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Letter from the Chairman and CEO
Dear Shareholder,
2012 was a year in which our strategy gained significant
tankers in the energy supply chain is expanding rapidly,
validation, our markets proved resilient, and various
and we are very focused on what this expansion means
disruptive forces continued to work in our favor. Scorpio
for our business.
Tankers is taking full advantage of these dynamics.
“Ton Miles”—a traditional measure of demand in which
The shipping market generally, and product tankers
cargo volumes are multiplied by transport distance—is no
specifically, have concluded without question that next-
longer adequate to describe the changes we are seeing.
generation, fuel-efficient vessels will capture a significant
As the supply chain for refined products expands in dis-
and prolonged cost advantage relative to their older peers.
tance and complexity, there is more risk, inefficiency, and
Five of our first newbuidings, STI Amber, STI Topaz, STI Ruby,
opportunity for our customers, not less. In the world as
STI Garnet, and STI Onyx delivered into our fleet in 2012,
we view it, “Vessel Demand Days”—the number of days
and they have performed as we expected, saving up to
product tankers are employed—is increasing at an expo-
9 tons of fuel for each day of steaming. To put this in per-
nential rate. Types of cargoes, types of voyages, short
spective, conventional marine fuel has hovered recently
term or localized demand shocks are all increasing, and
between $600–$700 ton, and it is our single largest voyage
critically, one must remember that the cost of seaborne
expense. With increasing regulatory scrutiny over emissions,
transportation is a small percentage of the delivered price
and with refiners and suppliers focusing on more profit-
of our cargoes. By way of an example, the difference to
able activities, we expect the economic and logistical
our customer between one of our MR vessels earning a
pressures around marine fuel to tighten and sustain this
time charter equivalent of $10,000/day and $40,000/day
significant competitive advantage in our assets.
on a 20 day voyage is less than 6 cents per gallon.
In addition, we are beneficiaries of a very transparent,
At the same time, we are heartened by the modest
high-stakes, and inexorable process: the separation of
pace of supply growth of product tankers. Capital is con-
winners from losers in the business of refining. Those
strained, shipbuilding capacity is declining or otherwise
unable to compete—usually where input costs or political
pre-occupied with other business, and our analysis leads
risks are high—are giving way to a new, ultra-competitive,
us to believe that supply growth will significantly lag
export-driven refining complex. The role of product
demand growth for a number of years.
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Lastly, we would point out that regulatory developments
LR2 vessels (larger product tankers of 600,000 to 800,000
and political upheaval are proving to be positive for our
barrels capacity) are becoming the logical choice for some
business. One law we believe in is the law of unintended
commodity traders and industrial customers as they move
consequences. Fractured political structures, unilateral
cargoes across regions. With the recent ramp-up of capital
policy-making, taxes and incentives generally lead to
investment in storage and terminal assets for refined
market distortions. For instance, for the myriad specifica-
products, coupled with growing export capacity in key
tions for gasoline around the globe, each is subject to a
refining centers, this segment shows tremendous potential.
different supply and demand curve, and for each imbalance
there is a customer who needs a reliable, flexible vessel
with a professional operator to arbitrage.
Your management team has worked tirelessly to create
a unique company: a true pure-play in product tankers;
a cautious balance sheet coupled with tremendous oper-
As for our business itself, the nexus of standards and
ating leverage in the form of our multiple options on
regulations regarding our cargoes, our vessels, and our
attractive leases and additional newbuildings; entry and
management systems is creating very high hurdles for
growth at a cyclical low; and a tremendous depth of com-
capital investment and operational expertise, hurdles that
mercial and operational expertise to deliver superior results.
are simply beyond the reach of many weaker competitors.
We will continue to execute on our strategy. Thank you
As we turn to 2013 and beyond, we are particularly excited
for your support.
about the recent expansion in our newbuilding stable
to include ice-class handymax vessels and LR2 vessels.
Sincerely,
Management has significant experience in handymax
vessels—these smaller, regional traders show both an
attractive fleet profile as well as tremendous upside vola-
tility when weather or ice create choke-points in critical
trading lanes.
EMaNuELE a. Lauro
Chairman and Chief Executive Officer
Fleet List
owned vessels
Vessel Name
Handymax
1 STI Highlander
Mr
2 STI Amber
3 STI Topaz
4 STI Ruby
5 STI Garnet
6 STI Onyx
7 STI Sapphire
8 STI Emerald
Lr1/Post-Panamax
9 Noemi
10 Senatore
11 STI Harmony
12 STI Heritage
13 Venice
Lr2
14 STI Spirit
Total owned DWT
Year Built
DWT
Ice class
2007
2012
2012
2012
2012
2012
2013
2013
2004
2004
2007
2008
2001
2008
37,145
52,000
52,000
52,000
52,000
52,000
52,000
52,000
72,515
72,514
73,919
73,919
81,408
113,100
888,520
1A
—
—
—
—
—
—
—
—
—
1A
1A
1C
—
Time Chartered-In vessels(1)
Vessel Name
Year Built
DWT
Ice class
Handymax
15 Freja Polaris
16 Kraslava
17 Krisjanis Valdemars
18 Jinan
19 Histria Azure
20 Histria Coral
21 Histria Perla
Mr
22 STX Ace 6
23 Targale
24 Ugale
25 Nave Orion
26 Freja Lupus
27 Gan-Trust
28 Usma
Lr1
29 SN Federica
30 Hellespont Promise
31 FPMC P Eagle
Lr2
32 FPMC P Hero
33 FPMC P Ideal
34 Khawr Aladid
35 Fair Seas
36 Pink Stars
37 Four Wind
38 Orange Stars
2004
2007
2007
2003
2007
2006
2005
2007
2007
2007
2013
2012
2013
2007
2003
2007
2009
2011
2012
2006
2008
2010
2009
2011
37,217
37,258
37,266
37,285
40,394
40,426
40,471
46,161
49,999
49,999
49,999
50,385
51,561
52,684
72,344
73,669
73,800
99,995
99,993
106,003
115,406
115,592
115,727
115,756
1B
1B
1B
—
—
—
—
—
—
1B
—
—
—
1B
—
—
—
—
—
—
—
—
—
—
Newbuildings currently under construction(2)
Vessel Name
Handymax
39 Hull 2451
40 Hull 2452
41 Hull 2453
42 Hull 2454
43 Hull 2462
44 Hull 2463
45 HMD Handymax(3)
46 HMD Handymax(3)
Mr
47 Hull 2369
48 HMD MR(4)
49 HMD MR(4)
50 HMD MR(4)
51 HMD MR(4)
52 Hull 2389
53 Hull 2390
54 Hull 2391
55 Hull 2392
56 Hull 2449
57 Hull 2450
58 Hull 2458
59 Hull 2459
60 Hull 2460
61 Hull 2461
62 Hull S1138
63 Hull S1139
64 Hull S1140
65 Hull S1141
66 Hull S1142
67 Hull S1143
68 Hull S1144
69 Hull S1145
Lr2
70 Hull S703
71 Hull S704
72 Hull S705
73 Hull S706
74 Hull S709
75 Hull S710
76 DSME LR2
77 DSME LR2
Total newbuilding DWT
Total Fleet DWT
Yard
DWT
Ice class
Estimated
Delivery
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
HMD
SPP
SPP
SPP
SPP
SPP
SPP
SPP
SPP
HSHI
HSHI
HSHI
HSHI
HSHI
HSHI
DSME
DSME
38,000
38,000
38,000
38,000
38,000
38,000
38,000
38,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
114,000
114,000
114,000
114,000
114,000
114,000
114,000
114,000
2,412,000
4,909,910
1A
1A
1A
1A
1A
1A
1A
1A
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Q2 2014
Q2 2014
Q2 2014
Q2 2014
Q3 2014
Q3 2014
Q3 2014
Q3 2014
Q2 2013
Q2 2013
Q3 2013
Q3 2013
Q3 2013
Q1 2014
Q1 2014
Q2 2014
Q2 2014
Q2 2014
Q2 2014
Q2 2014
Q2 2014
Q3 2014
Q4 2014
Q2 2014
Q2 2014
Q3 2014
Q3 2014
Q3 2014
Q4 2014
Q4 2014
Q4 2014
Q3 2014
Q3 2014
Q3 2014
Q4 2014
Q4 2014
Q4 2014
Q4 2014
Q4 2014
Total time chartered-in DWT
1,609,390
(1) See fleet list on pages 21 and 22 of Form 20-F for a description of these time charter-in agreements
(2) See fleet list on pages 21 and 22 of Form 20-F for a description of our Newbuilding Program
(3) The agreement for two ice class-1A Handymax Newbuilding Vessels was entered into in April 2013
(4) The agreement for four MR Newbuilding Vessels with 2013 deliveries was entered into in April 2013
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _________________
Commission file number
SCORPIO TANKERS INC.
(Exact name of Registrant as specified in its charter)
(Translation of Registrant’s name into English)
Republic of The Marshall Islands
(Jurisdiction of incorporation or organization)
9, Boulevard Charles III Monaco 98000
(Address of principal executive offices)
Mr. Emanuele Lauro,
+377-9898-5716
9, Boulevard Charles III Monaco 98000
(Name, Telephone Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to section 12(b) of the Act.
Title of each class
Common Stock, par value of $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered or to be registered pursuant to section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE
(Title of class)
NONE
(Title of class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2012, there were 63,827,846 outstanding common shares with a par value $0.01 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Yes No
If this report is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
Yes No
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-
2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP
International Financial Reporting Standards as issued by the International Accounting Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 17 18
Yes No
Cautionary Statement Regarding Forward-Looking Statements
Matters discussed in this report may constitute forward-looking statements. The Private Securities Litigation Reform Act of
1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective
information about their business. Forward-looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of
historical facts. We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and is including this cautionary statement in connection with this safe harbor legislation. The words “believe,”
“anticipate,” “intends,” “estimate,” “forecast,” “project,” “plan,” “potential,” “may,” “should,” “expect,” “pending” and
similar expressions identify forward-looking statements.
The forward-looking statements in this report are based upon various assumptions, many of which are based, in turn, upon
further assumptions, including without limitation, our management’s examination of historical operating trends, data
contained in our records and other data available from third parties. Although we believe that these assumptions were
reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which
are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish
these expectations, beliefs or projections.
In addition to these important factors, other important factors that, in our view, could cause actual results to differ materially
from those discussed in the forward-looking statements include the failure of counterparties to fully perform their contracts
with us, the strength of world economies and currencies, general market conditions, including fluctuations in charter rates and
vessel values, changes in demand for tanker vessel capacity, changes in our operating expenses, including bunker prices,
drydocking and insurance costs, the market for our vessels, availability of financing and refinancing, charter counterparty
performance, ability to obtain financing and comply with covenants in such financing arrangements, changes in
governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future
litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or
political events, vessels breakdowns and instances of off-hires and other factors described from time to time in the reports we
file with the SEC. We caution readers of this report not to place undue reliance on these forward-looking statements, which
speak only as of their dates. We undertake no obligation to update or revise any forward-looking statements. These forward
looking statements are not guarantees of our future performance, and actual results and future developments may vary
materially from those projected in the forward looking statements. Please see our Risk Factors in Item 3.D of this annual
report for a more complete discussion of these and other risks and uncertainties.
TABLE OF CONTENTS
Page
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS .........................................
1
OFFER STATISTICS AND EXPECTED TIMETABLE ...........................................................................
KEY INFORMATION ...............................................................................................................................
1
INFORMATION ON THE COMPANY .................................................................................................... 18
UNRESOLVED STAFF COMMENTS ..................................................................................................... 37
OPERATING AND FINANCIAL REVIEW AND PROSPECTS ............................................................. 38
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES .............................................................. 70
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ............................................. 75
FINANCIAL INFORMATION .................................................................................................................. 80
THE OFFER AND LISTING ..................................................................................................................... 81
ADDITIONAL INFORMATION ............................................................................................................... 81
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS ......................... 89
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ........................................... 90
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES .....................................................
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS ................................................................................................................................................
CONTROLS AND PROCEDURES ...........................................................................................................
ITEM 15.
AUDIT COMMITTEE FINANCIAL EXPERT .........................................................................................
ITEM 16A.
CODE OF ETHICS .....................................................................................................................................
ITEM 16B.
PRINCIPAL ACCOUNTANT FEES AND SERVICES ............................................................................
ITEM 16C.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES ............................
ITEM 16D.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS ........
ITEM 16E.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT ............................................................
ITEM 16F.
ITEM 16G.
CORPORATE GOVERNANCE ................................................................................................................
ITEM 16H. MINE SAFETY DISCLOSURE .................................................................................................................
PART III
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS ....................................................................................................................
FINANCIAL STATEMENTS ....................................................................................................................
EXHIBITS ..................................................................................................................................................
91
91
91
91
93
93
93
93
94
94
94
94
95
95
95
95
PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
Unless the context otherwise requires, when used in this annual report, the terms “Scorpio Tankers,” the
“Company,” “we,” “our” and “us” refer to Scorpio Tankers Inc. and its subsidiaries. “Scorpio Tankers Inc.” refers only to
Scorpio Tankers Inc. and not its subsidiaries. Unless otherwise indicated, all references to “dollars,” “US dollars” and “$”
in this annual report are to the lawful currency of the United States. We use the term deadweight tons, or dwt, expressed in
metric tons, each of which is equivalent to 1,000 kilograms, in describing the size of tankers.
A. Selected Financial Data
The following tables set forth our selected consolidated financial data and other operating data as of and for the
years ended December 31, 2012, 2011, 2010, 2009 and 2008. The selected data is derived from our audited consolidated
financial statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB). Our audited consolidated financial statements for the years
ended December 31, 2012, 2011 and 2010 and our consolidated balance sheets as of December 31, 2012 and 2011, together
with the notes thereto, are presented herein. Our audited consolidated financial statements for the years ended December 31,
2009 and 2008 and our consolidated balance sheets as of December 31, 2010, 2009 and 2008, and the notes thereto, are not
included herein.
We began our operations in October 2009, when Liberty Holding Company Ltd., or Liberty, a wholly-owned
subsidiary of Simon Financial Limited, or Simon, a company owned and controlled by the Lolli-Ghetti family, of which our
founder, Chairman and Chief Executive Officer, Mr. Emanuele Lauro, is a member, transferred to us three vessel owning and
operating subsidiary companies. Prior to October 1, 2009, our historical consolidated financial statements were prepared on a
carve-out basis from the financial statements of Liberty. These carve-out financial statements include all assets, liabilities and
results of operations of the three vessel-owning subsidiaries owned by us, formerly subsidiaries of Liberty, for the periods
presented. For the periods presented, certain of the expenses incurred by these subsidiaries for commercial, technical and
administrative management services were under management agreements with other entities owned and controlled by the
Lolli-Ghetti family, which we refer to collectively as the Scorpio Group, consisting of: (i) Scorpio Ship Management S.A.M.,
or SSM; and Scorpio Commercial Management S.A.M., or SCM; which provide us and third parties with technical and
commercial management services, respectively; (ii) Liberty, which provided us with administrative services until March 13,
2012 when the administrative services agreement was assigned to Scorpio Services Holding Limited, or SSH, a company
owned by the Lolli-Ghetti family; and (iii) other affiliated entities. Since agreements with related parties are by definition not
at arms length, the expenses incurred under these agreements may have been different than the historical costs incurred if the
subsidiaries had operated as unaffiliated entities during prior periods. Our estimates of any differences between historical
expenses and the expenses that may have been incurred had the subsidiaries been stand-alone entities have been disclosed in
the notes to our historical consolidated financial statements for those relevant years which are not presented herein.
1
In thousands of US dollars except per share and
share data
Consolidated income statement data
Revenue:
Vessel revenue ....................................................... $
Operating expenses:
Vessel operating costs ............................................
Voyage expenses ...................................................
Charterhire .............................................................
Impairment (1) .........................................................
Depreciation ...........................................................
Loss from sale of vessels .......................................
General and administrative expenses .....................
Total operating expenses .......................................
Operating (loss) / income .....................................
Other income and expense:
Financial expenses .................................................
Earnings from profit or loss sharing agreements ...
Realized loss on derivative financial instruments ..
Unrealized (loss) / gain on derivative financial
instruments .........................................................
Financial income ....................................................
Other expense, net .................................................
Total other income and expense ............................
$
Net (loss)/income ..................................................
(Loss)/earnings per common share (2):
Basic and diluted (loss)/earnings per share ............ $
Basic and diluted weighted average shares
For the year ended December 31,
2012
2011
2010
2009
2008
115,381 $
82,110 $
38,798 $
27,619 $
39,274
(30,353)
(21,744)
(43,701)
—
(14,818)
(10,404)
(11,536)
(132,556)
(17,175)
(31,370)
(6,881)
(22,750)
(66,611)
(18,460)
—
(11,637)
(157,708)
(75,599)
(18,440)
(2,542)
(276)
—
(10,179)
—
(6,200)
(37,637)
1,161
(8,562)
—
(3,073)
(4,512)
(6,835)
—
(417)
(23,399)
4,220
(8,512)
443
—
(7,060)
—
—
(1,231)
35
(97)
(9,362)
(26,537) $
—
51
(119)
(7,128)
(82,727) $
(3,231)
—
(280)
—
37
(509)
(3,983)
(2,822) $
(699)
—
(808)
956
5
(256)
(802)
3,418 $
(8,623)
—
(6,722)
—
(6,984)
—
(600)
(22,930)
16,344
(1,711)
—
(406)
(2,058)
35
(19)
(4,158)
12,186
(0.64) $
(2.88) $
(0.18) $
0.61 $
2.18
outstanding ......................................................... 41,413,339 28,704,876 15,600,813 5,589,147 5,589,147
In thousands of US dollars
Balance sheet data
Cash and cash equivalents ..................................... $
Vessels and drydock ..............................................
Vessels under construction ....................................
Total assets ............................................................
Current and non-current bank loans .......................
Shareholder payable(3) ............................................
Related party payable (3) ........................................
Shareholders’ equity ..............................................
2012
87,165 $
395,412
50,251
573,280
142,459
—
—
414,790
As of December 31,
2010
2011
2009
2008
36,833 $
322,458
60,333
448,230
145,568
—
—
286,853
68,187 $
333,425
—
444 $
99,594
—
412,268 104,423
36,200
143,188
—
—
—
—
61,329
264,783
3,608
109,260
—
117,112
43,400
22,028
27,406
20,299
In thousands of US dollars
Cash flow data
Net cash inflow/(outflow)
Operating activities ................................................ $
Investing activities .................................................
Financing activities ................................................
2012
For the year ended December 31,
2009
2010
2011
2008
(1,928) $
(90,155)
142,415
(12,452) $
(122,573)
103,671
4,907 $
(245,595)
308,431
9,306 $
—
(12,469)
24,838
—
(22,384)
(1)
In the years ended December 31, 2011 and December 31, 2009, we recorded an impairment charge of $66.6 million
for our 12 owned vessels and $4.5 million for two of our owned vessels, respectively. See Item 5. “Operating and
Financial Review and Prospects.”
(2) Basic earnings per share is calculated by dividing the net (loss)/income attributable to equity holders of the parent by
the weighted average number of common shares outstanding assuming, for the period prior to October 1, 2009, when
our historical consolidated financial statements were prepared on a carve-out basis, that the reorganization described
2
above was effective during the period. Diluted earnings per share are calculated by adjusting the net (loss)/income
attributable to equity holders of the parent and the weighted average number of common shares used for calculating
basic earnings per share for the effects of all potentially dilutive shares. Such potentially dilutive common shares are
excluded when the effect would be to increase earnings per share or reduce a loss per share.
(3) On November 18, 2009, the shareholder payable and the related party payable balances, as of that date, were converted
to equity as a capital contribution.
The following table sets forth our other operating data. This data should be read in conjunction with Item 5.
“Operating and Financial Review and Prospects.”
For the year ended December 31,
2010
2009
2011
2012
2008
Average Daily Results
Time charter equivalent (TCE) per day(1) ........................................... $ 12,960 $ 12,898 $ 16,213 $ 23,423 $ 29,889
Vessel operating costs per day(2) .........................................................
7,875
8,166 $
7,819 $
7,605
7,581
Aframax/LR2
TCE per revenue day – pool ............................................................... $ 10,201 $ 14,849 $ 12,460 $
—
TCE per revenue day – time charters ..................................................
Vessel operating costs per day(2) .........................................................
8,293
15,457
6,960
—
8,436
— $
—
—
—
—
—
Panamax/LR1
TCE per revenue day – pool ............................................................... $ 14,242 $ 12,876 $ 15,213 $ 21,425 $ 36,049
—
2,839
TCE per revenue day – spot ................................................................
22,729 $ 24,825 $ 24,992
TCE per revenue day – time charters ..................................................
Vessel operating costs per day(2) .........................................................
7,875
7,819
8,189
15,147
—
7,714
—
23,962
7,891
—
MR
TCE per revenue day – pool ............................................................... $ 11,811 $
12,541
TCE per revenue day – spot ................................................................
Vessel operating costs per day(2) .........................................................
6,770
— $
12,092
6,748
— $
—
—
Handymax
TCE per revenue day – pool ............................................................... $ 13,166 $ 11,343 $
—
TCE per revenue day – spot ................................................................
Vessel operating costs per day(2) .........................................................
7,619
11,201
7,594
9,965 $
8,077
8,107
— $
—
—
— $
—
—
—
—
—
—
—
—
Fleet data
Average number of owned vessels .....................................................
Average number of time chartered-in vessels .....................................
10.81
9.18
11.29
4.95
6.19
0.06
3.00
0.33
3.00
0.59
Drydock
Expenditures for drydock (in thousands of US dollars) ...................... $
2,869 $
2,624 $
974 $
1,681 $
—
(1)
Freight rates are commonly measured in the shipping industry in terms of time charter equivalent per revenue day.
Vessels in the pool and on time charter do not have voyage expenses; therefore, the revenue for pool vessels and time
charter vessels is the same as their TCE revenue. Please see “Important financial and operational terms and concepts”
section below for a discussion of TCE revenue, revenue days and voyage expenses.
(2) Vessel operating costs per day represent vessel operating costs, as such term is defined in the “Important financial and
operational terms and concepts” section below, divided by the number of days the vessel is owned during the period.
(3)
For a definition of items listed under “Fleet Data,” please see the section of this annual report entitled Item 5.
“Operating and Financial Review and Prospects.”
B. Capitalization and indebtedness
Not applicable.
3
C. Reasons for the offer and use of proceeds
Not applicable.
D. Risk Factors
The following risks relate principally to the industry in which we operate and our business in general. Other risks
relate principally to the securities market and ownership of our common stock. The occurrence of any of the events described
in this section could significantly and negatively affect our business, financial condition, operating results or cash available
for dividends or the trading price of our common stock.
RISKS RELATED TO OUR INDUSTRY
If the tanker industry, which historically has been cyclical, continues to be depressed in the future, our earnings and
available cash flow may be adversely affected.
The tanker industry is both cyclical and volatile in terms of charter rates and profitability. A worsening of the
current global economic conditions may adversely affect our ability to charter or recharter our vessels or to sell them on the
expiration or termination of their charters and the rates payable in respect of our vessels currently operating in tanker pools,
or any renewal or replacement charters that we enter into may not be sufficient to allow us to operate our vessels profitably.
Fluctuations in charter rates and vessel values result from changes in the supply and demand for tanker capacity and changes
in the supply and demand for oil and oil products. The factors affecting the supply and demand for tankers are outside of our
control, and the nature, timing and degree of changes in industry conditions are unpredictable.
The factors that influence demand for tanker capacity include:
supply and demand for energy resources and oil and petroleum products;
regional availability of refining capacity and inventories;
global and regional economic and political conditions, including armed conflicts, terrorist activities, and strikes;
the distance oil and oil products are to be moved by sea;
changes in seaborne and other transportation patterns;
environmental and other legal and regulatory developments;
weather and natural disasters;
competition from alternative sources of energy; and
international sanctions, embargoes, import and export restrictions, nationalizations and wars.
The factors that influence the supply of tanker capacity include:
supply and demand for energy resources and oil and petroleum products;
the number of newbuilding deliveries;
the scrapping rate of older vessels;
conversion of tankers to other uses;
the number of vessels that are out of service;
environmental concerns and regulations; and
port or canal congestion.
We are dependent on spot-oriented pools and spot charters and any decrease in spot charter rates in the future may
adversely affect our earnings.
As of the date of this annual report, all of our vessels are employed in either the spot market or in spot market-
oriented tanker pools, such as the Scorpio LR2 Pool, Scorpio Panamax Tanker Pool the Scorpio MR Pool, or the Scorpio
Handymax Tanker Pool, which we refer to collectively as the Scorpio Group Pools, exposing us to fluctuations in spot
market charter rates. The spot charter market may fluctuate significantly based upon tanker and oil supply and demand. The
4
successful operation of our vessels in the competitive spot charter market, including within the Scorpio Group Pools, 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. 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. If future spot charter rates decline, then we
may be unable to operate our vessels trading in the spot market profitably, meet our obligations, including payments on
indebtedness, or pay dividends in the future. 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, we will generally experience delays
in realizing the benefits from such increases.
Our ability to renew expiring charters or obtain new charters will depend on the prevailing market conditions at the
time. If we are not able to obtain new charters in direct continuation with existing charters, or if new charters are entered into
at charter rates substantially below the existing charter rates or on terms otherwise less favorable compared to existing charter
terms, our revenues and profitability could be adversely affected.
An over-supply of tanker capacity may lead to a reduction in charter rates, vessel values, and profitability.
The market supply of tankers is affected by a number of factors, such as supply and demand for energy resources,
including oil and petroleum products, supply and demand for seaborne transportation of such energy resources, and the
current and expected purchase orders for newbuildings. If the capacity of new tankers delivered exceeds the capacity of
tankers being scrapped and converted to non-trading tankers, tanker capacity will increase. According to Drewry Shipping
Consultants Ltd., or Drewry, as of the end of January 2013, the newbuilding order book, which extends to 2016, equaled
approximately 12.4% of the existing world tanker fleet and the order book may increase further in proportion to the existing
fleet. If the supply of tanker capacity increases and if the demand for tanker capacity decreases or does not increase
correspondingly, charter rates could materially decline. A reduction in charter rates and the value of our vessels may have a
material adverse effect on our results of operations and available cash.
Acts of piracy on ocean-going vessels could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China
Sea, the Indian Ocean and in the Gulf of Aden. Although the frequency of sea piracy worldwide decreased during 2012 to its
lowest level since 2009, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and
increasingly in the Gulf of Guinea, with drybulk vessels and tankers particularly vulnerable to such attacks. If these piracy
attacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones by insurers or
Joint War Committee “war and strikes” listed areas, premiums payable for such coverage could increase significantly and
such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which may be incurred to
the extent we employ onboard security guards, could increase in such circumstances. We may not be adequately insured to
cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a
result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a
material adverse impact on our business, results of operations, cash flows and financial condition and may result in loss of
revenues, increased costs and decreased cash flows to our customers, which could impair their ability to make payments to us
under our charters.
The current state of the global financial markets and current economic conditions may adversely impact our ability to
obtain additional financing on acceptable terms and otherwise negatively impact our business.
Global financial markets and economic conditions have been, and continue to be, volatile. In recent years, operating
businesses in the global economy have faced tightening credit, weakening demand for goods and services, deteriorating
international liquidity conditions, and declining markets. 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. We will need to secure additional debt or equity financing or both in
addition to our 2013 Credit Facility (defined later) to fully fund the remaining balance of our obligations under our Newbuilding
Program (defined later). 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, we
5
may be unable to expand or meet our obligations as they come due or we may be unable to enhance our existing business,
complete additional vessel acquisitions or otherwise take advantage of business opportunities as they arise.
If economic conditions throughout the world do not improve, it will impede our operations.
Negative trends in the global economy that emerged in 2008 continue to adversely affect global economic
conditions. In addition, the world economy continues to face a number of new challenges, including uncertainty related to the
continuing discussions in the United States regarding the U.S. federal debt ceiling, mandatory reductions in federal spending,
along with widespread skepticism about the implementation of any resulting agreements, continuing turmoil and hostilities in
the Middle East, North Africa and other geographic areas and countries and continuing economic weakness in the European
Union. There has historically been a strong link between the development of the world economy and demand for energy,
including oil and gas. An extended period of deterioration in the outlook for the world economy could reduce the overall
demand for oil and gas and for our services. Such changes could adversely affect our results of operations and cash flows.
The economies of the United States, the European Union and other parts of the world continue to experience
relatively slow growth or remain in recession and exhibit weak economic trends. The credit markets in the United States and
Europe have experienced significant contraction, de-leveraging and reduced liquidity, and the U.S. federal government and
state governments and European authorities continue to implement a broad variety of governmental action and/or new
regulation of the financial markets. Global financial markets and economic conditions have been, and continue to be, severely
disrupted and volatile. Since 2008, lending by financial institutions worldwide remain at very low levels compared to the
period preceding 2008.
We face risks attendant to changes in economic environments, changes in interest rates, and instability in the
banking and securities markets around the world, among other factors. We cannot predict how long the current market
conditions will last. However, these recent and developing economic and governmental factors, together with the concurrent
decline in charter rates and vessel values, may have a material adverse effect on our results of operations and may cause the
price of our common stock to decline.
