized access, computer viruses, and other security problems as well as failures caused by the occurrence of natural disasters or other unexpected problems. Many companies, including companies in the shipping industry, have increasingly reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. The Company has experienced attacks on its email system to obtain unauthorized access to confidential information.

 

The Company may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. Security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches (including the inability of INSW’s third party vendors, suppliers or counterparties to prevent security breaches) could also cause existing clients to lose confidence in the Company’s IT systems and could adversely affect INSW’s reputation, cause losses to INSW or our customers, damage our brand, and increase our costs.

 

INSW’s revenues are subject to seasonal variations.

 

INSW operates its tankers in markets that have historically exhibited seasonal variations in demand for tanker capacity, and therefore, charter rates. Peaks in tanker demand quite often precede seasonal oil consumption peaks, as refiners and suppliers anticipate consumer demand. Charter rates for tankers are typically higher in the fall and winter months as a result of increased oil consumption in the Northern Hemisphere. Unpredictable weather patterns and variations in oil reserves disrupt tanker scheduling. Because a majority of the Company’s vessels trade in the spot market, seasonality has affected INSW’s operating results on a quarter-to-quarter basis and could continue to do so in the future. Such seasonality may be outweighed in any period by then current economic conditions or tanker industry fundamentals.

 

Effective internal controls are necessary for the Company to provide reliable financial reports and effectively prevent fraud.

 

The Company maintains a system of internal controls to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The process of designing and implementing effective internal controls is a continuous effort that requires the Company to anticipate and react to changes in its business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy its reporting obligations as a public company.

 

Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. Any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase the Company’s operating costs and harm its business. Furthermore, investors’ perceptions that the Company’s internal controls are inadequate or that the Company is unable to produce accurate financial statements on a timely basis may harm its stock price.

 

Work stoppages or other labor disruptions may adversely affect INSW’s operations.

 

INSW could be adversely affected by actions taken by employees of other companies in related industries (including third parties providing services to INSW) against efforts by management to control labor costs, restrain wage or benefit increases or modify work practices or the failure of other companies in its industry to successfully negotiate collective bargaining agreements.

 

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Risks Related to Legal and Regulatory Matters

 

Governments could requisition the Company’s vessels during a period of war or emergency, which may negatively impact the Company’s business, financial condition, results of operations and available cash.

 

A government could requisition one or more of the Company’s vessels for title or hire. Requisition for title occurs when a government takes control of a vessel and becomes the owner. Requisition for hire occurs when a government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency. Government requisition of one or more of the Company’s vessels may negatively impact the Company’s business, financial condition, results of operations and available cash.

 

The Company’s vessels may be directed to call on ports located in countries that are subject to restrictions imposed by the U.S. government, the U.N. or the E.U., which could negatively affect the trading price of the Company’s common shares.

 

From time to time, certain of the Company’s vessels, on the instructions of the charterers or pool manager responsible for the commercial management of such vessels, have called and may again call on ports located in countries or territories, and/or operated by persons, subject to sanctions and embargoes imposed by the U.S. government, the U.N. or E.U. and countries identified by the U.S. government, the U.N. or the E.U. as state sponsors of terrorism. The U.S., U.N. and E.U. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or expanded over time. Some sanctions may also apply to transportation of goods (including crude oil) originating in sanctioned countries (particularly Iran), even if the vessel does not travel to those countries, or otherwise acting on behalf of sanctioned persons. Sanctions may include the imposition of penalties and fines against companies violating national law or companies acting outside the jurisdiction of the sanctioning power themselves becoming the target of sanctions.

 

Although INSW believes that it is in compliance with all applicable sanctions and embargo laws and regulations and intends to maintain such compliance, and INSW does not, and does not intend to, engage in sanctionable activity, INSW might fail to comply or may engage in a sanctionable activity in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation or sanctionable activity could result in fines or other penalties, or the imposition of sanctions against the Company, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in the Company and negatively affect INSW’s reputation and investor perception of the value of INSW’s common stock.

 

Compliance with complex laws, regulations, and, in particular, environmental laws or regulations, including those relating to the emission of greenhouse gases, may adversely affect INSW’s business.

 

The Company’s operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties, conventions and standards in force in international waters, the jurisdictional waters of the countries in which INSW’s vessels operate, as well as the countries of its vessels’ registration. Many of these requirements are designed to reduce the risk of oil spills. They also regulate other water pollution issues, including discharge of ballast water and effluents and air emissions, including emission of greenhouse gases. These requirements impose significant capital and operating costs on INSW, including, without limitation, ones related to engine adjustments and ballast water treatment.

 

Environmental laws and regulations also can affect the resale value or significantly reduce the useful lives of the Company’s vessels, require a reduction in carrying capacity, ship modifications or operational changes or restrictions (and related increased operating costs) or retirement of service, lead to decreased availability or higher cost of insurance coverage for environmental matters or result in the denial of access to, or detention in, certain jurisdictional waters or ports. Under local, national and foreign laws, as well as international treaties and conventions, INSW could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or other hazardous substances from its vessels or otherwise in connection with its operations. INSW could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with its current or historic operations. Violations of or liabilities under environmental requirements also can result in substantial penalties, fines and other sanctions, including in certain instances, seizure or detention of the Company’s vessels.

 

INSW could incur significant costs, including cleanup costs, fines, penalties, third-party claims and natural resource damages, as the result of an oil spill or liabilities under environmental laws. The Company is subject to the oversight of several government agencies, including the U.S. Coast Guard and the EPA. OPA 90 affects all vessel owners shipping oil or hazardous material to, from or within the United States. OPA 90 allows for potentially unlimited liability without regard to fault for owners, operators and bareboat charterers of vessels for oil pollution in U.S. waters. Similarly, the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended, which has been adopted by most countries outside of the United States, imposes liability for oil pollution in international waters. OPA 90 expressly permits individual states to impose their own liability regimes with regard to hazardous materials and oil pollution incidents occurring within their boundaries. Coastal states in the United States have enacted pollution prevention liability and response laws, many providing for unlimited liability. Similarly, the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended, which has been adopted by most countries outside of the United States, imposes liability for oil pollution in international waters.

 

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In addition, in complying with OPA 90, IMO regulations, E.U. directives and other existing laws and regulations and those that may be adopted, shipowners likely will incur substantial additional capital and/or operating expenditures in meeting new regulatory requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Key regulatory initiatives that are anticipated to require substantial additional capital and/or operating expenditures in the next several years include more stringent limits on the sulfur content of fuel oil for vessels operating in certain areas and more stringent requirements for management and treatment of ballast water.

 

Certain of the Company’s vessels are subject to more stringent numeric discharge limits of ballast water under the EPA’s VGP, with additional vessels becoming subject in future years, even though those vessels have obtained a valid extension from the USCG for implementation of treatment technology under the USCG’s final rules. The EPA has determined that it will not issue extensions under the VGP but has stated that vessels that (i) have received an extension from the USCG, (ii) are in compliance with all of the VGP requirements other than numeric discharge limits and (iii) meet certain other requirements will be entitled to “low enforcement priority”. While INSW believes that any vessel that is or may become subject to the more stringent numeric discharge limits of ballast water meets the conditions for “low enforcement priority,” no assurance can be given that they will do so. If the EPA determines to enforce the limits for such vessels, such action could have a material adverse effect on INSW. See Item 1, “Business ___ Environmental and Security Matters Relating to Bulk Shipping.”

 

Other government regulation of vessels, particularly in the areas of safety and environmental requirements, can be expected to become more strict in the future and require the Company to incur significant capital expenditures on its vessels to keep them in compliance, or even to scrap or sell certain vessels altogether. Such expenditures could result in financial and operational impacts that may be material to INSW’s financial statements. Additionally, the failure of a shipowner or bareboat charterer to comply with local, domestic and foreign regulations may subject it to increased liability, may invalidate existing insurance or decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. If any of our vessels are denied access to, or are detained in, certain ports, reputation, business, financial results and cash flows could be materially and adversely affected.

 

Accidents involving highly publicized oil spills and other mishaps involving vessels can be expected in the tanker industry, and such accidents or other events could be expected to result in the adoption of even stricter laws and regulations, which could limit the Company’s operations or its ability to do business and which could have a material adverse effect on INSW’s business, financial results and cash flows. In addition, the Company is required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to its operations. The Company believes its vessels are maintained in good condition in compliance with present regulatory requirements, are operated in compliance with applicable safety and environmental laws and regulations and are insured against usual risks for such amounts as the Company’s management deems appropriate. The vessels’ operating certificates and licenses are renewed periodically during each vessel’s required annual survey. However, government regulation of tankers, particularly in the areas of safety and environmental impact may change in the future and require the Company to incur significant capital expenditures with respect to its ships to keep them in compliance.

 

Due to concern over the risk of climate change, a number of countries, including the United States, and international organizations, including the E.U., the IMO and the U.N., have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. Such actions could result in significant financial and operational impacts on the Company’s business, including requiring INSW to install new emission controls, acquire allowances or pay taxes related to its greenhouse gas emissions, or administer and manage a greenhouse gas emission program. See Item 1, “Business — Environmental and Security Matters Relating to Bulk Shipping.” In addition to the added costs, the concern over climate change and regulatory measures to reduce greenhouse gas emissions may reduce global demand for oil and oil products, which would have an adverse effect on INSW’s business, financial results and cash flows.

 

The employment of the Company’s vessels could be adversely affected by an inability to clear the oil majors’ risk assessment process.

 

The shipping industry, and especially vessels that transport crude oil and refined petroleum products, is heavily regulated. In addition, the “oil majors” such as BP, Chevron Corporation, Phillips 66, Exxon Mobil Corp., Royal Dutch Shell and Total S.A. have developed a strict due diligence process for selecting their shipping partners out of concerns for the environmental impact of spills. This vetting process has evolved into a sophisticated and comprehensive risk assessment of both the vessel manager and the vessel, including audits of the management office and physical inspections of the ship. Under the terms of the Company’s charter agreements (including those entered into by pools in which the Company participates), the Company’s charterers require that the Company’s vessels and the technical managers pass vetting inspections and management audits, respectively. The Company’s failure to maintain any of its vessels to the standards required by the oil majors could put the Company in breach of the applicable charter agreement and lead to termination of such agreement. Should the Company not be able to successfully clear the oil majors’ risk assessment processes on an ongoing basis, the future employment of the Company’s vessels could be adversely affected since it might lead to the oil majors’ terminating existing charters.

 

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International Seaways, Inc.  

 

  

The Company may be subject to litigation and government inquiries or investigations that, if not resolved in the Company’s favor and not sufficiently covered by insurance, could have a material adverse effect on it.

 

The Company has been and is, from time to time, involved in various litigation matters and subject to government inquiries and investigations. These matters may include, among other things, regulatory proceedings and litigation arising out of or relating to contract disputes, personal injury claims, environmental claims or proceedings, asbestos and other toxic tort claims, employment matters, governmental claims for taxes or duties, and other disputes that arise in the ordinary course of the Company’s business. For example, in late September 2017, an industrial accident at a leased facility in Galveston resulted in fatalities to two temporary employees.  In accordance with law, an investigation of the accident is currently underway, and filed lawsuits have identified several defendants, including a subsidiary of the Company.  The Company believes it is too early to determine what, if any, effect the outcome of this matter will have on us.

 

Although the Company intends to defend these matters vigorously, it cannot predict with certainty the outcome or effect of any such matter, and the ultimate outcome of these matters or the potential costs to resolve them could involve or result in significant expenditures or losses by the Company, or result in significant changes to INSW’s tariffs, rates, rules and practices in dealing with its customers, all of which could have a material adverse effect on the Company’s future operating results, including profitability, cash flows, and financial condition. Insurance may not be applicable or sufficient in all cases and/or insurers may not remain solvent which may have a material adverse effect on the Company’s financial condition. The Company’s recorded liabilities and estimates of reasonably possible losses for its contingent liabilities are based on its assessment of potential liability using the information available to the Company at the time and, as applicable, any past experience and trends with respect to similar matters. However, because litigation is inherently uncertain, the Company’s estimates for contingent liabilities may be insufficient to cover the actual liabilities from such claims, resulting in a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. See Item 3, “Legal Proceedings” in this Annual Report on Form 10-K and Note 20, “Contingencies,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data.”

 

Maritime claimants could arrest INSW’s vessels, which could interrupt cash flows.

 

Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of the Company’s vessels could interrupt INSW’s cash flow and require it to pay a significant amount of money to have the arrest lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated” vessel, meaning any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one vessel in the Company’s fleet for claims relating to another vessel in its fleet which, if successful, could have an adverse effect on the Company’s business, financial condition, results of operations and cash flows.

 

We may be subject to U.S. federal income tax on U.S. source shipping income, which would reduce our net income and cash flows.

 

If we do not qualify for an exemption pursuant to Section 883, or the “Section 883 exemption,” of the U.S. Internal Revenue Code of 1986, as amended, or the “Code,” then we will be subject to U.S. federal income tax on our shipping income that is derived from U.S. sources. If we are subject to such tax, our results of operations and cash flows would be reduced by the amount of such tax. We will qualify for the Section 883 exemption for 2018 and forward if, among other things, (i) our common shares are treated as primarily and regularly traded on an established securities market in the United States or another qualified country (“publicly traded test”), or (ii) we satisfy one of two other ownership tests. Under applicable U.S. Treasury Regulations, the publicly traded test will not be satisfied in any taxable year in which persons who directly, indirectly or constructively own five percent or more of our common shares (sometimes referred to as “5% shareholders”) own 50% or more of the vote and value of our common shares for more than half the days in such year, unless an exception applies. We can provide no assurance that ownership of our common shares by 5% shareholders will allow us to qualify for the Section 883 exemption in 2018 and any other future taxable years. If we do not qualify for the Section 883 exemption, our gross shipping income derived from U.S. sources, i.e., 50% of our gross shipping income attributable to transportation beginning or ending in the United States (but not both beginning and ending in the United States), generally would be subject to a four percent tax without allowance for deductions.

 

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International Seaways, Inc.  

 

  

U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. shareholders.

 

A non-U.S. corporation generally will be treated as a “passive foreign investment company,” or a “PFIC,” for U.S. federal income tax purposes if, after applying certain look through rules, either (i) at least 75% of its gross income for any taxable year consists of “passive income” or (ii) at least 50% of the average value (determined on a quarterly basis) produce or are held for the production of “passive income.” We refer to assets which produce or are held for production of “passive income” as “passive assets.” For purposes of these tests, “passive income” generally includes dividends, interest, gains from the sale or exchange of investment property and rental income and royalties other than rental income and royalties which are received from unrelated parties in connection with the active conduct of a trade or business, as defined in applicable U.S. Treasury Regulations. Passive income does not include income derived from the performance of services. Although there is no authority under the PFIC rules directly on point, and existing legal authority in other contexts is inconsistent in its treatment of time charter income, we believe that the gross income we derive or are deemed to derive from our time and spot chartering activities is services income, rather than rental income. Accordingly, we believe that (i) our income from time and spot chartering activities does not constitute passive income and (ii) the assets that we own and operate in connection with the production of that income do not constitute passive assets. Therefore, we believe that we are not now and have never been a PFIC with respect to any taxable year. There is no assurance that the IRS or a court of law will accept our position and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover because there are uncertainties in the application of the PFIC rules and PFIC status is determined annually and is based on the composition of a company’s income and assets (which are subject to change), we can provide no assurance that we will not become a PFIC in any future taxable year. If we were to be treated as a PFIC for any taxable year (and regardless of whether we remain as a PFIC for subsequent taxable years), our U.S. shareholders would be subject to a disadvantageous U.S. federal income tax regime with respect to distributions received from us and gain, if any, derived from the sale or other disposition of our common shares. These adverse tax consequences to shareholders could negatively impact our ability to issue additional equity in order to raise the capital necessary for our business operations.

 

Risks Related to the Common Stock

 

We are incorporated in the Marshall Islands, which does not have a well-developed body of corporate case law or bankruptcy law and, as a result, shareholders may have fewer rights and protections under Marshall Islands law than under a typical jurisdiction in the United States.

 

Our corporate affairs are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act (the "BCA"). The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our shareholders may have more difficulty in protecting their interests in the face of actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction. In addition, the Marshall Islands does not have a well-developed body of bankruptcy law. As such, in the case of a bankruptcy involving us, there may be a delay of bankruptcy proceedings and the ability of securityholders and creditors to receive recovery after a bankruptcy proceeding, and any such recovery may be less predictable.

 

It may be difficult to serve process on or enforce a United States judgment against us, our officers and our directors because we are a foreign corporation.

 

We are a corporation formed in the Republic of the Marshall Islands. In addition, a substantial portion of our assets are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or our directors and officers, including in actions based upon the civil liability provisions of U.S. federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Republic of the Marshall Islands or of the non-U.S. jurisdictions in which our offices are located would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws.

 

The market price of the Company’s securities may fluctuate significantly.

 

The Company’s common stock is listed on New York Stock Exchange. However, trading volume has been relatively low and the market price of the Company’s common stock may fluctuate substantially. You may not be able to resell your common stock at or above the price you paid for such securities due to a number of factors, some of which are beyond the Company’s control. These risks include those described or referred to in this “Risk Factors” section and under “Forward -Looking Statements,” as well as, among other things: fluctuations in the Company’s operating results; activities of and results of operations of the Company’s competitors; changes in the Company’s relationships with the Company’s customers or the Company’s vendors; changes in business or regulatory conditions; changes in the Company’s capital structure; any announcements by the Company or its competitors of significant acquisitions, strategic alliances or joint ventures; additions or departures of key personnel; investors’ general perception of the Company; failure to meet market expectations; future sales of the Company’s securities by it, directors, executives and significant stockholders; changes in domestic and international economic and political conditions; and other events or factors, including those resulting from natural disasters, war, acts of terrorism or responses to these events. Any of the foregoing factors could also cause the price of the Company’s equity securities to fall and may expose the Company to securities class action litigation. Any securities class action litigation could result in substantial cost and the diversion of management’s attention and resources.

 

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International Seaways, Inc.  

 

  

In addition, the stock market has recently experienced volatility that, in some cases, has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of the Company’s common stock, regardless of its actual operating performance.

 

Investors’ percentage ownership in INSW may be diluted in the future.

 

The Company may issue equity in order to raise capital or in connection with future acquisitions and strategic investments, which would dilute investors’ percentage ownership in INSW. In addition, investors’ percentage ownership may be diluted if the Company issues equity instruments such as debt and equity financing. If the Company’s board of directors makes grants of equity awards to the Company’s directors, officers and employees pursuant to any equity incentive or compensation plan, any such grants would cause further dilution.

 

INSW has not paid cash dividends on its Common Stock.