Changes in fuel, or bunkers, prices may adversely affect profits.
Fuel, or bunkers, is typically the largest expense in our shipping operations for our vessels and changes in the price
of fuel may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events
outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of
the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, war and unrest in oil producing countries and
regions, regional production patterns and environmental concerns. Further, fuel may become much more expensive in the
future, which may reduce the profitability.
We are subject to complex laws and regulations, including environmental laws and regulations that can adversely
affect our business, results of operations, cash flows and financial condition, and our available cash.
Our operations are subject to numerous laws and regulations in the form of international conventions and treaties,
national, state and local laws and national and international regulations in force in the jurisdictions in which our vessels
operate or are registered, which can significantly affect the ownership and operation of our vessels. These requirements
include, but are not limited to, the U.S. Oil Pollution Act of 1990, or OPA, the U.S. Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Air Act, U.S. Clean Water Act and the U.S.
Marine Transportation Security Act of 2002, European Union Regulation, and regulations of the International Maritime
Organization, or the IMO, including the International Convention for the Prevention of Pollution from Ships of 1975, the
International Convention for the Prevention of Marine Pollution of 1973, the IMO International Convention for the Safety of
Life at Sea of 1974, the International Convention on Load Lines of 1966, and the International Ship and Port Facility Security
Code. Compliance with such laws and regulations, where applicable, may require installation of costly equipment or
operational changes and may affect the resale value or useful lives of our vessels. We may also incur additional costs in order
to comply with other existing and future regulatory obligations, including, but not limited to, costs relating to air emissions
including greenhouse gases, the management of ballast waters, maintenance and inspection, development and implementation
of emergency procedures and insurance coverage or other financial assurance of our ability to address pollution incidents.
The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes or
changes to existing laws that may affect our operations or require us to incur additional expenses to comply with such
regulatory initiatives, statutes or laws.
These costs could have a material adverse effect on our business, results of operations, cash flows and financial
condition and our available cash. A failure to comply with applicable laws and regulations may result in administrative and
6
civil penalties, criminal sanctions or the suspension or termination of our operations. Environmental laws often impose strict
liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without
regard to whether we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are
jointly and severally strictly liable for the discharge of oil within the 200-nautical mile exclusive economic zone around the
United States (unless the spill results solely from the act or omission of a third party, an act of God or an act of war). An oil
spill could result in significant liability, including fines, penalties, criminal liability and remediation costs for natural resource
damages under other international and U.S. federal, state and local laws, as well as third-party damages, including punitive
damages, and could harm our reputation with current or potential charterers of our tankers. We are required to satisfy
insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution
incidents. Although we have arranged insurance to cover certain environmental risks, there can be no assurance that such
insurance will be sufficient to cover all such risks or that any claims will not have a material adverse effect on our business,
results of operations, cash flows and financial condition and available cash.
If we fail to comply with international safety regulations, we may be subject to increased liability, which may
adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain ports.
The operation of our vessels is affected by the requirements set forth in the IMO’s International Management Code
for the Safe Operation of Ships and Pollution Prevention, or the ISM Code, promulgated by the IMO under the International
Convention for the Safety of Life at Sea of 1974, or SOLAS. The ISM Code requires the party with operational control of a
vessel to develop and maintain an extensive “Safety Management System” that includes, among other things, the adoption of
a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing
procedures for dealing with emergencies. If we fail to comply with the ISM Code, we may be subject to increased liability,
may invalidate existing insurance or decrease available insurance coverage for our affected vessels and such failure may
result in a denial of access to, or detention in, certain ports.
Adverse market conditions could cause us to breach covenants in our credit facilities and adversely affect our
operating results.
The market values of tankers have generally experienced high volatility. The market prices for tankers declined
significantly from historically high levels reached in early 2008 and remain at relatively low levels. You should expect the
market value of our vessels to fluctuate depending on general economic and market conditions affecting the shipping industry
and prevailing charterhire rates, competition from other tanker companies and other modes of transportation, types, sizes and
ages of vessels, applicable governmental regulations and the cost of newbuildings. We believe that the current aggregate
market value of our vessels will be in excess of loan to value amounts required under our credit facilities. Our 2010
Revolving Credit Facility (defined later) and 2011 Credit Facility (defined later) each require that the fair market value of the
vessels pledged as collateral never be less than 150% of the aggregate principal amount outstanding. Our Newbuilding Credit
Facility (defined later) requires 140% (120% if the vessel is subject to acceptable long term employment) of the aggregate
principal amount outstanding plus a pro rata amount of any allocable swap exposure. Our STI Spirit Credit Facility (defined
later) requires that the charter-free market value of the STI Spirit be no less than 140% of the then outstanding loan balance
and we made prepayments of $0.8 million in June 2012, and $1.3 million in December 2012 in order to stay in compliance
with this covenant which will be applied to our next four quarterly payments.
In addition, each of our 2010 Revolving Credit Facility, 2011 Credit Facility and STI Spirit Credit Facility required
us to maintain a ratio of EBITDA to interest expense of no less than 1.25 to 1.00 commencing with the fourth fiscal quarter
of 2011 through the fourth quarter of 2012, at which time it increased to 1.50 to 1.00 for the first quarter of 2013, 1.75 to 1.00
for the second quarter of 2013, and 2.00 to 1.00 at all times thereafter. Our Newbuilding Credit Facility required us to
maintain a ratio of EBITDA to interest expense of not less than 2.00 to 1.00 through the fourth quarter of 2012 and 2.50 to
1.00 at all times thereafter. Such ratio in all our credit facilities shall be calculated quarterly on a trailing four quarter basis.
We expect to be subject to similar financial covenants under our 2013 Credit Facility.
A decrease in vessel values or a failure to meet these ratios could cause us to breach certain covenants in our
existing credit facilities and future financing agreements that we may enter into from time to time. If we breach such
covenants and are unable to remedy the relevant breach or obtain a waiver, our lenders could accelerate our debt and
foreclose on our owned vessels. Additionally, if we sell one or more of our vessels at a time when vessel prices have fallen,
the sale price may be less than the vessel’s carrying value on our consolidated financial statements, resulting in a loss on sale
or an impairment loss being recognized, ultimately leading to a reduction in earnings. For the year ended December 31, 2011,
we evaluated the recoverable amount of our vessels, and we recognized a total impairment loss of $66.6 million for all of our
owned vessels. For the year ended December 31, 2012, we did not recognize an impairment loss, however we did record a
$4.5 million total loss from disposal on the sales of the STI Conqueror, STI Gladiator and STI Matador and a $5.9 million
total loss from disposal on the sales of the STI Diamond and STI Coral. See “—Risks related to our indebtedness” and Item
7
5.B. “Liquidity and Capital Resources - Long-Term Debt Obligations and Credit Arrangements” for a more comprehensive
discussion of our current credit facilities and the related risks.
If our vessels suffer damage due to the inherent operational risks of the tanker industry, we may experience
unexpected drydocking costs and delays or total loss of our vessels, which may adversely affect our business and
financial condition.
The operation of an ocean-going vessel carries inherent risks. Our vessels and their cargoes will be at risk of being
damaged or lost because of events such as marine disasters, bad weather, and other acts of God, business interruptions caused
by mechanical failures, grounding, fire, explosions and collisions, human error, war, terrorism, piracy and other
circumstances or events. Changing economic, regulatory and political conditions in some countries, including political and
military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes
and boycotts. These hazards may result in death or injury to persons, loss of revenues or property, the payment of ransoms,
environmental damage, higher insurance rates, damage to our customer relationships, and market disruptions, delay or
rerouting, which may also subject us to litigation. In addition, the operation of tankers 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 us. Compared to other types of vessels, tankers are 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.
If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are
unpredictable and may be substantial. We may have to pay drydocking costs that our insurance does not cover in full. The
loss of revenues while these vessels are being repaired and repositioned, as well as the actual cost of these repairs, may
adversely affect our business and financial condition. In addition, space at drydocking facilities is sometimes limited and not
all drydocking facilities are conveniently located. We may be unable to find space at a suitable drydocking facility or our
vessels may be forced to travel to a drydocking facility that is not conveniently located to our vessels’ positions. The loss of
earnings while these vessels are forced to wait for space or to travel to more distant drydocking facilities may adversely affect
our business and financial condition. Further, the total loss of any of our vessels could harm our reputation as a safe and
reliable vessel owner and operator. If we are unable to adequately maintain or safeguard our vessels, we may be unable to
prevent any such damage, costs, or loss which could negatively impact our business, financial condition, results of operations
and available cash.
We operate our vessels worldwide and as a result, our vessels are exposed to international risks which may reduce
revenue or increase expenses.
The international shipping industry is an inherently risky business involving global operations. Our vessels and their
cargoes will be at risk of being damaged or lost because of events such as marine disasters, bad weather, and other acts of
God, business interruptions caused by mechanical failures, grounding, fire, explosions and collisions, human error, war,
terrorism, piracy and other circumstances or events. In addition, changing economic, regulatory and political conditions in
some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of
waterways, piracy, terrorism, labor strikes and boycotts. These sorts of events could interfere with shipping routes and result
in market disruptions which may reduce our revenue or increase our expenses.
International shipping is subject to various security and customs inspection and related procedures in countries of
origin and destination and trans-shipment points. Inspection procedures can result in the seizure of the cargo and/or our
vessels, delays in the loading, offloading or delivery and the levying of customs duties, fines or other penalties against us. It
is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore,
changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain
cases, render the shipment of certain types of cargo uneconomical or impractical. Any such changes or developments may
have a material adverse effect on our business, results of operations, cash flows, financial condition and available cash.
Political instability, terrorist or other attacks, war or international hostilities can affect the tanker industry, which
may adversely affect our business.
We conduct most of our operations outside of the United States, and our business, results of operations, cash flows,
financial condition and available cash may be adversely affected by the effects of political instability, terrorist or other
attacks, war or international hostilities. Continuing conflicts and recent developments in the Middle East, including Egypt,
and North Africa, including Libya, and the presence of the United States and other armed forces in Iraq and Afghanistan may
lead to additional acts of terrorism and armed conflict around the world, which may contribute to further world economic
instability and uncertainty in global financial markets. As a result of the above, insurers have increased premiums and
8
reduced or restricted coverage for losses caused by terrorist acts generally. Future terrorist attacks could result in increased
volatility of the financial markets and negatively impact the U.S. and global economy. These uncertainties could also
adversely affect our ability to obtain additional financing on terms acceptable to us or at all.
In the past, political instability has also resulted in attacks on vessels, such as the attack on the M/T Limburg, a very
large crude carrier not related to us, in October 2002, mining of waterways and other efforts to disrupt international shipping,
particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the
South China Sea and the Gulf of Aden off the coast of Somalia. Any of these occurrences could have a material adverse
impact on our business, financial condition, results of operations and available cash.
If our vessels call on ports located in countries that are subject to sanctions and embargos imposed by the U.S. or
other governments that could adversely affect our reputation and the market for our common stock.
Although no vessels owned or operated by us have called on ports located in countries subject to sanctions and
embargoes imposed by the U.S. government and other authorities or countries identified by the U.S. government or other
authorities as state sponsors of terrorism, such as Cuba, Iran, Sudan, and Syria, in the future, our vessels may call on ports in
these countries from time to time on charterers’ instructions. Sanctions and embargo laws and regulations vary in their
application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and
embargo laws and regulations may be amended or strengthened over time. In 2010, the U.S. enacted the Comprehensive Iran
Sanctions Accountability and Divestment Act, or “CISADA”, which expanded the scope of the Iran Sanctions Act. Among
other things, CISADA expands the application of the prohibitions of companies, such as ours, and introduces limits on the
ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or
export of refined petroleum or petroleum products.
In 2012, President Obama signed Executive Order 13608 which prohibits foreign persons from violating or
attempting to violate, or causing a violation of any sanctions in effect against Iran or facilitating any deceptive transactions
for or on behalf of any person subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will
be deemed a foreign sanctions evader and will be banned from all contacts with the United States, including conducting
business in US dollars. Also in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights
Act of 2012, or the Iran Threat Reduction Act, which created new sanctions and strengthened existing sanctions. Among
other things, the Iran Threat Reduction Act intensifies existing sanctions regarding the provision of goods, services,
infrastructure or technology to Iran’s petroleum or petrochemical sector. The Iran Threat Reduction Act also includes a
provision requiring the President of the United States to impose five or more sanctions from Section 6(a) of the Iran
Sanctions Act, as amended, on a person the President determines is a controlling beneficial owner of, or otherwise owns,
operates, or controls or insures a vessel that was used to transport crude oil from Iran to another country and (1) if the person
is a controlling beneficial owner of the vessel, the person had actual knowledge the vessel was so used or (2) if the person
otherwise owns, operates, or controls, or insures the vessel, the person knew or should have known the vessel was so used.
Such a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from
financial transactions subject to U.S. jurisdiction, and exclusion of that person’s vessels from U.S. ports for up to two years.
Although we believe that we have been in compliance with all applicable sanctions and embargo laws and
regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future,
particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation
could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and
conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest,
in us. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding
securities of companies that have contracts with countries identified by the U.S. government as state sponsors of terrorism.
The determination by these investors not to invest in, or to divest from, our common stock may adversely affect the price at
which our common stock trades. Additionally, some investors may decide to divest their interest, or not to invest, in our
company simply because we do business with companies that do business in sanctioned countries. Moreover, our charterers
may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels,
and those violations could in turn negatively affect our reputation. In addition, our reputation and the market for our
securities may be adversely affected if we engage in certain other activities, such as entering into charters with individuals or
entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries,
or engaging in operations associated with those countries pursuant to contracts with third parties that are unrelated to those
countries or entities controlled by their governments. Investor perception of the value of our common stock may also be
adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and
surrounding countries.
9
The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.
We expect that our 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 our vessels are found with contraband, whether inside or
attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face governmental
or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows, financial
condition and ability to pay dividends.
Maritime claimants could arrest our vessels, which would have a negative effect on our 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 a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may
enforce its lien by arresting or attaching a vessel through foreclosure proceedings. The arrest or attachment of one or more of
our vessels could interrupt our business or require us to pay large sums of money to have the arrest lifted, which would have
a negative effect on our cash flows.
In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may
arrest both the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned
or controlled by the same owner. Claimants could try to assert “sister ship” liability against one vessel in our fleet for claims
relating to another of our ships.
Governments could requisition our vessels during a period of war or emergency, which may negatively impact our
business, financial condition, results of operations and available cash.
A government could requisition one or more of our vessels for title or hire. Requisition for title occurs when a
government takes control of a vessel and becomes the owner. Also, a government could requisition our vessels for hire.
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
our vessels may negatively impact our business, financial condition, results of operations and available cash.
Technological innovation could reduce our charterhire income and the value of our vessels.
The charterhire 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 our vessels, competition from these more technologically advanced vessels could adversely
affect the amount of charterhire payments we receive for our vessels and the resale value of our vessels could significantly
decrease. As a result, our available cash could be adversely affected.
If labor interruptions are not resolved in a timely manner, they could have a material adverse effect on our business,
results of operations, cash flows, financial condition and available cash.
We, indirectly through SSM, employ masters, officers and crews to man our vessels. If not resolved in a timely and
cost-effective manner, industrial action or other labor unrest could prevent or hinder our operations from being carried out as
we expect and could have a material adverse effect on our business, results of operations, cash flows, financial condition and
available cash.
RISKS RELATED TO OUR BUSINESS
Newbuilding projects are subject to risks that could cause delays, cost overruns or cancellation of our
newbuilding contracts.
We have entered into contracts with Hyundai Mipo Dockyard Co. Ltd., or HMD, SPP Shipbuilding Co., Ltd., or
SPP, Hyundai Samho Heavy Industries Co. Ltd., or HSHI and Daewoo Shipbuilding & Marine Engineering Co., Ltd., or
DSME for the construction of 33 newbuilding vessels with expected delivery between April 2013 and December 2014. As of
the date of this annual report, we have made total yard payments in the amount of $124.7 million and we have remaining yard
installments in the amount of $1,101.5 million before we take possession of all of these vessels.
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The delivery of such vessels or vessels that we may acquire in the future could be delayed, not completed or
cancelled, which would delay or eliminate our expected receipt of revenues from the employment of such vessels. In
addition, the yards or a seller could fail to deliver vessels to us as agreed, or we could cancel a purchase contract because
such yard or seller has not met its obligations.
If the delivery of any vessel is materially delayed or cancelled, especially if we have committed the vessel to a
charter for which we become responsible for substantial liquidated damages to the customer as a result of the delay or
cancellation, our business, financial condition and results of operations could be adversely affected.
In addition, in the event HMD, SPP, HSHI and DSME do not perform under their contracts and we are unable to
enforce certain refund guarantees with third party banks for any reason, we may lose all or part of our investment, which
would have a material adverse effect on our results of operations, financial condition and cash flows.
Obligations associated with being a public company require significant company resources and management attention.
In April 2010, we became subject to the reporting requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and the other rules and regulations of the SEC, including the Sarbanes-Oxley Act of 2002, or Sarbanes-
Oxley. Section 404 of Sarbanes-Oxley requires that we evaluate and determine the effectiveness of our internal controls over
financial reporting. If we have a material weakness in our internal control over financial reporting, we may not detect errors
on a timely basis and our financial statements may be materially misstated. We will need to dedicate a significant amount of
time and resources to ensure compliance with these regulatory requirements.
We will continue to evaluate areas such as corporate governance, corporate control, internal audit, disclosure
controls and procedures and financial reporting and accounting systems. We will make changes in any of these and other
areas, including our internal control over financial reporting, which we believe are necessary. However, these and other
measures we may take may not be sufficient to allow us to satisfy our obligations as a public company on a timely and
reliable basis. In addition, compliance with reporting and other requirements applicable to public companies will create
additional costs for us and will require the time and attention of management. Our limited management resources may
exacerbate the difficulties in complying with these reporting and other requirements while focusing on executing our business
strategy. Our incremental general and administrative expenses as a publicly traded corporation will include costs associated
with annual reports to shareholders, tax returns, investor relations, registrar and transfer agent’s fees, incremental director and
officer liability insurance costs and director compensation. We cannot predict or estimate the amount of the additional costs
we may incur, the timing of such costs or the degree of impact that our management’s attention to these matters will have on
our business.
We may have difficulty managing our planned growth properly.
One of our principal strategies is to continue to grow by expanding our operations and adding to our fleet. Our future
growth will primarily depend upon a number of factors, some of which may not be within our control. These factors include
our ability to:
identify suitable tankers and/or shipping companies for acquisitions at attractive prices;
obtain required financing for our existing and new operations;
identify businesses engaged in managing, operating or owning tankers for acquisitions or joint ventures;
integrate any acquired tankers or businesses successfully with our existing operations, including obtaining any
approvals and qualifications necessary to operate vessels that we acquire;
hire, train and retain qualified personnel and crew to manage and operate our growing business and fleet;
identify additional new markets;
enhance our customer base; and
improve our operating, financial and accounting systems and controls.
Our failure to effectively identify, purchase, develop and integrate any tankers or businesses could adversely affect
our business, financial condition and results of operations. The number of employees that perform services for us and our
current operating and financial systems may not be adequate as we implement our plan to expand the size of our fleet, and we
may not be able to effectively hire more employees or adequately improve those systems. Finally, acquisitions may require
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additional equity issuances or debt issuances (with amortization payments), both of which could lower our available cash. If
any such events occur, our financial condition may be adversely affected.
Growing any business by acquisition presents numerous risks such as undisclosed liabilities and obligations,
difficulty in obtaining additional qualified personnel and managing relationships with customers and suppliers and integrating
newly acquired operations into existing infrastructures. The expansion of our fleet may impose significant additional
responsibilities on our management and staff, and the management and staff of our commercial and technical managers, and
may necessitate that we, and they, increase the number of personnel. We cannot give any assurance that we will be successful
in executing our growth plans or that we will not incur significant expenses and losses in connection with our future growth.
If we purchase and operate secondhand vessels, we will be exposed to increased operating costs which could adversely
affect our earnings and, as our fleet ages, the risks associated with older vessels could adversely affect our ability to
obtain profitable charters.
Our current business strategy includes additional growth through the acquisition of new and secondhand vessels.
While we typically inspect secondhand vessels prior to purchase, this does not provide us with the same knowledge about
their condition that we would have had if these vessels had been built for and operated exclusively by us. Generally, we do
not receive the benefit of warranties from the builders for the secondhand vessels that we acquire.
In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Older
vessels are typically less fuel-efficient than more recently constructed vessels due to improvements in engine technology.
Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.
Governmental regulations, safety or other equipment standards related to the age of vessels may require
expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which
the vessels may engage. As our vessels age, market conditions may not justify those expenditures or enable us to operate our
vessels profitably during the remainder of their useful lives.
An increase in operating costs would decrease earnings and available cash.
Under time charter-out agreements, the charterer is responsible for voyage costs and the owner is responsible for the
vessel operating costs. The same applies to time-charter-in agreements. With the exception of certain vessels on short-term
time charter-out agreements, we currently have no vessels on long-term time charter-out agreements (greater than one year)
and 21 vessels on time-charter-in agreements. When our owned vessels are employed under one of the Scorpio Group Pools,
the pool is responsible for voyage expenses and we are responsible for vessel costs. As of the date of this annual report, we
have 12 of our owned vessels and 15 of our time-chartered-in vessels employed through the Scorpio Group Pools. When our
vessels operate in the spot market, we are responsible for both voyage expenses and vessel operating costs. As of the date of
this annual report, four of the vessels in our Operating Fleet (defined later) operate in the spot market. Our vessel operating
costs include the costs of crew, fuel (for spot chartered vessels), provisions, deck and engine stores, insurance and
maintenance and repairs, which depend on a variety of factors, many of which are beyond our control. Further, if our vessels
suffer damage, they may need to be repaired at a drydocking facility. The costs of drydocking repairs are unpredictable and
can be substantial. Increases in any of these expenses would decrease earnings and available cash.
Declines in charter rates and other market deterioration could cause us to incur impairment charges.
We evaluate the carrying amounts of our vessels to determine if events have occurred that would require an
impairment of their carrying amounts. The recoverable amount of vessels is reviewed based on events and changes in
circumstances that would indicate that the carrying amount of the assets might not be recovered. The review for potential
impairment indicators and projection of future cash flows related to the vessels is complex and requires us to make various
estimates including future freight rates, earnings from the vessels and discount rates. All of these items have been
historically volatile.
We evaluate the recoverable amount as the higher of fair value less costs to sell and value in use. If the recoverable
amount is less than the carrying amount of the vessel, the vessel is deemed impaired. The carrying values of our vessels may
not represent their fair market value at any point in time because the new market prices of secondhand vessels tend to
fluctuate with changes in charter rates and the cost of newbuildings. For the year ended December 31, 2011, charter rates in
the oil and petroleum products charter market declined along with second hand vessel values. Due to these indicators of
potential impairment, in the year ended December 31, 2011, we evaluated the recoverable amount of our vessels, and we
recognized a total impairment loss of $66.6 million for all of our owned vessels. For the year ended December 31, 2012, we
did not recognize an impairment loss, however, we cannot assure you that there will be not be further impairments in future
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years. Any additional impairment charges incurred as a result of further declines in charter rates could negatively affect our
business, financial condition, operating results or the trading price of our common shares.
If we are unable to operate our vessels profitably, we may be unsuccessful in competing in the highly competitive
international tanker market, which would negatively affect our financial condition and our ability to expand our business.
The operation of tanker vessels and transportation of crude and petroleum products is extremely competitive, in an
industry that is capital intensive and highly fragmented. The recent global financial crisis may reduce the demand for
transportation of oil and oil products which could lead to increased competition. Competition arises primarily from other
tanker owners, including major oil companies as well as independent tanker companies, some of whom have substantially
greater resources than we do. Competition for the transportation of oil and oil products can be intense and depends on price,
location, size, age, condition and the acceptability of the tanker and its operators to the charterers. We will have to compete
with other tanker owners, including major oil companies as well as independent tanker companies.
Our market share may decrease in the future. We may not be able to compete profitably as we expand our business
into new geographic regions or provide new services. New markets may require different skills, knowledge or strategies than
we use in our current markets, and the competitors in those new markets may have greater financial strength and capital
resources than we do.
If we do not set aside funds and are unable to borrow or raise funds for vessel replacement, at the end of a vessel’s
useful life our revenue will decline, which would adversely affect our business, results of operations, financial
condition, and available cash.
If we do not set aside funds and are unable to borrow or raise funds for vessel replacement, we will be unable to
replace the vessels in our fleet upon the expiration of their remaining useful lives, which we expect to occur between 2026 to
2038, depending on the vessel. Our cash flows and income are dependent on the revenues earned by the chartering of our
vessels. If we are unable to replace the vessels in our fleet upon the expiration of their useful lives, our business, results of
operations, financial condition, and available cash per share would be adversely affected. Any funds set aside for vessel
replacement will reduce available cash.
Our ability to obtain additional financing may be dependent on the performance of our then existing charters and the
creditworthiness of our charterers.
The actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability
to obtain the additional capital resources that we will require to purchase additional vessels or may significantly increase our
costs of obtaining such capital. Our inability to obtain additional financing at all or at a higher than anticipated cost may
materially affect our results of operation and our ability to implement our business strategy.
United States tax authorities could treat us as a “passive foreign investment company,” which could have adverse
United States federal income tax consequences to United States shareholders.
A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for United States federal
income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive
income” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those
types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale
or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated
parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the
performance of services does not constitute “passive income.” United States shareholders of a PFIC are subject to a
disadvantageous United States federal income tax regime with respect to the income derived by the PFIC, the distributions
they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
Based on our current and proposed method of operation, we do not believe that we will be a PFIC with respect to
any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time
chartering activities as services income, rather than rental income. Accordingly, our income from our time and voyage
chartering activities should not constitute “passive income,” and the assets that we own and operate in connection with the
production of that income should not constitute assets that produce or are held for the production of “passive income.”
There is substantial legal authority supporting this position, consisting of case law and United States Internal
Revenue Service, or IRS, pronouncements concerning the characterization of income derived from time charters and voyage
charters as services income for other tax purposes. However, it should be noted that there is also authority that characterizes
time charter income as rental income rather than services income for other tax purposes. Accordingly, no assurance can be
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given that the IRS or a court of law will accept this position, and there is a risk that the IRS or a court of law could determine
that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if
the nature and extent of our operations change.
If the IRS were to find that we are or have been a PFIC for any taxable year, our United States shareholders would
face adverse United States federal income tax consequences and incur certain information reporting obligations. Under the
PFIC rules, unless those shareholders make an election available under the United States Internal Revenue Code of 1986, as
amended, or the Code (which election could itself have adverse consequences for such shareholders), such shareholders
would be subject to United States federal income tax at the then prevailing rates on ordinary income plus interest, in respect
of excess distributions and upon any gain from the disposition of their common shares, as if the excess distribution or gain
had been recognized ratably over the shareholder’s holding period of the common shares. See “Taxation—Passive Foreign
Investment Company Status and Significant Tax Consequences” for a more comprehensive discussion of the United States
federal income tax consequences to United States shareholders if we are treated as a PFIC.
We may have to pay tax on United States source shipping income, which would reduce our earnings.
Under the Code, 50% of the gross shipping income of a corporation that owns or charters vessels, as we and our
subsidiaries do, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United
States may be subject to a 4% United States federal income tax without allowance for deductions, unless that corporation
qualifies for exemption from tax under Section 883 of the Code and the regulations promulgated thereunder by the United
States Department of the Treasury.
We and our subsidiaries intend to take the position that we qualify for this statutory tax exemption for United States
federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause
us to lose the benefit of this tax exemption and thereby become subject to United States federal income tax on our United
States source shipping income. For example, we may no longer qualify for exemption under Section 883 of the Code for a
particular taxable year if shareholders with a five percent or greater interest in our common shares, or “5% Shareholders,”
owned, in the aggregate, 50% or more of our outstanding common shares for more than half the days during the taxable year,
and there does not exist sufficient 5% Shareholders that are qualified shareholders for purposes of Section 883 of the Code to
preclude nonqualified 5% Shareholders from owning 50% or more of our common shares for more than half the number of
days during such taxable year or we are unable to satisfy certain substantiation requirements with regard to our 5%
Shareholders. Due to the factual nature of the issues involved, there can be no assurances on the tax-exempt status of us or
any of our subsidiaries.
If we or our subsidiaries were not entitled to exemption under Section 883 of the Code for any taxable year, we or
our subsidiaries could be subject for such year to an effective 2% United States federal income tax on the shipping income
we or they derive during such year which is attributable to the transport of cargoes to or from the United States. The
imposition of this taxation would have a negative effect on our business and would decrease our earnings available for
distribution to our shareholders.
We will be required to make additional capital expenditures to expand the number of vessels in our fleet and to
maintain all our vessels, which will be dependent on additional financing.
Our business strategy is based in part upon the expansion of our fleet through the purchase of additional vessels. If
we are unable to fulfill our obligations under any memorandum of agreement for future vessel acquisitions, the sellers of such
vessels may be permitted to terminate such contracts and we may forfeit all or a portion of the down payments we already
made under such contracts, and we may be sued for any outstanding balance.
In addition, we will incur significant maintenance costs for our existing and any newly-acquired vessels. A
newbuilding vessel must be drydocked within five years of its delivery from a shipyard, and vessels are typically drydocked
every 30 months thereafter, not including any unexpected repairs. We estimate the cost to drydock a vessel to be between
$500,000 and $1,000,000, depending on the size and condition of the vessel and the location of drydocking.
We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate
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, or 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 Republic of The Marshall Islands interpreting the BCA.
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The rights and fiduciary responsibilities of directors under the law of the Republic 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
United States 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 public 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 United States jurisdiction.
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, and some of our directors and officers and
certain of the experts named in this offering are located outside the United States. In addition, a substantial portion of our
assets and the assets of our directors, officers and experts are located outside of the United States. As a result, you may have
difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty
enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or any of these persons
in any action, including 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.
RISKS RELATED TO OUR RELATIONSHIP WITH SCORPIO GROUP AND ITS AFFILIATES
We are dependent on our managers and their ability to hire and retain key personnel, and there may be conflicts of
interest between us and our managers that may not be resolved in our favor.
Our success depends to a significant extent upon the abilities and efforts of our technical manager, SSM, our
commercial manager, SCM, and our management team. Our success will depend upon our and our managers’ ability to hire
and retain key members of our management team. The loss of any of these individuals could adversely affect our business
prospects and financial condition.
Difficulty in hiring and retaining personnel could adversely affect our results of operations. We do not maintain
“key man” life insurance on any of our officers.
Our technical and commercial managers are affiliates of Scorpio Group, which is owned and controlled by the Lolli-
Ghetti family, of which our founder, Chairman and Chief Executive Officer, Mr. Emanuele Lauro, is a member. Conflicts of
interest may arise between us, on the one hand, and our commercial and technical managers, on the other hand. As a result of
these conflicts, our commercial and technical managers, who have limited contractual duties, may favor their own or their
owner’s interests over our interests. These conflicts may have unfavorable results for us.
Our founder, Chairman and Chief Executive Officer has affiliations with our commercial and technical managers
which may create conflicts of interest.
Emanuele Lauro, our founder, Chairman and Chief Executive Officer, is a member of the Lolli-Ghetti family which
owns and controls our commercial and technical managers. These responsibilities and relationships could create conflicts of
interest between us, on the one hand, and our commercial and technical managers, on the other hand. These conflicts may
arise in connection with the chartering, purchase, sale and operations of the vessels in our fleet versus vessels managed by
other companies affiliated with our commercial or technical managers. Our commercial and technical managers may give
preferential treatment to vessels that are time chartered-in by related parties because our founder, Chairman and Chief
Executive Officer and members of his family may receive greater economic benefits. In particular, as of the date of this
annual report, our commercial and technical managers provide commercial and technical management services to
approximately 59 and 8 vessels respectively, other than the vessels in our fleet, that are owned or operated by entities
affiliated with Mr. Lauro, and such entities may acquire additional vessels that will compete with our vessels in the future.
Such conflicts may have an adverse effect on our results of operations.
Our Chief Executive Officer and President do not devote all of their time to our business, which may hinder our
ability to operate successfully.
Messrs. Lauro and Bugbee, our Chief Executive Officer and President, respectively, participate in business
activities not associated with us. As a result, Messrs. Lauro and Bugbee may devote less time to us than if they were not
engaged in other business activities and may owe fiduciary duties to the shareholders of both us as well as shareholders of
other companies which they may be affiliated, including other Scorpio Group companies. This may create conflicts of
15
interest in matters involving or affecting us and our customers and it is not certain that any of these conflicts of interest
will be resolved in our favor. This could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Our commercial and technical managers are each privately held companies and there is little or no publicly available
information about them.
SCM is our commercial manager and SSM is our technical manager. SCM’s and SSM’s ability to render
management services will depend in part on their own financial strength. Circumstances beyond our control could impair our
commercial manager’s or technical manager’s financial strength, and because each is a privately held company, information
about the financial strength of our commercial manager and technical manager is not available. As a result, we and our
shareholders might have little advance warning of financial or other problems affecting our commercial manager or technical
manager even though their financial or other problems could have a material adverse effect on us.
We are subject to certain risks with respect to our counterparties on contracts, and failure of such counterparties to
meet their obligations could cause us to suffer losses or negatively impact our results of operations and cash flows.
We have entered into, and may enter in the future, various contracts, including, charter agreements and credit
facilities. Such agreements subject us to counterparty risks. The ability of each of our counterparties to perform its
obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among
other things, general economic conditions, the condition of the maritime and offshore industries, the overall financial
condition of the counterparty, charter rates received for specific types of vessels, and various expenses. For example, the
combination of a reduction of cash flow resulting from declines in world trade, a reduction in borrowing bases under reserve-
based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in the ability
of our charterers to make charter payments to us. In addition, in depressed market conditions, our 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, charterers and customers may seek to renegotiate the terms of their existing charter agreements or avoid
their obligations under those contracts. Should a counterparty fail to honor its obligations under agreements with us, we could
sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
The failure of our charterers to meet their obligations under our charter agreements, on which we depend for our
revenues, could cause us to suffer losses or otherwise adversely affect our business.
As of the date of this annual report, we do not employ any vessels under a long-term time charter agreement but we
may enter into such agreements in the future. The ability and willingness of each of our counterparties to perform their
obligations under a time charter, spot voyage or other agreement with us will depend on a number of factors that are beyond
our control and may include, among other things, general economic conditions, the condition of the tanker shipping industry
and the overall financial condition of the counterparties. Charterers are sensitive to the commodity markets and may be
impacted by market forces affecting commodities such oil. In addition, in depressed market conditions, there have been
reports of charterers renegotiating their charters or defaulting on their obligations under charters. Our customers may fail to
pay charterhire or attempt to renegotiate charter rates. Should a counterparty fail to honor its obligations under agreements
with us, it may be difficult to secure substitute employment for such vessel, and any new charter arrangements we secure in
the spot market or on time charters may be at lower rates given currently decreased tanker charter rate levels. When we
employ a vessel in the spot charter market, we generally place such vessel in a tanker pool managed by our commercial
manager that pertains to that vessel’s size class. If our charterers fail to meet their obligations to us or attempt to renegotiate
our charter agreements, we could sustain significant losses which could have a material adverse effect on our business,
financial condition, results of operations and cash flows, as well as our ability to pay dividends, if any, in the future, and
compliance with covenants in our credit facilities.
Our insurance may not be adequate to cover our losses that may result from our operations due to the inherent
operational risks of the tanker industry.
We carry insurance to protect us against most of the accident-related risks involved in the conduct of our business,
including marine hull and machinery insurance, protection and indemnity insurance, which include pollution risks, crew
insurance and war risk insurance. However, we may not be adequately insured to cover losses from our operational risks,
which could have a material adverse effect on us. Additionally, our insurers may refuse to pay particular claims and our
insurance may be voidable by the insurers if we take, or fail to take, certain action, such as failing to maintain certification of
our vessels with applicable maritime regulatory organizations. Any significant uninsured or under-insured loss or liability
could have a material adverse effect on our business, results of operations, cash flows and financial condition and our
16
available cash. In addition, we may not be able to obtain adequate insurance coverage at reasonable rates in the future during
adverse insurance market conditions.
Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance
more difficult for us to obtain due to increased premiums or reduced or restricted coverage for losses caused by terrorist
acts generally.
Because we obtain some of our insurance through protection and indemnity associations, which result in significant
expenses to us, we may be required to make additional premium payments.
We may be subject to increased premium payments, or calls, in amounts based on our claim records, the claim
records of our managers, as well as the claim records of other members of the protection and indemnity associations through
which we receive insurance coverage for tort liability, including pollution-related liability. In addition, our protection and
indemnity associations may not have enough resources to cover claims made against them. Our payment of these calls could
result in significant expense to us, which could have a material adverse effect on our business, results of operations, cash
flows, financial condition and available cash.
RISKS RELATED TO OUR INDEBTEDNESS
Servicing our current or future indebtedness limits funds available for other purposes and if we cannot service our
debt, we may lose our vessels.
Borrowing under our credit facilities requires us to dedicate a part of our cash flow from operations to paying
interest on our indebtedness. These payments limit funds available for working capital, capital expenditures and other
purposes, including further equity or debt financing in the future. Amounts borrowed under our credit facilities bear interest
at variable rates. Increases in prevailing rates could increase the amounts that we would have to pay to our lenders, even
though the outstanding principal amount remains the same, and our net income and cash flows would decrease. We expect
our earnings and cash flow to vary from year to year due to the cyclical nature of the tanker industry. If we do not generate or
reserve enough cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing
plans, such as:
seeking to raise additional capital;
refinancing or restructuring our debt;
selling tankers; or
reducing or delaying capital investments.
However, these alternative financing plans, if necessary, may not be sufficient to allow us to meet our debt
obligations. If we are unable to meet our debt obligations or if some other default occurs under our credit facilities, our
lenders could elect to declare that debt, together with accrued interest and fees, to be immediately due and payable and
proceed against the collateral vessels securing that debt even though the majority of the proceeds used to purchase the
collateral vessels did not come from our credit facilities.
Our credit facilities contain restrictive covenants which limit the amount of cash that we may use for other corporate
activities, which could negatively affect our growth and cause our financial performance to suffer.
Our credit facilities impose operating and financial restrictions on us. These restrictions limit our ability, or the
ability of our subsidiaries party thereto to:
pay dividends and make capital expenditures if we do not repay amounts drawn under our credit facilities or if
there is another default under our credit facilities;
incur additional indebtedness, including the issuance of guarantees;
create liens on our assets;
change the flag, class or management of our vessels or terminate or materially amend the management
agreement relating to each vessel;
sell our vessels;
merge or consolidate with, or transfer all or substantially all our assets to, another person; or
enter into a new line of business.
17
Therefore, we will need to seek permission from our lenders in order to engage in some corporate actions. Our
lenders’ interests may be different from ours and we may not be able to obtain our lenders’ permission when needed. This
may limit our ability to pay dividends to you if we determine to do so in the future, finance our future operations or capital
requirements, make acquisitions or pursue business opportunities.
If the recent volatility in LIBOR rates continues, it will affect the interest rate under our existing credit facilities or
future credit facilities which could affect our profitability, earnings and cash flow.
Amounts borrowed under our credit facilities are tied to LIBOR rates. LIBOR rates have recently been volatile, with
the spread between those rates and prime lending rates widening significantly at times. These conditions are the result of the
recent disruptions in the international credit markets. Because the interest rates borne by amounts that we may drawdown
under our existing credit facilities or future credit facilities fluctuate with changes in the LIBOR rates, if this volatility were
to continue, it would affect the amount of interest payable on amounts that we were to draw down from our existing credit
facilities or future credit facilities, which in turn, would have an adverse effect on our profitability, earnings and cash flow.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Scorpio Tankers Inc. was incorporated in the Republic of the Marshall Islands pursuant to the Marshall Islands
Business Corporations Act on July 1, 2009. Our principal executive offices are located at 9, Boulevard Charles III, Monaco
98000 and our telephone number at that location is +377-9798-5716.We provide seaborne transportation of refined petroleum
products and crude oil worldwide. We began our operations in October 2009 with three vessel owning and operating
subsidiary companies. In April 2010, we completed our initial public offering of 12,500,000 shares of common stock at a
public offering price of $13.00 per share and commenced trading on the New York Stock Exchange, or NYSE, under the
symbol “STNG”. We have since expanded our fleet and as of the date of this annual report, our fleet consists of 14 wholly
owned tankers (one LR2 tanker, four LR1 tankers, one Handymax tanker, seven MR tankers, and one post-Panamax tanker)
with a weighted average age of approximately 4.4 years compared to a weighted average age of approximately 9.1 years for
the global fleet (according to Drewry) and time charter-in and operate 21 tankers (six Handymax tankers, seven MR tankers,
three LR1 tankers and five LR2 tankers, including four vessels we expect to be delivered to us by April 2013), which we
refer to collectively as our Operating Fleet. Additionally, we currently have contracts for the construction of 33 newbuilding
vessels (19 MR tankers, six Handymax ice class 1-A tankers and eight LR2 tankers), of which, one is expected to be
delivered to us in April 2013 and the remaining 32 within 2014.
Fleet development
Newbuilding vessels
Since June 2011, we have entered into contracts for the construction of 40 fuel efficient newbuilding product tankers
with shipyards, including HMD, HSHI, SPP and DSME, which we refer to as our Newbuilding Program. As of the date of
this annual report, seven of the vessels in our Newbuilding Program have been delivered to us. We currently have contracts
for the construction of 33 vessels, consisting of 11 MR tankers with HMD for an aggregate purchase price of $368.6 million,
eight MR product tankers with SPP for an aggregate purchase price of $267.0 million, six Handymax ice class-1A tankers
with HMD for an aggregate purchase price of $187.5 million, six LR2 product tankers with HSHI for an aggregate purchase
price of $303.0 million and two LR2 product tankers with DSME for an aggregate purchase price of $100.0 million. One
vessel in our Newbuilding Program is expected to be delivered to us by April 2013 and the remaining 32 within 2014. We
also have fixed-price options to construct additional newbuilding product tankers at these yards.
As of March 28, 2013, we have paid $124.7 million of installment payments related to these newbuilding product
tankers, and are committed to make additional installment payments of $1,101.5 million. We will need to secure additional
debt or equity financing or both in addition to our 2013 Credit Facility to fully fund the remaining balance of our obligations
under our newbuilding program.
Owned vessels
We currently have 14 wholly-owned vessels and contracts for the construction of 33 additional vessels.
We sold three Handymax vessels in 2012, STI Conqueror for $21.0 million in March 2012, STI Matador for $16.2
million in April 2012, and STI Gladiator for $16.2 million in May 2012 and recorded a $4.5 million loss from disposal in
connection with the sales of these vessels. We also completed the sales of two MR product tankers, STI Diamond and STI
18
Coral in August 2012 and September 2012, respectively, for $25.25 million each and recorded a $5.9 million loss from
disposal in connection with the sales of these vessels.
In 2012, we took delivery of the first five vessels in our Newbuilding Program, STI Amber, STI Topaz STI Ruby, STI
Garnet and STI Onyx, and in January 2013 and March 2013, we took delivery of the sixth and seventh vessels in our
Newbuilding Program, STI Sapphire and STI Emerald, respectively.
Time chartered-in vessels
During 2012, we time chartered-in 21 vessels (six Handymax tankers, eight MR tankers, three LR1 tankers and four
LR2 tankers), compared to 11 vessels in 2011. We currently have 21 vessels on time charter-in agreements as of the date of
this annual report (six Handymax tankers, seven MR tankers, three LR1 tankers and five LR2 tankers, including four vessels
we expect to be delivered to us by April 2013).
Please see our fleet list under Item 4.B. “Business Overview” for further information regarding our time
chartered-in vessels.
Recent Developments
In January 2013, we reached an agreement with HMD for the construction of two additional MR product tankers for
approximately $32.5 million each. These vessels will be delivered in May and June 2014.
In January 2013, we took delivery of the sixth vessel under our newbuilding program, STI Sapphire. Upon
delivery, the vessel began a time charter for up to 80 days at $20,750 per day. The vessel was partially financed under our
2011 Credit Facility.
In February 2013, we closed on the sale 30,672,000 shares of common stock in a registered direct placement of
common shares at an offering price of $7.50 per share. We received net proceeds of $222.1 million, after deducting
placement agents’ discounts and offering expenses.
In February 2013, we reached an agreement with SPP for the construction of four MR product tankers for
approximately $32.5 million each, two of which are the exercise of options from a previous contract. The vessels are
expected to be delivered in the third and fourth quarters of 2014, respectively.
In February 2013, we exercised options with HMD for the construction of four MR product tankers for $33.0
million each and six Handymax ice class-1A tankers for approximately $31.3 million each. Two of the MR product tankers
are expected to be delivered in the second quarter of 2014, with the third and fourth MR product tankers expected to be
delivered in the third and fourth quarter of 2014, respectively. The six Handymax vessels are expected to be delivered in the
third quarter of 2014.
In February 2013, we signed a commitment letter for a $267.0 million credit facility, or the 2013 Credit Facility,
with Nordea Bank Finland plc, acting through its New York branch, ABN AMRO Bank N.V, and Skandinaviska Enskilda
Banken AB.
In March 2013, we closed on the sale of 29,012,000 shares of common stock in a registered direct placement of
common shares at an offering price of $8.10 per share. We received net proceeds of $226.7 million, after deducting
placement agents’ discounts and offering expenses.
In March 2013, we reached an agreement with HSHI for the construction of six 114,000 dwt LR2 product tankers
for approximately $50.5 million each. These vessels are expected to be delivered to us within 2014.
In March 2013, we reached an agreement with DSME for the construction of two 114,000 dwt LR2 product tankers
for approximately $50.0 million each. These vessels are expected to be delivered to us within 2014.
In March 2013, we took delivery of the seventh vessel under our newbuilding program, STI Emerald. Upon
delivery, the vessel began a time charter for up to 80 days at $19,500 per day. The vessel was partially financed under our
2011 Credit Facility.
19
In March 2013, we agreed to time charter-in two LR2 product tankers (one 115,756 dwt, 2011 built, and one
115,592 dwt, 2010 built) each for one year at $16,125 per day with expected deliveries by the middle of April 2013. We also
agreed to time charter-in a Handymax product tanker, ice-class 1B, (37,217 dwt, 2004 built) for one year at
approximately $12,700 per day. We have an option to extend the charter for an additional year at $14,000 per day. This
vessel is expected to be delivered by the middle of April 2013.
B. Business Overview
We provide seaborne transportation of refined petroleum products and crude oil worldwide. We began our
operations in October 2009 with three vessel-owning and operating subsidiary companies. In April 2010, we completed our
initial public offering of 12,500,000 shares of common stock at a public offering price of $13.00 per share and commenced
trading on the NYSE under the symbol “STNG.” We have since expanded our fleet, and as of the date of this annual report,
our fleet consists of 14 wholly owned tankers (one LR2 tanker, four LR1 tankers, one Handymax tanker, seven MR tankers,
and one post-Panamax tanker) with a weighted average age of approximately 4.4 years and 21 time chartered-in tankers (five
LR2 tankers, three LR1 tankers, seven MR tankers and six Handymax tankers), which we refer to collectively as our
Operating Fleet. Additionally, we currently have contracts for 33 newbuilding vessels (six Handymax ice class 1-A tankers,
19 MR tankers and eight LR2 tankers), of which one MR is expected to be delivered by April 2013 and the remaining 32
within 2014.
20
The following table sets forth certain information regarding our fleet as of the date of this annual report:
Vessel Name
Owned vessels
STI Highlander
1
STI Amber
2
STI Topaz
3
STI Ruby
4
STI Garnet
5
STI Onyx
6
STI Sapphire
7
STI Emerald
8
Noemi
9
10 Senatore
11 STI Harmony
12 STI Heritage
13 Venice
14 STI Spirit
Total owned DWT
Year
Built
DWT
Ice
Class Employment Vessel type
2007
2012
2012
2012
2012
2012
2013
2013
2004
2004
2007
2008
2001
2008
37,145 1A
52,000 —
52,000 —
52,000 —
52,000 —
52,000 —
52,000 —
52,000 —
72,515 —
72,514 —
73,919 1A
73,919 1A
81,408 1C
113,100 —
888,520
SHTP (1)
SMRP(4)
SMRP(4)
SMRP(4)
SMRP(4)
SMRP(4)
Spot
Spot
SPTP (2)
SPTP (2)
SPTP (2)
SPTP (2)
SPTP (2)
SLR2P (3)
Handymax
MR
MR
MR
MR
MR
MR
MR
LR1
LR1
LR1
LR1
Post-Panamax
LR2
Time Chartered-In vessels
Vessel Name
15 Freja Polaris
16 Kraslava
17 Krisjanis Valdemars
18 Histria Azure
19 Histria Coral
20 Histria Perla
21 STX Ace 6
22 Targale
23 Ugale
24 Nave Orion
25 Freja Lupus
26 Gan-Trust
27 Usma
28 SN Federica
29 Hellespont Promise
30 FPMC P Eagle
31 FPMC P Hero
32 FPMC P Ideal
33 Fair Seas
34 Pink Stars
35 Orange Stars
Year Built
2004
2007
2007
2007
2006
2005
2007
2007
2007
2013
2012
2013
2007
2003
2007
2009
2011
2012
2008
2010
2011
DWT
Ice
Class Employment Vessel type
Expiry (5)
Time Charter Info
Daily
Base
Rate
Handymax $ 12,700 10-Apr-14 (6)
Handymax $ 12,070 18-Jul-13
(7)
Handymax $ 12,000 14-Jun-13 (8)
Handymax $ 12,000 04-Apr-14 (9)
(10)
Handymax $ 13,000 17-Jul-13
(10)
Handymax $ 13,000 15-Jul-13
$ 14,150 17-May-14 (11)
$ 14,500 17-May-14 (12)
$ 14,000 15-Jan-14 (13)
$ 14,300 25-Mar-15 (14)
$ 14,760 26-Apr-14 (15)
$ 16,250 06-Jan-16 (16)
$ 13,500 03-Jan-14 (17)
$ 11,250 28-Feb-15 (18)
$ 12,500 16-Dec-13 (19)
$ 12,800 09-Sep-13 (20)
$ 14,750 19-Oct-13 (21)
(21)
$ 14,750 09-Jul-13
$ 16,000 27-Jul-13
(22)
$ 16,125 01-Apr-14 (23)
$ 16,125 01-Apr-14 (23)
MR
MR
MR
MR
MR
MR
MR
LR1
LR1
LR1
LR2
LR2
LR2
LR2
LR2
37,217 1B
37,258 1B
37,266 1B
40,394 —
40,426 —
40,471 —
46,161 —
49,999 —
49,999 1B
49,999 —
50,385 —
51,561 —
52,684 1B
72,344 —
73,669 —
73,800 —
99,995 —
99,993 —
115,406 —
115,592 —
115,756 —
SHTP (1)
SHTP (1)
SHTP (1)
SHTP (1)
SHTP (1)
SHTP (1)
SMRP(4)
SMRP(4)
SMRP(4)
Spot
SMRP(4)
SMRP(4)
SMRP(4)
Spot
SPTP (2)
SPTP (2)
SLR2P (3)
SLR2P (3)
SLR2P (3)
SLR2P (3)
SLR2P (3)
Total time chartered-in DWT
1,350,375
21
Newbuildings currently under construction
Vessel Name
36 Hull 2451
37 Hull 2452
38 Hull 2453
39 Hull 2454
40 Hull 2462
41 Hull 2463
42 Hull 2369
43 Hull 2389
44 Hull 2390
45 Hull 2391
46 Hull 2392
47 Hull 2449
48 Hull 2450
49 Hull 2458
50 Hull 2459
51 Hull 2460
52 Hull 2461
53 Hull S1138
54 Hull S1139
55 Hull S1140
56 Hull S1141
57 Hull S1142
58 Hull S1143
59 Hull S1144
60 Hull S1145
61 Hull S703
62 Hull S704
63 Hull S705
64 Hull S706
65 Hull S709
66 Hull S710
67 LR2 #1
68 LR2 #2
DWT
Ice
Class
38,000 1A
38,000 1A
38,000 1A
38,000 1A
38,000 1A
38,000 1A
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
52,000
114,000
114,000
114,000
114,000
114,000
114,000
114,000
114,000
Vessel type
Handymax
Handymax
Handymax
Handymax
Handymax
Handymax
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
MR
LR2
LR2
LR2
LR2
LR2
LR2
LR2
LR2
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(24)
(25)
(25)
(25)
(25)
(25)
(25)
(25)
(25)
(26)
(26)
(26)
(26)
(26)
(26)
(27)
(27)
Total newbuilding DWT
2,128,000
Total DWT
4,366,895
(1)
(2)
(3)
(4)
This vessel operates in or is expected to operate in the Scorpio Handymax Tanker Pool (SHTP). SHTP is operated by
Scorpio Commercial Management (SCM). SHTP and SCM are related parties to the Company.
This vessel operates in or is expected to operate in the Scorpio Panamax Tanker Pool (SPTP). SPTP is operated by
SCM. SPTP is a related party to the Company.
This vessel operates in or is expected to operate in the Scorpio LR2 Pool (SLR2P). SLR2P is operated by SCM.
SLR2P is a related party to the Company.
This vessel operates in or is expected to operate in the Scorpio MR Pool (SMRP). SMRP is operated by SCM. SMRP
is a related party to the Company.
(5) Redelivery from the charterer is plus or minus 30 days from the expiry date.
(6) We have an option to extend the charter for an additional year at $14,000 per day. This vessel is expected to be
delivered in April 2013.
(7) We have an option to extend the charter for an additional year at $13,070 per day.
22
(8) We have an option to extend the charter for an additional year at $13,000 per day. The agreement also contains a 50%
profit and loss sharing provision whereby we split all of the vessel’s profits and losses above or below the daily base
rate with the vessel’s owner.
(9)
In April 2013, the daily base rate will increase to $12,600 per day for one year thereafter. We have an option to extend
the term of the charter for an additional year at $13,550 per day.
(10) Represents the average rate for the two year duration of the agreement. The rate for the first year is $12,750 per day
and the rate for the second year is $13,250 per day. We have an option to extend the charter for an additional year at
$14,500 per day.
(11) We have an option to extend the charter for an additional year at $15,150 per day.
(12) We have options to extend the charter for up to three consecutive one year periods at $14,850 per day, $15,200 per day
and $16,200 per day, respectively.
(13) We have an option to extend the charter for an additional year at $15,000 per day.
(14) We have an option to extend the charter for an additional year at $15,700 per day.
(15) We have an option to extend the charter for an additional year at $16,000 per day.
(16) The daily base rate represents the average rate for the three year duration of the agreement. The rate for the first
year is $15,750 per day, the rate for the second year is $16,250 per day, and the rate for the third year is $16,750 per
day. We have options to extend the charter for up to two consecutive one year periods at $17,500 per day and
$18,000 per day, respectively.
(17) We have an option to extend the charter for an additional year at $14,500 per day.
(18) We have an option to extend the charter for an additional year at $12,500 per day. We have also entered into an
agreement with the owner whereby we split all of the vessel’s profits above the daily base rate.
(19) We have an option to extend the charter for an additional six months at $14,250 per day.
(20) We have options to extend the charter for up to two consecutive one year periods at $13,400 per day and $14,400 per
day, respectively. We have also entered into an agreement with a third party whereby we split all of the vessel’s profits
and losses above or below the daily base rate.
(21) We have options to extend the charters for three consecutive six month periods at $15,000 per day, $15,250 per day,
and $15,500 per day respectively. FPMC P Hero is expected to be delivered in April 2013 and FPMC P Ideal was
delivered in January 2013.
(22) We have options to extend the charter for three consecutive six month periods at $16,250 per day, $16,500 per day,
and $16,750 per day respectively.
(23) These vessels are expected to be delivered in April 2013.
(24) These Newbuilding vessels are being constructed at HMD (Hyundai Mipo Dockyard Co., Ltd. of South Korea). One
vessel is expected to be delivered in April 2013, and the remaining 16 vessels are expected to be delivered by the end
of 2014.
(25) These Newbuilding vessels are being constructed at SPP (SPP Shipbuilding Co., Ltd. of South Korea). These eight
vessels are expected to be delivered during the second, third and fourth quarters of 2014.
(26) These Newbuilding vessels are being constructed at HSHI (Hyundai Samho Heavy Industries Co., Ltd.). These six
vessels are expected to be delivered in the third and fourth quarters of 2014.
(27) These Newbuilding vessels are being constructed at DSME (Daewoo Shipbuilding and Marine Engineering Co., Ltd.).
These two vessels are expected to be delivered in the fourth quarter of 2014.
23
Chartering strategy
Generally, we operate our vessels in commercial pools on time charters or in the spot market.
Commercial Pools
To increase vessel utilization and thereby revenues, we participate in commercial pools with other shipowners of
similar modern, well-maintained vessels. As of the date of this annual report, 27 of the vessels in our Operating Fleet operate
in one of the Scorpio Group Pools. 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 employ
experienced commercial managers and operators who have close working relationships with customers and brokers, while
technical management is performed by each shipowner. Pools negotiate charters with customers primarily in the spot market.
The size and scope of these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and
contracts of affreightment, or COAs, thus generating higher effective TCE revenues than otherwise might be obtainable in
the spot market.
Time Charters
Time charters give us a fixed and stable cash flow for a known period of time. Time charters also mitigate in part the
seasonality of the spot market business, which is generally weaker in the second and third quarters of the year. In the future,
we may opportunistically look to enter our vessels into time charter contracts. We may also enter into time charter contracts
with profit sharing agreements, which enable us to benefit if the spot market increases. As of the date of this annual report,
none of the vessels in our Operating Fleet operate under long-term time charters (greater than one year).
Spot Market
A spot market voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for
an agreed freight per ton of cargo or a specified total amount. Under spot market voyage charters, we pay voyage expenses
such as port, canal and bunker costs. Spot charter rates are volatile and fluctuate on a seasonal and year-to-year basis.