 

INSW has not paid cash dividends or other distributions with respect to its Common Stock. Any future determinations to pay dividends on its Common Stock will be at the discretion of its board of directors and will depend upon many factors, including INSW’s future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors its board of directors may deem relevant. The timing, declaration, amount and payment of any future dividends will be at the discretion of INSW’s board of directors. INSW has no obligation to, and may not be able to, declare or pay dividends on its Common Stock. If INSW does not declare and pay dividends on our Common Stock, its share price could decline.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We lease approximately 13,100 square feet of office space for the Company’s New York headquarters. We do not own or lease any production facilities, plants, mines or similar real properties.

 

Vessels:

 

At December 31, 2017, the Company owned or operated an aggregate of 49 vessels (including six chartered-in vessels) and had ownership interests in six additional vessels through joint ventures. See tables presented under Item 1, “Business—Fleet Operations.”

 

ITEM 3. LEGAL PROCEEDINGS

 

See Note 20, “Contingencies” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for information regarding legal proceedings in which we are involved.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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International Seaways, Inc.  

 

  

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information, Holders and Dividends

 

The Company’s common stock was approved for listing on the New York Stock Exchange (NYSE) on November 9, 2016.

 

On November 30, 2016, we amended and restated our articles of incorporation (“Amended and Restated Articles of Incorporation”). In accordance with the Amended and Restated Articles of Incorporation, immediately prior to the distribution of our common stock by OSG the Company effected a stock split on its 102.21 issued and outstanding shares of common stock, which were all owned by OSG, to allow for a prorata dividend of such shares to the holders of OSG common stock and warrants as described in Item 1, “ Business — Overview and Recent Developments” above. Following the distribution our authorized capital stock consisted of 100,000,000 shares of no par value common stock and 10,000,000 shares of no par value preferred stock.

 

The following table summarizes (i) the quarterly high and low closing sales prices of the Company’s common stock (INSW) as reported on the NYSE since December 1, 2016 as there was no established published trading market prior to December 1, 2016.

 

   Common stock (INSW) 
   High   Low 
   (In dollars) 
2017          
First Quarter  $20.41   $14.39 
Second Quarter  $21.67   $18.63 
Third Quarter  $23.02   $17.99 
Fourth Quarter  $20.88   $16.68 
           
2016          
Fourth Quarter  $14.88   $10.64 

 

On March 7, 2018, there were 195 stockholders of record of the Company’s common stock.

 

The Company has not paid any cash dividends since its spin-off from OSG. The declaration and timing of future cash dividends, if any, will be at the discretion of the Board of Directors and will depend upon, among other things, our future operations and earnings, capital requirements, general financial condition, contractual restrictions, restrictions imposed by applicable law or the SEC and such other factors as our Board of Directors may deem relevant. In addition, the Company’s ability to pay cash dividends in the future may be limited by the Company’s loan agreements. See Note 8, “Debt”, to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional information about these limitations.

 

Purchase of Equity Securities

 

On May 2, 2017, the Company’s Board of Directors approved a resolution authorizing the Company to implement a stock repurchase program. Under the program, the Company may opportunistically repurchase up to $30,000 worth of shares of the Company’s common stock from time to time over a 24-month period, on the open market or otherwise, in such quantities, at such prices, in such manner and on such terms and conditions as management determines is in the best interests of the Company. Shares owned by employees, directors and other affiliates of the Company will not be eligible for repurchase under this program without further authorization from the Board. During the quarter ended September 30, 2017, the Company repurchased and retired 160,000 shares of its common stock in open-market purchases at an average price of $19.86 per share, for a total cost of $3,177. As of December 31, 2017, the maximum number of shares that may still be purchased under the Program is 1,350,907 shares which was determined by dividing the remaining buyback authorization ($26,823) by the average purchase price of common stock repurchased during 2017. Future buybacks under the stock repurchase program will be at the discretion of our Board of Directors and subject to limitations under the Company’s 2017 Term Loan Facility.

 

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International Seaways, Inc.  

 

 

Stockholder Return Performance Presentation

 

Set forth below is a line graph for the period between December 1, 2016 and December 31, 2017 comparing the percentage change in the cumulative total stockholder return on the Company’s common stock against the cumulative return of (i) the published Standard and Poor’s 500 index and (ii) a peer group index consisting of Teekay Tankers Ltd. Class A (TNK), Nordic American Tankers Limited (NAT), DHT Holdings, Inc. (DHT), Ardmore Shipping Corporation (ASC), Scorpio Tankers, Inc. (STNG), Euronav NV (EURN), Gener8 Maritime Inc. (GNRT), Navios Maritime Acquisition Corporation (NNA), and the Company, referred to as the peer group index (old) previously used by the Company and included herein for comparative purposes, and (iii) a peer group index consisting of Frontline Ltd. (FRO), Tsakos Energy Navigation Limited (TNP), Teekay Tankers Ltd. Class A (TNK), DHT Holdings, Inc. (DHT), Ardmore Shipping Corporation (ASC), Scorpio Tankers, Inc. (STNG), Euronav NV (EURN), Gener8 Maritime Inc. (GNRT), Navios Maritime Acquisition Corporation (NNA) and the Company, referred to as the peer group index (new). One company previously included in the peer group index (old), Nordic American Tankers Limited (NAT), was removed and two companies were added to the peer group index (new) - Frontline Ltd. (FRO) and Tsakos Energy Navigation Limited (TNP).  The Company believes that this expanded peer group index is more aligned with the peer group management uses to measure its performance and overall more relevant for comparative purposes.

 

STOCK PERFORMANCE GRAPH

COMPARISON OF CUMULATIVE TOTAL RETURN*

THE COMPANY, S&P 500 INDEX, PEER GROUP INDEX

 

 

*Assumes that the value of the investment in the Company’s common stock and each index was $100 on December 1, 2016 and that all dividends were reinvested.

 

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International Seaways, Inc.  

 

  

Equity Compensation Plan Information

 

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for further information on the number of shares of the Company’s common stock that may be issued under the Management Incentive Compensation Plan and the Non-Employee Director Incentive Compensation Plan.

 

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International Seaways, Inc.  

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

The selected financial data as of and for the five years ended December 31, 2017, presented below, is derived from our consolidated financial statements. This selected financial data is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

As discussed in Item 1, “ Business — Overview and Recent Developments,” on November 30, 2016, the Company effected a stock split on its 102.21 issued and outstanding shares of common stock, which were all owned by OSG, to allow for a prorata dividend of such shares to the holders of OSG common stock and warrants. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 260, Earnings Per Share, the Company adjusted the computations of basic and diluted earnings per share retroactively for all periods presented to reflect that change in its capital structure.

 

  

   2017   2016   2015   2014   2013 
Shipping revenues  $290,101   $398,319   $497,634   $517,018   $585,360 
(Loss)/income from vessel operations   (108,228)   5,941    176,314    4,604    (452,439)
(Loss)/income before reorganization items and income taxes   (106,044)   (17,652)   178,969    (13,827)   (415,300)
Reorganization items, net   -    (131)   (5,659)   (104,528)   (304,288)
(Loss)/income before income taxes   (106,044)   (17,783)   173,310    (118,355)   (719,588)
Net (loss)/income   (106,088)   (18,223)   173,170    (119,099)   (723,805)
Depreciation and amortization   78,853    79,885    81,653    84,931    108,675 
Net cash (used by)/provided by operating activities   (3,825)   116,768    222,739    (253,295)   101,695 
Dividend to OSG   -    202,000    200,000    -    - 
Cash and cash equivalents   60,027    92,001    308,858    178,240    173,943 
Restricted cash   10,579    -    8,989    70,093    - 
Total vessels, deferred drydock and other property at net book amount (a)   1,140,363    1,130,607    1,277,486    1,345,863    1,463,743 
Total assets   1,664,484    1,662,521    2,029,950    2,035,183    2,136,629 
Debt (b)   552,937    439,651    595,222    601,356    782,956 
Total equity   1,085,654    1,179,512    1,383,786    1,390,943    - 
Net investment of parent and accumulated other comprehensive loss   -    -    -    -    968,842 
Per share amounts:                         
Basic and diluted net (loss)/income   (3.64)   (0.62)   5.94    (4.08)   (24.82)
Weighted average shares outstanding - basic and diluted   29,159,440    29,157,992    29,157,387    29,157,387    29,157,387 
Other data:                         
Time charter equivalent revenues (c)   274,995    385,045    475,790    346,987    362,452 
EBITDA(d)   13,247    101,578    297,933    22,834    (610,563)
Adjusted EBITDA(d)   116,966    221,997    299,172    137,490    78,454 

 

(a)Includes vessel held for sale of $5,108 at December 31, 2017.

(b)As of December 31, 2013, debt was a component of liabilities subject to compromise in the consolidated balance sheet.

(c)Reconciliations of time charter equivalent revenues to shipping revenues as reflected in the consolidated statements of operations follow:

 

For the year ended December 31,  2017   2016   2015   2014   2013 
Time charter equivalent revenues  $274,995   $385,045   $475,790   $346,987   $362,452 
Add: Voyage expenses   15,106    13,274    21,844    170,031    222,908 
Shipping revenues  $290,101   $398,319   $497,634   $517,018   $585,360 

 

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International Seaways, Inc.  

 

  

Consistent with general practice in the shipping industry, the Company uses time charter equivalent revenues, which represents shipping revenues less voyage expenses, as a measure to compare revenue generated from a voyage charter to revenue generated from a time charter. Time charter equivalent revenues, a non-GAAP measure, provides additional meaningful information in conjunction with shipping revenues, the most directly comparable GAAP measure, because it assists Company management in decisions regarding the deployment and use of its vessels and in evaluating their financial performance.

 

(d)EBITDA represents net income/(loss) before interest expense, income taxes and depreciation and amortization expense. Adjusted EBITDA consists of EBITDA adjusted for the impact of certain items that we do not consider indicative of our ongoing operating performance. EBITDA and Adjusted EBITDA are presented to provide investors with meaningful additional information that management uses to monitor ongoing operating results and evaluate trends over comparative periods. EBITDA and Adjusted EBITDA do not represent, and should not be considered a substitute for, net income/(loss) or cash flows from operations determined in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results reported under GAAP. Some of the limitations are:

 

(i)EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

(ii)EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and

(iii)EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt.

 

While EBITDA and Adjusted EBITDA are frequently used by companies as a measure of operating results and performance, neither of those items as prepared by the Company is necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. The following table reconciles net income/(loss), as reflected in the consolidated statements of operations, to EBITDA and Adjusted EBITDA:

 

For the year ended December 31,  2017   2016   2015   2014   2013 
Net (loss)/income  $(106,088)  $(18,223)  $173,170   $(119,099)  $(723,805)
Income tax provision   44    440    140    744    4,217 
Interest expense   40,438    39,476    42,970    56,258    350 
Depreciation and amortization   78,853    79,885    81,653    84,931    108,675 
EBITDA   13,247    101,578    297,933    22,834    (610,563)
Severance costs   -    -    -    16,666    2,090 
Third-party debt modification fees and costs associated with repurchase of debt   9,240    225    -    -    - 
Separation and transition costs   604    9,043    -    -    - 
Technical management transition costs   -    -    39    3,417    - 
Goodwill and other intangibles impairment charge        -    -    -    16,214 
Loss/(gain) on disposal of vessels and other property, including impairments   86,855    79,203    (4,459)   (9,955)   366,425 
Impairment of equity method investments   -    30,475    -    -    - 
Write-off of deferred financing costs   7,020    5,097    -    -    - 
Discount on repurchase of debt   -    (3,755)   -    -    - 
Reorganization items, net   -    131    5,659    104,528    304,288 
Adjusted EBITDA  $116,966   $221,997   $299,172   $137,490   $78,454 

 

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International Seaways, Inc.  

 

  

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a discussion and analysis of (i) industry operations that have an impact on the Company’s financial position and results of operations, (ii) the Company’s financial condition at December 31, 2017 and 2016 and its results of operations comparing the years ended December 31, 2017 and 2016 and the years ended December 31, 2016 and 2015, and (iii) critical accounting policies used in the preparation of the Company’s consolidated financial statements. All dollar amounts are presented in thousands, except daily dollar amounts and per share amounts.

 

GENERAL

 

We are a provider of ocean transportation services for crude oil and refined petroleum products. We operate our vessels in the International Flag market. Our business includes two reportable segments: Crude Tankers and Product Carriers. For the years ended December 31, 2017, 2016 and 2015 we derived 65%, 67% and 64% of our TCE revenues from our Crude Tankers segment. Revenues from our Product Carriers segment constituted the balance of our TCE revenues during these periods.

 

As of December 31, 2017, we owned or operated an International Flag fleet of 55 vessels aggregating 6.9 million dwt and 864,800 cbm, including six vessels that have been chartered-in under operating leases. Our fleet includes ULCC, VLCC, Suezmax, Aframax and Panamax crude tankers and LR1, LR2 and MR product carriers. Through joint venture partnerships, we have ownership interests in two FSO service vessels and four LNG Carriers (together the “JV Vessels”). During the first quarter of 2018, we have delivered a 2002-built and a 2004-built MR to buyers (see Note 5, “Vessels”, to the accompanying consolidated financial statements). Other than the JV Vessels, revenues are derived predominantly from spot market voyage charters and those vessels are predominantly employed in the spot market via market-leading commercial pools. We derived approximately 80%, 76% and 90% of our total TCE revenues in the spot market for the years ended December 31, 2017, 2016 and 2015, respectively.

 

Our Spin-off from Overseas Shipholding Group, Inc.

 

On November 30, 2016, OSG completed the separation of its business into two independent publicly-traded companies through the spin-off of INSW. The spin-off transaction was in the form of a pro rata dividend of 100% of the common stock of INSW to holders of OSG common stock and warrants. See Note 1 “Basis of Presentation and Description of Business,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data,” for additional information relating to the spin-off transaction.

 

OPERATIONS AND OIL TANKER MARKETS

 

The Company’s revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by the Company and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products from which the Company earns a substantial majority of its revenues are determined by market forces such as the supply and demand for oil, the distance that cargoes must be transported and the number of vessels expected to be available at the time such cargoes need to be transported. The demand for oil shipments is significantly affected by the state of the global economy, levels of U.S. domestic and international production and OPEC exports. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally through storage, scrappings or conversions. The Company’s revenues are also affected by the mix of charters between spot (voyage charter) and long-term (time or bareboat charter). Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, the Company manages its vessels based on TCE revenues. Management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved.

 

The International Energy Agency (“IEA”) estimates global oil consumption for the fourth quarter of 2017 at 98.3 million barrels per day (“b/d”) an increase of 1.3 million b/d, or 1.3%, over the same quarter in 2016. The estimate for global oil consumption for all of 2017 is 97.8 million b/d, an increase of 1.6% over 2016. OECD demand in 2017 is estimated to have increased by 0.9% to 47.3 million b/d, while non-OECD demand is estimated to have increased by 2.4% to 50.6 million b/d.

 

Global oil production in the fourth quarter of 2017 reached 98.1 million b/d, an increase of 0.2% from the fourth quarter of 2016. OPEC crude oil production averaged 32.5 million b/d in the fourth quarter of 2017, a decrease of 0.2 million b/d from the third quarter of 2017, and 0.6 million b/d from the fourth quarter of 2016. Non-OPEC production growth increased by 0.8 million b/d to 58.7 million b/d in the fourth quarter of 2017 compared with the fourth quarter of 2016. Oil production in the U.S. increased by 0.8 million b/d from 9.2 million b/d in the third quarter of 2017 to 10.0 million b/d in the fourth quarter of 2017.

 

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U.S. refinery throughput increased by about 0.6 million b/d to 17.1 million b/d in the fourth quarter of 2017 compared with the comparable quarter in 2016. U.S. crude oil imports decreased by about 0.4 million b/d in the fourth quarter of 2017 compared with the comparable quarter of 2016 with imports from OPEC countries decreasing by 0.4 million b/d, a 13.8% decrease from the comparable quarter in 2016.

 

Chinese imports of crude oil continued increasing, with 2017 showing a 10.2% increase from 2016 with imports averaging 8.4 million b/d compared with 7.7 million b/d in 2016.

 

During the fourth quarter of 2017, the International Flag tanker fleet of vessels over 10,000 deadweight tons (“dwt”) increased by 1.3 million dwt as the crude fleet increased by 1.0 million dwt, while the product carrier fleet expanded by 0.3 million dwt. Year over year, the size of the tanker fleet increased by 26.7 million dwt with the largest increases in the VLCC, Suezmax, Aframax and MR sectors.

 

During the fourth quarter of 2017, the International Flag crude tanker orderbook increased by 1.4 million dwt, and the product carrier orderbook remained flat.

 

From the end of the fourth quarter of 2016 through the end of the fourth quarter of 2017, the total tanker orderbook declined by 8.1 million dwt due to a high level of vessel deliveries combined with relatively fewer new orders being placed in 2017.

 

VLCC freight rates initially saw a strengthening during the fourth quarter of 2017, reaching a peak of around $23,000 per day in October before beginning to decrease to below $10,000 per day by the end of the quarter. This was primarily attributable to increased newbuilding deliveries further exacerbating the oversupply situation coupled with reduced OPEC exports. Other crude segments had similar earnings patterns, although the Panamax sector, where earnings were poor at the beginning of the quarter, saw improvement throughout the quarter and product carrier rates also improved during the quarter from a low of around $8,000 per day in October to over $12,000 per day during December. Since OPEC has announced their intention to continue to restrict production, and 2018 will see continued newbuilding deliveries, albeit at a lower rate than during 2017, 2018 will likely continue to see a weakened rate environment. 

 

RESULTS FROM VESSEL OPERATIONS

 

During 2017, results from vessel operations decreased by $114,169 to a loss of $108,228 from income of $5,941 in 2016. This decrease primarily resulted from reduced TCE revenues, the incurrence of third-party debt modification fees (see Note 8, “Debt”, to the accompanying consolidated financial statements), and increased charter hire expense. Vessel impairment charges also increased by $9,166 to $88,408 in 2017. Such impacts were partially offset by decreases in spin-off related costs and general and administrative expenses in the current year.

 

The decrease in TCE revenues in 2017 of $110,050, or 29%, to $274,995 from $385,045 in 2016 primarily reflected lower average daily rates across INSW’s fleet sectors, which accounted for a decrease of approximately $111,765.

 

The increase in charter hire expense was principally attributable to increased activity in the Crude Tankers Lightering business.

 

During 2016, income from vessel operations decreased by $170,373 to $5,941 from $176,314 in 2015. The decrease reflected the impact of declining TCE revenues, net vessel impairment charges of $79,242 recorded in 2016, and the incurrence of spin-off related costs in 2016. Such impacts were partially offset by a decrease in general and administrative expenses in the 2016 period.

 

TCE revenues decreased in 2016 by $90,745, or 19%, to $385,045 from $475,790 in 2015. The decrease was principally as a result of (i) a weakening in rates in the MR, VLCC and Aframax sectors, which accounted for $106,558 of the overall decrease and (ii) a decrease in MR revenue days, which accounted for $4,667 of the overall decrease, and reflects the sale of a 1998-built MR in July 2015 as well as the redelivery of an MR to its owners at the expiry of its time charter in March 2015. These negative factors were partially offset by increased revenue days in the VLCC and Aframax fleets due to fewer drydock and repair days, which accounted for a $11,623 increase in revenue, along with a $5,242 increase in revenue resulting from the Company’s ULCC being taken out of lay-up in the first quarter of 2015.

 

See Note 4, “Business and Segment Reporting,” to the Company’s consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data”, for additional information on the Company’s segments, including equity in income of affiliated companies and reconciliations of (i) time charter equivalent revenues to shipping revenues and (ii) adjusted income from vessel operations for the segments to income/(loss) before income taxes, as reported in the consolidated statements of operations.  

 

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International Seaways, Inc.  

 

  

International Crude Tankers

 

   2017   2016   2015 
TCE revenues  $178,812   $258,171   $304,182 
Vessel expenses   (87,236)   (84,276)   (86,174)
Charter hire expenses   (13,651)   (9,732)   (8,821)
Depreciation and amortization   (56,302)   (52,395)   (51,347)
Adjusted income from vessel operations (a)  $21,623   $111,768   $157,840 
Average daily TCE rate  $20,525   $29,853   $36,839 
Average number of owned vessels (b)   25.0    24.0    24.0 
Average number of vessels chartered-in under operating leases   0.5    0.3    0.2 
Number of revenue days: (c)   8,712    8,648    8,257 
Number of ship-operating days: (d)               
Owned vessels   9,137    8,784    8,760 
Vessels bareboat chartered-in under operating leases (e)   -    -    - 
Vessels time chartered-in under operating leases   -    -    - 
Vessels spot chartered-in under operating leases   173    118    73 

 

(a)Adjusted income/(loss) from vessel operations by segment is before general and administrative expenses, technical management transition costs, third-party debt modification fees, separation and transition costs, and loss on disposal of vessels and other property, including impairments.
(b)The average is calculated to reflect the addition and disposal of vessels during the year.
(c)Revenue days represent ship-operating days less days that vessels were not available for employment due to repairs, drydock or lay-up. Revenue days are weighted to reflect the Company’s interest in chartered-in vessels.
(d)Ship-operating days represent calendar days.
(e)Vessels spot chartered-in under operating leases are related to the Company’s Crude Tankers Lightering business.

 

The following table provides a breakdown of TCE rates achieved for the years ended December 31, 2017, 2016 and 2015 between spot and fixed earnings and the related revenue days. The information in these tables is based, in part, on information provided by the commercial pools in which the segment’s vessels participate and excludes revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies.

 

   2017   2016   2015 
   Spot   Fixed   Spot   Fixed   Spot   Fixed 
   Earnings   Earnings   Earnings   Earnings   Earnings   Earnings 
ULCC:                              
Average rate  $-   $34,867   $-   $43,613   $-   $39,000 
Revenue days   17    348    -    366    -    275 
VLCC:                              
Average rate  $24,871   $33,756   $41,994   $40,737   $54,591   $- 
Revenue days   2,525    346    2,226    624    2,672    - 
Suezmax:                              
Average rate  $17,910   $-   $-   $-   $-   $- 
Revenue days   317    -    -    -    -    - 
Aframax:                              
Average rate  $13,392   $-   $21,345   $-   $34,042   $- 
Revenue days   2,419    -    2,508    -    2,439    - 
Panamax:                              
Average rate  $13,030   $14,093   $19,006   $21,094   $25,226   $15,462 
Revenue days   1,244    1,278    1,726    1,079    1,432    1,362 

 

During 2017, TCE revenues for the International Crude Tankers segment decreased by $79,359 or 31%, to $178,812 from $258,171 in 2016. Such decrease principally resulted from the impact of significantly lower average blended rates in the VLCC, Aframax, Panamax and ULCC sectors aggregating approximately $84,155. Further contributing to the decrease was a decrease in revenue days in the Panamax and Aframax sectors, which had the effect of decreasing revenue by approximately $6,428. The decrease in Panamaxes and Aframax revenue days reflects 319 incremental drydock and repair days in the current year. These declines in TCE revenues were partially offset by $6,268 in total revenues contributed by the two 2017-built Suezmaxes and the 2010-built VLCC, which were acquired by the Company in July 2017 and November 2017, respectively. Also serving to offset the decreases in revenue during 2017 was the increased activity levels in the Crude Tankers Lightering business, which resulted in a $5,037 increase in Lightering revenues to $25,478 in 2017 from $20,441 in 2016. Current prices of crude oil have generally been the same or less than future prices since the latter half of 2016 through to the end of 2017 and this has resulted in a general decline in demand for storage of oil at sea. Accordingly, we expect to put our ULCC into layup by the end of the first quarter of 2018 for a period of up to 18 months as it is unlikely to secure a new time charter contract for storage in the near term.

 

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International Seaways, Inc.  

 

  

Vessel expenses increased by $2,960 to $87,236 in 2017 from $84,276 in 2016. The increase was primarily attributable to (i) a $2,418 increase related to the Suezmax acquisitions discussed above, (ii) a reserve of $388 which was recorded during the second quarter of 2017 for a potential assessment by the trustees of the Marine Navy Ratings Pension Fund (“MNRPF”), as discussed in Note 20, “Contingencies”, to the accompanying consolidated financial statements, (iii) a $1,367 increase in drydock deviation costs incurred for the Panamax fleet, and (iv) a $900 increase due to increased activity in the Crude Tankers Lightering business. Such increases were partially offset by a $2,079 favorable variance in net insurance claim deductible costs in the Panamax fleet in the current year. Charter hire expenses increased by $3,919 to $13,651 in 2017 from $9,732 in 2016 as a result of an increase in chartered-in Aframaxes and workboats employed in the Crude Tankers Lightering business in the current year. The only vessels in the segment chartered-in by the Company in either period were the vessels chartered-in by the Crude Tankers Lightering business. Depreciation and amortization increased by $3,907 to $56,302 in 2017 from $52,395 in 2016. Such increase reflects the delivery of the two Suezmaxes and one VLCC noted above, and increased drydock amortization.

 

Excluding depreciation and amortization, and general and administrative expenses, operating income for the Crude Tankers Lightering business was $5,062 for 2017 and $4,822 for 2016. Although there was an increase in the number of full service lighterings performed in 2017, 27 as compared to 19 in 2016, the growth in operating income between 2016 and 2017 was relatively flat, primarily due to lower margins earned on jobs performed in the third quarter of 2017. The lower margins were as a result of increased charter hire expense, as Aframaxes were spot chartered-in at higher rates because of significant hurricane activity during the third quarter of 2017. In addition, there were more time chartered-in workboats in the six months ended December 31, 2017 compared to the same period in the prior year. However, the higher level of lightering activity anticipated in the second half of 2017 did not materialize as the number of service-only and full service lighterings declined in the second half of 2017 compared with the first six months of 2017.

 

During 2016, TCE revenues for the International Crude Tankers segment decreased by $46,011, or 15%, to $258,171 from $304,182 in 2015 primarily as a result of lower average daily rates in the VLCC and Aframax sectors, which accounted for a decrease in revenue of approximately $65,267. Such decrease was mitigated to an extent by an increase of 246 revenue days for the VLCC and Aframax fleets, which resulted from fewer drydock and repair days in 2016 and increased revenue by approximately $11,623. Also serving to partially offset the decline in rates were increased activity levels in the Crude Tankers Lightering business in 2016, which resulted in a $4,552 increase in revenue, and the Company’s ULCC exiting lay-up and commencing an 11-month time charter for storage in April 2015, which was subsequently extended for 21 months following the expiry of the initial charter period. A full year of service for the ULCC accounted for an increase in revenue of $5,242 in 2016.

 

Vessel expenses decreased by $1,898 to $84,276 in 2016 from $86,174 in 2015. The change in vessel expenses is primarily due to a reserve of $1,450 recorded in the third quarter of 2015 for an assessment by the MNRPF. Charter hire expenses increased by $911 to $9,732 in 2016 from $8,821 in 2015, resulting from an increase in spot chartered-in Aframaxes by the Crude Tankers Lightering business for utilization in the performance of full-service lighterings during 2016. The only vessels in the segment chartered-in by the Company during either period were Aframaxes and workboats employed in the Crude Tankers Lightering business.

 

Product Carriers            
   2017   2016   2015 
TCE revenues  $96,183   $126,314   $171,608 
Vessel expenses   (54,100)   (58,612)   (58,118)
Charter hire expenses   (28,050)   (27,679)   (27,981)
Depreciation and amortization   (22,418)   (26,696)   (28,763)
Adjusted (loss)/income from vessel operations  $(8,385)  $13,327   $56,746 
Average daily TCE rate  $11,105   $14,206   $19,043 
Average number of owned vessels   17.5    18.0    18.6 
Average number of vessels chartered-in under operating leases   6.9    6.9    7.2 
Number of revenue days   8,662    8,891    9,012 
Number of ship-operating days:               
Owned vessels   6,378    6,588    6,782 
Vessels bareboat chartered-in under operating leases   1,093    1,098    1,095 
Vessels time chartered-in under operating leases   1,408    1,433    1,530 

 

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International Seaways, Inc.  

 

  

The following table provides a breakdown of TCE rates achieved for the years ended December 31, 2017, 2016 and 2015 between spot and fixed earnings and the related revenue days. The information is based, in part, on information provided by the commercial pools in which certain of the segment’s vessels participate and excludes revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies.

 

   2017   2016   2015 
   Spot   Fixed   Spot   Fixed   Spot   Fixed 
   Earnings   Earnings   Earnings   Earnings   Earnings   Earnings 
LR2                              
Average rate  $13,813   $-   $21,153   $-   $32,075   $- 
Revenue days   364    -    365    -    365    - 
LR1                              
Average rate  $12,871   $17,040   $20,599   $21,107   $27,465   $17,337 
Revenue days   808    615    361    1,029    327    929 
MR                              
Average rate  $11,001   $5,342   $13,107   $11,309   $19,490   $7,004 
Revenue days   6,496    366    6,431    705    6,949    442 

 

During 2017, TCE revenues for the International Product Carriers segment decreased by $30,131, or 24%, to $96,183 from $126,314 in 2016. This resulted primarily from declining average daily blended rates earned in all Product Carrier fleet sectors, which accounted for $27,625 of the overall decrease. A 230-day decrease in revenue days in the segment also contributed approximately $2,506 of the overall decrease. The decline in revenue days was driven by the Company’s sale of a 2001-built MR, which was delivered to buyers in August 2017, and a 2004-built MR, which was delivered to buyers in November 2017.

 

Vessel expenses decreased by $4,512 to $54,100 in 2017 from $58,612 in 2016. The two MRs sold during 2017 had an aggregate vessel expense reduction of $1,841 year-over-year. The remaining decline is principally attributable to a $2,991 favorable variance in net insurance claim deductible costs in the segment in the current year. Charter hire expenses increased by $371 to $28,050 in 2017 from $27,679 in 2016, reflecting an increase in the daily charter hire rates for the Company’s bareboat chartered-in MR fleet, which was effective beginning in the fourth quarter of 2016, partially offset by decreases in the daily charter hire rates for the Company’s time chartered-in MR fleet which were effective beginning in the third quarter of 2017. Depreciation and amortization decreased by $4,278 to $22,418 in 2017 from $26,696 in 2016. Such decrease reflects (i) the impact of reductions in vessel bases that resulted from impairment charges on nine vessels recorded in the third and fourth quarters of 2016 and two vessels in the third quarter of 2017, and (ii) the sale of the two MRs during 2017 discussed above.

 

During 2016, TCE revenues for the International Product Carriers segment decreased by $45,294, or 26%, to $126,314 from $171,608 in 2015. This decrease resulted primarily from a year-over-year decrease in average daily blended rates earned by the MR fleet, which accounted for $41,291 of the total decrease, and a 255-day decrease in MR fleet revenue days, which accounted for $4,667 of the total decrease. The reduction in revenue days was driven by the sale of a 1998-built MR in July 2015 as well as the redelivery of an MR to its owners at the expiry of its time charter in March 2015.

 

Depreciation and amortization decreased by $2,067 to $26,696 in 2016 from $28,763 in 2015, principally due to the impact of reductions in vessel bases that resulted from impairment charges on two vessels in the segment recorded in the third quarter of 2016, and the MR sale in 2015 discussed above.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

During 2017, general and administrative expenses decreased by $6,882 to $24,736 from $31,618 in 2016. This decrease reflects declines of approximately $3,253 in compensation and benefits related costs and $2,328 in legal, accounting, consulting and other overhead expenses. Such reductions resulted from the Company streamlining its structure in conjunction with its spin-off from OSG. Foreign exchange gains principally related to operations in the United Kingdom also contributed to the decrease as the Company had currency translation gains of $798 in 2017 as compared to currency translation losses of $502 in 2016.

 

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International Seaways, Inc.  

 

  

During 2016, general and administrative expenses decreased by $9,898 to $31,618 from $41,516 in 2015. The decrease was principally attributable to an approximately $11,300 decrease in non-compensation and benefits related overhead costs incurred and allocated by OSG to INSW during the 11-month period ended November 30, 2016 that INSW was included as a part of consolidated OSG compared with 2015. Such decrease reflected lower accounting, legal and consulting fees incurred in the 2016 period. Further contributing to the decrease was an approximately $2,200 decline in the annual incentive bonus expense in 2016. Certain individuals that departed OSG in conjunction with the spin-off of INSW did not receive an annual incentive bonus for 2016, and instead received severance payments in accordance with their respective employment agreements. Partially offsetting the above reductions was a $2,262 net increase in accounting, consulting and legal fees incurred directly by the Company in 2016, along with an increase in foreign exchange losses in 2016 of $473 and the inclusion in the 2015 period of approximately $604 in insurance premium credits.

 

SEPARATION AND TRANSITION COSTS

 

On November 30, 2016, INSW entered into a separation and distribution agreement (the “Separation and Distribution Agreement”) with OSG, which among other things, (i) governed the transfer of assets and liabilities between both entities, (ii) terminated all intercompany arrangements between INSW and OSG except for specified agreements and arrangements, (iii) contained terms and conditions that generally required INSW and OSG to use commercially reasonable efforts to consummate the transactions contemplated by the Separation and Distribution Agreement and the ancillary agreements, (iv) released certain claims between the parties and their affiliates, successors and assigns, (v) contained mutual indemnification provisions and (vi) allocated expenses of the spin-off between the parties. Following the true up of final separation costs between INSW and OSG, income of $64 was recognized during the year ended December 31, 2017, in conjunction with the Separation and Distribution Agreement.

 

During the year ended December 31, 2016, spin-off related expenses incurred by INSW pursuant to the Separation and Distribution Agreement aggregated $9,043. Approximately $3,337 of these costs represented INSW’s allocated share of severance costs for certain individuals that departed OSG in conjunction with the spin-off of INSW.

 

INSW and OSG also entered into a transition services agreement (the “TSA” or “Transition Services Agreement”) pursuant to which both parties agreed to provide each other with specified services for a limited time to help ensure an orderly transition following the Distribution. The Transition Services Agreement specifies the calculation of the costs for these services. Pursuant to the terms of the agreement, OSG provided certain administrative services, including administrative support services related to benefit plans, human resources and legal services, for a transitional period after the spin-off. Similarly, INSW agreed to provide certain limited transition services to OSG, including services relating to accounting activities and information and data provision services. The Transition Services Agreement terminated on June 30, 2017.

 

During the years ended December 31, 2017 and 2016, INSW earned fees totaling $63 and $27, respectively for services provided to OSG pursuant to the terms of the Transition Services Agreement. During the years ended December 31, 2017 and 2016, INSW also incurred fees totaling $731 and $31, respectively, for services received from OSG, including INSW’s share of the compensation costs of former OSG corporate employees providing services to one or both companies during the defined transitional period, which ended on June 30, 2017.

 

EQUITY IN INCOME OF AFFILIATED COMPANIES

 

During 2017, equity in income of affiliated companies increased by $32,117 to $48,966 from $16,849 in 2016. This increase was principally attributable to increases in earnings from the two FSO joint ventures and the LNG joint venture of $28,562 and $3,123, respectively. The increase in earnings from the Company’s FSO joint ventures is primarily due to the fact that there was no current year impairment of the Company’s investments in the joint ventures compared to a $30,475 impairment charge recognized in 2016. In addition, the increase in earnings from the FSO joint ventures in 2017 also reflects (i) lower depreciation expense in the current period as a result of decreases in the Company’s bases in the FSO joint ventures following the aforementioned impairment charges recorded in relation to our investments in the fourth quarter of 2016 and (ii) lower interest expense associated with the interest rate swap covering the FSO Africa’s original debt and outstanding debt principal amounts on the FSO Asia which were paid off in July 2017. These expense reductions more than offset the impact of a reduction in revenues of $5,704, attributable to the commencement of the new service contracts described below. The increase in earnings from the LNG joint venture was primarily driven by reimbursements received from the joint venture’s charterer for drydock expenditures incurred in prior years and lower interest expense resulting from a decrease in outstanding debt principal amounts in the current period.

 

During 2016, equity in income of affiliated companies decreased by $28,710 to $16,849 from $45,559 in 2015. This decrease reflected impairment charges of $30,475 recorded in 2016 in relation to the Company’s investment in the FSO joint ventures. Partially offsetting such decrease was a $1,829 increase in earnings from the FSO joint ventures resulting from lower interest expense associated with changes in the mark-to-market valuation of the interest rate swap covering the FSO Africa’s original debt and lower outstanding debt principal amounts. The increased earnings generated by the FSO joint ventures, also reflected in part, scheduled increases in charter out rates and lower vessel operating expenses.

 

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International Seaways, Inc.  

 

  

Revenue generated by the FSO joint ventures for the future years is expected to be lower than revenue generated during 2017, as charter rates in the five-year service contracts with NOC, which commenced in the third quarter of 2017, are lower than the charter rates included in the service contracts under which the FSO joint ventures operated previously.

 

Overall, over the term of the five-year service contracts with NOC described above, the FSO joint ventures are expected to generate in excess of $180,000 of EBITDA for the Company.

 

OTHER INCOME(EXPENSE)

 

Other expense was $6,344 for the year ended December 31, 2017 compared with $966 for the year ended December 31, 2016. The current period expense consists primarily of the write-off of $7,020 in unamortized original issue discount and deferred financing costs associated with the INSW Facilities, which were treated as partial extinguishments. Such charges were partially offset by interest income on cash balances and insurance claim recoveries. Similarly, the prior period expense included a net loss of $1,342 realized on the repurchases and mandatory prepayments of the INSW Term Loan during 2016, which included a $5,097 write-off of unamortized original issue discount and deferred financing costs associated with such principal reductions, which were treated as partial extinguishments, net of $3,755 discount on repurchase of debt.