Fluctuations derive from imbalances in the availability of cargoes for shipment and the number of vessels available at any
given time to transport these cargoes. Vessels operating in the spot market generate revenue that is less predictable, but may
enable us to capture increased profit margins during periods of improvements in tanker rates. As of the date of this annual
report, four of the vessels in our Operating Fleet, STI Sapphire, STI Emerald, Nave Orion, and SN Federica, operate in the
spot market.
Management of our fleet
Commercial and Technical Management
Our vessels are commercially managed by Scorpio Commercial Management S.A.M., or SCM and technically
managed by Scorpio Ship Management S.A.M., or SSM, pursuant to a Master Agreement (which may be terminated upon a
two year notice). SCM and SSM are related parties of ours. We expect that additional vessels that we may acquire in the
future will also be managed under the Master Agreement or on substantially similar terms.
SCM’s services include securing employment, in the spot market and on time charters, for our vessels. SCM also
manages the Scorpio Group Pools. For commercial management of our vessels that do not operate in any of the Scorpio
Group Pools, we pay SCM a fee of $250 per vessel per day for each Panamax, LR1 and LR2 vessel and $300 per vessel per
day for each Handymax and MR vessels, plus 1.25% commission on gross revenues per charter fixture. Effective January 1,
2013, all participants in the Scorpio Group Pools collectively pay SCM a pool management fee of $250 per vessel per day
with respect to our LR2 vessels, $300 per vessel per day with respect to each of our Panamax vessels and $325 per vessel per
day with respect to each of our Handymax and MR vessels, plus 1.50% commission on gross revenues per charter fixture.
These are the same fees that SCM charges other vessels in these pools, including third party owned vessels.
SSM’s services include day-to-day vessel operation, performing general maintenance, monitoring regulatory and
classification society compliance, customer vetting procedures, supervising the maintenance and general efficiency of
vessels, arranging the hiring of qualified officers and crew, arranging and supervising drydocking and repairs, purchasing
supplies, spare parts and new equipment for vessels, appointing supervisors and technical consultants and providing technical
support. We currently pay SSM $548 per vessel per day to provide technical management services for each of our vessels.
This fee is lower than that charged to third parties by SSM.
24
Administrative Services Agreement
We have an Administrative Services Agreement with Scorpio Services Holding Limited, or SSH, or our
Administrator, for the provision of administrative staff and office space, and administrative services, including accounting,
legal compliance, financial and information technology services. SSH is a related party of ours. Liberty, a company affiliated
with us, acted as our Administrator until March 13, 2012 when the Administrative Services Agreement was novated to SSH.
The effective date of the novation was November 9, 2009, the date that we first entered into the agreement with Liberty. We
reimburse our current Administrator for the reasonable direct or indirect expenses it incurs in providing us with the
administrative services described above. Our Administrator also arranges vessel sales and purchases for us. The services
provided to us by our Administrator may be sub-contracted to other entities within the Scorpio Group.
We pay our Administrator a fee for arranging vessel purchases and sales for us, equal to 1% of the gross purchase or
sale price, payable upon the consummation of any such purchase or sale. For the years ended December 31, 2012 and 2011,
we paid our Administrator $2.4 million and $0.7 million in fees, respectively, relating to vessel acquisitions and sales. We
believe this 1% fee on purchases and sales is customary in the tanker industry.
Further, pursuant to our administrative services agreement, our Administrator, on behalf of itself and other members
of the Scorpio Group, has agreed that it will not directly own product or crude tankers ranging in size from 35,000 dwt to
200,000 dwt.
Our administrative services agreement, whose effective commencement began in December 2009, was
automatically renewed on December 31, 2012 for an additional term of two years.
The International Oil Tanker Shipping Industry
All the information and data presented in this section, including the analysis of the oil tanker shipping industry, has
been provided by Drewry Shipping Consultants Ltd., or Drewry. The statistical and graphical information contained herein
is drawn from Drewry’s database and other sources. According to Drewry: (i) certain information in Drewry’s database is
derived from estimates or subjective judgments; (ii) the information in the databases of other maritime data collection
agencies may differ from the information in Drewry’s database; and (iii) while Drewry has taken reasonable care in the
compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is
subject to limited audit and validation procedures.
Oil Tanker Demand
Demand for crude oil and refined petroleum products is affected by a number of factors including general economic
conditions (such as increases and decreases in industrial production), oil prices, environmental concerns, weather conditions,
and competition from alternative energy sources.
The world economy grew continuously from 2000 to 2008, but growth came to a halt in 2009 when the world went
into a global economic recession. Since 2009, the world economy has returned to a state of growth, with a 3.1% increase in
global GDP in 2012, generated largely by China and India.
World oil consumption has followed a similar pattern. From 2000 to 2007, world oil consumption grew
considerably, but receded in 2008 and 2009 due to global economic downturn. World oil consumption has since recovered,
with consumption rising to 89.7 million bpd in 2012. Since 2000, world oil consumption has grown at a compound annual
growth rate, or CAGR, of approximately 1.4%.
25
World Oil Consumption: 1990 – 2012(1)
(Million Barrels Per Day)
(1) Provisional
Source: Drewry Maritime Research
Oil consumption is either static or declining in most of the developed world, but is increasing in most of the
developing world. In recent years, Asia, particularly China, has been the main generator of additional demand for oil.
Traditional sources, such as oil from the Middle East, have largely fulfilled this demand. From 2000 to 2012, Chinese oil
consumption grew by a CAGR of 5.9%, reaching 9.54 million barrels per day. Notably, oil consumption on a per capita basis
is still low in countries such as China and India as compared to the United States and Western Europe.
Seasonal trends also affect world oil consumption and, consequently, oil tanker demand. While trends in
consumption do vary with season, peaks in tanker demand frequently precede seasonal consumption peaks due to anticipated
consumer demand by refiners and suppliers. Seasonal peaks in oil demand can be broadly classified into two categories:
increased demand prior to winter in the Northern Hemisphere, during which heating oil consumption increases, and increased
demand for gasoline prior to the summer driving season in the United States.
Production trends have generally followed oil consumption patterns, though changes in oil inventories also play a
part in determining production levels.
Production and exports from the Middle East, particularly countries that are members of the Organization of the
Petroleum Exporting Countries, or OPEC, have historically had a significant impact on the demand for tanker capacity, and,
consequently, on tanker charter hire rates, due to the relatively long distances between the Middle East and typical destination
ports. Oil exports from short-haul regions, such as Latin America and the North Sea, are significantly closer to ports used by
the primary consumers of such exports, which results in shorter average voyage length as compared to oil exports from the
Middle East. Therefore, production in short-haul regions has historically increased the demand for vessels in the Handy,
Panamax and Aframax market segments, but has had less of an impact on the demand for larger vessels.
Oil Refinery Capacity
Oil refineries also vary greatly in the quantity, variety and specification of products that they produce, and it is
common for tankers to take products into and out of the same refinery. This global multi-directional trade pattern enables
owners and operators of product tankers to engage in charters of triangulation, thereby maximizing revenue.
Changes in refinery throughput are somewhat driven by changes in the location of refinery capacity. Capacity
increases are taking place mostly in the developing world, especially in Asia, and this is leading to changes in voyage
patterns and longer voyages.
26
In response to growing domestic demand, Chinese refinery throughput has grown at the fastest rate of any global
region in the last decade, ahead of the Middle East and other emerging economies. By contrast, refinery throughput in North
America has actually declined in the last decade.
The shift in global refinery capacity from the developed to the developing world is likely to continue as refinery
development plans are heavily focused on areas such as Asia and the Middle East, with relatively little capacity additions
planned for North America and Europe.
World Oil Trades
World oil trades are naturally the result of geographical imbalances between areas of oil consumption and
production, although in some sectors, such as refined petroleum products, arbitrage can have an impact on trade flows.
The volume of crude oil moved by sea each year also reflects underlying changes in world oil consumption and
production. Seaborne trade in crude oil in 2012 is provisionally estimated at 2.1 billion tons, while refined petroleum
products movement is provisionally estimated at 910 million tons.
Demand for oil tankers is primarily determined by the volume of crude oil and refined petroleum products
transported and the distances over which they are transported. Tanker demand is generally expressed in ton miles, which are
calculated as the number of metric tons of oil carried multiplied by the miles over which the oil is carried.
The transportation of crude oil is typically unidirectional as most oil is transported from a few areas of production to
many regions of consumption, where it is refined into petroleum products. Conversely, the transportation of refined
petroleum products and associated cargoes is multidirectional as there are several areas of both production and consumption.
In terms of ton miles, geographical changes in the pattern of trade have had a positive impact on tanker demand
despite only modest growth in the volume of oil moved by sea since 2000. From 2000 to 2012, ton mile demand in the
tanker sector grew at a CAGR of 2.6%, whereas the overall increase in trade over the same period was equivalent to a
CAGR of 2.2%.
As a result of changes in patterns of trade, the average loaded voyage haul length of refined product trades has risen
from a recent market low of 2,283 miles in 2000 to 2,800 miles in 2012, equivalent to a CAGR of 1.7%.
Oil Tanker Supply
The world oil tanker fleet is generally divided into five major types of vessel classifications based on vessel carrying
capacity. Additionally, the tanker fleet is divided between crude tankers that carry dirty products, such as crude oil or residual
fuel oil, and product tankers that carry clean products, such as refined petroleum products, including gasoline, jet fuel,
kerosene, naphtha and gas oil.
While product tankers can carry dirty products, they generally do not switch between clean and dirty cargoes
because a vessel’s tank must be cleaned prior to loading a different cargo type. Product tankers do not form a distinct vessel
classification, but are identified on the basis of various factors, including technical and trading histories.
A number of tankers also have the capability to carry chemicals as well as refined petroleum products. These ships
are sometimes referred to as product/chemical tankers and may switch between the carriage of chemicals or refined
petroleum products depending on market conditions and employment opportunities.
The supply of tankers is measured in deadweight tons, or dwt. The supply of tanker capacity is determined by the
age and size of the existing global fleet, the number of vessels on order and the number of ships removed from the fleet by
scrapping and international regulations. Other factors which can affect the short-term supply of tankers include the number of
combined carriers (which are vessels capable of trading wet and dry cargoes) trading in the oil market and the number of
tankers in storage, dry-docked, awaiting repairs or otherwise out of commission.
There are eight main fleet categories within the oil tanker fleet: Small, Handy, Handymax (which include MR
product tankers), Panamax (which include LR1 product tankers), Aframax (which include LR2 product tankers), Suezmax,
Very Large Crude Carrier, or VLCC, and Ultra Large Crude Carrier, or ULCC.
27
The oil tanker fleet at the end of January 2013 consisted of 3,166 vessels with a combined capacity of 413.4
million dwt.
Oil Tanker Fleet – January 31, 2013
Sector
Deadweight Tons
(dwt)
Small ........................... 10-29,999
Handy.......................... 30-41,999
Handymax ................... 42-54,999
Panamax ...................... 55-79,999
Aframax ...................... 80-119,999
Suezmax ...................... 120-199,999
VLCC.......................... 200-320,000
ULCC.......................... 320,000+
Number of
% of Fleet
Vessels
228
152
407
397
902
470
574
36
3,166
7.2
4.8
12.9
12.5
28.5
14.8
18.1
1.1
100.0
Source: Drewry Maritime Research
Capacity
(million dwt)
% of Fleet
4.1
5.6
19.2
28.5
96.6
72.7
174.9
11.8
413.4
1.0
1.4
4.6
6.9
23.4
17.6
42.3
2.9
100.0
Between the end of 2000 and January 2013 the size of the total tanker fleet grew by 54%, with increases in fleet size
taking place across all sectors.
The Product Tanker Fleet
The product tanker fleet as of January 31, 2013 comprises 1,239 ships of 70.9 million dwt.
World Product(1) Tanker Fleet January 31, 2013
Sector
Deadweight Tons
(dwt)
Small ......................................
Handy (MR1) .........................
Handymax (MR2) ..................
Panamax (LR1) ......................
Aframax (LR2) ......................
10-29,999
30-41,999
42-54,999
55-79,999
80,000+
Number of
% of Fleet
Vessels
209
135
403
293
199
1,239
16.9
10.9
32.5
23.6
16.1
100.0
Capacity
(million dwt )
% of Fleet
3.7
5
18.9
21.3
22
70.9
5.2
7.1
26.7
30.0
31.0
100.0
(1) Excludes chemical tankers
Source: Drewry Maritime Research
The supply of the smallest product tanker category fleet (tankers with 10,000-29,999 dwt) has declined in favor of
larger ships that are more suited to long-haul routes.
World Product Tanker Fleet: Age Profile, January 31, 2013
Left Hand Scale = Million Dwt; Right Hand Scale = No of Ships
Source: Drewry Maritime Research
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Oil Tanker Orderbook
As of January 31, 2013, the oil tanker orderbook amounted to 362 tankers of 51.3 million dwt, equivalent to 12.4%
of the current fleet. At its peak in 2008, the orderbook to existing fleet ratio was just over 40%. The decrease to its current
level is due to deliveries from the orderbook outpacing new orders being placed. The current total tanker orderbook,
including crude tankers and product tankers, and the schedule of deliveries are shown below.
The Total Tanker Fleet & Orderbook: January 31, 2013
Size
Existing Fleet 2013
No.
Dwt No. Dwt No. Dwt No. Dwt No.
Dwt No. Dwt No
Dwt
2014
2015
2016+
Total
% Existing Fleet
7
7
0.1 0
0.2 2
0.1 3.1% 2.4%
0.0
10-29,999 ...................... 228
0.0
0.3 5.9% 5.4%
30-41,999 ...................... 152
0.2 99 4.9 24.3% 25.5%
42-54,999 ...................... 407
0.3 28 2.0 7.1% 7.0%
55-79,999 ...................... 397
0.0 57 6.3 6.3% 6.5%
80-119,999 .................... 902
0.2 84 13.1 17.9% 18.0%
120-199,999 .................. 470
0.0 38 11.8 6.6% 6.7%
200,000-319,999 ........... 574
320,000+ ....................... 36
0.0 40 12.8 111.1% 108.5%
Total ............................. 3,166 413.4 242 35.9 87 11.9 23 2.8 10 0.7 362 51.3 11.4% 12.4%
0.0 0
4.1
5.6
0.1 0
19.2 58 2.9 28 1.4 8
28.5 18 1.3 6
0.4 0
96.6 29 3.2 21 2.3 7
72.7 67 10.4 10 1.5 6
174.9 23 7.2 13 4.0 2
2.2 0
11.8 33 10.6 7
0.0
0.0
0.4
0.0
0.8
1.0
0.6
0.0
0
0
5
4
0
1
0
0
7
9
Product Tanker Orderbook
Source: Drewry Maritime Research
As of January 31, 2013, the product tanker orderbook amounted to 145 ships of 8.3 million dwt, equivalent to 11.7%
of the current fleet.
World Product Tanker Orderbook, January 31, 2013
Scheduled Deliveries
2014
2015
Size (’000 dwt)
Existing Fleet* 2013
No.
209
10-29,999 ......................
135
30-41,999 ......................
403
42-54,999 ......................
293
55-79,999 ......................
80,000+ .........................
199
Total ............................. 1,239
Dwt No. Dwt No. Dwt No. Dwt No. Dwt No.
6 0.1 0 0.0 0 0.0 0 0.0
3.7
6
6 0.2 2 0.1 0 0.0 0 0.0
5.0
8
18.9 54 2.7 28 1.4 8 0.4 5 0.2
95
21.3 13 0.9 5 0.4 0 0.0 4 0.3
22
22.0 8 0.9 6 0.7 0 0.0 0 0.0
14
70.9 87 4.8 41 2.6 8 0.4 9 0.5
145
2016+ Total Orderbook % of Fleet
No Dwt
2.9 2.7
5.9 6.0
23.6 24.9
7.5 7.5
7.0 7.3
11.7 11.7
Dwt
0.1
0.3
4.7
1.6
1.6
8.3
Source: Drewry Maritime Research
The Product Tanker Freight Market
Tanker charter hire rates and vessel values for all tankers are influenced by supply and demand for tanker
capacity. However, the product tanker segment is generally less volatile than other crude market segments because these
vessels mainly transport refined petroleum products that are not subject to the same degree of volatility as the crude oil
market. Time charter rates are also less volatile than spot rates because chartered vessels are fixed for a longer period of
time. In the spot market, rates will reflect the immediate underlying conditions in vessel supply and demand and are thus
prone to more volatility. Recent trends in rates in the time charter equivalent of spot rates and time charter rates are shown
in the tables below.
Tanker charter hire rates and vessel values for all tankers are strongly influenced by supply and demand for tanker
capacity. Small changes in tanker utilization have historically led to relatively large fluctuations in tanker charter rates for
VLCCs, more moderate price volatility in the Suezmax, Aframax and Panamax markets and less volatility in the Handy
market compared to the tanker market as a whole.
From 2005 to 2008, time charter rates for all sizes of oil tankers rose steeply, reflecting additional demand for tanker
capacity generated by increased demand for oil and seaborne movements. This led to a much tighter balance between vessel
demand and supply, and freight rates consequently rose. However, as the world economy weakened in the second half of
2008, demand for oil also fell, negatively impacting tanker demand and freight rates. Rates resultantly declined in 2009,
recovered briefly in 2010, but remained weak for all of 2011 and 2012, especially for larger sized oil tankers.
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Oil Tanker One Year Time Charter Rates: 2000-2013
(US$/Day Period Averages)
Size Range
Age
2000 .........................
2001 .........................
2002 .........................
2003 .........................
2004 .........................
2005 .........................
2006 .........................
2007 .........................
2008 .........................
2009 .........................
2010 .........................
2011 .........................
2012 .........................
Jan 2013 ..................
30,000 Dwt 40-45,000 Dwt
60,000 Dwt 95-105,000 Dwt
150,000 Dwt 280,000 Dwt
5 Yr
12,454
15,583
11,417
13,267
15,629
18,854
21,417
22,200
21,438
13,675
11,038
12,300
12,013
12,500
5 Yr
13,958
17,563
13,288
14,846
19,029
25,271
26,792
25,250
23,092
14,850
12,388
13,633
13,325
13,750
10 Yr
14,854
19,708
15,292
14,163
18,813
21,833
23,225
22,292
19,704
13,675
11,738
10,275
9,808
10,750
5 Yr
18,854
23,125
16,896
19,146
29,500
34,771
35,150
33,413
34,708
19,663
18,571
15,208
13,588
13,500
Source: Drewry Maritime Research
5 Yr
27,042
30,500
17,750
26,104
37,875
42,292
42,667
43,042
46,917
27,825
25,967
19,700
17,504
16,750
5 Yr
35,250
37,958
23,458
33,604
53,875
60,125
55,992
53,333
74,663
38,533
36,083
24,642
20,996
21,500
Environmental and Other Regulations
Government laws and regulations significantly affect the ownership and operation of our vessels. We are subject to
various international conventions, laws and regulations in force in the countries in which our vessels may operate or are
registered. Compliance with such laws, regulations and other requirements entails significant expense, including vessel
modification and implementation costs.
A variety of government, quasi-governmental and private organizations subject our vessels to both scheduled and
unscheduled inspections. These organizations include the local port authorities, national authorities, harbor masters or
equivalent entities, classification societies, relevant flag state (country of registry) and charterers, particularly terminal
operators and oil companies. Some of these entities require us to obtain permits, licenses, certificates and approvals for the
operation of our vessels. Our failure to maintain necessary permits, licenses, certificates or approvals could require us to incur
substantial costs or temporarily suspend operation of one or more of the vessels in our fleet, or lead to the invalidation or
reduction of our insurance coverage.
We believe that the heightened levels of environmental and quality concerns among insurance underwriters,
regulators and charterers have led to greater inspection and safety requirements on all vessels and may accelerate the
scrapping of older vessels throughout the industry. Increasing environmental concerns have created a demand for tankers that
conform to stricter environmental standards. We are required to maintain operating standards for all of our vessels that
emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with
applicable local, national and international environmental laws and regulations. We believe that the operation of our vessels
is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material
permits, licenses, certificates or other authorizations necessary for the conduct of our operations; however, because such laws
and regulations are frequently changed and may impose increasingly strict requirements, we cannot predict the ultimate cost
of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels.
In addition, a future serious marine incident that results in significant oil pollution or otherwise causes significant adverse
environmental impact, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, could result in additional
legislation or regulation that could negatively affect our profitability.
International Maritime Organization
The International Maritime Organization, or the IMO, is the United Nations agency for maritime safety and the
prevention of pollution by ships. The IMO has adopted several international conventions that regulate the international
shipping industry, including but not limited to the International Convention on Civil Liability for Oil Pollution Damage of
1969, generally referred to as CLC, the International Convention on Civil Liability for Bunker Oil Pollution Damage, and the
International Convention for the Prevention of Pollution from Ships of 1973, or the MARPOL Convention. The MARPOL
Convention is broken into six Annexes, each of which establishes environmental standards relating to different sources of
pollution: Annex I relates to oil leakage or spilling; Annexes II and III relate to harmful substances carried, in bulk, in liquid
30
or packaged form, respectively; Annexes IV and V relate to sewage and garbage management, respectively; and Annex VI,
adopted by the IMO in September of 1997, relates to air emissions.
Air Emissions
In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution. Effective May 2005, Annex
VI sets limits on nitrogen oxide emissions from ships whose diesel engines were constructed (or underwent major
conversions) on or after January 1, 2000. It also prohibits “deliberate emissions” of “ozone depleting substances,” defined to
include certain halons and chlorofluorocarbons. “Deliberate emissions” are not limited to times when the ship is at sea; they
can for example include discharges occurring in the course of the ship’s repair and maintenance. Emissions of “volatile
organic compounds” from certain tankers, and the shipboard incineration (from incinerators installed after January 1, 2000)
of certain substances (such as polychlorinated biphenyls (PCBs)) are also prohibited. Annex VI also includes a global cap on
the sulfur content of fuel oil (see below).
The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive
reduction of the amount of sulfur contained in any fuel oil used on board ships. As of January 1, 2012, the amended Annex
VI requires that fuel oil contain no more than 3.50% sulfur. By January 1, 2020, sulfur content must not exceed 0.50%,
subject to a feasibility review to be completed no later than 2018.
Sulfur content standards are even stricter within certain Emission Control Areas ( or ECAs). As of July 1, 2010,
ships operating within an ECA were not permitted to use fuel with sulfur content in excess of 1.0% (from 1.50%), which will
be further reduced to 0.10% on January 1, 2015. Amended Annex VI establishes procedures for designating new ECAs.
Currently, the Baltic Sea and the North Sea have been so designated. On August 1, 2012, certain coastal areas of North
America were designated ECAs as will, the United States Caribbean Sea, effective January 1, 2014. 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 we operate, compliance with these regulations could entail
significant capital expenditures or otherwise increase the costs of our operations.
As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for new ships. It
makes the Energy Efficiency Design Index (EEDI) apply to all new ships, and the Ship Energy Efficiency Management Plan
(SEEMP) apply to all ships.
Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for new marine
engines, depending on their date of installation. The U.S. Environmental Protection Agency promulgated equivalent (and in
some senses stricter) emissions standards in late 2009. As a result of these designations or similar future designations, we
may be required to incur additional operating or other costs.
Safety Management System Requirements
The IMO also adopted the International Convention for the Safety of Life at Sea, or SOLAS, and the International
Convention on Load Lines, or LL, which impose a variety of standards that regulate the design and operational features of
ships. The IMO periodically revises the SOLAS and LL standards. The Convention on Limitation for Maritime Claims
(LLMC) was recently amended and the amendments are expected to go into effect on June 8, 2015. The amendments alter the
limits of liability for a loss of life or personal injury claim and a property claim against ship owners.
Our operations are also subject to environmental standards and requirements contained in the International Safety
Management Code for the Safe Operation of Ships and for Pollution Prevention, or ISM Code, promulgated by the IMO
under Chapter IX of SOLAS. The ISM Code requires the owner of a vessel, or any person who has taken responsibility for
operation of a vessel, to develop an extensive safety management system that includes, among other things, the adoption of a
safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and
describing procedures for responding to emergencies. We rely upon the safety management system that has been developed
for our vessels for compliance with the ISM Code.
The ISM Code requires that vessel operators also obtain a safety management certificate for each vessel they
operate. This certificate evidences compliance by a vessel’s management with code requirements for a safety management
system. No vessel can obtain a certificate unless its manager has been awarded a document of compliance, issued by each
flag state, under the ISM Code. We have obtained documents of compliance for its offices and safety management
certificates for all of our vessels for which the certificates are required by the ISM Code. These documents of compliance and
safety management certificates are renewed as required.
31
Noncompliance with the ISM Code and other IMO regulations may subject the shipowner or bareboat charterer to
increased liability, may lead to decreases in, or invalidation of, available insurance coverage for affected vessels and may
result in the denial of access to, or detention in, some ports.
Pollution Control and Liability Requirements
IMO has negotiated international conventions that impose liability for pollution in international waters and the
territorial waters of the signatory nations to such conventions. For example, 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, as amended by different Protocol in 1976, 1984, and 1992, and amended in 2000, or the CLC. Under the CLC and
depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel’s
registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of
persistent oil, subject to certain exceptions. The 1992 Protocol changed certain limits on liability, expressed using the
International Monetary Fund currency unit of Special Drawing Rights. The limits on liability have since been amended so
that compensation limits on liability were raised. The right to limit liability is forfeited under the CLC where the spill is
caused by the shipowner’s actual fault and under the 1992 Protocol where the spill is caused by the shipowner’s intentional or
reckless act or omission where the shipowner knew pollution damage would probably result. The CLC requires ships covered
by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner’s liability for a single incident.
We believe that our protection and indemnity insurance will cover the liability under the plan adopted by the IMO.
The IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker
Convention, to impose strict liability on shipowners for pollution damage in jurisdictional waters of ratifying states caused by
discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain
insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international
limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for
Maritime Claims of 1976, as amended). With respect to non-ratifying states, liability for spills or releases of oil carried as
fuel in ship’s bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or
damages occur.
In addition, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water
and Sediments, or the BWM Convention, in February 2004. The BWM Convention’s implementing regulations call for a
phased introduction of mandatory ballast water exchange requirements to be replaced in time with mandatory concentration
limits. The BWM Convention will not become effective until 12 months after it has been adopted by 30 states, the combined
merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. To date, there
has not been sufficient adoption of this standard for it to take force. However, Panama may adopt this standard in the
relatively near future, which would be sufficient for it to take force. Upon entry into force of the BWM Convention, mid-
ocean ballast exchange would be mandatory. Vessels would be required to be equipped with a ballast water treatment system
that meets mandatory concentration limits not later than the first intermediate or renewal survey, whichever occurs first, after
the anniversary date of delivery of the vessel in 2014, for vessels with ballast water capacity of 1500-5000 cubic meters, or
after such date in 2016, for vessels with ballast water capacity of greater than 5000 cubic meters. If mid-ocean ballast
exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean
carriers. Although we do not believe that the costs of compliance with a mandatory mid-ocean ballast exchange would be
material, it is difficult to predict the overall impact of such a requirement on our operations.
The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations,
if any, may be passed by the IMO and what effect, if any, such regulations might have on our operations.
U.S. Regulations
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the
protection and cleanup of the environment from oil spills. OPA affects all “owners and operators” whose vessels trade in the
United States, its territories and possessions or whose vessels operate in U.S. waters, which includes the U.S. territorial sea
and its 200 nautical mile exclusive economic zone. The United States has also enacted the Comprehensive Environmental
Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than
oil, whether on land or at sea. OPA and CERCLA both define “owner and operator” in the case of a vessel as any person
owning, operating or chartering by demise, the vessel. Accordingly, both OPA and CERCLA impact our operations.
32
Under OPA, vessel owners and operators are “responsible parties” and are jointly, severally and strictly liable
(unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and
clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. OPA defines
these other damages broadly to include:
injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;
injury to, or economic losses resulting from, the destruction of real and personal property;
net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or
personal property, or natural resources;
loss of subsistence use of natural resources that are injured, destroyed or lost;
lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or
natural resources; and
net cost of increased or additional public services necessitated by removal activities following a discharge of
oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.
OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs. Effective July
31, 2009, the U.S. Coast Guard adjusted the limits of OPA liability to the greater of $2,000 per gross ton or $17.088 million
for any double-hull tanker that is over 3,000 gross tons (subject to periodic adjustment for inflation), and our fleet is entirely
composed of vessels of this size class. These limits of liability do not apply if an incident was proximately caused by the
violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent,
employee or a person acting pursuant to a contractual relationship), or a responsible party’s gross negligence or willful
misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the
incident where the responsibility party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as
requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the
Federal Water Pollution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.
CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal
and remedial costs, as well as damage for injury to, or destruction or loss of, natural resources, including the reasonable costs
associated with assessing same, and health assessments or health effects studies. There is no liability if the discharge of a
hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under
CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo and
the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible
person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted
from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction
or operating standards or regulations. The limitation on liability also does not apply if the responsible person fails or refused
to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is
subject to OPA.
OPA and CERCLA both require owners and operators of vessels to establish and maintain with the U.S. Coast
Guard evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular
responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by
providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We have provided such
evidence and received certificates of financial responsibility from the U.S. Coast Guard’s for each of our vessels as
required to have one.