 

INTEREST EXPENSE

 

The components of interest expense are as follows: 

 

   2017   2016   2015 
Interest before impact of interest rate caps  $40,307   $38,959   $42,970 
Impact of interest rate caps   131    517    - 
Interest expense  $40,438   $39,476   $42,970 

 

Interest expense was $40,438 in 2017, compared with $39,476 in 2016. Interest expense for the year ended December 31, 2017 is higher than interest expense for the year ended December 31, 2016 primarily due to the higher average interest rates and outstanding principal balances under the 2017 Debt Facilities, which replaced the INSW Facilities in June 2017. This was partially offset by lower amortization of deferred finance costs in the 2017 period aggregating $220 attributable to costs incurred to amend the INSW Facilities in 2016 and costs related to the 2017 Debt Facilities. Refer to Note 8, “Debt,” in the accompanying consolidated financial statements for additional information.

 

Interest expense was $39,476 in 2016 compared with $42,970 in 2015. The decrease in interest expense reflected the impact of the Company’s repurchases and prepayments of $152,754 in aggregate principal amount of the INSW Term Loan in 2016.

 

INCOME TAX EXPENSE

 

The provisions for income taxes for the years ended December 31, 2017, 2016 and 2015 were $44, $440 and $140, respectively, resulting from operations in certain foreign jurisdictions which are subject to income tax.

 

If we do not qualify for an exemption pursuant to Section 883, or the “Section 883 exemption,” of the U.S. Internal Revenue Code of 1986, as amended, or the “Code,” then we will be subject to U.S. federal income tax on our shipping income that is derived from U.S. sources. If we are subject to such tax, our results of operations and cash flows would be reduced by the amount of such tax. We qualified for the Section 883 exemption for the tax year ended December 31, 2017. We will qualify for the Section 883 exemption for 2018 and forward if, among other things, (i) our common shares are treated as primarily and regularly traded on an established securities market in the United States or another qualified country (“publicly traded test”), or (ii) we satisfy one of two other ownership tests. Under applicable U.S. Treasury Regulations, the publicly traded test will not be satisfied in any taxable year in which persons who directly, indirectly or constructively own five percent or more of our common shares (sometimes referred to as “5% shareholders”) own 50% or more of the vote and value of our common shares for more than half the days in such year, unless an exception applies. We can provide no assurance that ownership of our common shares by 5% shareholders will allow us to qualify for the Section 883 exemption in future taxable years. If we do not qualify for the Section 883 exemption, our gross shipping income derived from U.S. sources, i.e., 50% of our gross shipping income attributable to transportation beginning or ending in the United States (but not both beginning and ending in the United States), generally would be subject to a four percent tax without allowance for deductions.

 

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International Seaways, Inc.  

 

  

EBITDA and Adjusted EBITDA

 

EBITDA represents net income/(loss) before interest expense, income taxes and depreciation and amortization expense. Adjusted EBITDA consists of EBITDA adjusted for the impact of certain items that we do not consider indicative of our ongoing operating performance. EBITDA and Adjusted EBITDA are presented to provide investors with meaningful additional information that management uses to monitor ongoing operating results and evaluate trends over comparative periods. EBITDA and Adjusted EBITDA do not represent, and should not be considered a substitute for, net income or cash flows from operations determined in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results reported under GAAP. Some of the limitations are:

·EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
·EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and
·EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt.

 

While EBITDA and Adjusted EBITDA are frequently used by companies as a measure of operating results and performance, neither of those items as prepared by the Company is necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

 

The following table reconciles net (loss)/income, as reflected in the consolidated statements of operations set forth in Item 8, “Financial Statements and Supplementary Data,” to EBITDA and Adjusted EBITDA:

 

For the year ended December 31,  2017   2016   2015 
Net (loss)/income  $(106,088)  $(18,223)  $173,170 
Income tax provision   44    440    140 
Interest expense   40,438    39,476    42,970 
Depreciation and amortization   78,853    79,885    81,653 
EBITDA   13,247    101,578    297,933 
Third-party debt modification fees and costs associated with repurchase of debt   9,240    225    - 
Separation and transition costs   604    9,043    - 
Technical management transition costs   -    -    39 
Loss/(gain) on disposal of vessels and other property, including impairments   86,855    79,203    (4,459)
Impairment of equity method investments   -    30,475    - 
Write-off of deferred financing costs   7,020    5,097    - 
Discount on repurchase of debt   -    (3,755)   - 
Reorganization items, net   -    131    5,659 
Adjusted EBITDA  $116,966   $221,997   $299,172 

 

EFFECTS OF INFLATION

 

The Company does not believe that inflation has had or is likely, in the foreseeable future, to have a significant impact on vessel operating expenses, drydocking expenses and general and administrative expenses.

 

LIQUIDITY AND SOURCES OF CAPITAL

 

Our business is capital intensive. Our ability to successfully implement our strategy is dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business to meet near-term and long-term debt repayment obligations is dependent on maintaining sufficient liquidity.

 

46  
International Seaways, Inc.  

 

 

Liquidity

 

Working capital at December 31, 2017 was approximately $85,000 compared with $126,000 at December 31, 2016. Current assets are highly liquid, consisting principally of cash, interest-bearing deposits and receivables. The Company’s total cash decreased by approximately $32,000 during 2017. This decrease reflects $4,983 in scheduled quarterly amortization of the INSW Term Loan and 2017 Term Loan Facility and the repayment of the $458,416 remaining principal balance of the INSW Term Loan as of June 22, 2017. In addition, $173,535 in cash was used for vessel acquisitions and betterments, $3,825 in cash was used in operating activities and $3,177 in cash was used in repurchases of the Company’s common stock. Such cash outflows were partially offset by proceeds from the issuance of the 2017 Debt Facilities (described below), net of issuance and deferred financing costs, of $534,933, net proceeds from drawdown and repayment activity under the 2017 Revolver Facility (described below) of $30,000, net distributions received from affiliated companies of $40,750 and net proceeds of $18,344 from the sales of a 2001-built and a 2004-built MR.

 

As of December 31, 2017, we had total liquidity on a consolidated basis of $90,606 comprised of $70,606 of cash (including $10,579 of restricted cash) and $20,000 of remaining undrawn revolver capacity. Our cash and cash equivalents balances generally exceed Federal Deposit Insurance Corporation insured limits. We place our cash and cash equivalents in what we believe to be credit-worthy financial institutions. In addition, certain of our money market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. government or its agencies, floating rate and variable demand notes of U.S. and foreign corporations, commercial paper rated in the highest category by Moody’s Investor Services and Standard & Poor’s, certificates of deposit and time deposits, and repurchase agreements.

 

Restricted cash of $10,579 as of December 31, 2017 represents legally restricted cash relating to the 2017 Debt Facilities. The 2017 Debt Facilities stipulate that if annual aggregate cash proceeds of INSW asset sales exceed $5,000, cash proceeds from each such sale are required to be reinvested in vessels within twelve months of such sale or be used to prepay the principal balance outstanding of the INSW Facilities. Restricted cash increased to $28,509 in February 2018 following the sale of a 2002-built MR and a 2004-built MR.

 

As of December 31, 2017, we had total debt outstanding (net of original issue discount and deferred financing costs) of $552,937 and a total debt to total capitalization of 33.7%, which compares with 26.6% at December 31, 2016. Our debt profile reflects actions taken during 2017 (discussed further below) as well as minimal required principal amortization.

 

Sources, Uses and Management of Capital

 

Net cash used in operating activities in the year ended December 31, 2017 was $3,825. In addition to future operating cash flows, our other current sources of funds are proceeds from issuances of equity securities, additional borrowings as permitted under our loan agreements and proceeds from the opportunistic sales of our vessels. As described in Note 8, “Debt,” in the accompanying consolidated financial statements, in June 2017 INSW, along with its wholly owned subsidiary, International Seaways Operating Corporation (the “Administrative Borrower” or “ISOC”) and certain of its subsidiaries entered into secured debt facilities with a syndicate of lenders party thereto, consisting of (i) a revolving credit facility of $50,000 and (ii) a term loan of $500,000 containing an accordion feature whereby the 2017 Term Loan Facility could be increased up to an additional $50,000 subject to certain conditions. The 2017 Term Loan Facility matures on June 22, 2022, and the 2017 Revolver Facility matures on December 22, 2021. The maturity dates for the 2017 Debt Facilities are subject to acceleration upon the occurrence of certain events (as described in the credit agreement). This refinancing extended the maturity of the Company’s debt facilities by approximately three years and provided the Company with certain structural benefits as well.

 

On June 22, 2017, the 2017 Term Loan Facility was drawn and the proceeds therefrom were used to repay the $458,416 outstanding balance under the INSW Facilities and to pay certain expenses related to the refinancing. The remaining proceeds were used for general corporate purposes, including fleet renewal and growth.

 

On July 19, 2017, the Company drew down $50,000 under the 2017 Revolver Facility, and on July 24, 2017, the Company entered into an amendment of the 2017 Debt Facilities to effect the increase of the 2017 Term Loan Facility by $50,000, pursuant to the accordion feature described above. Except as related to such increase, no other terms of the 2017 Debt Facilities were amended. The net proceeds from such borrowings were used in part to finance the purchase of two 2017-built Suezmax tankers that were delivered to the Company in July 2017. On August 18, 2017, the outstanding balance under the 2017 Revolver Facility was repaid in full using cash on hand and proceeds of the 2001-built MR described above.

 

We financed the purchase of the 2010-built VLCC, which was delivered in November 2017, through a combination of cash-on-hand and a $30,000 draw on the 2017 Revolver Facility.

 

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International Seaways, Inc.  

 

  

Our current uses of funds are to fund working capital requirements, maintain the quality of our vessels, purchase vessels, comply with international shipping standards and environmental laws and regulations, repurchase our outstanding shares and repay or repurchase our outstanding loan facilities. Fifty percent of Excess Cash Flow (as defined in the 2017 Debt Facilities credit agreement) must be used to prepay the outstanding principal balance of 2017 Term Loan Facility. To the extent permitted under the terms of the 2017 Debt Facilities we may also use cash generated by operations to finance capital expenditures to modernize and grow our fleet.

 

As set forth in the 2017 Debt Facilities credit agreement, the 2017 Debt Facilities contain certain restrictions relating to new borrowings and INSW’s ability to receive cash dividends, loans or advances from ISOC and its subsidiaries that are Restricted Subsidiaries. As of December 31, 2017, the permitted cash dividends that can be distributed to INSW by ISOC under the 2017 Term Loan Facility was $15,000.

 

Outlook

 

We believe the actions we have taken have strengthened our balance sheet as well as increased our flexibility to actively pursue fleet renewal or potential strategic opportunities that may arise within the diverse sectors in which we operate and at the same time positioned us to continue to generate sufficient cash to support our operations over the next twelve months ending December 31, 2018. Our balanced fleet deployment and a moderate level of predictable cash flows from our joint ventures and contracted fixed-rate charters will enable the Company to both optimize revenue through the current tanker market cycle and benefit from a market recovery in both the product and crude tanker sectors. We or our subsidiaries may in the future complete additional transactions consistent with achieving the objectives of our business plan.

 

In December 2017, the Company entered into a binding letter of intent to acquire the holding companies for six 300,000 DWT VLCCs with an average age of 1.7 years from Euronav in connection with the closing of Euronav’s announced acquisition of Gener8 Maritime, Inc. (“GNRT”). The $434,000 transaction (inclusive of assumed debt) is subject to a number of closing conditions, including (i) consummation of Euronav’s announced acquisition of GNRT, (ii) amendment of the Company’s existing credit facility as required to consummate the transaction, (iii) the Company’s receipt of financing necessary to consummate the transaction, (iv) completion of the Company’s due diligence to its reasonable satisfaction, (v) execution of a definitive stock purchase agreement and (vi) receipt of all required third-party consents, third-party approvals and regulatory approvals. The transaction is expected to close in the second quarter of 2018. Either party is permitted to terminate the LOI on or after March 31, 2018 if the parties have not entered into a definitive stock purchase agreement by such date and the party terminating the LOI is not otherwise in breach thereof. INSW intends to fund the transaction with a combination of available liquidity, the assumption of all or part of the debt (that is currently secured by the vessels) with an expected March 31, 2018 outstanding balance of $311,000, maturing between 2027 and 2028 and carrying a fixed annual interest rate of LIBOR plus 2.0% and other financing sources such as the proceeds from the financing of the 2010-built VLCC acquired in November 2017, as permitted under the Company’s existing term loan, and the sale and leaseback of two modern Aframax vessels.

 

Carrying Value of Vessels

 

All except one of the Company’s owned vessels are pledged as collateral under the INSW Facilities. The following table presents information with respect to the carrying amount of the Company’s vessels by type and indicates whether their fair market values, which are estimated by taking an average of two third-party vessel appraisals, are below their carrying values as of December 31, 2017. The carrying value of each of the Company’s vessels does not necessarily represent its fair market value or the amount that could be obtained if the vessel were sold. The Company’s estimates of market values for its vessels assume that the vessels are all in good and seaworthy condition without need for repair and, if inspected, would be certified as being in class without notations. In addition, because vessel values are highly volatile, these estimates may not be indicative of either the current or future prices that the Company could achieve if it were to sell any of the vessels. The Company would not record a loss for any of the vessels for which the fair market value is below its carrying value unless and until the Company either determines to sell the vessel for a loss or determines that the vessel is impaired as discussed below in “— Critical Accounting Policies — Vessel Impairment.” The Company believes that the future undiscounted cash flows expected to be earned over the estimated remaining useful lives for those vessels that have experienced declines in market values below their carrying values would exceed such vessels’ carrying values.

 

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International Seaways, Inc.  

 

  

Footnotes to the following table exclude those vessels with an estimated market value in excess of their carrying value.

 

As of December 31, 2017            
Vessel Type  Average
Vessel Age
(weighted by
dwt)
   Number of
Owned
Vessels
   Carrying
Value
 
             
Crude Tankers               
VLCC (includes ULCC)   12.5    10   $453,914 
Suezmax   0.4    2    115,438 
Aframax   12.6    7    146,082 
Panamax   15.3    8    60,582 
Total Crude Tankers(1)   12.1    27   $776,016 
                
Product Carriers               
LR2   3.4    1   $64,376 
LR1   9.0    4    93,054 
MR   11.5    10    168,827 
Total Product Carriers(2)   9.6    15   $326,257 

 

(1)As of December 31, 2017, the Crude Tankers segment includes vessels with an aggregate carrying value of $581,461, which the Company believes exceeds their aggregate market value of approximately $459,000 by $122,461.
(2)As of December 31, 2017, the Product Carriers segment includes vessels with an aggregate carrying value of $281,383, which the Company believes exceeds their aggregate market value of approximately $209,375 by $72,008. This excludes a 2002-built MR which was held for sale as of December 31, 2017 and delivered to its buyer in January 2018.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2017, the LNG Joint Venture had total bank debt outstanding of $597,129 that was nonrecourse to the Company. The FSO Joint Venture’s debt matured in July 2017 and was accordingly repaid, together with all amounts remaining under related interest rate swap agreements, by the FSO Joint Venture.

 

The FSO Joint Venture is a party to a number of contracts: (a) the FSO Joint Venture is an obligor pursuant to a guarantee facility agreement dated as of July 14, 2017, by and among the FSO Joint Venture, ING Belgium NV/SA, as issuing bank, and Euronav and INSW, as guarantors (the ‘‘Guarantee Facility’’); and (b) the FSO Joint Venture is party to two service contracts with NOC (the ‘‘NOC Service Contracts’’).

 

INSW severally guarantees the obligations of the FSO Joint Venture pursuant to the Guarantee Facility and severally guarantees the obligations of the FSO Joint Venture to Maersk Oil Qatar AS (“MOQ”) under the MOQ service contracts, which contracts were novated to NOC in July 2017 (the ‘‘MOQ Guarantee’’) for the period beginning on the novation date and severally guarantees the obligations of the FSO Joint Venture under the NOC Service Contracts. INSW continues the MOQ Guarantee to MOQ for the period ended on the novation date of the service contracts for MOQ, which guarantee will end when Qatari authorities determine that the FSO Joint Venture has paid all Qatari taxes owed by the FSO Joint Venture under such service contracts through the novation date.

 

INSW maintains a guarantee in favor of Qatar Liquefied Gas Company Limited (2) (‘‘LNG Charterer’’) relating to certain LNG Tanker Time Charter Party Agreements with the LNG Charterer and each of Overseas LNG H1 Corporation, Overseas LNG H2 Corporation, Overseas LNG S1 Corporation and Overseas LNG S2 Corporation (such agreements, the ‘‘LNG Charter Party Agreements,’’ and such guarantee, the ‘‘LNG Performance Guarantee’’). INSW will pay QGTC an annual fee of $100 until such time that QGTC ceases to provide a guarantee in favor of the LNG charterer relating to performance under the LNG Charter Party Agreements.

 

OSG continues to provide a guarantee in favor of the LNG Charterer relating to the LNG Charter Party Agreements (such guarantees, the ‘‘OSG LNG Performance Guarantee’’). INSW will indemnify OSG for liabilities arising from the OSG LNG Performance Guarantee pursuant to the terms of the Separation and Distribution Agreement. In connection with the OSG LNG Performance Guarantee, INSW will pay a $125 fee per year to OSG, which will increase to $135 per year in 2018 and will be terminated if OSG ceases to provide the OSG LNG Performance Guarantee.

 

See Note 12, “Related Parties,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data” for additional information.

 

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International Seaways, Inc.  

 

  

In addition and pursuant to an agreement between INSW and the trustees of the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the “Scheme”), INSW guarantees the obligations of OSG Ship Management (UK) Ltd., a subsidiary of INSW, to make payments to the Scheme. See Note 16, “Pension and other postretirement benefit plans,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data,” for additional information.

 

Aggregate Contractual Obligations

 

A summary of the Company’s long-term contractual obligations as of December 31, 2017 follows:

 

                       Beyond     
   2018   2019   2020   2021   2022   2022   Total 
2017 Debt Facilities(1)  $67,425   $65,752   $63,879   $91,680   $454,837   $-   $743,573 
Operating lease obligations (2)                                   
Bareboat Charter-ins   1,841    -    -    -    -    -    1,841 
Time Charter-ins   11,849    -    -    -    -    -    11,849 
Office space   1,249    1,166    1,152    665    -    -    4,232 
Total  $82,364   $66,918   $65,031   $92,345   $454,837   $-   $761,495 

 

(1)Amounts shown include contractual interest obligations of floating rate debt estimated based on the aggregate effective LIBOR rate as of December 31, 2017 of 1.35% and applicable margins of 5.5% and 3.5% for the 2017 Term Loan Facility, due 2022 and the 2017 Revolver Facility due 2021, respectively. Management estimates that no prepayment will be required for the 2017 Term Loan Facility as a result of estimated Excess Cash Flow for the year ended December 31, 2017. Amounts shown for the 2017 Term Loan Facility for years subsequent to 2018 exclude any estimated repayment as a result of Excess Cash Flow.

 

(2)As of December 31, 2017, the Company had charter-in commitments for six vessels on leases that are accounted for as operating leases. Certain of these leases provide the Company with various renewal and purchase options. The future minimum commitments for time charters-in have been reduced to reflect estimated days that the vessels will not be available for employment due to drydock.