OPA permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring
within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA. Some states have
enacted legislation providing for unlimited liability for discharge of pollutants within their waters, however, in some cases,
states which have enacted this type of legislation have not yet issued implementing regulations defining tanker owners’
responsibilities under these laws.
The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or
statutes, including the raising of liability caps under OPA. For example, on August 15, 2012, the U.S. Bureau of Safety and
Environmental Enforcement (BSEE) issued a final drilling safety rule for offshore oil and gas operations that strengthens the
requirements for safety equipment, well control systems, and blowout prevention practices. Compliance with any new
33
requirements of OPA may substantially impact our cost of operations or require us to incur additional expenses to comply
with any new regulatory initiatives or statutes.
Through our P&I Club membership, we expect to maintain pollution liability coverage insurance in the amount of
$1 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance
coverage, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The U.S. Clean Water Act, or CWA, prohibits the discharge of oil, hazardous substances and ballast water in U.S.
navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties
for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and
damages and complements the remedies available under OPA and CERCLA. Furthermore, many 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 may be more stringent than U.S.
federal law.
The United States Environmental Protection Agency, or EPA, has enacted rules requiring a permit regulating ballast
water discharges and other discharges incidental to the normal operation of certain vessels within United States waters under
the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP. For a new vessel delivered
to an owner or operator after September 19, 2009 to be covered by the VGP, the owner must submit a Notice of Intent, or
NOI, at least 30 days before the vessel operates in United States waters. The EPA has proposed a draft 2013 VGP to replace
the current VGP upon its expiration on December 19, 2013. The VGP focuses on authorizing discharges incidental to
operations of commercial vessels and the new VGP is expected to contain numeric ballast water discharge limits for most
vessels to reduce the risk of invasive species in US waters, more stringent requirements for exhaust gas scrubbers and the use
of environmentally acceptable lubricants.
U.S. Coast Guard regulations adopted and proposed for adoption under the U.S. National Invasive Species Act, or
NISA, impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering U.S.
waters, which could require the installation of equipment on our vessels to treat ballast water before it is discharged or the
implementation of other port facility disposal arrangements or procedures, and/or otherwise restrict our vessels from entering
U.S. waters. In 2009, the Coast Guard proposed new ballast water management standards and practices, including limits
regarding ballast water releases. As of June 21, 2012, the U.S. Coast Guard implemented revised regulations on ballast water
management by establishing standards on the allowable concentration of living organisms in ballast water discharged from
ships into U.S. waters. The revised ballast water standards are consistent with those adopted by the IMO in 2004.
Compliance with the EPA and the U.S. Coast Guard regulations could require the installation of equipment on our
vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or
procedures at potentially substantial cost, and/or otherwise restrict our vessels from entering U.S. waters.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source
discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious
negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and
abetting the discharge of a polluting substance may also lead to criminal penalties. Member States were required to enact
laws or regulations to comply with the directive by the end of 2010. Criminal liability for pollution may result in substantial
penalties or fines and increased civil liability claims.
Greenhouse Gas Regulation
Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the
United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting
countries have been required to implement national programs to reduce greenhouse gas emissions. On January 1, 2013, two
new sets of mandatory requirements to address greenhouse gas emissions from ships which were adopted by MEPC in July
2011, entered into force. Currently operating ships will be required to develop Ship Energy Efficiency Management Plans,
and minimum energy efficiency levels per capacity mile will apply to new ships. These requirements could cause us to incur
additional compliance costs. The IMO is also planning to implement market-based mechanisms to reduce greenhouse gas
emissions from ships at an upcoming MEPC session. The European Union has indicated that it intends to propose an
expansion of the existing European Union emissions trading scheme to include emissions of greenhouse gases from marine
vessels, and in January 2012 the European Commission launched a public consultation on possible measures to reduce
greenhouse gas emissions from ships. In the United States, the EPA has issued a finding that greenhouse gases endanger the
34
public health and safety and has adopted regulations to limit greenhouse gas emissions from certain mobile sources and large
stationary sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels,
such regulation of vessels is foreseeable, and the EPA has in recent years received petitions from the California Attorney
General and various environmental groups seeking such regulation. Any passage of climate control legislation or other
regulatory initiatives by the IMO, European Union, the U.S. or other countries where we operate, or any treaty adopted at the
international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require us to make
significant financial expenditures which we cannot predict with certainty at this time.
International Labour Organization
The International Labour Organization (ILO) is a specialized agency of the UN with headquarters in Geneva,
Switzerland. The ILO has adopted the Maritime Labor Convention 2006 (MLC 2006). A Maritime Labor Certificate and a
Declaration of Maritime Labor Compliance will be required to ensure compliance with the MLC 2006 for all ships above 500
gross tons in international trade. The MLC 2006 will enter into force one year after 30 countries with a minimum of 33% of
the world’s tonnage have ratified it. On August 20, 2012, the required number of countries was met and MLC 2006 is
expected to come into force on August 20, 2013. MLC 2006 will require us to develop new procedures to ensure full
compliance with its requirements.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel
security. On November 25, 2002, the U.S. Maritime Transportation Security Act of 2002, or the MTSA, came into effect. To
implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation
of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. The
regulations also impose requirements on certain ports and facilities, some of which are regulated by the U.S. Environmental
Protection Agency (EPA).
Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically
with maritime security. The new Chapter V became effective in July 2004 and imposes various detailed security obligations
on vessels and port authorities, and mandates compliance with the ISPS Code. The ISPS Code is designed to enhance the
security of ports and ships against terrorism. Amendments to SOLAS Chapter VII, made mandatory in 2004, apply to vessels
transporting dangerous goods and require those vessels be in compliance with the International Maritime Dangerous Goods
Code (“IMDG Code”).
To trade internationally, a vessel must attain an International Ship Security Certificate, or ISSC, from a recognized
security organization approved by the vessel’s flag state. Among the various requirements are:
on-board installation of automatic identification systems to provide a means for the automatic transmission of
safety-related information from among similarly equipped ships and shore stations, including information on a
ship’s identity, position, course, speed and navigational status;
on-board installation of ship security alert systems, which do not sound on the vessel but only alert the
authorities on shore;
the development of vessel security plans;
ship identification number to be permanently marked on a vessel’s hull;
a continuous synopsis record kept onboard showing a vessel’s history, including the name of the ship, the state
whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship’s
identification number, the port at which the ship is registered and the name of the registered owner(s) and their
registered address; and
compliance with flag state security certification requirements.
Ships operating without a valid certificate, may be detained at port until it obtains an ISSC, or it may be expelled
from port, or refused entry at port.
The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt
from MTSA vessel security measures non-U.S. vessels provided that such vessels have on board a valid ISSC that
attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We have implemented the
various security measures addressed by MTSA, SOLAS and the ISPS Code, and our fleet is in compliance with
applicable security requirements.
35
Inspection by classification societies
Every seagoing 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, 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, within three months before or after each
anniversary date of 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 are to be
carried out at or between the occasion of the second or third annual survey.
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 vessel owner
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.
At an owner’s application, the surveys required for class renewal may be split according to an agreed schedule to
extend over the entire period of class. This process is referred to as continuous class renewal.
All areas subject to survey as defined by the classification society are required to be surveyed at least once per class
period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of
each area must not exceed five years.
Most vessels are also dry-docked every 30 to 36 months for inspection of the underwater parts and for repairs related
to inspections. If any defects are found, the classification surveyor will issue a ‘‘recommendation’’ which must be rectified
by the ship 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 which is a member of the International Association of Classification Societies (IACS). The IACS issued
draft harmonized Common Structure Rules that align with IMO goal standards, for industry review in 2012 and it expects
them to be adopted in Winter 2013. All our vessels are certified as being “in-class” by American Bureau of Shipping. All
new and secondhand vessels that we purchase must be certified prior to their delivery under our standard purchase contracts
and memoranda of agreement. If the vessel is not certified on the scheduled date of closing, we have no obligation to take
delivery of the vessel.
In addition to the classification inspections, many of our customers regularly inspect our vessels as a precondition to
chartering them for voyages. We believe that our well-maintained, high-quality vessels provide us with a competitive
advantage in the current environment of increasing regulation and customer emphasis on quality.
36
Risk of Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as mechanical failure, collision, property loss, cargo loss or
damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition,
there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the
liabilities arising from owning and operating vessels in international trade. OPA, which in certain circumstances imposes
virtually unlimited liability upon owners, operators and demise charterers of any vessel trading in the United States exclusive
economic zone for certain oil pollution accidents in the United States, has made liability insurance more expensive for vessel-
owners and operators trading in the United States market. While we believe that our present insurance coverage is adequate,
not all risks can be insured against, and there can be no guarantee that any specific claim will be paid, or that we will always
be able to obtain adequate insurance coverage at reasonable rates.
Marine and War Risks Insurance
We have in force marine and war risks insurance for all of our vessels. Our marine hull and machinery insurance
covers risks of particular average and actual or constructive total loss from collision, fire, grounding, engine breakdown and
other insured named perils up to an agreed amount per vessel. Our war risks insurance covers the risks of particular average
and actual or constructive total loss from confiscation, seizure, capture, vandalism, sabotage, and other war-related named
perils. We have also arranged coverage for increased value for each vessel. Under this increased value coverage, in the event
of total loss of a vessel, we will be able to recover amounts in excess of those recoverable under the hull and machinery
policy in order to compensate for additional costs associated with replacement of the loss of the vessel. Each vessel is
covered up to at least its fair market value at the time of the insurance attachment and subject to a fixed deductible per each
single accident or occurrence, but excluding actual or constructive total loss.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and indemnity associations, or P&I
Associations, and covers our third party liabilities in connection with our shipping activities. This includes third-party
liability and other related expenses resulting from injury or death of crew, passengers and other third parties, loss or damage
to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or
other substances, and salvage, towing and other related costs, including wreck removal. Protection and indemnity insurance is
a form of mutual indemnity insurance, extended by mutual protection and indemnity associations, or “clubs.” Subject to the
“capping” discussed below, our coverage, except for pollution, is unlimited.
As a member of a P&I Club that is a member of the International Group of P&I Clubs, or the International Group,
we carry protection and indemnity insurance coverage for pollution of $1 billion per vessel per incident. The P&I Clubs that
comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a
pooling agreement to reinsure each association’s liabilities. Although the P&I Clubs compete with each other for business,
they have found it beneficial to pool their larger risks under the auspices of the International Group. This pooling is regulated
by a contractual agreement which defines the risks that are to be pooled and exactly how these risks are to be shared by the
participating P&I Clubs. We are subject to calls payable to the associations based on its claim records as well as the claim
records of all other members of the individual associations and members of the pool of P&I Clubs comprising the
International Group.
C. Organizational Structure
Please see Exhibit 8.1 to this annual report for a list of our current subsidiaries.
D. Property, Plant and Equipment
For a description of our fleet, see Item 4.A. – “History and Development of the Company” and Item 4.B. “Business
Overview – Our Fleet.”
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
37
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following presentation of management’s discussion and analysis of results of operations and financial condition
should be read in conjunction with our consolidated financial statements, accompanying notes thereto and other financial
information appearing in Item 18. “Financial Statements.” You should also carefully read the following discussion with the
sections of this annual report entitled “Risk Factors,” “The International Tanker Industry,” and “Cautionary Statement
Regarding Forward-Looking Statements.” Our consolidated financial statements as of December 31, 2012 and 2011 and for
the years ended December 31, 2012, 2011 and 2010 have been prepared in accordance with IFRS as issued by the IASB. The
consolidated financial statements are presented in US dollars ($) unless otherwise indicated. Any amounts converted from
another non-U.S. currency to US dollars in this annual report are at the rate applicable at the relevant date, or the average
rate during the applicable period.
We anticipate additional opportunities to expand our fleet through acquisitions of tankers, and we believe that recent
downward pressure on tanker values will present attractive investment opportunities to ship operators that have the necessary
capital resources. We may purchase secondhand vessels that meet our specifications or newbuilding vessels, either directly
from shipyards or from the current owners with shipyard contracts. The timing of these acquisitions will depend on our
ability to identify suitable vessels on attractive purchase terms. Since our initial public offering in April 2010, we have
expanded our fleet from three tankers to 14 wholly-owned tankers and 21 time chartered-in tankers, and we have contracts
for the construction of 33 additional newbuilding vessels.
We generate revenues by charging customers for the transportation of their refined oil and other petroleum products
using our vessels. Historically, these services generally have been provided under the following basic types of contractual
relationships:
Voyage charters, which are charters for short intervals that are priced on current, or “spot,” market rates.
Time charters, which are chartered to customers for a fixed period of time at rates that are generally fixed, but
may contain a variable component based on inflation, interest rates, or current market rates.
Commercial Pools, whereby we participate with other shipowners to operate a large number of vessels as an
integrated transportation system, which offers customers greater flexibility and a higher level of service while
achieving scheduling efficiencies. Pools negotiate charters primarily in the spot market. The size and scope of
these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and contracts
of affreightment (described below), thus generating higher effective time charter equivalent, or TCE, revenues
than otherwise might be obtainable in the spot market.
For all types of vessels in contractual relationships, we are responsible for crewing and other vessel operating
costs for our owned vessels and the charterhire expense for vessels that we time charter-in.
The table below illustrates the primary distinctions among these different employment arrangements:
Typical contract length
Hire rate basis(1)
Voyage expenses(2)
Vessel operating costs for owned vessels(3)
Charterhire expense for vessels chartered-in(3)
Off-hire (4)
Voyage Charter
Single voyage
Varies
We pay
We pay
We pay
Time Charter
One year or more
Daily
Customer pays
We pay
We pay
Commercial Pool
Varies
Varies
Pool pays
We pay
We pay
Customer does not pay Customer does not pay Pool does not pay
(1)
(2)
“Hire rate” refers to the basic payment from the charterer for the use of the vessel.
“Voyage expenses” refers to expenses incurred due to a vessel’s traveling from a loading port to a
discharging port, such as fuel (bunker) cost, port expenses, agent’s fees, canal dues and extra war risk
insurance, as well as commissions.
(3) Defined below under “—Important Financial and Operational Terms and Concepts.”
(4)
“Off-hire” refers to the time a vessel is not available for service due primarily to scheduled and unscheduled
repairs or drydockings. For time chartered-in vessels, we do not pay the charterhire expense when the vessel
is off-hire.
38
As of the date of this annual report, all of our owned and time chartered-in vessels were operating in the Scorpio
Group Pools except STI Sapphire, STI Emerald, Nave Orion and SN Federica, which were operating in the spot market.
IMPORTANT FINANCIAL AND OPERATIONAL TERMS AND CONCEPTS
We use a variety of financial and operational terms and concepts. These include the following:
Vessel revenues. Vessel revenues primarily include revenues from time charters, pool revenues and voyage charters
(in the spot market). Vessel revenues are affected by hire rates and the number of days a vessel operates. Vessel revenues are
also affected by the mix of business between vessels on time charter, vessels in pools and vessels operating on voyage
charter. Revenues from vessels in pools and on voyage charter are more volatile, as they are typically tied to prevailing
market rates.
Voyage charters. Voyage charters or spot voyages are charters under which the customer pays a transportation
charge for the movement of a specific cargo between two or more specified ports. We pay all of the voyage expenses.
Voyage expenses. Voyage expenses primarily include bunkers, port charges, canal tolls, cargo handling operations
and brokerage commissions paid by us under voyage charters. These expenses are subtracted from voyage charter revenues to
calculate time charter equivalent revenues.
Vessel operating costs. For our owned vessels, we are responsible for vessel operating costs, which include crewing,
repairs and maintenance, insurance, stores, lube oils, communication expenses, and technical management fees. The two
largest components of our vessel operating costs are crews, and repairs and maintenance. Expenses for repairs and
maintenance tend to fluctuate from period to period because most repairs and maintenance typically occur during periodic
drydocking. Please read “Drydocking” below. We expect these expenses to increase as our fleet matures and to the extent that
it expands.
Additionally, these costs include technical management fees that we paid to SSM, which is controlled by the Lolli-
Ghetti family. Pursuant to our Master Agreement, SSM provides us with technical services, and we provide them with the
ability to subcontract technical management of our vessels with our approval.
Charterhire. Charterhire is the amount we pay the owner for time chartered-in vessels. The amount is usually for a
fixed period of time at rates that are generally fixed, but may contain a variable component based on inflation, interest rates,
or current market rates. The vessel’s owner is responsible for crewing and other vessel operating costs.
Drydocking. We periodically drydock each of our owned vessels for inspection, repairs and maintenance and any
modifications to comply with industry certification or governmental requirements. Generally, each vessel is drydocked every
30 months to 60 months. We capitalize a substantial portion of the costs incurred during drydocking and amortize those costs
on a straight-line basis from the completion of a drydocking to the estimated completion of the next drydocking. We
immediately expense costs for routine repairs and maintenance performed during drydocking that do not improve or extend
the useful lives of the assets. The number of drydockings undertaken in a given period and the nature of the work performed
determine the level of drydocking expenditures.
Depreciation. Depreciation expense typically consists of:
charges related to the depreciation of the historical cost of our owned vessels (less an estimated residual value)
over the estimated useful lives of the vessels; and
charges related to the amortization of drydocking expenditures over the estimated number of years to the next
scheduled drydocking.
Time charter equivalent (TCE) revenue or rates. We report time charter equivalent, or TCE revenues, a non-IFRS
measure, because (i) we believe it provides additional meaningful information in conjunction with voyage revenues and
voyage expenses, the most directly comparable IFRS measure, (ii) it assists our management in making decisions regarding
the deployment and use of our vessels and in evaluating their financial performance, (iii) it is a standard shipping industry
performance measure used primarily to compare period-to-period changes in a shipping company’s performance irrespective
of changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be
employed between the periods, and (iv) we believe that it presents useful information to investors. TCE revenue is vessel
revenue less voyage expenses, including bunkers and port charges. The TCE rate achieved on a given voyage is expressed in
39
US dollars/day and is generally calculated by taking TCE revenue and dividing that figure by the number of revenue days in
the period. For a reconciliation of TCE revenue, deduct voyage expenses from revenue on our Statement of Profit or Loss.
Revenue days. Revenue days are the total number of calendar days our vessels were in our possession during a
period, less the total number of off-hire days during the period associated with major repairs or drydockings. Consequently,
revenue days represent the total number of days available for the vessel to earn revenue. Idle days, which are days when a
vessel is available to earn revenue, yet is not employed, are included in revenue days. We use revenue days to show changes
in net vessel revenues between periods.
Average number of vessels. Historical average number of owned vessels consists of the average number of vessels
that were in our possession during a period. We use average number of vessels primarily to highlight changes in vessel
operating costs and depreciation and amortization.
Contract of affreightment. A contract of affreightment, or COA, relates to the carriage of specific quantities of
cargo with multiple voyages over the same route and over a specific period of time which usually spans a number of years. A
COA does not designate the specific vessels or voyage schedules that will transport the cargo, thereby providing both the
charterer and shipowner greater operating flexibility than with voyage charters alone. The charterer has the flexibility to
determine the individual voyage scheduling at a future date while the shipowner may use different vessels to perform these
individual voyages. As a result, COAs are mostly entered into by large fleet operators, such as pools or shipowners with large
fleets of the same vessel type. We pay the voyage expenses while the freight rate normally is agreed on a per cargo ton basis.
Commercial pools. To increase vessel utilization and revenues, we participate in commercial pools with other
shipowners and operators of similar modern, well-maintained 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 employ experienced commercial charterers and operators who have close working
relationships with customers and brokers, while technical management is performed by each shipowner. Pools negotiate
charters with customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization
rates for pool vessels by securing backhaul voyages and COAs, thus generating higher effective TCE revenues than otherwise
might be obtainable in the spot market while providing a higher level of service offerings to customers.
Operating days. Operating days are the total number of available days in a period with respect to the owned vessels,
before deducting available days due to off-hire days and days in drydock. Operating days is a measurement that is only
applicable to our owned vessels, not our chartered-in vessels.
ITEMS YOU SHOULD CONSIDER WHEN EVALUATING OUR RESULTS
You should consider the following factors when evaluating our historical financial performance and assessing our
future prospects:
Our vessel revenues are affected by cyclicality in the tanker markets. The cyclical nature of the tanker industry
causes significant increases or decreases in the revenue we earn from our vessels, particularly those vessels we trade in the
spot market. We employ a chartering strategy to capture upside opportunities in the spot market while using fixed-rate time
charters to reduce downside risks, depending on SCM’s outlook for freight rates, oil tanker market conditions and global
economic conditions. Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes
in the supply of, and demand for, tanker capacity. The supply of tanker capacity is influenced by the number and size of new
vessels built, vessels scrapped, converted and lost, the number of vessels that are out of service, and regulations that may
effectively cause early obsolescence of tonnage. The demand for tanker capacity is influenced by, among other factors:
global and regional economic and political conditions;
increases and decreases in production of and demand for crude oil and petroleum products;
increases and decreases in OPEC oil production quotas;
the distance crude oil and petroleum products need to be transported by sea; and
developments in international trade and changes in seaborne and other transportation patterns.
Tanker rates also fluctuate based on seasonal variations in demand. Tanker markets are typically stronger in the
winter months as a result of increased oil consumption in the northern hemisphere but weaker in the summer months as a
result of lower oil consumption in the northern hemisphere and refinery maintenance that is typically conducted in the
40
summer months. In addition, unpredictable weather patterns during the winter months in the northern hemisphere tend to
disrupt vessel routing and scheduling. The oil price volatility resulting from these factors has historically led to increased oil
trading activities in the winter months. As a result, revenues generated by our vessels have historically been weaker during
the quarters ended June 30 and September 30, and stronger in the quarters ended March 31 and December 31.
Our general and administrative expenses were affected by the fees we pay SCM and SSH for commercial
management and administrative services respectively, and costs incurred from being a public company. SCM and SSH,
companies controlled by the Lolli-Ghetti family of which our founder, Chairman and Chief Executive Officer is a member,
provide commercial and administrative management services to us, respectively. We pay fees under our Master Agreement
with SCM, which are identical to what SCM charges to its pool participants, including third-party owned vessels. We
reimburse our Administrator for the reasonable direct or indirect expenses it incurs in providing us with the administrative
services described above. We also pay our Administrator a fee for arranging vessel purchases and sales for us equal to 1% of
the gross purchase or sale price, payable upon the consummation of any such purchase or sale. We believe this 1% fee on
purchases and sales is customary in the tanker industry. In addition, we continue to incur general and administrative expenses
related to our being a publicly traded company, including, among other things, costs associated with reports to shareholders,
filings with the U.S. Securities Exchange Commission, investor relations, New York Stock Exchange fees and tax
compliance expenses.
RESULTS OF OPERATIONS
The following tables separately present our operating results for the years ended December 31, 2012, 2011 and 2010.
Results of Operations for the Year ended December 31, 2012 Compared to the Year Ended December 31, 2011
In thousands of US dollars
Vessel revenue ......................................................................... $
Vessel operating costs ..............................................................
Voyage expenses .....................................................................
Charterhire ...............................................................................
Impairment ...............................................................................
Depreciation .............................................................................
Loss from sale of vessels .........................................................
General and administrative expenses .......................................
Financial expenses ...................................................................
Earnings from profit or loss sharing agreements .....................
Unrealized loss on derivative financial instruments ................
Financial income ......................................................................
Other expenses, net ..................................................................
Net loss .................................................................................... $
For the year ended
December 31,
2012
2011
Change
Percentage
Change
115,381 $
(30,353)
(21,744)
(43,701)
—
(14,818)
(10,404)
(11,536)
(8,512)
443
(1,231)
35
(97)
(26,537) $
82,110 $
(31,370)
(6,881)
(22,750)
(66,611)
(18,460)
—
(11,637)
(7,060)
—
—
51
(119)
(82,727) $
33,271
1,017
(14,863)
(20,951)
66,611
3,642
(10,404)
101
(1,452)
443
(1,231)
(16)
22
56,190
41%
3%
(216%)
(92%)
100%
20%
N/A
1%
(21%)
N/A
N/A
(31%)
18%
68%
Net Loss. Net loss for the year ended December 31, 2012 was $26.5 million, compared to a net loss of $82.7 million
for the year ended December 31, 2011. The differences between the two periods are discussed below.
41
Vessel revenue. Revenue for the year ended December 31, 2012 was $115.4 million, an increase of $33.3 million, or
41% from revenue of $82.1 million for the year ended December 31, 2011. The following table summarizes our revenue:
In thousands of US dollars
2012
2011
Change
For the year ended
December 31,
Percentage
Change
Owned vessels
Time charter revenue ............................................................
Pool revenue .........................................................................
Voyage revenue ....................................................................
— $
38,522
26,668
9,626 $
39,522
12,287
(9,626)
(1,000)
14,381
(100%)
(3%)
117%
Time chartered-in vessels
Pool revenue .........................................................................
Voyage revenue ....................................................................
$
33,740
16,451
115,381 $
20,675
—
82,110 $
13,065
16,451
33,271
63%
N/A
41%
Owned vessels – Time charter revenue. We did not time charter-out any owned vessels for the year ended
December 31, 2012. For the year ended December 31, 2011, Noemi and STI Spirit were employed on time charters for a total
of 427 days.
Owned vessels – Pool revenue. Pool revenue for owned vessels for the year ended December 31, 2012 was $38.5
million, a decrease of $1.0 million or 3% from $39.5 million for the year ended December 31, 2011. We had 2,851 revenue
days of owned vessels in the pools during the year ended December 31, 2012 compared to 3,149 during the year ended
December 31, 2011. This decrease in revenue days was primarily driven by the sales of STI Conqueror, STI Matador, and
STI Gladiator during March, April and May 2012 resulting in 911 less pool days partially offset by (i) the entrance in the
Scorpio MR Pool by our first five newbuilding vessels during the fourth quarter of 2012 for a total of 176 additional days, (ii)
Noemi, which was on time charter for the majority of 2011 and operated in the pool during the year ended December 31,
2012 (net increase of 355 days), and (iii) an increase in TCE earnings from our owned vessels operating in the pools to
$13,510 per day for the year ended December 31, 2012 from $12,550 per day for the year ended December 31, 2011.
Owned vessels – Voyage revenue. Voyage revenue for owned vessels for the year ended December 31, 2012 was
$26.7 million, an increase of $14.4 million, or 117% from $12.3 million during the year ended December 31, 2011. The
increase was primarily the result of an increase in the number of days that our vessels operated in the spot market for the year
ended December 31, 2012 and 2011 to 1,015 days from 450 days, respectively. Additionally, TCE earnings from our owned
vessels operating in the spot market increased to $13,220 per day in 2012 from $12,092 per day in 2011. Our first five
newbuilding vessels operated in the spot market immediately after delivery from the yards for a total of 414 days.
Furthermore, STI Conqueror, STI Matador, STI Gladiator, STI Coral and STI Diamond all operated in the spot market during
2012 prior to their sales. While STI Coral and STI Diamond were the only vessels operating in the spot market during 2011.
Time chartered-in vessels – Pool revenue. Pool revenue for time chartered-in vessels for the year ended December
31, 2012 was $33.7 million, an increase of $13.1 million, or 63% from $20.7 million during the year ended December 31,
2011. The increase was primarily the result of an increase in the number of days that our time chartered-in vessels operated in
the pools for the years ended December 31, 2012 and 2011 to 2,662 days from 1,806 days, respectively. Additionally, TCE
earnings from our time chartered-in vessels operating in the pools increased to $12,656 per day for the year ended December
31, 2012 from $11,448 per day for the year ended December 31, 2011.
Time chartered-in vessels – Voyage revenue. Voyage revenue for our time chartered-in vessels for the year ended
December 31, 2012 was $16.5 million. During the year ended December 31, 2012, time chartered-in vessels operated 698
days in the spot market. There were no time chartered-in vessels operating in the spot market during the year ended
December 31, 2011.
Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $30.4 million, a decrease
of $1.0 million or 3%, from $31.4 million during the year ended December 31, 2011. We had 3,957 operating days during
2012 compared to 4,121 operating days during 2011. The decrease was primarily the result of the sales of STI Conqueror,
STI Gladiator and STI Matador in 2012 which resulted in a decrease of 789 operating days for these vessels during the year
ended December 31, 2012 versus the same period of the prior year. This decrease was partially offset by an increase of 612
operating days resulting from the delivery of our first five newbuilding vessels during the third quarter of 2012. Overall
operating costs per day were consistent at $7,605 per day for the year ended December 31, 2012 compared to $7,581 per day
for the year ended December 31, 2011.
42
Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $21.7 million, an increase of $14.9
million, or 216%, from $6.9 million during the year ended December 31, 2011. The increase was primarily due to an increase
in the number of days vessels operated in the spot market. There were 1,712 spot voyage days (owned and time chartered-in)
during the year ended December 31, 2012 as compared to 450 days during year ended December 31, 2011.
Charterhire. Charterhire expense for the year ended December 31, 2012 was $43.7 million, an increase of $21.0
million, or 92%, from $22.8 million during the year ended December 31, 2011. The increase was the result of additional time
chartered-in vessels in 2012 compared with 2011; the average number of chartered-in vessels increased to 9.18 from 4.95
during the years ended December 31, 2012 and 2011, respectively.
Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $66.6 million for our 12
owned vessels. This impairment loss was triggered by reductions in vessel values, and represented the difference between the
carrying value and recoverable amount, being fair value less cost to sell. No impairment was recognized in the year ended
December 31, 2012.
Impairment methodology
The carrying values of our vessels may not represent their fair market value at any point in time since the market
prices of second-hand vessels fluctuate with changes in charter rates and the cost of constructing new vessels. At each
reporting period end date, we review the carrying amounts of our vessels to determine whether there is any indication that
those vessels may have suffered an impairment loss. In this regard, fluctuations in market values below carrying values are
considered to represent an impairment triggering event that necessitates performance of a full impairment review.
Impairment losses are calculated as the excess of a vessel’s carrying amount over its recoverable amount. Under
IFRS, the recoverable amount is the higher of an asset’s (i) fair value less costs to sell and (ii) value in use. Fair value less
costs to sell is defined by IFRS as “the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal”. When we calculate value in use, we discount
the expected future cash flows to be generated by our vessels to their net present value.
Our impairment evaluation is performed on an individual vessel basis when there are indications of impairments.
First, we assess the fair value less the cost to sell our vessels taking into consideration vessel valuations from leading,
independent and internationally recognized ship brokers. We then compare that estimate of market values (less an estimate of
selling costs) to each vessel’s carrying value and, if the carrying value exceeds the vessel’s market value, an indicator of
impairment exists. The indicator of impairment prompts us to perform a calculation of the potentially impaired vessel’s value
in use, in order to appropriately determine the ‘higher of’ the two values.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which
the estimates of future cash flows have not been adjusted. In developing estimates of future cash flows, we make assumptions
about future charter rates, vessel operating expenses, the estimated remaining useful lives of the vessels and the discount
rate. These assumptions are based on historical trends as well as future expectations. Although management believes that the
assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective.
Reasonable changes in the assumptions for the discount rate or future charter rates could lead to a value in use for some of
our vessels that is equal to or less than the carrying amount for such vessels. All of the aforementioned assumptions have
been highly volatile in both the current market and historically. Given the current and historical volatility in market prices for
similar vessels and recent downward pressure on charter rates, the fair value less estimated costs to sell in the current year
reflected potential indicators of impairment for all of our owned vessels.
For the year ended December 31, 2012, we performed an assessment as described above. At that date, the carrying
amounts of our vessels were greater than the basic, meaning charter free, market value for all of our owned vessels. In line
with our policy we performed a value in use calculation where we estimated each vessels’ future cash flows based on a
combination of the latest forecast time charter rates for the next three years (obtained from a third party service provider), a
growth rate of 3.0% in freight rates for each period thereafter, and our best estimate of vessel operating expenses and drydock
costs, which also assume a growth rate of 3.0% in each succeeding year. These cash flows were then discounted to their
present value, using a discount rate of 7.9%, based on our current borrowing rates adjusted for certain credit risks. The value
in use calculations were greater than the fair value less estimated costs to sell in all instances. As a result of this testing, no
impairment charge was recorded.
For the year ended December 31, 2011, the value in use calculations for all vessels were less than both the fair value
less estimated costs to sell and carrying amounts of the vessels. As a result of this testing, we recorded an impairment loss of
$66.6 million to adjust the carrying amounts of our vessels to reflect fair value less estimated costs to sell.
43
Illustrative comparison of excess of carrying amounts over estimated charter-free market value of certain vessels
During the past few years, the market values of vessels have experienced particular volatility, with substantial
declines in many vessel classes. As a result, the charter-free market value, or basic market value, of certain of our vessels
may have declined below the carrying amounts of those vessels. After undergoing the impairment analysis using value in use
to determine the recoverable amount as discussed above, we have concluded that at December 31, 2012, the value in use for
our vessels was higher than their carrying values and consequently, no impairment is required.
The table set forth below indicates the carrying amount of each of our vessels as of December 31, 2012 and
December 31, 2011 and the aggregate difference between the carrying amount and the market value represented by such
vessels (see footnote 1 to the table set forth below). This aggregate difference represents the approximate analysis of the
amount by which we believe we would record a loss if we sold those vessels, in the current environment, on industry
standard terms, in cash transactions and to a willing buyer where we are not under any compulsion to sell, and where the
buyer is not under any compulsion to buy. For purposes of this calculation, we have assumed that the vessels would be sold at
a price that reflects our estimate of their basic market values. However, we are not holding our vessels for sale.
Our estimate of basic market value assumes that our vessels are all in good and seaworthy condition without need
for repair and if inspected would be certified in class without notations of any kind. Our estimates are based on information
available from various industry sources, including:
reports by industry analysts and data providers that focus on our industry and related dynamics affecting vessel
values;
news and industry reports of similar vessel sales;
news and industry reports of sales of vessels that are not similar to our vessels where we have made certain
adjustments in an attempt to derive information that can be used as part of our estimates;
approximate market values for our vessels or similar vessels that we have received from shipbrokers, whether
solicited or unsolicited, or that shipbrokers have generally disseminated;
offers that we may have received from potential purchasers of our vessels; and
vessel sale prices and values of which we are aware through both formal and informal communications with
shipowners, shipbrokers, industry analysts and various other shipping industry participants and observers.
As we obtain information from various industry and other sources, our estimates of basic market value are
inherently uncertain. In addition, vessel values and revenues are highly volatile; as such, our estimates may not be indicative
of the current or future basic market value of our vessels or prices that we could achieve if we were to sell them.
Year Built December 31, 2012 (1)
Carrying value as at,
In millions of US dollars
Vessel Name
1 STI Highlander
2 STI Gladiator
3 STI Matador
4 STI Conqueror
5 STI Coral
6 STI Diamond
7 Noemi
8 Senatore
9 STI Harmony
10 STI Heritage
11 Venice
12 STI Spirit
13 STI Amber
14 STI Topaz
15 STI Ruby
16 STI Garnet
17 STI Onyx
$
2007
2003
2003
2005
2008
2008
2004
2004
2007
2008
2001
2008
2012
2012
2012
2012
2012
December 31, 2011 (2)
24.4
17.8
18.3
20.5
28.3
28.3
28.4
28.4
35.3
35.9
19.7
37.7
N/A (4)
N/A (4)
N/A (4)
N/A (4)
N/A (4)
23.1
$
N/A (3)
N/A (3)
N/A (3)
N/A (3)
N/A (3)
27.0
27.1
33.6
35.9
17.7
37.4
38.6
38.7
38.7
38.8
38.8
Total
$
395.4
$
322.5
44
(1) As of December 31, 2012, the basic charter-free market value is lower than each vessel’s carrying value. We
believe that the aggregate carrying value of these vessels exceeds their aggregate basic charter-free market
value by approximately $64.2 million.
(2) Given that each of our vessels was impaired at December 31, 2011 based on fair value less costs to sell, the
carrying amounts noted above are representative of fair value less estimated costs to sell as of December 31,
2011.
(3)
(4)
These vessels were sold during the year ended December 31, 2012.
These vessels were acquired during the year ended December 31, 2012.
The impairment test that we conduct is most sensitive to variances in the discount rate and future time charter rates.
Based on the sensitivity analysis performed for December 31, 2012, a 1.0% increase in the discount rate would result in an
aggregate impairment of $6.4 million. Alternatively, a 5% decrease in forecasted time charter rates would result in an
aggregate impairment of $8.0 million.
We refer you to the discussion herein under Item 3.D. “Risk Factors — Risks Related to our Industry,” including the
risk factor entitled “Adverse market conditions could cause us to breach covenants in our credit facilities and adversely affect
our operating results.”
Depreciation. Depreciation expense for the year ended December 31, 2012 was $14.8 million, a decrease of $3.6
million or 20%, from $18.5 million during the year ended December 31, 2011. The decrease was a result of (i) a $66.6
million impairment charge recorded at December 31, 2011 which decreased the depreciable basis of our vessels and (ii) a
decrease in the number of owned vessels to 10.81 from 11.29 which was driven by the sales of STI Conqueror in March
2012, STI Matador in April 2012, STI Gladiator in May 2012, STI Diamond in August 2012 and STI Coral in September
2012, partially offset by the delivery of our first five newbuilding vessels between July 2012 and September 2012.
Loss from sale of vessels. Loss from sale of vessels for the year ended December 31, 2012 was $10.4 million. This
loss is related to the sales of STI Conqueror, STI Matador, STI Gladiator, STI Coral, and STI Diamond during the year ended
December 31, 2012 and includes $0.2 million in relating to a loss on the interest rate swaps used to hedge the interest
payments on the borrowings on these vessels.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2012
were $11.5 million, a decrease of $0.1 million, or 1%, from the year ended December 31, 2011. These costs remained
relatively stable as there were no significant changes in our overhead structure on a period over period basis.
Financial expenses. Financial expenses for the year ended December 31, 2012 were $8.5 million, an increase of
$1.5 million, or 21%, from $7.1 million during the year ended December 31, 2011. The increase for the year ended December
31, 2012 was primarily driven by a $3.0 million write-off of deferred financing fees relating to our 2011 Credit Facility offset
by a decrease in interest expense of $1.7 million which was driven by an increase in capitalized interest expense of $2.6
million for the year ended December 31, 2012 related to our vessels under construction.
Financial expenses for the year ended December 31, 2012 consisted of interest expense of $3.3 million, commitment
fees of $1.0 million on the undrawn portions of the 2010 Revolving Credit Facility and 2011 Credit Facility, deferred
financing fee amortization of $1.1 million, write-off of deferred financing fees of $3.0 million and other costs of $0.1 million.
Financial expenses for the year ended December 31, 2011 consisted of interest expense of $5.0 million, commitment
fees of $1.1 million on the undrawn portion of the 2010 Revolving Credit Facility and 2011 Credit Facility and deferred
financing fee amortization of $1.0 million.
Earnings from profit or loss sharing agreements. Earnings from profit or loss sharing agreements consist of
realized earnings from profit and loss sharing agreements with third parties relating to a time chartered-in vessel. There were
no similar agreements for the comparative period.
Unrealized loss on derivative financial instruments. Unrealized loss on derivative financial instruments consists of
(i) the impact of the reclassification of $1.0 million from other comprehensive income to the statement of profit or loss
relating to the de-designation of the hedge relationship on our interest rate swaps relating to the 2010 Revolving Credit
Facility (See Note 12 to the consolidated financial statements) and (ii) the change in the fair value of profit and loss sharing
agreements on time chartered-in vessels with third parties of $0.2 million.
45
(30%)
(30%)
N/A
(53%)
100%
16%
26%
(29%)
92%
76%
(100%)
(31%)
(21%)
(100%)
23%
0%
0%
53%
The following is a discussion of our operating results by operating segment:
Aframax/LR2 segment
The following table summarizes vessel operations for our Aframax/LR2 segment.
For the year ended
December 31,
Percentage
2012
2011
Change Change
Aframax/LR2 segment
In thousands of US dollars except per day and fleet data
Vessel revenue ...................................................................................... $
Vessel operating costs ...........................................................................
Voyage expenses ..................................................................................
Charterhire ............................................................................................
Impairment ............................................................................................
Depreciation ..........................................................................................
General and administrative expenses ....................................................
Financial expenses ................................................................................
Other expenses, net ...............................................................................
Segment loss ......................................................................................... $
4,541 $
(3,304)
(25)
(1,287)
—
(1,735)
(100)
(1,086)
(11)
6,484 $
(2,547)
—
(839)
(12,459)
(2,074)
(136)
(841)
(134)
(3,007) $ (12,546) $
(1,943)
(757)
(25)
(448)
12,459
339
36
(245)
123
9,539
Time charter revenue per day ............................................................... $
Pool revenue per day ............................................................................
Operating costs per day ........................................................................
— $
10,201
8,436
15,457 $ (15,457)
(4,648)
14,849
(1,476)
6,960
Time charter revenue days ....................................................................
Pool revenue days .................................................................................
Operating days ......................................................................................
—
443
366
72
361
365
Average number of owned vessels .......................................................
Average number of time chartered-in vessels .......................................
1.00
0.29
1.00
0.19
(72)
82
1
—
0.10
Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $4.5 million, a decrease of $1.9 million
or 30% from the year ended December 31, 2011. There were two vessels operating in this segment during both periods, STI
Spirit and Khawr Aladid. The decrease in revenue is due to a decrease in pool revenue per day to $10,201 per day from
$14,849 per day. This was primarily driven by STI Spirit, which in June 2012 needed repairs and a subsequent positioning
voyage which negatively affected the vessel’s earnings.
Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $3.3 million, an increase
of $0.8 million, or 30%, from the year ended December 31, 2011. On a daily basis, vessel operating costs for the year ended
December 31, 2012 increased $1,476 per day, or 21% from the year ended December 31, 2011. This was a result of
unplanned repairs on STI Spirit during the year ended December 31, 2012.
Charterhire. Charterhire expense for the year ended December 31, 2012 was $1.3 million, an increase of $0.5
million, or 53%, from the year ended December 31, 2011. This increase was driven by the time chartered-in vessel, Khawr
Aladid, which was delivered on October 24, 2011, on a six month arrangement that expired in April 2012.
Depreciation. Depreciation expense for the year ended December 31, 2012 was $1.7 million, a decrease of $0.3
million, or 16%, from the year ended December 31, 2011. This was a result of an impairment charge that was recorded in
December 2011 which reduced the depreciable basis of STI Spirit in 2012.
Financial expense. Financial expense for the year ended December 31, 2012 was $1.1 million, an increase of $0.2
million or 29% from the year ended December 31, 2011. Financial expense for the Aframax/LR1 segment represents interest
for the STI Spirit Credit Facility, which was signed and drawn in March 2011; therefore, the year ended December 31, 2012
represents a full year of interest expense as opposed to approximately nine months of interest expense during year ended
December 31, 2011.
Other expenses, net. Other expenses, net for the year ended December 31, 2012 decreased $0.1 million or 92% from
the year ended December 31, 2011. This decrease was driven by the write-off of the fair value of vessel purchase options that
were acquired with STI Spirit in September 2011.
46
(8%)
2%
(7585%)
64%
100%
21%
28%
N/A
N/A
100%
116%
(100%)
11%
N/A
2%
(100%)
8%
N/A
0%
For the year ended
December 31,
Percentage
2012
2011
Change Change
Panamax/LR1 segment
The following table summarizes vessel operations for our Panamax/LR1 segment.
Panamax/LR1 segment
In thousands of US dollars except per day and fleet data
Vessel revenue ...................................................................................... $
Vessel operating costs ...........................................................................
Voyage expenses ..................................................................................
Charterhire ............................................................................................
Impairment ............................................................................................
Depreciation ..........................................................................................
General and administrative expenses ....................................................
Earnings from profit or loss sharing agreements ..................................
Unrealized loss on derivative financial instruments .............................
Other expenses, net ...............................................................................
Segment profit / (loss) .......................................................................... $
28,602 $
(14,137)
(999)
(1,629)
—
(7,352)
(495)
443
(184)
—
4,249 $
31,101 $
(14,428)
(13)
(4,554)
(28,616)
(9,279)
(692)
—
—
23
(2,499)
291
(986)
2,925
28,616
1,927
197
443
(184)
(23)
(26,458) $ 30,707
Time charter revenue per day ............................................................... $
Pool revenue per day ............................................................................
Voyage revenue per day .......................................................................
Operating costs per day ........................................................................
— $
14,242
15,147
7,714
23,962 $ (23,962)
1,366
12,876
15,147
—
177
7,891
Time charter revenue days ....................................................................
Pool revenue days .................................................................................
Voyage revenue days ............................................................................
Operating days ......................................................................................
Average number of owned vessels .......................................................
Average number of time chartered-in vessels .......................................
—
1,888
48
1,830
5.00
0.35
355
1,754
—
1,825
(355)
134
48
(5)
5.00
0.91
—
(0.56)
0%
(62%)
Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $28.6 million, a decrease of $2.5
million or 8% from the year ended December 31, 2011. The decrease in revenue was the result of (i) a decrease in the
number of revenue days to 1,936 for the year ended December 31, 2012 compared to 2,109 days during the year ended
December 31, 2011 and (ii) a decrease in overall revenue per day to $14,264 for the year ended December 31, 2012 from
$14,743 for the year ended December 31, 2011. This was driven by a reduction in the average number of time chartered-in
vessels to 0.35 from 0.91 for the years ended December 31, 2012 and 2011, respectively. This reduction is due to the
redelivery of the time chartered-in vessel, BW Zambesi in November 2011 following its 10 month time charter-in
agreement offset partially by the delivery of the time chartered-in vessels, FPMC P Eagle and Hellespont Promise in
September and December 2012, respectively.
Noemi was time chartered-out during the year ended December 31, 2011 at a rate of $24,500 per day and was
redelivered in December 2011. The effect of the decrease on overall pool revenue resulting from the expiration of this charter
was offset by an increase of pool revenue per day to $14,242 per day during the year ended December 31, 2012 from $12,876
per day during the year ended December 31, 2011.
Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $14.1 million, a decrease
of $0.3 million, or 2%, from the year ended December 31, 2011. Vessel operating costs per day for the year ended December
31, 2012 decreased $177 per day, or 2% from the year December 31, 2011. These costs remained relatively stable as there
were no changes in our owned Panamax/LR1 fleet on a period over period basis.
Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $1.0 million, an increase of $1.0
million from the year ended December 31, 2011. This increase was the result of time chartered-in vessel, FPMC P Eagle,
which operated in the spot market for 48 days during the year ended December 31, 2012. No vessels operated in the spot
market for the year ended December 31, 2011.
47
Charterhire. Charterhire expense for the year ended December 31, 2012 was $1.6 million, a decrease of $2.9
million or 64% from the year ended December 31, 2011. This decrease was the result of the redelivery of time chartered-in
vessel, BW Zambesi in November 2011 from its 10 month time charter-in agreement. This was partially offset by the delivery
of the time chartered-in vessels, FPMC P Eagle and Hellespont Promise in September and December 2012, respectively.
Depreciation. Depreciation expense for the year ended December 31, 2012 was $7.4 million, a decrease of $1.9
million, or 21%, from the year ended December 31, 2011. This was a result of an impairment charge recorded in December
2011, which reduced the depreciable basis of all owned vessels in the Panamax / LR1 Segment.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2012
were $0.5 million, a decrease of $0.2 million or 28%, from the year ended December 31, 2011. General and administrative
expenses for the Panamax / LR1 segment primarily consist of administrative fees.
Earnings from profit or loss sharing agreements Earnings from profit or loss sharing agreements consist of
realized earnings from profit and loss sharing agreements with third parties relating to time chartered-in vessels. We had two
such agreements in place during the year ended December 31, 2012, one with our time chartered-in vessel, FPMC P Eagle
and the other relating to a vessel for which the Company neither owns nor time charters-in (i.e. the vessel is chartered-in by
an unrelated third party.) There were no similar agreements for the comparative period.
Unrealized loss on derivative financial instruments. Unrealized loss on derivative financial instruments consists of
a $0.2 million change in the fair value of our profit and loss sharing agreements with third parties. For a description of these
agreements, please see Item 5.B. “Liquidity and Capital Resources – Profit or loss sharing agreements.” There were no
similar agreements for the comparative period.
MR segment
The following table summarizes vessel operations for our MR segment.
For the year ended
December 31,
2012
2011
Change
Percentage
Change
MR segment
In thousands of US dollars except per day and fleet data
Vessel revenue ......................................................................... $
Vessel operating costs ..............................................................
Voyage expenses .....................................................................
Charterhire ...............................................................................
Impairment ...............................................................................
Depreciation .............................................................................
Loss from sale of vessels .........................................................
General and administrative expenses .......................................
Financial income ......................................................................
Other expenses, net ..................................................................
Segment loss ............................................................................ $
46,857 $
(7,484)
(17,979)
(17,593)
—
(4,015)
(5,879)
(398)
6
(51)
(6,536) $
12,287 $
(3,178)
(6,842)
—
(12,573)
(2,038)
—
(314)
—
—
(12,658) $
34,570
(4,306)
(11,137)
(17,593)
12,573
(1,977)
(5,879)
(84)
6
(51)
6,122
Pool revenue per day ............................................................... $
Voyage revenue per day ..........................................................
Operating costs per day ...........................................................
11,811 $
12,541
6,770
— $
12,092
6,748
11,811
449
(22)
Pool revenue days ....................................................................
Voyage revenue days ...............................................................
Operating days .........................................................................
809
1,541
1,089
Average number of owned vessels ..........................................
Average number of time chartered-in vessels ..........................
2.97
3.51
—
450
471
1.29
—
809
1,091
618
1.68
3.51
48
281%
(135%)
(163%)
N/A
100%
(97%)
N/A
(27%)
N/A
N/A
48%
N/A
4%
0%
N/A
242%
131%
130%
N/A
Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $46.9 million, an increase of $34.6
million or 281% from the year ended December 31, 2011. Vessel revenue less voyage expenses, or TCE revenue, was $28.9
million, an increase of $23.4 million, or 430% from $5.4 million for the year ended December 31, 2011. The change in
revenue was the result of an increase in revenue days to 2,350 for the year ended December 31, 2012 from 450 during the
year ended December 31, 2011. During the year ended December 31, 2011, only STI Diamond and STI Coral were operating
in this segment as these vessels were acquired in May 2011. Revenue days increased during the year ended December 31,
2012 as a result of the delivery of the first five Newbuilding vessels in the third quarter of 2012 (STI Amber, STI Topaz, STI
Ruby, STI Garnet, and STI Onyx) and the delivery of six time chartered-in vessels (Pacific Duchess, Freja Lupus, STX Ace 6,
Targale, Endeavour, and Valle Bianca). The increase in revenue was also driven by an increase in voyage revenue per day to
$12,541 during the year ended December 31, 2012 from $12,092 during the year ended December 31, 2011.
Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $7.5 million, an increase
of $4.3 million, or 135%, from the year ended December 31, 2011. The increase was driven by an increase in the number of
operating days to 1,089 from 471 days during the year ended December 31, 2012. This increase was the result of the delivery
of our first five newbuilding vessels during the third quarter of 2012.
Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $18.0 million, an increase of $11.1
million or 163% from the year ended December 31, 2011. The increase was primarily driven by STI Coral, STI Diamond,
Pacific Duchess, Freja Lupus, STX Ace 6, Targale, Endeavour, Valle Bianca and the first five newbuilding vessels operating
in the spot market for a total of 1,541 days during the year ended December 31, 2012 compared to only STI Coral and STI
Diamond operating in the spot market for 450 days during the year ended December 31, 2011.
Charterhire. Charterhire expense for the year ended December 31, 2012 was $17.6 million, which was the result of
time chartering-in Pacific Duchess, Freja Lupus, STX Ace 6, Targale, Endeavour and Valle Bianca during the year ended
December 31, 2012. There were no vessels chartered-in during the year ended December 31, 2011.
Depreciation. Depreciation expense for the year ended December 31, 2012 was $4.0 million, an increase of $2.0
million, or 97%, from the year ended December 31, 2011. The increase was driven by an increase in the average number of
owned MR vessels to 2.97 for the year ended December 31, 2012 from 1.29 for the year ended December 31, 2011, which
was the result of the delivery of the first five newbuilding vessels during the third quarter of 2012. The increase was partially
offset by a decrease of depreciation expense which was driven by an impairment charge recorded in December 2011 that
reduced the depreciable basis of STI Diamond and STI Coral.
Loss from sale of vessels. Loss from sale of vessels for the year ended December 31, 2012 was $5.9 million. This
was a result of the sales of STI Diamond and STI Coral for $25.25 million each in August and September 2012, respectively.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2012
were $0.4 million, an increase of $0.1 million, or 27%, from the year ended December 31, 2011. General and administrative
expenses for the MR segment primarily consist of administrative fees. The increase was the result of an increase in the
average number of owned vessels to 2.97 during the year ended December 31, 2012 from 1.29 during the year ended
December 31, 2011.
49
Handymax segment
The following table summarizes vessel operations for our Handymax segment:
Handymax segment
In thousands of US dollars except per day and fleet data
Vessel revenue ........................................................................... $
Vessel operating costs ................................................................
Voyage expenses .......................................................................
Charterhire .................................................................................
Impairment .................................................................................
Depreciation ...............................................................................
Loss from sale of vessels ...........................................................
General and administrative expenses .........................................
Segment loss .............................................................................. $
For the year ended
December 31,
2012
2011
Change
Percentage
Change
35,381 $
(5,428)
(2,741)
(23,192)
—
(1,716)
(4,525)
(195)
(2,416) $
32,238 $
(11,217)
(26)
(17,357)
(12,962)
(5,069)
—
(762)
(15,155) $
3,143
5,789
(2,715)
(5,835)
12,962
3,353
(4,525)
567
12,739
10%
52%
(10442%)
(34%)
100%
66%
N/A
74%
84%
Pool revenue per day ................................................................. $
Voyage revenue per day ............................................................
Operating costs per day .............................................................
13,166 $
11,201
7,594
11,343 $
—
7,619
1,823
11,201
25
Pool revenue days ......................................................................
Voyage revenue days .................................................................
Operating days ...........................................................................
Average number of owned vessels ............................................
Average number of time chartered-in vessels ............................
2,374
124
673
1.84
5.03
2,840
—
1,460
(466)
124
787
4.00
3.85
(2.16)
1.18
16%
N/A
0%
(16%)
N/A
54%
(54%)
31%
Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $35.4 million, an increase of $3.1
million or 10% from the year ended December 31, 2011. The increase is driven by 124 voyage revenue days in 2012
compared to no voyage revenue days in 2011 (though certain nominal voyage expenses were incurred).
Vessel revenue less voyage expenses, or TCE revenue, was $32.6 million for the year ended December 31, 2012, an
increase of $0.4 million, or 1.3% from $32.2 million for the year ended December 31, 2011. The Handymax segment had
2,498 revenue days for the year ended December 31, 2012 and 2,840 revenue days for the year ended December 31, 2011.
This decrease was driven by the sales of STI Conqueror, STI Matador and STI Gladiator in March, April and May of 2012,
respectively, and was partially offset by an increase in the number of vessels time chartered-in for the year ended December
31, 2012. The average number of vessels (owned and time chartered-in) was 6.87 for the year ended December 31, 2012 and
7.85 for the year ended December 31, 2011.
The decrease in revenue days was offset by an increase in pool revenue per day to $13,166 for the year ended
December 31, 2012 from $11,343 per day for the year ended December 31, 2011.
Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $5.4 million, a decrease
of $5.8 million, or 52%, from the year ended December 31, 2011. The decrease was driven by a decrease in the number of
operating days to 673 during the year ended December 31, 2012 from 1,460 during the year ended December 31, 2011 which
was due to the sales of STI Conqueror, STI Matador, and STI Gladiator in March, April and May of 2012, respectively.
Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $2.7 million, increasing $2.7
million from the year ended December 31, 2011. This was a result of STI Conqueror, STI Matador, and STI Gladiator
operating in the spot market for 124 days during the year ended December 31, 2012 prior to their sales. There were nominal
voyage expenses incurred for the year ended December 31, 2011.
Charterhire. Charterhire expense for the year ended December 31, 2012 was $23.2 million, an increase of $5.8
million or 34% from the year ended December 31, 2011. This was the result of an increase in the number of days of
chartered-in vessels to 1,840 during the year ended December 31, 2012 from 1,404 days during the year ended December 31,
2011. The increase was primarily driven by Histria Perla and Histria Coral; their time charters began in July 2011. These
vessels therefore operated for partial periods during the year ended December 31, 2011 as compared to the full year during
the year ended December 31, 2012. The average number of time chartered-in vessels increased to 5.03 for the year ended
December 31, 2012 as compared to 3.85 for the year ended December 31, 2011.
50
Depreciation. Depreciation expense for the year ended December 31, 2012 was $1.7 million, a decrease of $3.4
million, or 66%, from the year ended December 31, 2011. This was due to the sales of STI Conqueror, STI Matador, and STI
Gladiator which ceased being depreciated and were written down to their disposal values in February 2012, the date which
they were considered held for sale. In addition, we recorded an impairment charge in December 2011 which decreased the
depreciable basis of the owned vessels in this segment.
Loss from sales of vessels. Loss from sales of vessels for the year ended December 31, 2012 was $4.5 million which
was the result of the sales of STI Conqueror, STI Matador, and STI Gladiator in March, April, and May 2012, respectively.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2012
were $0.2 million, a decrease of $0.6 million, or 74% from the year ended December 31, 2011. General and administrative
expenses for the Handymax segment primarily consist of administrative fees. The decrease in administrative fees was driven
by decrease in the average number of owned vessels to 1.84 for the year ended December 31, 2012 from 4.00 for the year
ended December 31, 2011 resulting from the sales of STI Conqueror, STI Matador and STI Gladiator during the year ended
December 31, 2012.
Results of Operations for the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
Net Loss. For the year ended December 31, 2011, we incurred a net loss of $82.7 million, compared to a net loss of
$2.8 million for the year ended December 31, 2010. The differences between the two periods are discussed below.
In thousands of US dollars
Vessel revenue .................................................................. $
Vessel operating costs .......................................................
Voyage expenses ..............................................................
Charterhire ........................................................................
Impairment ........................................................................
Depreciation ......................................................................
General and administrative expenses ................................