 

RISK MANAGEMENT

 

Interest rate risk

 

The Company is exposed to market risk from changes in interest rates, which could impact its results of operations and financial condition. The Company manages this exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. To manage its interest rate risk in a cost-effective manner, the Company, from time to time, enters into interest rate swap or cap agreements, in which it agrees to exchange various combinations of fixed and variable interest rates based on agreed upon notional amounts or to receive payments if floating interest rates rise above a specified cap rate. The Company uses such derivative financial instruments as risk management tools and not for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage exposure to nonperformance on such instruments by the counterparties.

 

In December 2017, INSW entered into an interest rate cap agreement with a forward start date of January 1, 2018 with a major financial institution covering a notional amount of $300,000 to limit the floating interest rate exposure associated with the 2017 Term Loan. The Interest Rate Cap agreement contained no leverage features and had a cap rate of 2.5% through the termination date of December 31, 2020. As of December 31, 2016, the Company was party to a similar interest rate cap agreement in place associated with the INSW Term Loan and such agreement expired on February 5, 2017.

 

Currency and exchange rate risk

 

The shipping industry’s functional currency is the U.S. dollar. All of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurs certain operating expenses, such as vessel and general and administrative expenses, in currencies other than the U.S. Dollar, and the foreign exchange risk associated with these operating expenses is immaterial. If foreign exchange risk becomes material in the future, the Company may seek to reduce its 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.

 

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International Seaways, Inc.  

 

  

Fuel price volatility risk

 

Historically, the Company managed its exposure to future increases in fuel prices in the normal course of its business by entering into standalone bunker swaps. The Company’s deployment of most of its conventional tanker fleet in commercial pools and time charters currently limits the Company’s direct exposure to fluctuations in fuel prices as a component of voyage expenses.

 

INTEREST RATE SENSITIVITY

 

The following table presents information about the Company’s financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents the principal cash flows and related weighted average interest rates by expected maturity dates of the Company’s debt obligations.

 

Principal (Notional) Amount (dollars in millions) by Expected Maturity and Average Interest (Swap) Rate

 

                           Fair Value at 
                   Beyond       Dec. 31, 
At December 31, 2017  2018   2019   2020   2021   2021   Total   2017 
Liabilities                                   
Debt                                   
Variable rate debt  $24.1   $27.5   $27.5   $57.5   $440.0   $576.6   $580.9 
Average interest rate   6.95%   6.95%   6.95%   5.91%   6.95%          

 

As of December 31, 2017, the Company had a secured term loan (2017 Term Loan) and a revolving credit facility (2017 Revolver Facility) under which borrowings bear interest at a rate based on LIBOR, plus the applicable margin, as stated in the respective loan agreements. There was $30,000 outstanding under the 2017 Revolver Facility as of December 31, 2017.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments, and opinions of management. Following is a discussion of the accounting policies that involve a higher degree of judgment and the methods of their application. For a description of all of the Company’s material accounting policies, see Note 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data.”

 

Revenue Recognition

 

The Company generates a majority of its revenue from voyage charters, including vessels in pools that predominantly perform voyage charters. Within the shipping industry, there are two methods used to account for voyage charter revenue: (1) ratably over the estimated length of each voyage and (2) completed voyage. The recognition of voyage revenues ratably over the estimated length of each voyage is the most prevalent method of accounting for voyage revenues in the shipping industry and the method used by the Company. Under each method, voyages may be calculated on either a load-to-load or discharge-to-discharge basis. In applying its revenue recognition method, management believes that the discharge-to-discharge basis of calculating voyages more accurately estimates voyage results than the load-to-load basis. Since, at the time of discharge, management generally knows the next load port and expected discharge port, the discharge-to-discharge calculation of voyage revenues can be estimated with a greater degree of accuracy. The Company does not begin recognizing voyage revenue until a charter has been agreed to by both the Company and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage, because it is at this time an obligation to perform is established, the charter rate is determinable for the specified load and discharge ports and collectability is reasonably assured.

 

Revenues from time charters and bareboat charters are accounted for as operating leases and are thus recognized ratably over the rental periods of such charters, as service is performed. The Company does not recognize time charter revenues during periods that vessels are off hire.

  

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International Seaways, Inc.  

 

  

For the Company’s vessels operating in Commercial Pools, revenues and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent basis in accordance with an agreed-upon formula. The formulas in the pool agreements for allocating gross shipping revenues net of voyage expenses are based on points allocated to participants’ vessels based on cargo carrying capacity and other technical characteristics, such as speed and fuel consumption. The selection of charterers, negotiation of rates and collection of related receivables and the payment of voyage expenses are the responsibility of the pools. The pools may enter into contracts that earn either voyage charter revenue or time charter revenue. Each of the pools follows the same revenue recognition principles, as applied by the Company, in determining shipping revenues and voyage expenses, including recognizing revenue only after a charter has been agreed to by both the pool and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage.

 

For the pools in which the Company participates, management monitors, among other things, the relative proportion of the Company’s vessels operating in each of the pools to the total number of vessels in each of the respective pools and assesses whether or not the Company’s participation interest in each of the pools is sufficiently significant so as to determine that the Company has effective control of the pool.

 

The adoption of ASC 606, Revenue from Contracts with Customers, in the first quarter of 2018 will not materially change the Company’s current revenue recognition for time charters, bareboat charters and commercial pool arrangements. However, revenue recognition for voyage charters will most likely change depending on whether such charters are determined to be service only contracts or operating leases. Such determination will require management to exercise a significant level of judgment when evaluating the specific terms and conditions of a charter agreement. Refer to Note 2, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements for additional discussion of the impact of the adoption of the new revenue recognition standard.

 

Vessel Lives and Salvage Values

 

The carrying value of each of the Company’s vessels represents its original cost at the time it was delivered or purchased less depreciation calculated using an estimated useful life of 25 years (except for FSO service vessels for which estimated useful lives of 30 years are used and LNG Carriers for which estimated useful lives of 35 years are used) from the date such vessel was originally delivered from the shipyard. A vessel’s carrying value is reduced to its new cost basis (i.e. its current fair value) if a vessel impairment charge is recorded.

 

If the estimated economic lives assigned to the Company’s vessels prove to be too long because of new regulations, an extended period of weak markets, the broad imposition of age restrictions by the Company’s customers, or other future events, it could result in higher depreciation expense and impairment losses in future periods related to a reduction in the useful lives of any affected vessels. Company management estimates the scrap value of all of its vessels to be $300 per lightweight ton. The Company’s assumptions used in the determination of estimated salvage value take into account current scrap prices, the historic pattern of annual average scrap rates over the five years ended December 31, 2017, which ranged from $235 to $495 per lightweight ton, estimated changes in future market demand for scrap steel and estimated future demand for vessels. Scrap prices also fluctuate depending upon type of ship, bunkers on board, spares on board and delivery range. Market conditions that could influence the volume and pricing of scrapping activity in 2018 and beyond include the combined impact of scheduled newbuild deliveries and charter rate expectations for vessels potentially facing age restrictions imposed by oil majors as well as the impact of ballast water treatment systems regulatory requirements and requirements for the use of low sulphur fuels. These factors will influence owners’ decisions to accelerate the disposal of older vessels, especially those with upcoming special surveys.

 

Although management believes that the assumptions used to determine the scrap rate for its International Flag vessels are reasonable and appropriate, such assumptions are highly subjective, in part, because of the cyclicality of the nature of future demand for scrap steel.

 

Vessel Impairment

 

The carrying values of the Company’s vessels may not represent their fair market value or the amount that could be obtained by selling the vessel at any point in time since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically, both charter rates and vessel values tend to be cyclical. Management evaluates the carrying amounts of vessels held and used by the Company for impairment only when it determines that it will sell a vessel or when events or changes in circumstances occur that cause management to believe that future cash flows for any individual vessel will be less than its carrying value. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the individual vessel level as separately identifiable cash flow information for each vessel is available.

 

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International Seaways, Inc.  

 

  

In developing estimates of future cash flows, the Company must make assumptions about future performance, with significant assumptions being related to charter rates, ship operating expenses, utilization, drydocking requirements, residual value and the estimated remaining useful lives of the vessels. These assumptions are based on historical trends as well as future expectations. Specifically, in estimating future charter rates, management takes into consideration rates currently in effect for existing time charters and estimated daily time charter equivalent rates for each vessel class for the unfixed days over the estimated remaining lives of each of the vessels. The estimated daily time charter equivalent rates used for unfixed days are based on a combination of (i) internally forecasted rates that are consistent with forecasts provided to the Company’s senior management and Board of Directors, and (ii) the trailing 12-year historical average rates, based on monthly average rates published by a third party maritime research service. The internally forecasted rates are based on management’s evaluation of current economic data and trends in the shipping and oil and gas industries. Management uses the published 12-year historical average rates in its assumptions because it is management’s belief that the 12-year period captures a distribution of strong and weak charter rate periods, which results in the use of an average mid-cycle rate that is more in line with management’s forecast of a return to mid-cycle charter rate levels in the medium term. Recognizing that the transportation of crude oil and petroleum products is cyclical and subject to significant volatility based on factors beyond the Company’s control, management believes the use of estimates based on the combination of internally forecasted rates and 12-year historical average rates calculated as of the reporting date to be reasonable.

 

Estimated outflows for operating expenses and drydocking requirements are based on historical and budgeted costs and are adjusted for assumed inflation. Utilization is based on historical levels achieved and estimates of a residual value for recyclings are based upon published 12-year historical data or the pattern of scrap rates used in management’s evaluation of salvage value for purposes of recording depreciation. Finally, for vessels that are being considered for disposal before the end of their respective useful lives, the Company utilizes weighted probabilities assigned to the possible outcomes for such vessels being sold or scraped before the end of their respective useful lives.

 

The determination of fair value is highly judgmental. In estimating the fair value of INSW’s vessels for purposes of Step 2 of the impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals and discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company uses a methodology consistent with the methodology discussed above in relation to the undiscounted cash flow models prepared by the Company, and discounts the cash flows using its current estimate of INSW’s weighted average cost of capital, which ranged from 9.0% to 9.5% over the three years ended December 31, 2017.

 

The more significant factors that could impact management’s assumptions regarding time charter equivalent rates include (i) loss or reduction in business from significant customers, (ii) unanticipated changes in demand for transportation of crude oil and petroleum products, (iii) changes in production of or demand for oil and petroleum products, generally or in particular regions, (iv) greater than anticipated levels of tanker newbuilding orders or lower than anticipated levels of tanker scrappings, and (v) changes in rules and regulations applicable to the tanker industry, including legislation adopted by international organizations such as IMO and the EU or by individual countries. 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.

 

2017 Impairment Evaluation — Management gave consideration to the following events and changes in circumstances in determining whether there were any indicators that the carrying amounts of the vessels in the Company’s fleet were not recoverable as of December 31, 2017. Factors considered included declines in valuations during 2017 for vessels of certain sizes and ages, any negative changes in forecasted near term charter rates, and an increase in the likelihood that the Company will sell certain of its vessels before the end of their estimated useful lives in conjunction with the Company’s fleet renewal program. The Company concluded that the above indicators constituted impairment trigger events for eighteen vessels (one ULCC, one VLCC, six Aframaxes, eight Panamaxes and two LR1s) as of December 31, 2017 and three vessels (one Panamax and two MRs) as of September 30, 2017.

 

In developing estimates of undiscounted future cash flows for performing Step 1 of the impairment tests, the Company utilized the methodology described above. In estimating the fair value of the vessels for the purposes of Step 2 of the impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals, current recycling market data, and discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company used a methodology consistent with the methodology described above and a weighted average cost of capital discount rate of 9.5%. Based on the tests performed, impairment charges totaling $81,062 and $7,346 were recorded on twelve vessels (one ULCC, one VLCC, four Aframaxes and six Panamaxes) at December 31, 2017 and three vessels (one Panamax and two MRs) as of September 30, 2017, respectively to write-down their carrying values to their estimated fair values.

 

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International Seaways, Inc.  

 

  

2016 Impairment Evaluations — The Company had been monitoring the industry wide decline in vessel valuations during 2016 and specifically from June 30, 2016 to September 30, 2016, and September 30, 2016 to December 31, 2016, as well as the decline in forecasted near term charter rates, and concluded that the declines in vessel valuations and in forecasted near term charter rates constituted impairment trigger events for 28 vessels as of September 30, 2016 and 24 vessels as of December 31, 2016. In developing estimates of undiscounted future cash flows for performing Step 1 of the impairment tests, the Company utilized the methodology described above. In estimating the fair value of the vessels for the purposes of Step 2 of the September 30, 2016 impairment tests, the Company developed fair value estimates that utilized a market approach which considered an average of two vessel appraisals. Based on the tests performed, impairment charges totaling $49,640 were recorded on two LR1s, an Aframax and a Panamax to write-down their carrying values to their estimated fair values at September 30, 2016. In estimating the fair values of the vessels for the purposes of Step 2 of the December 31, 2016 impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals and discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company used a methodology consistent with the methodology described above and a weighted average cost of capital discount rate of 9.0%. Based on the tests performed, impairment charges aggregating $29,602 were recorded on one Panamax and seven MRs to write-down their carrying values to their estimated fair values at December 31, 2016.

 

2015 Impairment Evaluation — Management gave consideration as to whether any events and changes in circumstances existed as of December 31, 2015 that could be viewed as indicators that the carrying amounts of the vessels in the Company’s International Flag fleet were not recoverable as of December 31, 2015 and determined there were no such events or changes in circumstances.

 

Impairment of Equity Method Investments

 

When events and circumstances warrant, investments accounted for under the equity method of accounting are evaluated for impairment. If a determination is made that an other-than-temporary impairment exists, the investment should be written down to its fair value in accordance with ASC 820, Fair Value Measurements and Disclosures, which establishes a new cost basis. In December 2016, evidence of an other-than-temporary decline in the fair value of the Company’s investments in its FSO joint ventures below their carrying values was identified by the Company. Specifically, management concluded that the lower charter rate expected over the duration of the recently awarded five-year service contracts commencing in the third quarter of 2017 was negative evidence indicating that the excess of the carrying value of the Company’s investment in these joint ventures over their fair value was other-than-temporary as of December 31, 2016.

 

As the Company determined that other-than-temporary impairments existed in relation to its investments in the FSO joint ventures, impairment charges aggregating $30,475 were recorded to write down the investments to their estimated fair values as of December 31, 2016. Such charges are included in equity in income of affiliated companies in the accompanying consolidated statements of operations. In estimating the fair value of the Company’s investments in the FSO joint ventures as of December 31, 2016, the Company utilized an income approach, by preparing discounted cash flow models since there is a lack of comparable market transactions for the specially built assets held by the joint ventures. In preparing the discounted cash flows models, the Company used a methodology largely consistent with the methodology and assumptions detailed in the “Vessel Impairment” section above, with the exception being that as the assets owned by the joint ventures serve under specific service contracts, the estimated charter rates for periods after the expiry of the existing contracts are based upon management’s internally forecasted rates. The cash flows were discounted using the estimated weighted average cost of capital for each joint venture, which approximated 9.5% and took into consideration country risk, entity size and uncertainty with respect to the cash flows for periods beyond the current charter expiries.

 

Drydocking

 

Within the shipping industry, there are two methods that are used to account for dry dockings: (1) capitalize drydocking costs as incurred (deferral method) and amortize such costs over the period to the next scheduled drydocking, and (2) expense drydocking costs as incurred. Since drydocking cycles typically extend over two and a half years or five years, management uses the deferral method because management believes it provides a better matching of revenues and expenses than the expense-as-incurred method. 

 

Pension Benefits

 

The Company has obligations outstanding under the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the “Scheme”), a defined benefit pension plan maintained by a subsidiary in the U.K., who is the principal employer of the Scheme. The plan has been closed to new entrants and accrual since December 2007. The Company has recorded pension benefit costs based on valuations developed by its actuarial consultants. These valuations are based on key estimates and assumptions, including those related to the discount rates, the rates expected to be earned on investments of plan assets and the life expectancy/mortality of plan participants. The Company is required to consider market conditions in selecting a discount rate that is representative of the rates of return currently available on high-quality fixed income investments. A higher discount rate would result in a lower benefit obligation and a lower rate would result in a higher benefit obligation. The expected rate of return on plan assets is management’s best estimate of expected returns on plan assets. A decrease in the expected rate of return will increase net periodic benefit costs and an increase in the expected rate of return will decrease benefit costs. The mortality assumption is management’s best estimate of the expected duration of future benefit payments at the measurement date. The estimate is based on the specific demographics and other relevant facts and circumstances of the Scheme and considers all relevant information available at the measurement date. Longer life expectancies would result in higher benefit obligations and a decrease in life expectancies would result in lower benefit obligations.

 

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International Seaways, Inc.  

 

  

In determining the benefit obligations at the end of year measurement date, the Company continues to use an equivalent single weighted-average discount rate, at December 31, 2017 (2.40%) and 2016 (2.60%), respectively. Management believes these rates to be appropriate for ongoing plans with a long duration such as Scheme. The Company also assumed a long-term rate of return on the Scheme assets of 3.85% and 3.85% at December 31, 2017 and 2016, respectively, based on the asset mix as of such dates and management’s estimate of the long term rate of return that could be achieved over the remaining duration of the Scheme.

 

Newly Issued Accounting Standards

 

See Note 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data.”

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Risk Management” and “— Interest Rate Sensitivity.”

 

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International Seaways, Inc.  

 

 

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

TABLE OF CONTENTS

 

Years ended December 31, 2017, 2016 and 2015

Page

Consolidated Balance Sheets at December 31, 2017 and 2016 57
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015 58
Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2017, 2016 and 2015 59
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 60
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017, 2016 and 2015 61
Notes to Consolidated Financial Statements 62
Reports of Independent Registered Public Accounting Firms 99

 

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International Seaways, Inc.  

 

  

INTERNATIONAL SEAWAYS, INC.

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31

DOLLARS IN THOUSANDS

 

   December 31,   December 31, 
   2017   2016 
         
ASSETS          
Current Assets:          
Cash and cash equivalents  $60,027   $92,001 
Voyage receivables, including unbilled of $54,701 and $61,416   58,187    66,918 
Other receivables   4,411    5,302 
Inventories   3,270    1,338 
Prepaid expenses and other current assets   5,897    5,350 
Total Current Assets   131,792    170,909 
Restricted cash   10,579    - 
Vessels and other property, less accumulated depreciation   1,104,727    1,100,050 
Vessel held for sale, net   5,108    - 
Deferred drydock expenditures, net   30,528    30,557 
Total Vessels, Deferred Drydock and Other Property   1,140,363    1,130,607 
Investments in and advances to affiliated companies   378,894    358,681 
Other assets   2,856    2,324 
Total Assets  $1,664,484   $1,662,521 
           
LIABILITIES AND EQUITY          
Current Liabilities:          
Accounts payable, accrued expenses and other current liabilities  $22,805   $38,237 
Payable to OSG   367    683 
Current installments of long-term debt   24,063    6,183 
Total Current Liabilities   47,235    45,103 
Long-term debt   528,874    433,468 
Other liabilities   2,721    4,438 
Total Liabilities   578,830    483,009 
           
Commitments and contingencies          
           
Equity:          
Capital - 100,000,000 no par value shares authorized; 29,089,865 and 29,189,454 shares issued and outstanding   1,306,606    1,306,236 
Accumulated deficit   (180,545)   (74,457)
    1,126,061    1,231,779 
Accumulated other comprehensive loss   (40,407)   (52,267)
Total Equity   1,085,654    1,179,512 
Total Liabilities and Equity  $1,664,484   $1,662,521 

 

See notes to consolidated financial statements

 

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INTERNATIONAL SEAWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

   2017   2016   2015 
Shipping Revenues:               
Pool revenues, including $39,572 in 2017, $37,481 in 2016, and $45,372 in 2015 from companies accounted for by the equity method  $177,347   $246,196   $360,218 
Time and bareboat charter revenues   55,106    95,484    52,092 
Voyage charter revenues   57,648    56,639    85,324 
    290,101    398,319    497,634 
                
Operating Expenses:               
Voyage expenses   15,106    13,274    21,844 
Vessel expenses   141,235    141,944    143,925 
Charter hire expenses   41,700    37,411    36,802 
Depreciation and amortization   78,853    79,885    81,653 
General and administrative   24,736    31,618    41,516 
Third-party debt modification fees   9,240    -    - 
Separation and transition costs   604    9,043    - 
Technical management transition costs   -    -    39 
Loss/(gain) on disposal of vessels and other property, including impairments   86,855    79,203    (4,459)
Total operating expenses   398,329    392,378    321,320 
(Loss)/income from vessel operations   (108,228)   5,941    176,314 
Equity in income of affiliated companies   48,966    16,849    45,559 
Operating (loss)/income   (59,262)   22,790    221,873 
Other (expense)/income   (6,344)   (966)   66 
(Loss)/income before interest expense, reorganization items and income taxes   (65,606)   21,824    221,939 
Interest expense   (40,438)   (39,476)   (42,970)
(Loss)/income before reorganization items and income taxes   (106,044)   (17,652)   178,969 
Reorganization items, net   -    (131)   (5,659)
(Loss)/income before income taxes   (106,044)   (17,783)   173,310 
Income tax provision   (44)   (440)   (140)
Net (loss)/income  $(106,088)  $(18,223)  $173,170 
                
Weighted Average Number of Common Shares Outstanding:               
Basic   29,159,440    29,157,992    29,157,387 
Diluted   29,159,440    29,157,992    29,157,387 
                
Per Share Amounts:               
Basic and diluted net (loss)/income per share   (3.64)   (0.62)   5.94 

 

See notes to consolidated financial statements

 

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INTERNATIONAL SEAWAYS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

FOR THE YEARS ENDED DECEMBER 31

DOLLARS IN THOUSANDS

 

   2017   2016   2015 
             
Net (Loss)/Income  $(106,088)  $(18,223)  $173,170 
Other Comprehensive Income, net of tax:               
Net change in unrealized losses on cash flow hedges   11,328    13,129    7,910 
Foreign currency translation adjustment   -    42    (13)
Defined benefit pension and other postretirement benefit plans:               
Net change in unrecognized prior service costs   (31)   294    118 
Net change in unrecognized actuarial losses   563    (1,608)   2,234 
Other Comprehensive Income, net of tax   11,860    11,857    10,249 
Comprehensive (Loss)/Income  $(94,228)  $(6,366)  $183,419 

 

See notes to consolidated financial statements

 

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INTERNATIONAL SEAWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31

DOLLARS IN THOUSANDS

 

   2017   2016   2015 
Cash Flows from Operating Activities:               
Net (loss)/income  $(106,088)  $(18,223)  $173,170 
Items included in net income not affecting cash flows:               
Depreciation and amortization   78,853    79,885    81,653 
Loss on write-down of vessels   88,408    79,242    - 
Amortization of debt discount and other deferred financing costs   6,423    6,643    5,835 
Deferred financing costs write-off   7,020    5,097    - 
Direct and allocated stock compensation, non-cash   3,808    2,841    2,811 
Undistributed earnings of affiliated companies   (49,427)   (17,816)   (38,666)
Allocated reorganization items, non-cash   -    131    5,659 
Other – net   131    517    (41)
Items included in net income related to investing and financing activities:               
Gain on disposal of vessels and other property   (1,553)   (39)   (4,459)
Allocated general and administrative expenses recorded as capital contributions   -    1,146    954 
Discount on repurchase of debt   -    (3,755)   - 
Payments for drydocking   (21,396)   (9,258)   (20,728)
Deferred financing costs paid for loan modification   -    (8,273)   (5,545)
Changes in operating assets and liabilities:               
Decrease in receivables   8,730    8,033    13,398 
(Decrease)/increase in payable to OSG   (316)   (10,667)   5,733 
(Decrease)/increase in deferred revenue   (4,730)   4,421    - 
Net change in inventories, prepaid expenses and other current assets and accounts payable, accrued expense, and other current and long-term liabilities   (13,688)   (3,131)   2,965 
Net cash (used in)/provided by operating activities   (3,825)   116,794    222,739 
Cash Flows from Investing Activities:               
(Increase)/decrease in restricted cash   (10,579)   8,989    61,104 
Expenditures for vessels and vessel improvements   (173,535)   (1,988)   (964)
Proceeds from disposal of vessels and other property   18,344    -    17,058 
Expenditures for other property   (406)   (907)   - 
Investments in and advances to affiliated companies   (731)   (987)   (153)
Repayments of advances from affiliated companies   40,750    18,500    37,500 
Other – net   -    -    (382)
Net cash (used in)/provided by investing activities   (126,157)   23,607    114,163 
Cash Flows from Financing Activities:               
Issuance of debt, net of issuance and deferred financing costs   614,933    -    - 
Payments on debt   (54,983)   (90,065)   (6,284)
Extinguishment of debt   (458,416)   (65,167)   - 
Dividend payments to OSG   -    (202,000)   (200,000)
Repurchases of common stock   (3,177)   -    - 
Cash paid to tax authority upon vesting of stock-based compensation   (349)   (26)   - 
Net cash provided by/(used in) financing activities   98,008    (357,258)   (206,284)
Net (decrease)/increase in cash and cash equivalents   (31,974)   (216,857)   130,618 
Cash and cash equivalents at beginning of year   92,001    308,858    178,240 
Cash and cash equivalents at end of period  $60,027   $92,001   $308,858 

 

See notes to consolidated financial statements

 

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INTERNATIONAL SEAWAYS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

DOLLARS IN THOUSANDS

 

           Accumulated     
           Other     
       Accumulated   Comprehensive     
   Capital   Deficit   Loss   Total 
                 
Balance at January 1, 2015  $1,464,428   $888   $(74,373)  $1,390,943 
Net income   -    173,170    -    173,170 
Other comprehensive income   -    -    10,249    10,249 
Dividend to OSG   (118,523)   (81,477)   -    (200,000)
Capital contribution of OSG, net   9,424    -    -    9,424 
Balance at December 31, 2015   1,355,329    92,581    (64,124)   1,383,786 
Net loss   -    (18,223)   -    (18,223)
Other comprehensive income   -    -    11,857    11,857 
Dividend to OSG   (53,185)   (148,815)   -    (202,000)
Compensation relating to restricted stock awards   40    -    -    40 
Compensation relating to restricted stock units awards   184    -    -    184 
Compensation relating to stock option awards   71    -    -    71 
Capital contribution of OSG, net   3,797    -    -    3,797 
Balance at December 31, 2016   1,306,236    (74,457)   (52,267)   1,179,512 
Net loss   -    (106,088)   -    (106,088)
Other comprehensive income   -    -    11,860    11,860 
Forfeitures of vested restricted stock awards   (261)   -    -    (261)
Compensation relating to restricted stock awards   841    -    -    841 
Compensation relating to restricted stock units awards   2,141    -    -    2,141 
Compensation relating to stock option awards   826    -    -    826 
Repurchase of common stock   (3,177)   -    -    (3,177)
Balance at December 31, 2017  $1,306,606   $(180,545)  $(40,407)  $1,085,654 

 

See notes to consolidated financial statements

 

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International Seaways, Inc.  

 

 

INTERNATIONAL SEAWAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

 

Spin-Off from Overseas Shipholding Group, Inc.

 

On November 30, 2016 (the “Distribution Date”), International Seaways, Inc. (“INSW”), a Marshall Islands corporation, and its wholly owned subsidiaries (the “Company” or “INSW”, or “we” or “us” or “our”), became a public entity as a result of its spin-off (the “Distribution”) from Overseas Shipholding Group, Inc. (“OSG”), a publicly traded company incorporated in Delaware (United States). The spin-off separated OSG and INSW into two distinct businesses with separate management. OSG retained the U.S. Flag business and INSW holds entities and other assets and liabilities that formed OSG’s former International Flag business.

 

On November 30, 2016, we amended and restated our articles of incorporation (“Amended and Restated Articles of Incorporation”). In accordance with the Amended and Restated Articles of Incorporation, immediately prior to the distribution, as described in the following paragraph, the Company effected a stock split of its 102.21 issued and outstanding shares of common stock, which were all owned by OSG, to allow for a prorata dividend of such shares to the holders of OSG common stock and warrants. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 260, Earnings Per Share, the Company adjusted the computations of basic and diluted earnings per share retroactively for all periods presented to reflect that change in its capital structure. Following the distribution our authorized capital stock consisted of 100,000,000 shares of common stock without par value and 10,000,000 shares of preferred stock without par value.

 

The spin-off transaction was in the form of a pro rata dividend of 100% of the common stock of INSW to holders of OSG common stock and warrants. Effective as of 5:00 p.m., New York time, on the Distribution Date (the “Effective Time”), our common stock was distributed, on a pro rata basis, to OSG’s stockholders and warrant holders of record as of 5:00 p.m., New York time, on November 18, 2016 (the “Record Date”). On the Distribution Date, each holder of OSG common stock received 0.3333 shares of our common stock for every share of OSG common stock held on the Record Date. Each holder of OSG warrants received 0.3333 shares of our common stock for every one share of OSG common stock they would have received if they exercised their warrants immediately prior to the Distribution (or 0.063327 INSW shares per warrant), treating such warrants on an as-exercised basis without deduction for the exercise price of such warrants. Fractional shares of our common stock were not distributed in the spin-off. Holders of OSG common stock and warrants received cash in lieu of fractional shares of our common stock. Our common stock began “regular-way” trading on the New York Stock Exchange on December 1, 2016, under the symbol “INSW.”

 

The spin-off was completed pursuant to a separation and distribution agreement (the “Separation and Distribution Agreement”) and several other agreements with OSG related to the spin-off, including a transition services agreement (the “Transition Services Agreement”) and an employee matters agreement (the “Employee Matters Agreement”) dated November 30, 2016. These agreements govern the relationship between us and OSG following the spin-off and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services that were provided by OSG to the Company and by the Company to OSG. See Note 13, “Related Parties,” for additional discussion of the significant agreements with OSG.

 

Nature of the Business

 

The Company is engaged primarily in the ocean transportation of crude oil and petroleum products in international markets. The Company’s business is currently organized into two reportable segments: Crude Tankers and Product Carriers. The crude oil fleet is comprised of most major crude oil vessel classes. The products fleet transports refined petroleum product cargoes from refineries to consuming markets characterized by both long and short-haul routes. Through joint venture partnerships, the Company operates four liquefied natural gas (“LNG”) carriers and two Floating Storage and Offloading (“FSO”) service vessels.

 

As of December 31, 2017, the Company’s operating fleet consisted of 55 vessels, 49 of which were owned (including four LNG carriers and two FSO service vessels in which the Company has joint venture ownership interests), with the remaining vessels chartered-in. Subsequent to December 31, 2017, we delivered a 2002-built and a 2004-built MR to buyers (see Note 5, “Vessels”, to the accompanying consolidated financial statements). Vessels chartered-in may be bareboat charters or time charters. Under either a bareboat charter or time charter, a customer pays a fixed daily or monthly rate for a fixed period of time for use of the vessel. Under a bareboat charter, the customer pays all costs of operating the vessel, including voyage expenses, such as fuel, canal tolls and port charges, and vessel expenses such as crew costs, vessel stores and supplies, lubricating oils, maintenance and repair, insurance and communications associated with operating the vessel. Under a time charter, the customer pays all voyage expenses and the shipowner pays all vessel expenses. The Company’s operating fleet list excludes vessels chartered-in where the duration of the charter was one year or less at inception. The Marshall Islands is the principal flag of registry of the Company’s vessels.

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

 

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International Seaways, Inc.  

 

  

For the eleven-month period ended November 30, 2016 and the years ended December 31, 2015, the accompanying consolidated financial statements include the assets, liabilities, revenues and expenses of the individual entities that comprise the Company carved out from the historical results of operations, cost basis of the assets and liabilities and cash flows of OSG for these entities using both specific identification and allocation consistent with prior periods.

 

For the eleven month period ended November 30, 2016 and the years ended December 31, 2015, the Company functioned as part of the larger group of companies controlled by OSG, and accordingly, OSG performed certain corporate overhead functions for the Company. Therefore, certain costs related to the Company have been allocated from OSG. These allocated costs are primarily related to corporate administrative expenses, reorganization costs and employee related costs, including pensions and other benefits for corporate and shared employees, for the following functional groups: information technology, legal services, accounting and finance services, human resources, marketing and contract support, customer support, treasury and cash management, facility and other corporate and infrastructural services. The costs associated with these services and support functions have been allocated to the Company primarily based on either the proportion of time spent by employees within the above functions on tasks related to or for the benefit of the Company’s entities or the proportion of ship operating days of the Company. Ship operating days are defined as the total number of days vessels are owned or chartered in during a period. A portion of this cost allocation was offset by costs for certain corporate functions held within the Company (including information technology functions) that have historically provided services to OSG and non-INSW subsidiaries of OSG. The net costs allocated for these functions are included in general and administrative expenses, technical management and transition costs, separation and transition costs and reorganization items, net within the consolidated financial statements. The tax provisions for the Company have been provided using a separate tax return methodology.

 

Management believes the assumptions and allocations are reasonable. The expenses and cost allocations have been determined on a basis considered to be a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the periods relative to the total costs incurred by OSG. However, the amounts recorded may not be representative of the amounts that would have been incurred had the Company been an entity that operated independently of OSG. Consequently, these consolidated financial statements may not be indicative of the Company’s future performance and do not necessarily reflect what its consolidated results of operations, financial position and cash flows would have been had the Company operated as a separate entity apart from OSG during the eleven-month period ended November 30, 2016 and the year ended December 31, 2015.

 

Following our spin-off from OSG on November 30, 2016, we now perform functions previously performed by OSG using internal resources and purchased services, some of which were being provided by OSG during a transitional period that ended on June 30, 2017 pursuant to the Transition Services Agreement.

 

All intercompany balances and transactions within the Company have been eliminated. Investments in 50% or less owned affiliated companies, in which the Company exercises significant influence, are accounted for by the equity method.

 

Dollar amounts, except per share amounts are in thousands.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

1.Cash and cash equivalents — Interest-bearing deposits that are highly liquid investments and have a maturity of three months or less when purchased are included in cash and cash equivalents. Restricted cash of $10,579 as of December 31, 2017 represents legally restricted cash relating to the 2017 Debt Facilities (as defined in Note 8, “Debt”). Such restricted cash reserves are included in the non-current assets section of the consolidated balance sheet. The 2017 Debt Facilities stipulate that net cash proceeds of any INSW asset sale or casualty event exceeding $5,000, are restricted and required to be reinvested in fixed or capital assets within twelve months of such sale or casualty event or used to repay the principal balance outstanding on the 2017 Debt Facilities. Activity relating to restricted cash is reflected in investing activities in the consolidated statements of cash flow.

 

2.Concentration of Credit Risk — Financial instruments that potentially subject the Company to concentrations of credit risk are voyage receivables due from charterers and pools in which the Company participates. With respect to voyage receivables, the Company limits its credit risk by performing ongoing credit evaluations. Voyage receivables reflected in the consolidated balance sheets as of December 31, 2017 and 2016 are net of an allowance for doubtful accounts of $108 and $70, respectively. The provisions for doubtful accounts for the years ended December 31, 2017, 2016 and 2015 were not material.

 

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During the three years ended December 31, 2017, the Company did not have any individual customers who accounted for 10% or more of its revenues apart from the pools in which it participates. The pools in which the Company participates accounted for 89% and 90% of consolidated voyage receivables at December 31, 2017 and 2016.

 

3.Inventories —Inventories, which consists principally of fuel, are stated at cost determined on a first-in, first-out basis.

 

4.Vessels, vessel lives, deferred drydocking expenditures and other property —Vessels are recorded at cost and are depreciated to their estimated salvage value on the straight-line basis over the lives of the vessels, which are generally 25 years. Each vessel’s salvage value is equal to the product of its lightweight tonnage and an estimated scrap rate of $300 per ton.

 

Other property, including leasehold improvements, are recorded at cost and amortized on a straight-line basis over the shorter of the terms of the leases or the estimated useful lives of the assets, which range from three to seven years.

 

Interest costs are capitalized to vessels during the period that vessels are under construction, however, no interest was capitalized during 2017, 2016 or 2015. 

 

Expenditures incurred during a drydocking are deferred and amortized on the straight-line basis over the period until the next scheduled drydocking, generally two and a half to five years. The Company only includes in deferred drydocking costs those direct costs that are incurred as part of the drydocking to meet regulatory requirements, or are expenditures that add economic life to the vessel, increase the vessel’s earnings capacity or improve the vessel’s efficiency. Direct costs include shipyard costs as well as the costs of placing the vessel in the shipyard. Expenditures for normal maintenance and repairs, whether incurred as part of the drydocking or not, are expensed as incurred.

 

The carrying value of each of the Company’s vessels represents its original cost at the time it was delivered or purchased less depreciation calculated using estimated useful lives from the date such vessel was originally delivered from the shipyard. A vessel’s carrying value is reduced to its new cost basis (i.e., its current fair value) if a vessel impairment charge is recorded. 

 

5.Impairment of long-lived assets —The carrying amounts of long-lived assets held and used by the Company are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a particular asset may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the asset’s carrying amount. This assessment is made at the individual vessel level since separately identifiable cash flow information for each vessel is available. The impairment charge, if any, would be measured as the amount by which the carrying amount of a vessel exceeded its fair value. If using an income approach in determining the fair value of a vessel, the Company will consider the discounted cash flows resulting from highest and best use of the vessel asset from a market-participant’s perspective. Alternatively, if using a market approach, the Company will obtain third party appraisals of the estimated fair value of the vessel. A long lived asset impairment charge results in a new cost basis being established for the relevant long lived asset. See Note 5, “Vessels,” for further discussion on the impairment tests performed on certain of our vessels during the three years ended December 31, 2017.