Financial expenses ............................................................
Realized loss on derivative financial instruments .............
Financial income ...............................................................
Other expense, net ............................................................
Net loss ............................................................................. $
For the year ended
December 31,
2011
2010
Change
Percentage
Change
82,110 $
(31,370)
(6,881)
(22,750)
(66,611)
(18,460)
(11,637)
(7,060)
—
51
(119)
(82,727) $
38,798 $
(18,440)
(2,542)
(276)
—
(10,179)
(6,200)
(3,231)
(280)
37
(509)
(2,822) $
43,312
(12,929)
(4,339)
(22,475)
(66,611)
(8,281)
(5,437)
(3,829)
280
14
390
(79,904)
112%
(70%)
(171%)
(8157%)
N/A
(81%)
(88%)
(119%)
N/A
40%
77%
2831%
Vessel revenue. Vessel revenue was $82.1 million for the year ended December 31, 2011, an increase of $43.3
million, or 112%, from vessel revenue of $38.8 million for the year ended December 31, 2010. The following table
summarizes our revenue:
In thousands of US dollars
Owned vessels ................................................................
Time charter revenue ................................................... $
Pool revenue ................................................................
Voyage revenue ...........................................................
Time chartered-in vessels
For the year ended
December 31,
2011
2010
Change
Percentage
Change
9,626 $
39,522
12,287
19,417 $
15,180
3,916
(9,791)
24,342
8,371
(50%)
160%
214%
Pool revenue ................................................................
20,675
285
20,390
7163%
Total ............................................................................ $
82,110 $
38,798 $
43,312
112%
The decrease in time charter revenue of $9.8 million, or 50%, was the result of a decrease in the overall number of
days of vessels on time charter to 427 in 2011 compared to 854 in 2010. This decrease was the result of the expiration of time
charter contracts on the Senatore (expired August 2010), STI Harmony (expired September 2010), and STI Heritage (expired
November 2010). Noemi was employed on a time charter for both periods that began in 2007 and expired in December 2011,
and STI Spirit was employed on a short term time charter for 72 days during 2011.
The increase in pool revenue for owned vessels of $24.3 million, or 160%, was primarily the result of an increase in
the number of pool revenue days to 3,149 in 2011 from 1,185 in 2010. This increase was attributable to growth of the fleet as
51
our average number of owned vessels was 11.29 for the year ended December 31, 2011, compared to 6.19 for the year ended
December 31, 2010.
The increase in voyage revenue of $8.4 million, or 214%, is a result of an increase in the number of days that our
vessels operated in the spot market to 450 days in 2011 compared to 177 in 2010, in addition to an increase in TCE to
$12,092 per day in 2011 from $7,774 per day in 2010. During 2011, STI Coral and STI Diamond operated in the spot market
for 450 days combined. During 2010, our newly purchased vessels, STI Conqueror, STI Gladiator, STI Matador and STI
Highlander operated in the spot market prior to their entry in the Scorpio Handymax Tanker Pool for 167 days. Additionally,
Senatore operated in the spot market for 10 days subsequent to the termination of its time charter agreement and prior to its
entry in the Scorpio Panamax Tanker Pool.
The increase of pool revenue for time chartered-in vessels of $20.3 million, or 7,163%, in 2011 compared to 2010
was due to an increase in the number of pool revenue days for time chartered-in vessels. In 2011, BW Zambesi, Krisjanis
Valdemars, Kraslava, Kazdanga, Histria Azure, Histria Perla, Histria Coral and Khawr Aladid were time chartered-in for
1,806 days, while in 2010, BW Zambesi was time chartered-in for 20 days. All vessels operated in the Scorpio Group Pools.
Vessel operating costs. Vessel operating costs for owned vessels of $31.4 million for the year ended December 31,
2011, increased $12.9 million, or 70% from $18.4 million for the year ended December 31, 2010. The increase is the result of
an additional 1,863 operating days in 2011 which was driven by the purchase of two vessels in 2011 and seven vessels
throughout 2010, which operated for a full year in 2011 as opposed to partial years in 2010.
Voyage expenses. The increase in voyage expenses is a result of an increase in the number of days that our vessels
operated in the spot market to 450 in 2011 from 177 in 2010. During 2011, STI Coral and STI Diamond operated in the spot
market for 450 days combined. During 2010, our newly purchased vessels, STI Conqueror, STI Gladiator, STI Matador and
STI Highlander operated in the spot market for 167 days prior to their entry in the Scorpio Handymax Tanker Pool.
Additionally, Senatore operated in the spot market for 10 days subsequent to the termination of its time charter agreement
and prior to its entry in the Scorpio Panamax Tanker Pool.
Charterhire. Charterhire expense of $22.8 million for the year ended December 31, 2011 increased $22.5 million, or
8,157%, from $0.3 million for the year ended December 31, 2010. The increase was due to an increase of the number of time
chartered-in days in 2011. In 2011, BW Zambesi, Krisjanis Valdemars, Kraslava, Kazdanga, Histria Azure, Histria Perla,
Histria Coral and Khawr Aladid were time chartered-in for 1,806 days, while in 2010, BW Zambesi was time chartered-in for
20 days.
Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $66.6 million for our 12
owned vessels. This impairment loss was triggered by reductions in vessel values, and represented the difference between the
carrying value and recoverable amount, being fair value less cost to sell. In determining the fair value less cost to sell, we
took into consideration the estimated valuations provided by independent ship brokers. No impairments were recognized in
the year ended December 31, 2010.
Depreciation. Depreciation of $18.5 million for the year ended December 31, 2011 increased $8.3 million, or 81%,
from $10.2 million for the year ended December 31, 2010. The increase in depreciation expense was primarily due to an
increase in our average number of owned vessels to 11.29 in 2011 from 6.19 in 2010. This increase was offset by a change in
the depreciable life of our owned vessels from 20 to 25 years in the second quarter 2010. The estimated useful life of 25 years
is management’s best estimate and is also consistent with industry practice for similar vessels. This change in estimate was
applied prospectively and the impact on the income statement for the year ended December 31, 2010 resulted in a decrease in
depreciation expense and increase in net income of $1.2 million.
General and administrative expense. General and administrative expense, which includes commercial management
and administrative fees, of $11.6 million for the year ended December 31, 2011, increased $5.4 million, or 88%, from $6.2
million for the year ended December 31, 2010. The increase is a result of incremental costs incurred to operate as a public
company and additional compensation arrangements that were entered into as part of the initial public offering in April 2010.
This was specifically driven by an increase in the amortization of restricted stock issued in June 2010 and January 2011, a
full year of salary costs, directors and officers insurance and fees, legal fees, audit fees and other related expenses.
52
Financial expenses. Financial expenses of $7.1 million for the year ended December 31, 2011, increased $3.8
million, or 119%, from $3.2 million for the year ended December 31, 2010. Financial expenses for the year ended December
31, 2011 consisted of interest on bank loans ($5.0 million), commitment fees on undrawn portions of the our 2010 and 2011
Credit Facilities ($1.1 million ) and amortization of deferred financing fees ($1.0 million). Financial expenses for the year
ended December 31, 2010 consisted of interest on bank loan ($2.4 million), which at the time only consisted of the 2010
Revolving Credit Facility, commitment fees on undrawn portions of our 2010 Revolving Credit Facility ($0.6 million) and
amortization of deferred financing fees ($0.2 million).
Realized loss on derivative financial instruments. Realized loss on derivatives from our interest rate swap, was $0.3
million for the year ended December 31, 2010. The realized loss is the result of the settlement difference between contracted
interest rates and the actual market interest rates (LIBOR). The interest rate swap, which was related to the 2005 Credit
Facility and did not qualify for hedge accounting, was terminated on April 9, 2010.
Financial income. Interest income was $51,008 for the year ended December 31, 2011, an increase of $14,474 or
40% from the $36,534 for the year ended December 31, 2010. The increase was primarily due to an increase in our average
cash balance during the period.
Other expenses, net. Other expense, net was a loss of $0.1 million for the year ended December 31, 2011, and a loss
of $0.5 million for the year ended December 31, 2010. The decrease was primarily driven by expenses incurred for the initial
public offering in April 2010.
Results of operations – segment analysis
Aframax/LR2 segment
The following table summarizes vessel operations for our Aframax segment.
Aframax/LR2 segment
In thousands of US dollars except per day and fleet data
Vessel revenue .......................................................................... $
Vessel operating costs ...............................................................
Charterhire ................................................................................
Impairment ................................................................................
Depreciation ..............................................................................
General and administrative expenses ........................................
Financial expenses ....................................................................
Other expense, net ....................................................................
Segment loss ............................................................................. $
For the year ended
December 31,
2011
2010
Change
Percentage
Change
6,484 $
(2,547)
(839)
(12,459)
(2,074)
(136)
(841)
(134)
(12,546) $
641 $
(427)
—
—
(293)
(15)
1
—
(93)
5,843
(2,121)
(839)
(12,459)
(1,781)
(121)
(842)
(134)
(12,453)
911%
(497%)
N/A
N/A
(607%)
(819%)
108206%
N/A
(13434%)
Time charter revenue per day ...................................................
Pool revenue per day ................................................................
Operating costs per day ............................................................
15,457
14,849
6,960
—
12,460
8,293
15,457
2,389
(1,333)
Time charter revenue days ........................................................
Pool revenue days .....................................................................
Operating days ..........................................................................
Average number of owned vessels ...........................................
Average number of time chartered-in vessels ...........................
72
361
365
1.00
0.19
—
51
51
72
310
314
0.14
—
0.86
0.19
N/A
19%
(16%)
N/A
602%
609%
609%
N/A
On November 2010, we took delivery of STI Spirit, a 113,091 dwt Aframax/LR2 product tanker. From delivery on
November 10, 2010 through January 11, 2011, STI Spirit operated in the Scorpio Aframax Tanker Pool, which traded a mix
of crude and product tankers. As of March 25, 2011, this vessel joined the Scorpio LR2 Pool, which focuses solely on
product tankers.
Vessel Revenue. Vessel revenue of $6.5 million for the year ended December 31, 2011, increased $5.8 million, or
911%, as the result of an increase in the overall number of total revenue days to 434 days in 2011 from 51 days in 2010. This
was driven by the acquisition of STI Spirit. Additionally, we took delivery of the Khawr Aladid, a 2006 built LR2 product
tanker (106,003 DWT), on October 24, 2011, on a six month time charter-in agreement.
53
Vessel operating costs. Vessel operating costs of $2.5 million for the year ended December 31, 2011, increased $2.1
million or 497% as a result of an increase in the number of operating days to 365 in 2011 from 51 2010 which was driven by
the purchase of STI Spirit in November 2010.
Charterhire. Charterhire expense of $0.9 million for the year ended December 31, 2011 was driven by the delivery
of Khawr Aladid, a 2006 built LR2 product tanker (106,003 DWT), on October 24, 2011, on a six month time charter-in
agreement. There were no time chartered-in vessels in the Aframax/LR2 segment in 2010.
Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $12.5 million for the
Aframax/LR2 segment. No impairment was recognized in 2010.
Depreciation. Depreciation expense of $2.1 million for the year ended December 31, 2011 increased $1.8 million, or
607%, from $0.3 million for the year ended December 31, 2010. The increase is due to an increase in the number of operating
days to 365 in 2011 from 51 in 2010 which was driven by the purchase of STI Spirit in November 2010.
General and administrative expense. General and administrative expense of $0.1 million for the year ended
December 31, 2011, increased $0.1 million or 819% from $14,747 for the year ended December 31, 2010. General and
administrative expenses for the Aframax/LR2 segment primarily consist of commercial management fees and administrative
fees to SCM. The increase is due to an increase in the number of revenue days to 434 in 2011 from 51 2010 which was driven
by the purchase of STI Spirit in November 2010 and delivery of Khawr Aladid in October 2011.
Financial expenses. Financial expenses was $0.8 million for the year ended December 31, 2011, an increase of
approximately $0.8 million or 108,206% from $778 for year ended December 31, 2010. Financial expenses for the
Aframax/LR2 segment represents interest for the STI Spirit Credit Facility which was signed and drawn in March 2011.
Other expense, net. Other expense, net was a loss of $0.1 million for the year ended December 31, 2011. There
were no other expenses for the year ended December 31, 2010. This increase is primarily due to the write-off of vessel
purchase options that were acquired as part of the purchase of STI Spirit in November 2010 and expired unexercised in
September 2011.
Panamax/LR1 segment
The following table summarizes vessel operations for our Panamax segment
Panamax/LR1 segment
In thousands of US dollars except per day and fleet data
Vessel revenue ....................................................................... $
Vessel operating costs ............................................................
Voyage expenses ...................................................................
Charterhire .............................................................................
Impairment .............................................................................
Depreciation ...........................................................................
General and administrative expenses .....................................
Financial expenses .................................................................
Realized loss on derivative financial instruments ..................
Other expense, net .................................................................
Segment (loss)/profit ............................................................. $
Time charter revenue per day ................................................
Pool revenue per day .............................................................
Voyage revenue per day ........................................................
Operating costs per day .........................................................
Time charter revenue days .....................................................
Pool revenue days ..................................................................
Voyage revenue days .............................................................
Operating days .......................................................................
Average number of owned vessels ........................................
Average number of time chartered-in vessels ........................
54
For the year ended
December 31,
2011
2010
Change
Percentage
Change
31,101 $
(14,428)
(13)
(4,554)
(28,616)
(9,279)
(692)
0
—
23
(26,458) $
23,962
12,876
—
7,891
355
1,754
—
1,825
5.00
0.91
29,345 $
(12,364)
(253)
(276)
—
(7,494)
(600)
(134)
(280)
(4)
7,940
22,729
15,213
2,839
8,189
854
634
10
1,510
4.14
0.05
1,756
(2,064)
240
(4,278)
(28,616)
(1,786)
(91)
134
280
27
(34,398)
1,233
(2,337)
(2,839)
(298)
(499)
1,120
(10)
315
6%
(17%)
95%
(1553%)
N/A
(24%)
(15%)
100%
N/A
616%
433%
5%
(15%)
N/A
(4%)
(58%)
177%
N/A
21%
0.86
0.86
21%
1565%
Vessel Revenue. Vessel revenue for the year ended December 31, 2011 was $31.1 million, an increase of $1.8
million, or 6% from $29.3 million for the year ended December 31, 2010. The increase in revenue was the result of an
increase in the overall number of total revenue days to 2,109 days in 2011 from 1,498 days in 2010. This was driven by an
increase in pool days of 1,120 offset by a decrease in time charter days of 499. STI Harmony and STI Heritage were acquired
in June 2010 with existing time charter contracts that expired in September and December 2010, respectively. These, along
with the time charter contracts with Noemi and Senatore comprised the time charter revenue for 2010. The time charter
contract for Senatore expired in August 2010. The time charter arrangement for Noemi expired in December 2011 and was
the only vessel in this segment on time charter during 2011. All of these vessels entered the Scorpio Panamax Tanker Pool
subsequent to the expiration of the time charters.
As such, in 2011, five of our owned vessels and one of our time chartered-in vessels operated in the Scorpio
Panamax Tanker Pool. In 2010, four of our owned vessels and one of our time chartered-in vessels operated in the Scorpio
Panamax Tanker Pool. The increase was offset by an overall decrease in daily TCE rates to $12,876 per day in 2011, from
$15,213 per day in 2010.
Vessel operating costs. Vessel operating costs of $14.4 million increased $2.1 million or 17%, as a result of an
increase in the number of operating days to 1,825 in 2011 from 1,510 in 2010, which was driven by the purchase of STI
Harmony and STI Heritage in June 2010 and therefore a full year of operation in 2011.
Voyage expenses. Voyage expenses of $13,383 decreased $0.2 million or 95% as a result of Senatore operating in
the spot market for 10 days subsequent to the termination of its time charter agreement and prior to its entry in the Scorpio
Panamax Tanker Pool.
Charterhire. Charterhire expense of $4.5 million for the year ended December 31, 2011 decreased $4.2 million or
1,553% from $0.3 million for the year ended December 31, 2010. The increase was due to BW Zambesi which was chartered-
in for a total of 333 days in 2011 and 20 days in 2010 at a charterhire rate of $13,850 per day.
Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $28.6 million for our
owned Panamax/LR1 vessels. No impairment was recognized in 2010.
Depreciation. Depreciation expense of $9.3 million for the year ended December 31, 2011, increased by $1.8
million, or 24% from $7.5 million for the year ended December 31, 2010. The increase in depreciation expense was primarily
due to an increase in our average number of owned vessels to 5.00 in 2011 from 4.14 in 2010. This increase was offset by the
effect from a change in the depreciable life of our owned vessels from 20 to 25 years, which occurred in the second quarter of
2010, together with the effect of an increase in estimated residual values of our vessels.
General and administrative expense. General and administrative expense of $0.7 million for the year ended
December 31, 2011, increased $0.1 million, or 15% from $0.6 million for the year ended December 31, 2010. General and
administrative expenses for the Panamax/LR1 segment primarily consist of commercial management fees and administrative
fees to SCM. The increase is the result of an increase in the average number of owned vessels to 5.00 in 2011 to 4.14 in 2010.
Financial expenses. Financial expenses were $0.1 million for the year ended December 31, 2010. Financial
expenses for the Panamax/LR1 segment represent interest for the 2005 Credit Facility which was repaid in April 2010.
Realized loss on derivative financial instruments. Realized loss on derivative financial instruments was $0.3
million for the year ended December 31, 2010. The realized loss is the result of the settlement difference between contracted
interest rates and the actual market interest rates (LIBOR) on an interest rate swap that was related to the 2005 Credit
Facility, and was terminated on April 9, 2010.
55
MR Segment
The following table summarizes vessel operations for our MR segment. On May 10, 2011, we took delivery of STI
Coral and STI Diamond and we did not have vessels operating in this segment in prior periods. As such, no further
commentary has been provided in respect of this segment as a year-on-year comparison is not applicable.
For the year ended
December 31,
2011
MR segment
In thousands of US dollars except per day and fleet data
Vessel revenue .................................................................................................................................... $
Vessel operating costs .........................................................................................................................
Voyage expenses ................................................................................................................................
Impairment ..........................................................................................................................................
Depreciation ........................................................................................................................................
General and administrative expenses ..................................................................................................
Segment loss ....................................................................................................................................... $
Voyage revenue per day .....................................................................................................................
Operating costs per day ......................................................................................................................
Voyage revenue days ..........................................................................................................................
Operating days ....................................................................................................................................
Average number of owned vessels .....................................................................................................
Handymax segment
The following table summarizes vessel operations for our Handymax segment.
Handymax segment
For the year ended
December 31,
In thousands of US dollars except per day and fleet data
2011
2010
Change
Vessel revenue ............................................................................... $
Vessel operating costs ....................................................................
Voyage expenses ...........................................................................
Charterhire .....................................................................................
Impairment .....................................................................................
Depreciation ...................................................................................
General and administrative expenses .............................................
Financial expenses .........................................................................
Segment loss .................................................................................. $ (15,155) $
32,238 $
(11,217)
(26)
(17,357)
(12,962)
(5,068)
(762)
—
8,812 $ 23,426
(5,567)
(5,650)
2,263
(2,289)
(17,357)
—
(12,962)
—
(2,678)
(2,390)
(496)
(267)
(1)
1
(13,373)
(1,782)
Pool revenue per day .....................................................................
Voyage revenue per day ................................................................
Operating costs per day .................................................................
11,343
—
7,619
Pool revenue days ..........................................................................
Voyage revenue days .....................................................................
Operating days ...............................................................................
Average number of owned vessels ................................................
Average number of time chartered-in vessels ................................
2,840
—
1,460
4.00
3.85
9,965
8,077
8,107
520
167
697
1.91
—
1,379
(8,077)
(489)
2,320
(167)
763
2.09
3.85
12,287
(3,178)
(6,842)
(12,573)
(2,038)
(314)
(12,658)
12,092
6,748
450
471
1.29
Percentage
Change
266%
(99%)
99%
N/A
N/A
(112%)
(186%)
N/A
(751%)
14%
N/A
(6%)
446%
N/A
109%
109%
N/A
Vessel Revenue. Vessel revenue for the year ended December 31, 2011 was $32.2 million, an increase of $23.4
million, or 266% from $8.8 million for the year ended December 31, 2010. This increase was the result of an increase in the
overall number of total revenue days to 2,840 days in 2011 from 687 days in 2010. STI Conqueror was delivered in June
2010, STI Matador and STI Gladiator were delivered in July 2010 and STI Highlander was delivered in August 2010. These
were the only vessels in the Handymax segment during the year ended December 31, 2010. We time chartered-in Krisjanis
56
Valdemars, Kraslava, Histria Azure, Kazdanga, Histria Perla and Histria Coral during the year ended December 31, 2011.
In addition, pool revenue per day increased 14% for the year ended December 31, 2011 when compared to the year ended
December 31, 2010.
Vessel operating costs. Vessel operating costs for the year ended December 31, 2011 were $11.2 million, an
increase of $5.6 million, or 99%from the year ended December 31, 2010. This was the result of an increase in the number of
operating days to 1,460 from 697 for the years ended December 31, 2011 and 2010, respectively which was driven by the
purchase of STI Conqueror in June 2010, STI Gladiator and STI Matador in July 2010 and STI Highlander in August 2010,
all of which operated for a full year during 2011.
Voyage expenses. Voyage expenses for the year ended December 31, 2011 were $25,760, a decrease of $2.3
million, or 99% as a result of STI Conqueror, STI Gladiator, STI Matador and STI Highlander operating in the spot market
for 167 days in during the year ended December 31, 2010. No vessels operated in the spot market during the year ended
December 31, 2011 though certain nominal voyage charges were incurred.
Charterhire. Charterhire for the year ended December 31, 2011 was $17.4 million, an increase of $17.4 million
from the year ended December 31, 2010. The increase was the result of the chartering-in of Krisjanis Valdemars, Kraslava,
Histria Azure, Kazdanga, Histria Perla and Histria Coral during the year ended December 31, 2011. There were no vessels
chartered-in during the year ended December 31, 2010.
Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $13.0 million for our
owned Handymax. No impairment was recognized in 2010.
Depreciation. Depreciation expense for the year ended December 31, 2011 was $5.0 million, an increase of $2.7
million, or 112% from the year ended December 31, 2010. This increase was a result of an increase in our average number of
owned Handymax vessels to 4.00 from 1.91 for the years ended December 31, 2011and 2010, respectively.
General and administrative expense. General and administrative expense for the year ended December 31, 2011
was $0.8 million, an increase of $0.5 million, or 186%, from the year ended December 31, 2010. General and administrative
expenses for the Handymax segment primarily consists of commercial management fees and administrative fees to SCM. The
increase is the result of an increase in the average number of owned and time chartered-in vessels to 7.85 from 1.91 for the
years ended December 31, 2011 and 2010, respectively.
B. Liquidity and Capital Resources
Our primary source of funds for our short-term and long-term liquidity needs will be the cash flows generated from
our vessels, which are currently operating in Scorpio Group Pools or in the spot market, in addition to availability under our
2010 Revolving Credit Facility, 2011 Credit Facility, 2013 Credit Facility (as defined later), which will be used for the partial
financing of newbuildings to be delivered after the first quarter of 2014, and cash on hand. The Scorpio Group Pools reduce
volatility because (i) they aggregate the revenues and expenses of all pool participants and distribute net earnings to the
participants based on an agreed upon formula and (ii) some of the vessels in the pool are on time charter. Furthermore, spot
charters provide flexibility and allow us to fix vessels at prevailing rates. We believe these cash flows from operations,
amounts available under our various credit facilities and our cash balance will be sufficient to meet our existing liquidity
needs for the next 12 months from the date of this annual report.
As of December 31, 2012, our cash balance was $87.2 million, which is an increase from our cash balance of $36.8
million as of December 31, 2011. Additionally, at December 31, 2012 we had $67.4 million in availability under our 2010
Revolving Credit Facility. The increase in cash balance was primarily due to net proceeds from the sales of STI Conqueror,
STI Matador, STI Gladiator, STI Coral and STI Diamond, drawdowns on various credit facilities, and proceeds from
registered direct placements of common shares in April 2012 and December 2012. These increases were offset by bank loan
repayments and payments related to our newbuilding vessels.
For the year ended December 31, 2012, our net cash outflow from operating activities was $1.9 million, our net cash
outflow from investing activities was $90.2 million and the net cash inflow from financing activities was $142.4 million. For
the year ended December 31, 2011, our net cash outflow from operating activities was $12.5 million, our net cash outflow
from investing activities was $122.6 million, and the net cash inflow from financing activities was $103.7 million.
As of December 31, 2012, our long-term liquidity needs were comprised of our debt repayment obligations for our
credit facilities, our obligations for our vessels under construction, and obligations under our charter-in arrangements.
57
Our credit facilities require us to comply with a number of covenants, including financial covenants related to
liquidity, consolidated net worth, minimum interest coverage, maximum leverage ratios, loan to value ratios and collateral
maintenance; delivery of quarterly and annual financial statements and annual projections; maintaining adequate insurances;
compliance with laws (including environmental); compliance with the Employee Retirement Income and Security Act, or
ERISA; maintenance of flag and class of the initial vessels; restrictions on consolidations, mergers or sales of assets;
approvals on changes in the manager of the vessels; limitations on liens; limitations on additional indebtedness; prohibitions
on paying dividends if a covenant breach or an event of default has occurred or would occur as a result of payment of a
dividend; prohibitions on transactions with affiliates; and other customary covenants.
No vessels are scheduled to be drydocked within the next 12 months.
Cash Flows
The table below summarizes our sources and uses of cash for the periods presented:
In thousands of US dollars
Condensed Cash Flows
Net cash inflow/(outflow)
Operating activities ................................................................................................. $
Investing activities ..................................................................................................
Financing activities .................................................................................................
For the year
ended December 31,
2011
2010
2012
(1,928 ) $
(12,452) $
(90,155 )
142,415
(122,573)
103,671
4,907
(245,595)
308,431
For the Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011
Net cash outflow from operating activities
Net cash outflow from operating activities was $1.9 million for the year ended December 31, 2012, which was an
increase of $10.5 million from a cash outflow of $12.5 million the year ended December 31, 2011. The increase was
primarily attributable to (i) an increase in vessel revenue of $33.3 million (ii) a decrease in vessel operating costs of $1.0
million (iii) earnings from profit or loss arrangements of $0.4 million (iv) a decrease in drydock payments of $0.8 million (v)
changes in working capital movements of $9.1 million and (vi) a decrease in financial expenses of $1.7 million (excluding
non-cash items such as deferred financing fee amortization). These changes were offset by (i) an increase in voyage expenses
of $14.9 million and (ii) an increase in charterhire expense of $21.0 million.
Net cash outflow from investing activities
Cash outflow from investing activities was $90.2 million for the year ended December 31, 2012 compared to net
cash outflows of $122.6 million for the year ended December 31, 2011. Investment activity during the year ended December
31, 2012 was driven by payments on our newbuilding vessels of $191.5 million (including capitalized costs). This was offset
by the sales of STI Conqueror, STI Matador, STI Gladiator, STI Coral and STI Diamond for aggregate net proceeds of
$101.3 million.
Cash outflow from investing activities was $122.6 million for the year ended December 31, 2011. Investment
activity during the year ended December 31, 2011 was driven by the purchase of STI Coral and STI Diamond for an
aggregate purchase price of $71.0 million (including a 1% commission paid to Liberty, our related party Administrator at that
time, along with other capitalized costs). Additionally, as of December 31, 2011, we had made payments of $51.0 million
relating to our newbuilding vessels under construction at HMD.
Net cash inflow from financing activities
Cash provided by financing activities was $142.4 million for the year ended December 31, 2012 compared to cash
provided by financing activities of $103.7 million for the year ended December 31, 2011. Financing activities during the year
ended December 31, 2012 were driven by the receipt of net proceeds of $153.1 million from two registered direct placements
of common shares in April and December 2012, borrowings of $32.2 million under our 2010 Revolving Credit Facility, and
borrowings of $92.0 million under our Newbuilding Credit Facility. These inflows were offset by repayments of $106.0
million into the 2010 Revolving Credit Facility, principal payments of $2.8 million into the STI Spirit Credit Facility, $18.2
million into the 2011 Credit Facility (of which $16.1 million was the repayment made as a result of the sale of STI Coral) and
$2.1 million into the Newbuilding Credit Facility. Cash outflows from financing activities also include the acquisition of
treasury shares of $2.4 million and debt issuance costs of $3.3 million.
58
Financing activities during the year ended December 31, 2011 were driven by net proceeds of $68.5 million from an
underwritten public offering of common shares in May 2011, net proceeds of $36.5 million from an underwritten public
offering of common shares in November 2011, borrowings of $35.0 million under the 2011 Credit Facility, borrowings of
$27.3 million under the STI Spirit Credit Facility, and borrowings of $53.0 million under the 2010 Revolving Credit Facility.
These inflows were offset by payments of $99.0 million into the 2010 Revolving Credit Facility, principal payments on all of
our credit facilities of $10.6 million, payment of debt issuance cost of $4.1 million under the 2011 Credit Facility, STI Spirit
Credit Facility and the 2010 Revolving Credit Facility along with $2.9 million of costs related to the repurchase of our
common shares.