 

6.Deferred finance charges —Finance charges, excluding original issue discounts, incurred in the arrangement and /or amendments resulting in the modification of debt are deferred and amortized to interest expense on either an effective interest method or straight-line basis over the life of the related debt. Unamortized deferred finance charges of $1,691 relating to the INSW Revolver Facility (as defined in Note 8, “Debt”) are included in other assets in the consolidated balance sheets as of December 31, 2016. Unamortized deferred finance charges of $23,626 relating to the 2017 Term Loan Facility (as defined in Note 8, “Debt”) and the 2017 Revolver Facility and $19,827 relating to the INSW Term Loan are included in long-term debt on the consolidated balance sheets as of December 31, 2017 and 2016.

 

Interest expense relating to the amortization of deferred financing costs amounted to $5,115 in 2017, $6,449 in 2016 and $5,625 in 2015.

 

7.Revenue and expense recognition —Revenues from time charters and bareboat charters are accounted for as operating leases and are thus recognized ratably over the rental periods of such charters, as service is performed. Voyage revenues and expenses are recognized ratably over the estimated length of each voyage, calculated on a discharge-to-discharge basis and, therefore, are allocated between reporting periods based on the relative transit time in each period. The impact of recognizing voyage expenses ratably over the length of each voyage is not materially different on a quarterly and annual basis from a method of recognizing such costs as incurred. The Company does not begin recognizing voyage revenue until a charter has been agreed to by both the Company and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage.

 

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Under voyage charters, expenses such as fuel, port charges, canal tolls, cargo handling operations and brokerage commissions are paid by the Company whereas, under time and bareboat charters, such voyage costs are paid by the Company’s customers.

 

For the Company’s vessels operating in pools, revenues and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent (“TCE”) basis in accordance with an agreed-upon formula. Such TCE revenues are reported as pool revenues in the accompanying consolidated statement of operations. For the pools in which the Company participates, management monitors, among other things, the relative proportion of the Company’s vessels operating in each of the pools to the total number of vessels in each of the respective pools, and assesses whether or not the Company’s participation interest in each of the pools is sufficiently significant so as to determine that the Company has effective control of the pool.

 

8.Derivatives —ASC 815, Derivatives and Hedging, requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not effective hedges must be adjusted to fair value through earnings. If the derivative is an effective hedge, depending on the nature of the hedge, a change in the fair value of the derivative is either recorded to current earnings (fair value hedge), or recognized in other comprehensive income/(loss) and reclassified into earnings in the same period or periods during which the hedge transaction affects earnings (cash flow hedge). The ineffective portion of an effective hedge and the full amount of the change in fair value of derivative instruments that do not qualify for hedge accounting are immediately recognized in earnings.

 

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. The Company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below.

 

The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item such as forecasted transactions; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate or desired.

 

When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive loss and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive loss will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current-period earnings, unless it is designated in a new hedging relationship.

 

During the three years ended December 31, 2017, no ineffectiveness gains or losses were recorded in earnings relative to interest rate caps entered into by the Company or its subsidiaries that qualified for hedge accounting. Any gain or loss realized upon the early termination of an interest rate cap is recognized as an adjustment of interest expense over the shorter of the remaining term of the cap or the hedged debt. See Note 9, “Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures,” for additional disclosures on the Company’s interest rate caps and other financial instruments.

 

9.Income taxes — Substantially all of the companies included in the Company’s consolidated financial statements were excluded from the OSG consolidated group for U.S. income tax purposes for the eleven month period ended November 30, 2016 and the year ended December 31, 2015. The Company’s financial statements have been prepared on the basis that OSG was responsible for all U.S. taxes for periods prior to December 1, 2016. Prior to December 1, 2016, the Company had not operated as an independent stand-alone entity. However, for the purposes of these consolidated financial statements the Company has calculated income taxes as if it had filed relevant income tax returns on a stand-alone basis. The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

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Net deferred tax assets are recorded to the extent the Company believes these assets will more likely than not be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event the Company were to determine that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes in the period such determination is made.

 

Uncertain tax positions are recorded in accordance with ASC 740, Income Taxes, on the basis of a two-step process whereby (1) the Company first determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority.

 

10.Valuation of equity method investments — When events and circumstances warrant, investments accounted for under the equity method of accounting are evaluated for impairment. An impairment charge is recorded whenever a decline in fair value of an investment below its carrying amount is determined to be other-than-temporary. Impairment charges related to equity method investments are recorded in equity in income of affiliated companies in the accompanying consolidated statements of operations. See Note 6, “Equity Method Investments,” for further discussion of the Company’s evaluation of impairment of its equity method investments at December 31, 2017 and 2016, respectively.

 

11.Use of estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts of assets, liabilities, equity, revenues and expenses reported in the financial statements and accompanying notes. The most significant estimates relate to the depreciation of vessels and other property, amortization of drydocking costs, estimates used in assessing the recoverability of goodwill, equity method investments, intangible and other long-lived assets, liabilities incurred relating to pension benefits, and income taxes. Actual results could differ from those estimates.

 

12.Recently Adopted Accounting Standards — In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASC 815), which makes more financial and nonfinancial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements, and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test after initial qualification if the company can reasonably support an expectation of high effectiveness throughout the term of the hedge. An initial quantitative test to establish that the hedge relationship is highly effective is still required. For cash flow hedges, if the hedge is highly effective, all changes in the fair value of the derivative hedging instrument will be recorded in other comprehensive income. They will be reclassified to earnings when the hedged item impacts earnings. On the other hand, for fair value hedges, because the change in fair value of the hedged item and the derivative hedging instrument will still be recorded in current earnings, if the hedge is not 100% effective there will be an income statement impact. The standard will be effective for interim and annual periods beginning after December 31, 2018 and early adoption is permitted. Beginning December 1, 2017, the Company elected to early adopt this accounting standard with an initial application date of January 1, 2017. The adoption of this accounting standard had no impact on the Company’s consolidated financial statements since the hedge relationship that existed at the initial application date had expired prior to the adoption date. Also, the hedge relationship entered into after the December 1, 2017 adoption date had a forward start date of January 1, 2018.

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASC 718), which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The standard is effective for annual periods beginning after December 31, 2016 and interim periods within that reporting period. As a result of the adoption of this accounting standard, effective January 1, 2017, the Company elected to account for forfeitures of share-based payments as they occur. The adoption of this accounting policy had no impact on the Company’s consolidated financial statements since management’s estimate of the forfeiture rate on share-based payment awards granted prior to January 1, 2017 was zero. In addition, the adoption of this accounting standard resulted in the presentation of $349 and $26 of cash paid to the tax authorities for shares withheld to satisfy the Company’s statutory income tax withholding obligations as a financing cash outflow in the consolidated statement of cash flows for the years ended December 31, 2017 and 2016, respectively.

 

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International Seaways, Inc.  

 

  

13.Recently Issued Accounting Standards In September 2017, the FASB issued ASU 2017-13, Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which allows certain public business entities (“PBEs”) that otherwise would not meet the definition of a public business entity except for a requirement to include its financial statements or financial information in another entity’s filings with the SEC, to elect to use non-PBE transition dates for the sole purpose of adopting ASU No. 2016-02, Leases (ASC 842), and ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). Accordingly, all financial statements or financial information of the Company’s FSO and LNG joint ventures that may be included in the Company’s filings with the SEC pursuant to SEC Regulation S-X Rule 4-08(g), Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons, and/or SEC Regulation S-X Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons, will likely not reflect the adoptions of ASC 606 and ASC 842 until January 1, 2019 and January 1, 2020, respectively.

 

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (ASC 718), which provides guidance in regards to a change to the terms or conditions of a share-based payment award. An entity is required to account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The standard will be effective for interim and annual periods beginning after December 31, 2017 and early adoption is permitted. The guidance is to be applied prospectively to an award modified on or after the adoption date. Management does not expect the adoption of this accounting standard to have a material impact on the Company’s consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASC 715), which requires that an employer classify and report the service cost component in the same line item or items in the statement of operations as other compensation costs arising from services rendered by the pertinent employees during the period and disclose by line item in the statement of operations the amount of net benefit cost that is included in the statement of operations. The other components of net benefit cost would be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. The standard will be effective for interim and annual periods beginning after December 31, 2017 and early adoption is permitted. The standard requires application using a retrospective transition method and allows a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Management does not expect the adoption of this accounting standard to have a material impact on the Company’s consolidated financial statements. Upon adoption, net benefit costs totaling $335 and $985 for the years ended December 31, 2017 and 2016, respectively, that is currently presented in the general and administrative expense line will be presented in the other (expense)/income line on the consolidated statement operations.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (ASC 230): Restricted Cash, which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard will be effective for annual periods beginning after December 31, 2017 and interim periods within that reporting period. The adoption of this accounting standard will not have a material impact on the Company’s consolidated statements of cash flows.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASC 230), which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic with respect to (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The standard will be effective for interim and annual periods beginning after December 31, 2017 and early adoption is permitted. The guidance requires application using a retrospective transition method. We currently anticipate adopting the standard for classification of distributions received from equity method investees using the cumulative equity earnings approach, which will result in the retrospective reclassification of distributions received from certain affiliated companies accounted for by the equity method, from investing activities to operating activities. Management does not expect the adoption of the other provisions of this accounting standard to have a material impact on the Company’s consolidated financial statements.

 

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International Seaways, Inc.  

 

  

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. The standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. Management is analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements, including assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting. Management expects that the Company will recognize increases in reported amounts for property, plant and equipment and related lease liabilities upon adoption of the new standard.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606), a standard that will supersede virtually all of the existing revenue recognition guidance in U.S. GAAP. The standard establishes a five-step model that will apply to revenue earned from a contract with a customer. The standard’s requirements will also apply to the sale of some non-financial assets that are not part of an entity’s ordinary activities (e.g., sales of property or plant and equipment). Extensive disclosures will be required, including disaggregation of total revenue, information about performance obligations, changes in contract asset and liability account balances between periods and key judgments and estimates. The FASB has issued several amendments to the standard, including clarification of the accounting for licenses of intellectual property and identifying performance obligations. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard will be effective for us beginning January 1, 2018 and while not expected to have a material impact upon adoption, it could have a material impact on the Company’s consolidated financial statements going forward. We intend to adopt the standard using the cumulative catch-up transition method. We have undertaken a comprehensive approach to assessing the impact of the guidance on our business by reviewing our current accounting policies and practices to identify any potential differences that may result from applying the new requirements to our consolidated financial statements. In evaluating the impact of adopting this standard, we determined that (i) the timing and recognition of earnings from the pool arrangements and time charter/bareboat charter-out contracts to which the Company is party will not change significantly from current practice; (ii) there may be a change in the timing of revenue recognition under spot voyage contracts that may have a material impact on the Company’s consolidated financial statements, depending on the number of spot voyages we have in progress at a reporting period end and whether or not the underlying voyage charter has been determined to be a service only contract or a lease contract with a service component; (iii) there will be a significant expansion of required disclosures regarding revenue recognition, including a requirement to disclose the portion of total revenues recognized in accordance with other standards such as ASC 840, Leases; and (iv) the use of time charter equivalent (“TCE”) revenues as a means of measuring performance and comparing results amongst shipping industry participants could become more challenging. In quantifying the cumulative catch up adjustment that will be recognized on January 1, 2018, we determined that as of December 31, 2017, only one of the Company’s vessels was operating on a spot voyage charter. A review of the terms of the charter agreement resulted in the determination that it was a short-term lease contract because the charterer had substantive decision-making rights with respect to the load and discharge ports. We concluded there would be no material cumulative catch up adjustment for this contract as the adoption of ASC 606 did not materially change the timing or the amount of the non-lease component of the revenue recognized ratably between contract signing date in November 2017 and discharge of cargo in January 2018.

 

NOTE 3 — EARNINGS PER COMMON SHARE:

 

Basic earnings per common share is computed by dividing earnings, after the deduction of dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period.

 

The computation of diluted earnings per share assumes the issuance of common stock for all potentially dilutive stock options and restricted stock units not classified as participating securities. Participating securities are defined by ASC 260, Earnings Per Share, as unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents and are included in the computation of earnings per share pursuant to the two-class method.

 

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There were 35,876, 1,489 and 0 weighted average shares of unvested restricted common stock shares considered to be participating securities for the years ended December 31, 2017, 2016 and 2015, respectively. Such participating securities are allocated a portion of income, but not losses under the two-class method. Accordingly, no allocation was made to the participating securities under the two-class method for the years ended December 31, 2017 and 2016. As of December 31, 2017, there were 105,429 shares of restricted stock units and 275,830 stock options outstanding considered to be potentially dilutive securities.

 

The components of the calculation of basic and diluted earnings per share are as follows:

 

For the year ended December 31,  2017   2016   2015 
Net (loss)/income  $(106,088)  $(18,223)  $173,170 
                
Weighted average common shares outstanding:               
Basic   29,159,440    29,157,992    29,157,387 
Diluted   29,159,440    29,157,992    29,157,387 

 

Reconciliations of the numerator of the basic and diluted earnings per share computations are as follows:

 

For the year ended December 31,  2017   2016   2015 
Net (loss)/income allocated to:               
Common Stockholders  $(106,088)  $(18,223)  $173,170 
Participating securities   -    -    - 
   $(106,088)  $(18,223)  $173,170 

 

There were no dilutive equity awards outstanding for the years ended December 31, 2017, 2016 and 2015. Awards of 397,833 and 11,153 for the year ended 2017 and 2016, respectively, were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive.

 

NOTE 4 — BUSINESS AND SEGMENT REPORTING:

 

The Company is engaged primarily in the ocean transportation of crude oil and petroleum products in the international market through the ownership and operation of a diversified fleet of vessels. The shipping industry has many distinct market segments based, in large part, on the size and design configuration of vessels required and, in some cases, on the flag of registry. Rates in each market segment are determined by a variety of factors affecting the supply and demand for vessels to move cargoes in the trades for which they are suited. Tankers are not bound to specific ports or schedules and therefore can respond to market opportunities by moving between trades and geographical areas. The Company charters its vessels to commercial shippers and foreign governments and governmental agencies primarily on voyage charters and on time charters.

 

The Company has two reportable segments: Crude Tankers and Product Carriers. The joint ventures with two floating storage and offloading service vessels are included in the Crude Tankers Segment. The joint venture with four LNG Carriers is included in Other. Adjusted income/(loss) from vessel operations for segment reporting is defined as income/(loss) from vessel operations before general and administrative expenses, third-party debt modification fees, separation and transition costs, technical management transition costs, and (loss)/gain on disposal of vessels and other property, including impairments. The accounting policies followed by the reportable segments are the same as those followed in the preparation of the Company’s consolidated financial statements.

 

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Information about the Company’s reportable segments as of and for each of the years in the three-year period ended December 31, 2017 follows: 

 

   Crude   Product         
   Tankers   Carriers   Other   Totals 
2017                    
Shipping revenues  $192,426   $97,675   $-   $290,101 
Time charter equivalent revenues   178,812    96,183    -    274,995 
Depreciation and amortization   56,302    22,418    133    78,853 
Loss on disposal of vessels and other property, including impairments   85,625    1,230    -    86,855 
Adjusted income/(loss) from vessel operations   21,623    (8,385)   (31)   13,207 
Equity in income of affiliated companies   34,577    -    14,389    48,966 
Investments in and advances to affiliated companies at December 31, 2017   260,884    15,612    102,398    378,894 
Adjusted total assets at December 31, 2017   1,104,714    382,905    102,025    1,589,644 
Expenditures for vessels and vessel improvements   172,164    1,371    -    173,535 
Payments for drydockings   17,606    3,790    -    21,396 
2016                    
Shipping revenues  $271,764   $126,555   $-   $398,319 
Time charter equivalent revenues   258,171    126,314    560    385,045 
Depreciation and amortization   52,395    26,696    794    79,885 
Loss on disposal of vessels and other property, including impairments   7,585    71,456    162    79,203 
Adjusted income from vessel operations   111,768    13,327    710    125,805 
Equity in income of affiliated companies   5,584    -    11,265    16,849 
Investments in and advances to affiliated companies at December 31, 2016   266,470    15,296    76,915    358,681 
Adjusted total assets at December 31, 2016   1,066,184    422,579    76,915    1,565,678 
Expenditures for vessels and vessel improvements   691    1,297    -    1,988 
Payments for drydockings   7,636    1,622    -    9,258 
2015                    
Shipping revenues  $324,703   $172,931   $-   $497,634 
Time charter equivalent revenues   304,182    171,608    -    475,790 
Depreciation and amortization   51,347    28,763    1,543    81,653 
Loss/(gain) on disposal of vessels and other property   31    (3,231)   (1,259)   (4,459)
Adjusted income/(loss) from vessel operations   157,840    56,746    (1,176)   213,410 
Equity in income of affiliated companies   34,371    -    11,188    45,559 
Investments in and advances to affiliated companies at December 31, 2015   276,839    13,793    54,259    344,891 
Adjusted total assets at December 31, 2015   1,148,361    505,353    43,340    1,697,054 
Expenditures for vessels and vessel improvements   91    873    -    964 
Payments for drydockings   13,842    6,886    -    20,728 

 

Reconciliations of time charter equivalent revenues of the segments to shipping revenues as reported in the consolidated statements of operations follow:

 

For the year ended December 31,  2017   2016   2015 
Time charter equivalent revenues  $274,995   $385,045   $475,790 
Add: Voyage expenses   15,106    13,274    21,844 
Shipping revenues  $290,101   $398,319   $497,634 

 

Consistent with general practice in the shipping industry, the Company uses time charter equivalent revenues, which represents shipping revenues less voyage expenses, as a measure to compare revenue generated from a voyage charter to revenue generated from a time charter. Time charter equivalent revenues, a non-GAAP measure, provides additional meaningful information in conjunction with shipping revenues, the most directly comparable GAAP measure, because it assists Company management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance.

 

Reconciliations of adjusted income from vessel operations of the segments to (loss)/income before income taxes, as reported in the consolidated statements of operations follow: 

 

For the year ended December 31,  2017   2016   2015 
Total adjusted income from vessel operations of all segments  $13,207   $125,805   $213,410 
General and administrative expenses   (24,736)   (31,618)   (41,516)
Third-party debt modification fees   (9,240)   -    - 
Separation and transition costs   (604)   (9,043)   - 
Technical management transition costs   -    -    (39)
(Loss)/gain on disposal of vessels and other property, including impairments   (86,855)   (79,203)   4,459 
Consolidated (loss)/income from vessel operations   (108,228)   5,941    176,314 
Equity in income of affiliated companies   48,966    16,849    45,559 
Other (expense)/income   (6,344)   (966)   66 
Interest expense   (40,438)   (39,476)   (42,970)
Reorganization items, net   -    (131)   (5,659)
(Loss)/income before income taxes  $(106,044)  $(17,783)  $173,310 

 

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Reconciliations of total assets of the segments to amounts included in the consolidated balance sheets follow: 

 

At December 31,  2017   2016 
Total adjusted assets of all segments  $1,589,644   $1,565,678 
Corporate unrestricted cash and cash equivalents   60,027    92,001 
Corporate restricted cash   10,579    - 
Other unallocated amounts   4,234    4,842 
Consolidated total assets  $1,664,484   $1,662,521 

 

Certain additional information about the Company’s operations for each of the years in the three year period ended December 31, 2017 follows:

 

   Crude   Product         
   Tankers   Carriers   Other   Consolidated 
2017                    
Total vessels, deferred drydock and other property at December 31, 2017  $800,362   $339,627   $374   $1,140,363 
2016                    
Total vessels, deferred drydock and other property at December 31, 2016  $753,028   $377,095   $484   $1,130,607 
2015                    
Total vessels, deferred drydock and other property at December 31, 2015  $804,514   $472,675   $297   $1,277,486 

 

NOTE 5 — VESSELS, DEFERRED DRYDOCK AND OTHER PROPERTY:

 

Vessels and other property, excluding vessel held for sale, consist of the following:

 

As of  2017   2016 
Vessels, at cost  $1,404,360   $1,478,940 
Accumulated depreciation   (302,087)   (381,449)
Vessels, net   1,102,273    1,097,491 
           
Other property, at cost   7,377    8,680 
Accumulated depreciation and amortization   (4,923)   (6,121)
Other property, net   2,454    2,559 
           
Total Vessels and other property  $1,104,727   $1,100,050 

 

All except one of the Company’s vessels are pledged as collateral under the INSW Facilities (see Note 8, “Debt”). The aggregate carrying value of the 42 vessels pledged as collateral under the INSW Facilities at December 31, 2017, including a 2002-built MR which was held for sale as of December 31, 2017, was $1,102,844. A breakdown of the carrying value of the Company’s vessels by reportable segment and fleet as of December 31, 2017 and 2016 follows:

 

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As of December 31, 2017                    
           Net   Average   Number of 
       Accumulated   Carrying   Vessel Age   Owned 
   Cost   Depreciation   Value   (by dwt)   Vessels 
                     
Crude Tankers                         
VLCC (includes ULCC)  $663,880   $(209,966)  $453,914    12.5    10 
Suezmax   117,259    (1,821)   115,438    0.4    2 
Aframax   167,146    (21,064)   146,082    12.6    7 
Panamax   61,120    (538)   60,582    15.3    8 
Total Crude Tankers   1,009,405    (233,389)   776,016(1)   12.1    27 
                          
Product Carriers                         
LR2   73,681    (9,305)   64,376    3.4    1 
LR1   106,176    (13,122)   93,054    9.0    4 
MR   215,098    (46,271)   168,827    11.5    10 
Total Product Carriers   394,955    (68,698)   326,257(2)   9.6    15 
                          
Fleet Total  $1,404,360   $(302,087)  $1,102,273    11.7    42 

 

(1)Includes seven VLCCs, two Suezmaxes, and three Aframaxes with an aggregate carrying value of $581,461, which the Company believes exceeds their aggregate market values (estimated by taking an average of two third party vessel appraisals) of approximately $459,000 by $122,461.
(2)Includes one LR2, four LR1s and four MRs with an aggregate carrying value of $281,383, which the Company believes exceeds their aggregate market values (estimated by taking an average of two third party vessel appraisals) of approximately $209,375, by $72,008.

 

As of December 31, 2016                    
           Net   Average   Number of 
       Accumulated   Carrying   Vessel Age   Owned 
   Cost   Depreciation   Value   (by dwt)   Vessels 
                     
Crude Tankers                         
VLCC (includes ULCC)  $681,891   $(235,159)  $446,732    12.1    9 
Aframax   247,863    (66,943)   180,920    11.6    7 
Panamax   121,810    (18,506)   103,304    14.3    8 
Total Crude Tankers   1,051,564    (320,608)   730,956    12.3    24 
                          
Product Carriers                         
LR2   73,681    (6,601)   67,080    2.4    1 
LR1   106,176    (8,474)   97,702    8.1    4 
MR   247,519    (45,766)   201,753    11.2    13 
Total Product Carriers   427,376    (60,841)   366,535    9.3    18 
                          
Fleet Total  $1,478,940   $(381,449)  $1,097,491    11.7    42 

 

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Vessel activity for the three years ended December 31, 2017 is summarized as follows:

 

       Accumulated   Net Book 
   Vessel Cost   Depreciation   Value 
Balance at January 1, 2015  $1,648,115    (341,575)  $1,306,540 
Purchases and vessel additions   1,531    -      
Disposals   (6,755)   1,003      
Depreciation   -    (64,385)     
Balance at December 31, 2015   1,642,891    (404,957)   1,237,934 
Purchases and vessel additions   2,127    -      
Disposals   -    (63,328)     
Depreciation   (166,078)   86,836      
Balance at December 31, 2016   1,478,940    (381,449)   1,097,491 
Purchases and vessel additions   174,108    -      
Disposals and transfer to held for sale   (23,266)   2,232      
Depreciation   -    (59,883)     
Impairment   (225,422)   137,013      
Balance at December 31, 2017  $1,404,360   $(302,087)  $1,102,273 

 

The total of purchases and vessel additions will differ from expenditures for vessels as shown in the consolidated statements of cash flows because of the timing of when payments were made.

 

Vessel Impairments

 

The Company gave consideration as to whether events or changes in circumstances had occurred since December 31, 2016 that could indicate that the carrying amounts of the vessels in the Company’s fleet may not be recoverable as of December 31, 2017. Factors considered included declines in valuations during 2017 for vessels of certain sizes and ages, any negative changes in forecasted near term charter rates, and an increase in the likelihood that the Company will sell certain of its vessels before the end of their estimated useful lives in conjunction with the Company’s fleet renewal program. The Company concluded that the above indicators constituted impairment trigger events for eighteen vessels (one ULCC, one VLCC, six Aframaxes, eight Panamaxes and two LR1s) as of December 31, 2017 and three vessels (one Panamax and two MRs) as of September 30, 2017.

 

In developing estimates of undiscounted future cash flows for performing Step 1 of the impairment tests, the Company utilized weighted probabilities assigned to possible outcomes for the vessels that the Company was considering to sell or recycle before the end of their respective useful lives in conjunction with the Company’s fleet renewal program. The Company made assumptions about future performance, with significant assumptions being related to charter rates, ship operating expenses, utilization, drydocking requirements, residual value and the estimated remaining useful lives of the vessels. These assumptions are based on historical trends as well as future expectations. The estimated daily time charter equivalent rates used for unfixed days were based on a combination of (i) internally forecasted rates that are consistent with forecasts provided to the Company’s senior management and Board of Directors, and (ii) the trailing 12-year historical average rates, based on monthly average rates published by a third party maritime research service. The internally forecasted rates were based on management’s evaluation of current economic data and trends in the shipping and oil and gas industries. Management used the published 12-year historical average rates in its assumptions because it is management’s belief that the 12-year period captures an even distribution of strong and weak charter rate periods, which results in the use of an average mid-cycle rate that is in line with management’s forecast of a return to mid-cycle charter rate levels in the medium term. Recognizing that the transportation of crude oil and petroleum products is cyclical and subject to significant volatility based on factors beyond the Company’s control, management believes the use of estimates based on the combination of internally forecasted rates and 12-year historical average rates calculated as of the reporting date to be reasonable.

 

Estimated outflows for operating expenses and drydocking requirements are based on historical and budgeted costs and are adjusted for assumed inflation. Utilization is based on historical levels achieved, and estimates of a residual value for recyclings are based upon published 12-year historical data or the pattern of scrap rates used in management’s evaluation of salvage value for purposes of recording depreciation.

 

In estimating the fair value of the vessels for the purposes of Step 2 of the impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals, current recycling market data, and discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company used a methodology consistent with that described above, and discounted the cash flows using its current estimate of INSW’s weighted average cost of capital. Based on the tests performed, impairment charges totaling $81,062 and $7,346 were recorded on twelve vessels (one ULCC, one VLCC, four Aframaxes and six Panamaxes) at December 31, 2017 and three vessels (one Panamax and two MRs) as of September 30, 2017, respectively to write-down their carrying values to their estimated fair values.

 

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The Company monitored the industry wide decline in vessel valuations during 2016 and specifically from June 30, 2016 to September 30, 2016, and September 30, 2016 to December 31, 2016, as well as the decline in forecasted near term charter rates, and concluded that the declines in vessel valuations and in forecasted near term charter rates constituted impairment trigger events for 28 vessels as of September 30, 2016 and 24 vessels as of December 31, 2016. In developing estimates of undiscounted future cash flows for performing Step 1 of the impairment tests, the Company utilized the methodology described above.

 

In estimating the fair value of the vessels for the purposes of Step 2 of the September 30, 2016 impairment tests, the Company developed fair value estimates that utilized a market approach which considered an average of two vessel appraisals. Based on the tests performed, impairment charges totaling $49,640 were recorded on two LR1s, an Aframax and a Panamax to write-down their carrying values to their estimated fair values at September 30, 2016. In estimating the fair values of the vessels for the purposes of Step 2 of the December 31, 2016 impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals and discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company used a methodology consistent with that described above, and discounted the cash flows using its current estimate of INSW’s weighted average cost of capital. Based on the tests performed, impairment charges aggregating $29,602 were recorded on one Panamax and seven MRs to write-down their carrying values to their estimated fair values at December 31, 2016.

 

During its evaluations as to whether or not events or circumstances existing during 2015 resulted in a triggering event for impairment testing of its fleet, Management gave consideration to average TCE rates earned by its vessels versus INSW’s 2015 budget, near term rate forecasts, significant changes in third party valuation appraisals of vessels, and plans or intentions that materially affect how the international fleet would be used in the next 12 months (including disposals). Management concluded there was no triggering event for impairment testing.

 

Management also gave consideration as to whether events or changes in circumstances had occurred since December 2014 that could indicate that the carrying amounts of the vessels in its fleet may not be recoverable as of December 31, 2015. INSW concluded that no such events or changes in circumstances had occurred to warrant a change in the assumptions utilized in the December 2014 impairment tests of its fleet.

 

Vessel Acquisitions and Deliveries

 

During 2017, the Company acquired two 2017-built Suezmax tankers for an aggregate price of $116,000, which were delivered in July 2017, and one 2010-built VLCC tanker for a price of $53,000, which was delivered in November 2017.

 

In December 2017, the Company entered into a binding Letter of Intent (“LOI”) for the acquisition of six VLCC tankers including one 2015-built and five 2016-built for a price of $434,000. The transaction is expected to close in the second quarter of 2018. The Company’s obligation to consummate the transaction is subject to a number of conditions. Either party is permitted to terminate the LOI on or after March 31, 2018 if the parties have not entered into a definitive stock purchase agreement by such date and the party terminating the LOI is not otherwise in breach thereof.

 

Vessel Sales

 

During 2017, the Company recognized an aggregate gain on disposal of vessels of $1,594 relating to the sale of a 2001-built MR and a 2004-built MR. During the last quarter of 2017, the Company entered into memorandums of agreement for the sale of a 2002-built MR and a 2004-built MR, which were delivered to buyers during the first quarter of 2018. The 2002-built MR had been classified as vessel held for sale as of December 31, 2017. The Company recognized gains on such sales in 2018.

 

There were no vessels sold during the year ended December 31, 2016. During the year ended December 31, 2015, the Company sold a 1998-built MR and recognized a gain on sale of $3,236.

 

Drydocking activity for the three years ended December 31, 2017 is summarized as follows:

 

   2017   2016   2015 
Balance at January 1  $30,557   $37,075   $29,325 
Additions   19,205    8,822    22,981 
Sub-total   49,762    45,897    52,306 
Drydock amortization   (18,367)   (15,340)   (15,231)
Amount charged to loss/gain on sale of vessels   (867)   -    - 
Balance at December 31  $30,528   $30,557   $37,075 

 

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NOTE 6 — EQUITY METHOD INVESTMENTS:

 

Investments in affiliated companies include joint ventures accounted for using the equity method. As of December 31, 2017, the Company had an approximate 50% interest in three joint ventures. One joint venture operates four LNG carriers (the “LNG Joint Venture”). The other two joint ventures converted two ULCCs to Floating Storage and Offloading Service vessels (collectively the “FSO Joint Venture”).

 

FSO Joint Venture

 

In May 2017, the FSO Joint Venture signed two five-year service contracts with North Oil Company (“NOC”), the new operator of the Al Shaheen oil field, off the coast of Qatar, relating to the two FSO service vessels. The shareholders of NOC are Qatar Petroleum Oil & Gas Limited and Total E&P Golfe Limited. Such contracts commenced at the expiry of the existing contracts with Maersk Oil Qatar AS during the third quarter of 2017. The Company has a 50% interest in this joint venture. The FSO Joint Venture financed the purchase of the vessels from each of Euronav NV and INSW and their conversion costs through partner loans and a long-term bank financing, which was secured by, among other things, the service contracts and the FSOs themselves. Approximately $75,343 was outstanding under the bank financing facility as of December 31, 2016. In July 2017, the FSO Joint Venture repaid the principal balance outstanding on the bank financing facility, using cash on hand.

 

The FSO Joint Venture previously entered into floating-to-fixed interest rate swaps with major financial institutions. These agreements, which paid fixed rates of approximately 3.9% and received floating rates based on LIBOR, had maturity dates ranging from July to September 2017. In conjunction with the repayment of the principal balance outstanding on the bank financing facility, the interest rate swap associated with the FSO Africa was terminated early and settled on June 15, 2017. The interest rate swap associated with the FSO Asia was settled upon maturity in July 2017. As of December 31, 2016, the joint venture had a liability of $2,236, for the fair value of the swaps associated with the FSO Africa and FSO Asia. The Company’s share of the effective portion of such amount, aggregating $111 at December 31, 2016, is included in accumulated other comprehensive loss in the accompanying balance sheet.

 

The FSO Joint Venture is party to a number of contracts to which INSW serves as guarantor. See Note 12, “Related Parties,” for additional information relating to guarantees.

 

LNG Joint Venture

 

In November 2004, the Company formed a joint venture with Qatar Gas Transport Company Limited (Nakilat) (“QGTC”) whereby companies in which OSG holds a 49.9% interest ordered four 216,200 cbm LNG Carriers. Upon delivery in late 2007 and early 2008, these vessels commenced 25-year time charters to Qatar Liquefied Gas Company Limited (2) (‘‘LNG Charterer’’). QGTC subsequently contributed its ownership interests in the joint venture to its wholly owned subsidiary, Nakilat Marine Services Ltd. The aggregate construction cost for such newbuildings was financed by the joint venture through long-term bank financing that is nonrecourse to the partners and partner contributions. Approximately $597,129 and $638,827 was outstanding under this secured facility as of December 31, 2017 and 2016, respectively.

 

The joint venture has entered into floating-to-fixed interest rate swaps with a group of major financial institutions pursuant to which it pays fixed rates of approximately 4.9% and receives a floating rate based on LIBOR. The interest rate swap agreements have maturity dates ranging from July to November 2022 and cover notional amounts aggregating $576,429 and $617,636 at December 31, 2017 and 2016, respectively. These swaps are being accounted for as cash flow hedges. As of December 31, 2017 and 2016, the joint venture recorded a liability of $58,243 and $80,458, respectively, for the fair value of these swaps. The Company’s share of the effective portion of the fair value of these swaps, $28,980 and $40,076 at December 31, 2017 and 2016, respectively, is included in accumulated other comprehensive loss in the accompanying consolidated balance sheets.

 

Impairment of Equity Method Investments

 

Management gave consideration as to whether events or changes in circumstances had occurred since December 2016 that could indicate that the carrying amounts of its investments in the FSO Joint Venture and LNG Joint Venture may not be recoverable as of December 31, 2017. Management concluded that no such events or changes in circumstances had occurred to warrant an impairment testing.

 

In December 2016, evidence of an other-than-temporary decline in the fair value of the Company’s investments in its FSO Joint Venture below its carrying value was identified by the Company. Specifically, management concluded that the lower charter rate expected over the duration of the recently awarded five-year service contracts commencing in the third quarter of 2017 was negative evidence indicating that the excess of the carrying value of the Company’s investment in these joint ventures over their fair value was other-than-temporary as of December 31, 2016.

 

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As the Company determined that other-than-temporary impairments existed in relation to its investments in the FSO Joint Venture, impairment charges aggregating $30,475 were recorded to write down the investments to their estimated fair values as of December 31, 2016. In estimating the fair value of the Company’s investments in the FSO Joint Ventures as of December 31, 2016, the Company utilized an income approach by preparing discounted cash flow models since there is a lack of comparable market transactions for the specially built assets held by the FSO Joint Venture. In preparing the discounted cash flow models, the Company used a methodology largely consistent with the methodology and assumptions detailed in Note 6, “Vessels, Deferred Drydock and Other Property” above with the exception being that as the assets owned by the joint ventures serve under specific service contracts, the estimated charter rates for periods after the expiry of the existing contracts are based upon management’s internally forecasted rates. The cash flows were discounted using the current estimated weighted average cost of capital for each joint venture, which approximated 9.5% and took into consideration country risk, entity size and uncertainty with respect to the cash flows for periods beyond the current charter expiries.

 

Financial Information of Significant Equity Method Investments

 

Investments in and advances to affiliated companies as reflected in the accompanying consolidated balance sheet as of December 31, 2017 consisted of: FSO Joint Venture of $251,594, LNG Joint Venture of $102,398 and Other of $24,902 (which primarily relates to working capital deposits that the Company maintains for commercial pools in which it participates).

 

Financial information for the equity method investees that were significant for the three years ended December 31, 2017, adjusted for basis and accounting policy differences, is as follows:

 

For the year ended December 31,  2017   2016   2015 
Shipping revenues  $234,916   $247,451   $245,444 
Ship operating expenses   (106,228)   (114,487)   (113,639)
Income from vessel operations   128,688    132,964    131,805 
Other income   3,497    830    2,357 
Interest expense   (36,831)   (43,038)   (47,218)
Income tax provision   (1,886)   -    - 
Net income  $93,468   $90,756   $86,944 
                
Percentage of ownership in equity investees   49.9% - 50.0%    49.9% - 50.0%    49.9% - 50.0% 
Equity in income/(loss) of affiliated companies, before consolidating and reconciling adjustments  $46,704   $45,355   $43,449 
                
Impairment of equity method investments in FSO Joint Venture   -    (30,475)   - 
Amortization on deferred gain on 2009 sale of TI Africa to FSO Joint Venture   2,301    2,409    2,409 
Amortization of interest capitalized during construction of LNG vessels   (419)   (419)   (419)
Other   380    (21)   120 
Equity in income/(loss) of affiliated companies  $48,966   $16,849   $45,559 

 

The tables below present the financial position for the equity method investees that were significant and a reconciliation of the Company’s share of the joint ventures’ total equity to the investments in and advances to affiliates line on the consolidated balance sheets as of December 31, 2017 and 2016:

 

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