For the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
Cash inflow/(outflow) from operating activities
Net cash outflow operating activities was $12.5 million for the year ended December 31, 2011, which was a
decrease of $17.4 million from the year ended December 31, 2010. The decrease was primarily attributable to (i) an increase
in vessel operating costs of $12.9 million, (ii) an increase in voyage expenses of $4.3 million, (iii) an increase in charterhire
expense of $22.5 million, (iv) an increase in general and administrative expenses of $4.4 million (excluding non-cash items),
(v) a net increase in interest expense of $3.8 million, (vi) a net increase in working capital movements of $11.5 million, (vii)
a decrease in receipts from shareholders of $1.9 million, and (viii) an increase in drydock payments of $1.5 million. These
decreases were partially offset by (i) an increase in vessel revenue of $43.3 million, (ii) a decrease in other expenses of $0.4
million and (iii) a decrease in interest rate swap termination payments of $1.9 million.
Cash outflow from investing activities
Cash outflow from investing activities was $122.6 million for the year ended December 31, 2011 compared to
$245.6 million for the year ended December 31, 2010. Investment activity during the year ended December 31, 2011 was
driven by the purchase of STI Coral and STI Diamond for an aggregate purchase price of $71.0 million (including a 1%
commission paid to Liberty, our related party Administrator (at that time), along with other capitalized costs). Additionally,
we entered into agreements with HMD for the construction of a total of six newbuilding vessels as of December 31, 2011 for
an aggregate purchase price of $223.4 million of which, $51.0 million was paid as of that date. The first five newbuilding
vessels were delivered to us in third quarter of 2012 and the sixth newbuilding vessel was delivered in January 2013.
Investment activity during the year ended December 31, 2010 was driven by the purchase of seven product tankers
during the period. Two of the tankers, STI Harmony and STI Heritage, are LR1 ice class 1A sister ships and were acquired
for an aggregate purchase price of $92.9 million (including a 1% commission paid to Liberty, a related party), which included
$2.3 million related to the value of the existing time charter contracts. Four of the other vessels, STI Conqueror, STI
Matador, STI Gladiator and STI Highlander are Handymax vessels that were acquired for $100.0 million in aggregate
(including a 1% commission paid to Liberty, our related party Administrator). The last vessel, STI Spirit was acquired for
$52.7 million which included $0.1 million related to the value of purchase options on two additional vessels which expired
unexercised in September 2011.
Cash inflow from financing activities
Cash inflow from financing activities was $103.7 million for the year ended December 31, 2011 compared to $308.4
million for the year ended December 31, 2010. Financing activity during the year ended December 31, 2011 was driven by
net proceeds of $68.5 million from an underwritten public offering in May 2011, net proceeds of $36.5 million from an
underwritten public offering in November 2011, borrowings of $35.0 million under the 2011 Credit Facility, borrowings of
$27.3 million under the STI Spirit Credit Facility, and borrowings of $53.0 million under the 2010 Revolving Credit Facility
offset by payments of $99.0 million into the 2010 Revolving Credit Facility, principal payments on all of our credit facilities
of $10.6 million, payment of deferred financing fees of $4.1 million under the 2011 Credit Facility, STI Spirit Credit Facility
and the 2010 Revolving Credit Facility along with $2.9 million of costs related to the repurchase of our common shares.
Financing activity during the year ended December 31, 2010 was driven from our initial public offering of $154.8 million
and $150.0 million of borrowings under the 2010 Revolving Credit Facility, which were offset by principal payments of $4.8
million under the 2010 Revolving Credit Facility, the repayment of $39.8 million under the 2005 Credit Facility, $2.6 million
of costs related to the repurchase of our common shares and the payment of deferred financing fees of $2.2 million under the
2010 Revolving Credit Facility.
59
Long-Term Debt Obligations and Credit Arrangements
2005 Credit Facility
Two of our wholly-owned subsidiaries, Senatore Shipping Company Limited and Noemi Shipping Company
Limited, were joint and several borrowers under a loan agreement dated May 17, 2005, or the 2005 Credit Facility, entered
into with The Royal Bank of Scotland plc, as lender, which was secured by, among other things, a first preferred mortgage
over each of Senatore and Noemi. The initial amount of the 2005 Credit Facility was $56.0 million and consisted of two
tranches, one for each vessel-owning subsidiary. On April 9, 2010, we repaid the outstanding balance of $38.9 million with a
portion of the proceeds from our initial public offering.
2010 Revolving Credit Facility
On June 2, 2010, we executed a credit facility with Nordea Bank Finland plc, acting through its New York
branch, DNB Bank ASA, acting through its New York branch, and ABN AMRO Bank N.V, for a senior secured term loan
facility of up to $150 million. On July 12, 2011, we amended and restated the credit facility to convert it from a term loan
to a reducing revolving credit facility. This gave us the ability to pay down and re-borrow from the total available
commitments under the loan.
In March, April and May 2012, we sold three of our Handymax vessels, STI Conqueror for $21.0 million, STI
Gladiator for $16.2 million, and STI Matador for $16.2 million. The availability of the 2010 Revolving Credit Facility
permanently decreased by $31.0 million as a result of these vessel sales. Commitments are now reduced by $3.1 million each
quarter, with a lump sum reduction of $39.9 million at the maturity on June 2, 2015. Our subsidiaries that own the vessels
that are collateralized by the 2010 Revolving Credit Facility act as guarantors under the amended and restated credit facility.
All terms mentioned are defined in the agreement.
Drawdowns under the credit facility bear interest as follows: (1) through December 29, 2011, at LIBOR plus an
applicable margin of 3.00% per annum when our debt to capitalization (total debt plus equity) ratio is equal to or less than
50% and 3.50% per annum when our debt to capitalization ratio is greater than 50%; (2) from December 30, 2011 through
September 30, 2013, at LIBOR plus an applicable margin of 3.50% per annum; and (3) from October 1, 2013 and at all times
thereafter, at LIBOR plus an applicable margin of 3.25% per annum when our debt to capitalization (total debt plus equity)
ratio is equal to or less than 50% and 3.50% per annum when our debt to capitalization ratio is greater than 50%. A
commitment fee equal to 40% of the applicable margin is payable on the unused daily portion of the credit facility. The credit
facility matures on June 2, 2015 and can only be used to refinance amounts outstanding from the original loan agreement and
for general corporate purposes.
The credit facility requires that we comply with a number of covenants, including financial covenants; delivery of
quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws
(including environmental); compliance with ERISA; maintenance of flag and class of the initial vessels; restrictions on
consolidations, mergers or sales of assets; approval on changes in the Manager of our initial vessels; limitations on liens;
limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has
occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other
customary covenants.
The financial covenants require us to maintain:
The ratio of net debt to capitalization no greater than 0.60 to 1.00.
Consolidated tangible net worth no less than $150 million plus 25% of cumulative positive net income (on a
consolidated basis) for each fiscal quarter beginning on July 1, 2010 and 50% of the value of any new equity
issues from July 1, 2010 going forward.
The ratio of EBITDA to interest expense no less than 1.25 to 1.00 commencing with the fourth fiscal quarter of
2011 until the fourth quarter of 2012, at which point the ratio will increase to: (i) 1.50 to 1.00 for the first
quarter of 2013, (ii) 1.75 to 1.00 for the second quarter of 2013 and (iii) 2.00 at all times thereafter. Such ratio
shall be calculated quarterly on a trailing four quarter basis. In addition, we are restricted from paying dividends
until our EBITDA to interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as defined in the loan
agreement, excludes non-cash charges such as impairment.
Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) not
less than $25 million, of which unrestricted cash and cash equivalents shall be not less than $15.0 million, until
60
we owns, directly or indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each
additional vessel.
The aggregate fair market value of the collateral vessels shall at all times be no less than 150% of the then
aggregate outstanding principal amount of loans under the credit facility.
In December 2012, we raised net proceeds of $127.2 million from a registered direct placement of common
shares and as part of the use of proceeds of this offering, we voluntarily repaid $50.0 million into our 2010 Revolving
Credit Facility.
As of December 31, 2012 and December 31, 2011 the outstanding balance was $17.2 million and $91.0 million,
respectively, and the amount available to be drawn was $67.4 million and $37.9 million, respectively. We were in
compliance with the financial covenants relating to this facility as of December 31, 2012.
STI Spirit Credit Facility
On March 9, 2011, we executed a credit facility with DVB Bank SE for a senior secured term loan facility of $27.3
million for STI Spirit, which was acquired on November 10, 2010. The credit facility was drawn down on March 17, 2011
and matures on March 17, 2018. On September 28, 2011 and on December 30, 2011, we amended certain financial covenants
contained in the credit facility. The loan bears interest at LIBOR plus a margin of 2.75% per annum. The loan is repayable
over 28 equal quarterly installments and a lump sum payment at maturity. The quarterly installments commenced three
months after the drawdown and were calculated using an 18 year amortization profile. Our subsidiary, STI Spirit Shipping
Company Limited, which owns the vessel, is the borrower and Scorpio Tankers Inc. is the guarantor. The credit facility
requires us to comply with a number of covenants, including financial covenants; delivery of quarterly and annual financial
statements and annual projections; maintaining adequate insurances; compliance with laws (including environmental);
compliance with ERISA; maintenance of flag and class of the vessel; restrictions on consolidations, mergers or sales of
assets; approval of changes in the Manager of our vessels; limitations on liens; limitations on additional indebtedness;
prohibitions on paying dividends if a covenant breach or an event of default has occurred or would occur as a result of
payment of a dividend; prohibitions on transactions with affiliates; and other customary covenants.
The financial covenants of the credit facility are described below. On September 28, 2011, we executed an
amendment modifying the EBITDA to interest expense financial covenant. On December 30, 2011, we entered into a first
amendatory agreement modifying certain other financial covenants.
The financial covenants require us to maintain:
The ratio of debt to capitalization no greater than 0.60 to 1.00.
Consolidated tangible net worth no less than $150 million plus 25% of cumulative positive net income (on a
consolidated basis) for each fiscal quarter.
The ratio of EBITDA to interest expense shall be no less than 1.25 to 1.00 for the period commencing with the
fourth quarter of 2011 through the fourth quarter of 2012, at which time it will increase to: (i) 1.50 to 1.00 for
the first quarter of 2013, (ii) 1.75 to 1.00 for the second quarter of 2013 and (iii) 2.00 to 1.00 at all times
thereafter. Such ratio shall be calculated quarterly on a trailing four quarter basis. In addition, we are restricted
from paying dividends until our EBITDA to interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as
defined in the loan agreement, excludes non-cash charges such as impairment.
Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) not
less than $25 million, of which unrestricted cash and cash equivalents shall be not less than $15.0 million, until
we own, directly or indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each
additional vessel.
The aggregate fair market value of STI Spirit not less than (i) 140% of the then outstanding loan balance if the
vessel is operating in a pool or in the spot market or (ii) 130% of the then outstanding loan if the vessel is on
time charter with a duration of at least one year.
As described above, our STI Spirit Credit Facility requires that the charter-free market value of the STI Spirit shall
be no less than 140% of the then outstanding loan balance. In order to stay in compliance with this covenant, we made
prepayments of $0.8 million in June, 2012, and $1.3 million in December 2012 which will be applied to the next four
quarterly payments.
61
As of December 31, 2012 the outstanding balance on this facility was $23.4 million, which includes a reduction for
the prepayments discussed above. We were in compliance with the financial covenants relating to this facility as of December
31, 2012
2011 Credit Facility
On May 3, 2011, we executed a credit facility with Nordea Bank Finland plc, acting through its New York branch,
DNB NOR Bank ASA, acting through its New York branch, and ABN AMRO Bank N.V., for a senior secured term loan
facility of up to $150 million. On September 22, 2011 and December 22, 2011 we amended the loan agreement to extend the
availability period and we amended the margin and certain financial covenants. On July 20, 2012, we extended the
availability period of the 2011 Credit Facility until January 31, 2014 which was previously scheduled to expire in May 2013.
As a result of this amendment, we wrote-off $3.0 million in deferred financing fees within Financial Expenses in our
consolidated financial statements attached hereto.
Borrowings under this credit facility are available until January 31, 2014. Drawdowns under the credit facility bear
interest as follows: (1) until December 29, 2011, at LIBOR plus an applicable margin of (i) 2.75% per annum when our debt
to capitalization (total debt plus equity) ratio is less than 45%, (ii) 3.00% per annum when our debt to capitalization ratio is
greater than or equal to 45% but less than or equal to 50% and (iii) 3.25% when our debt to capitalization ratio is greater than
50%; (2) from December 30, 2011 through September 30, 2013, at LIBOR plus an applicable margin of 3.50% per annum
and (3) from October 1, 2013 and at all times thereafter, at LIBOR plus an applicable margin of (i) 3.25% per annum when
our debt to capitalization (total debt plus equity) ratio is equal to or less than 50% and (ii) 3.50% per annum when our debt to
capitalization ratio is greater than 50%. A commitment fee equal to 40% of the applicable margin is payable on the unused
daily portion of the credit facility. The credit facility matures on May 3, 2017 and can only be used to finance up to 50% of
the cost of future vessel acquisitions, which vessels would be the collateral for the credit facility.
Borrowings for each vessel financed under this facility represent a separate tranche, with repayment terms
dependent on the age of the vessel at acquisition. Each tranche under the new credit facility is repayable in equal quarterly
installments, with a lump sum payment at maturity, based on a full repayment of such tranche when the vessel to which it
relates is sixteen years of age. Our subsidiaries, which may at any time, own one or more of our vessels, will act as
guarantors under the credit facility.
The credit facility requires us to comply with a number of covenants, including financial covenants; delivery of
quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws
(including environmental); compliance with ERISA; maintenance of flag and class of the initial vessels; restrictions on
consolidations, mergers or sales of assets; approvals on changes in the Manager of our initial vessels; limitations on liens;
limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has
occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other
customary covenants.
The financial covenants require us to maintain:
The ratio of net debt to capitalization no greater than 0.60 to 1.00.
Consolidated tangible net worth not less than $150 million plus 25% of cumulative positive net income (on a
consolidated basis) for each fiscal quarter from July 1, 2010 going forward and 50% of the value of any new
equity issues from July 1, 2010 going forward.
The ratio of EBITDA to interest expense not less than 1.25 to 1.00 commencing with the fourth fiscal quarter of
2011 until the fourth quarter of 2012, at which point it will increase to: (i) 1.50 to 1.00 for the first quarter of
2013, (ii) 1.75 to 1.00 for the second quarter of 2013 and (iii) 2.00 to 1.00 at all times thereafter. Such ratio shall
be calculated quarterly on a trailing four quarter basis. In addition, we are restricted from paying dividends until
our EBITDA to interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as defined in the loan agreement,
excludes non-cash charges such as impairment.
Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) not
less than $25 million, of which unrestricted cash and cash equivalents shall be not less than $15.0 million, until
we own, directly or indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each
additional vessel.
The aggregate fair market value of the collateral vessels shall at all times be no less than 150% of the then
aggregate outstanding principal amount of loans under the credit facility.
62
In August 2012, we sold STI Diamond and in September 2012, STI Coral for an aggregate amount of $50.5 million.
A portion of the proceeds from the sale of STI Coral was used to repay $16.1 million of debt outstanding on the 2011 Credit
Facility. STI Onyx, a newbuilding vessel which was delivered to us in September 2012, was substituted as collateral under the
2011 Credit Facility on the outstanding borrowings related to STI Diamond.
The outstanding balance on this facility at December 31, 2012 and December 31, 2011 was $15.5 million and $33.6
million, respectively. At December 31, 2012, there was $115.0 million available for borrowing which may be used to finance
up to 50% of future vessel acquisitions.
In January 2013, we drew down $17.0 million in connection with the delivery of the sixth vessel in our Newbuilding
Program, STI Sapphire. In March 2013, we drew down $17.4 million in connection with the delivery of the seventh vessel in
our Newbuilding Program, STI Emerald. As of the date of this annual report, there was $49.9 million outstanding under this
facility and $80.6 million available for borrowing which can be used to finance up to 50% of future vessel acquisitions.
We were in compliance with the financial covenants relating to this facility as of December 31, 2012.
Newbuilding Credit Facility
On December 21, 2011, we executed a credit facility agreement with Credit Agricole Corporate and Investment
Bank and Skandinaviska Enskilda Banken AB for a senior secured term loan facility of up to $92.0 million. During the year
ended December 31, 2012, we drew down an aggregate of $92.0 million from this facility to partially finance the deliveries
of STI Amber, STI Topaz, STI Ruby and STI Garnet ($23.0 million per vessel). These vessels are owned individually by
certain of our subsidiaries, who together are the borrowers under this credit facility, and Scorpio Tankers Inc. is the
guarantor. Borrowings under the credit facility bear interest at LIBOR plus an applicable margin of 2.70% per annum. A
commitment fee equal to 1.10% per annum is payable on the unused daily portion of the credit facility.
The facility is separated into four tranches (one tranche per vessel) and the four vessels are collateral for the credit
facility. The repayment of the tranche relating to the respective vessel commenced after delivery of that vessel in quarterly
installments of $375,000, which equates to a repayment profile of 15.33 years. Each tranche is scheduled to mature
approximately seven years after delivery of the relevant vessel from the shipyard.
The credit facility requires us to comply with a number of covenants, including financial covenants; delivery of
quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws
(including environmental); compliance with ERISA; maintenance of flag and class of the initial vessels; restrictions on
consolidations, mergers or sales of assets; approvals on changes in the Manager of our initial vessels; limitations on liens;
limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has
occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other
customary covenants.
The financial covenants require us to maintain:
The ratio of debt to capitalization no greater than 0.60 to 1.00.
Consolidated tangible net worth not less than $150 million plus 25% of cumulative positive net income (on a
consolidated basis) for each fiscal quarter from July 1, 2010 going forward and 50% of the value of any new
equity issues from July 2, 2010 going forward.
The ratio of EBITDA to interest expense not less than 2.00 to 1.00 commencing with the third fiscal quarter of
2011 until the fourth quarter of 2012, and 2.50 to 1.00 for all times thereafter. Such ratio shall be calculated
quarterly on a trailing four quarter basis. EBITDA, as defined in the loan agreement, excludes non-cash charges
such as impairment.
Unrestricted cash and cash equivalents not less than $15.0 million, until we owns, directly or indirectly, more
than 15 vessels, at which time the amount increases by $750,000 per each additional vessel.
The aggregate fair market value of the collateral vessels shall at all times not less than 140% (120% if the vessel
is subject to acceptable long term employment) of the aggregate principal amount outstanding plus a pro rata
amount of any allocable swap exposure for the credit facility.
As of December 31, 2012, the outstanding balance on this facility was $89.8 million and the facility was fully drawn.
We had no borrowings outstanding under this facility at December 31, 2011. We were in compliance with the
financial covenants relating to this facility as of December 31, 2012.
63
2013 Credit Facility
In February 2013, we signed a commitment letter for a $267.0 million credit facility, or the 2013 Credit Facility,
with Nordea Bank Finland plc, acting through its New York branch, ABN AMRO Bank N.V, and Skandinaviska Enskilda
Banken AB.
The 2013 Credit Facility is expected to consist of a $114.0 million delayed draw term loan facility and a $153.0
million revolving credit facility. The 2013 Credit Facility is expected to be secured by, among other things, a first-priority
cross-collateralized mortgage on certain vessels for which we have entered into newbuilding contracts, or the Firm Vessels,
and certain vessels for which we may exercise construction options, or the Option Vessels, and together with the Firm
Vessels, the Collateral Vessels. Our subsidiaries that own the Collateral Vessels are expected to act as joint and several
guarantors under the 2013 Credit Facility.
A single drawdown of the term loan may occur in connection with the delivery of each Firm Vessel in an amount
equal to the lesser of 60% of (i) the loan amount allocated for such vessel or (ii) its fair market value. The initial drawdown
of each revolving loan may occur in connection with the delivery of an Option Vessel and is similarly capped at the lesser of
60% of the loan amount or fair market value, with such amount, once drawn, available on a revolving basis. Drawdowns
under the term loan are expected to be available until January 31, 2015 and drawdowns under the revolving loan are expected
to be available until July 31, 2015 and each will bear interest at LIBOR plus an applicable margin of 3.50%.
Under the terms outlined in the commitment letter, the term loan shall be repaid and the revolving loans reduced, in
each case, in an amount equal to 1/60th of such loan on a consecutive quarterly basis until final maturity on the sixth
anniversary of the facility.
In addition to restrictions imposed upon the owners of the Collateral Vessels (such as, limitations on liens and
limitations on the incurrence of additional indebtedness), the 2013 Credit Facility is expected to include financial covenants
that require us to maintain:
minimum liquidity of at least the greater of $25 million or 5% of total indebtedness;
a consolidated tangible net worth no less than (i) $150 million plus 25% of cumulative positive net income (on a
consolidated basis) for each fiscal quarter beginning on July 1, 2010 and (ii) 50% of the value of any new equity
issues from July 1, 2010 going forward.
a ratio of net debt to total capitalization no greater than 0.60 to 1.00.
a ratio of EBITDA to net interest expense greater than 2.00 to 1.00 through September 30, 2013 and 2.50 to
1.00 thereafter.
the aggregate fair market value of the Collateral Vessels shall at all times be no less than 140% of the then
aggregate outstanding principal amount of loans under the credit facility.
Our ability to close the 2013 Credit Facility and our ability to draw down on the facility are each subject to usual
and customary conditions precedent, including the negotiation and execution of final documentation.
Derivative Contracts
Interest Rate Swaps
In August 2011, we entered into six interest rate swap agreements with three different banks to manage the
interest costs and the risk associated with changing interest rates on our 2010 Revolving Credit Facility and 2011
Revolving Credit Facility. The notional amount of the swaps relating to the 2010 Revolving Credit Facility is
$51.0 million with an average fixed rate of 1.27% starting on July 2, 2012 and expiring on June 2, 2015. The notional
amount of the swaps relating to the 2011 Credit Facility was $24.0 million with an average fixed rate of 1.30% starting on
July 2, 2012 and expiring on June 30, 2015.
64
In August and September 2012, we completed the sales of STI Coral and STI Diamond, respectively and as a result,
we reduced the notional amount on the interest rate swaps relating to the 2011 Credit Facility to $15.0 million from $24.0
million in aggregate. As a result of the reduction, we recognized a loss of $0.2 million which was reclassified out of other
comprehensive loss into the statement of profit or loss and recorded as a component of loss on sale of vessels.
In December 2012, we raised net proceeds of $127.2 million from a registered direct placement of common shares
and as part of the use of proceeds of this offering, we voluntarily repaid $50.0 million into our 2010 Revolving Credit
Facility. After the payment, we had $17.2 million of debt outstanding under the 2010 Revolving Credit Facility, which is less
than the total notional amount of $51.0 million for the three interest rate swaps related to the facility. As such, the swaps
related to the 2010 Revolving Credit Facility no longer met the criteria for hedge accounting and we therefore de-designated
the hedge relationship prospectively and reclassified all amounts accumulated in other comprehensive income ($1.0 million)
to the statement of profit or loss for the year ended December 31, 2012 as a component of Financial Expenses.
The interest rate swaps relating to the 2011 Credit Facility continue to qualify for hedge accounting. Hedge
effectiveness is measured quarterly. Accordingly, changes in their fair value, which the hedge is deemed to be effective, are
recognized directly in other comprehensive income and classified as ‘hedging reserves’. Changes in their fair value for any
portion deemed to be ineffective are recognized in the consolidated statement of profit or loss. The fair market value of the
interest rate swaps relating to both the 2010 Revolving Credit Facility and 2011 Credit Facility at December 31, 2012 and
December 31, 2011 was a liability of $1.4 million and $0.7 million, respectively.
Profit or loss sharing agreements
In July 2012, we entered into a profit or loss sharing arrangement on the earnings of an LR1 vessel that is not owned
or operated by us. Under the agreement, 50% of the profits and losses will be shared with the counterparty. The counterparty
to this agreement was time chartering-in this vessel for a period of six months at $12,750 per day and this agreement expired
in January 2013.
In September 2012, we took delivery of an LR1, FPMC P Eagle, on a time charter-in arrangement for one year at
$12,800 per day. We also entered into a profit and loss sharing arrangement whereby 50% of the profits and losses relating to
this vessel above or below the charterhire rate will be shared with a third party that neither owns nor operates this vessel.
These agreements are being treated as derivatives, recorded at fair value with any resultant gain or loss recognized in
the statement of profit or loss. Changes in fair value are recorded as unrealized gains and losses on derivative financial
instruments and actual earnings are recorded as earnings from profit or loss agreements, within the consolidated statement of
profit or loss. The fair value of instrument is determined by comparing published time charter rates to the charterhire rate and
discounting those cash flows to their estimated present value.
For the year ended December 31, 2012, we recognized earnings of $0.4 million and an unrealized loss of $0.2
million. There were no similar arrangements in 2011.
Equity
On April 6, 2010, we closed the issuance of 12,500,000 shares of common stock at $13.00 per share in our initial
public offering and received net proceeds of $149.6 million, after deducting underwriters’ discounts and offering expenses.
On May 4, 2010, pursuant to the underwriters’ exercise of their over-allotment option that we granted in connection
with our initial public offering, we closed the issuance of 450,000 shares of common stock at $13.00 and received $5.2
million, after deducting underwriters’ discounts.
On November 22, 2010, we closed on a follow-on public offering of 4,575,000 shares of common stock at $9.80 per
share. After deducting underwriters’ discounts and paying offering expenses, the net proceeds were $41.8 million, and
510,204 shares were issued in a concurrent private placement to a member of the Lolli-Ghetti family for total proceeds of
$5.0 million. On December 2, 2010, we closed the issuance of 686,250 shares of common stock at $9.80 and received $6.4
million, after deducting underwriters’ discounts, when the underwriters in our follow-on public offering fully exercised their
over-allotment option.
On May 18, 2011, we closed on a follow-on public offering of 6,000,000 shares of common stock and also closed on
the underwriters’ over-allotment option to purchase 900,000 additional common shares at an offering price of $10.50 per
share. We received net proceeds of $68.5 million, after deducting underwriters’ discounts and offering expenses.
65
On December 6, 2011, we closed on a follow-on public offering of 7,000,000 shares of common stock at an offering
price of $5.50 per share. We received net proceeds of $36.5 million, after deducting underwriters’ discounts and estimated
offering expenses.
In April 2012, we closed on the sale of 4,000,000 shares of common stock in a registered direct placement of
common shares at an offering price of $6.75 per share. We received net proceeds of $25.9 million, after deducting the
placement agents’ discount and offering expenses.
In December 2012, we closed on the sale of 21,639,774 shares of common stock in a registered direct placement of
common shares at an offering price of $6.10 per share. We received net proceeds of $127.2 million, after deducting the
placement agents’ discount and offering expenses.
In February 2013, we closed on the sale 30,672,000 shares of common stock in a registered direct placement of
common shares at an offering price of $7.50 per share. We received net proceeds of $222.1 million, after deducting
placement agents’ discounts and offering expenses.
In March 2013, we closed on the sale 29,012,000 shares of common stock in a registered direct placement of
common shares at an offering price of $8.10 per share. We received net proceeds of $226.7 million, after deducting
placement agents’ discounts and offering expenses.
CAPITAL EXPENDITURES
Vessel acquisitions
Since June 2011, we have entered into agreements to construct 40 fuel efficient newbuilding product tankers with
shipyards including HMD, SPP, HSHI and DSME, which we refer to as our Newbuilding Program. As of the date of this
annual report, seven of the vessels in our Newbuilding Program have been delivered to us. We currently have contracts for
the construction of 33 vessels, consisting of 11 MR product tankers with HMD for an aggregate purchase price of $368.6
million, eight MR product tankers with SPP for an aggregate purchase price of $267.0 million, six Handymax ice class-1A
tankers with HMD for an aggregate purchase price of $187.5 million, six LR2 product tankers with HSHI for an aggregate
purchase price of $303.0 million and two LR2 product tankers with DSME for an aggregate purchase price of $100.0 million.
One of the vessels in our Newbuilding Program is expected to be delivered to us by April 2013 and the remaining 32
within 2014.
We made $152.5 million of installment payments during the first quarter of 2013, which includes $44.2 million in
aggregate for the delivery installment payments on STI Sapphire in January 2013 and STI Emerald in March 2013. Our
remaining commitments under all newbuilding vessel agreements as of the date of this report, including the above mentioned
vessels are as follows*:
Q2 2013 ....................................................... $
Q3 2013 .......................................................
Q4 2013 .......................................................
Q1 2014 .......................................................
Q2 2014 .......................................................
Q3 2014 .......................................................
Q4 2014 .......................................................
Total ............................................................. $
41.6 million
114.3 million
74.1 million
77.6 million
302.0 million
241.0 million
250.9 million
1,101.5 million
* These are estimates only and are subject to change as construction progresses.
As of the date of this annual report, we have paid $124.7 million of installment payments related to the newbuilding
product tankers that we have contracted to purchase, and are committed to make additional installment payments of $1,101.5
million. We will need to secure additional debt or equity financing or both in addition to our 2013 Credit Facility to fully
fund the remaining balance of our newbuilding obligations.
66
Vessel disposals
We sold three Handymax vessels in 2012, STI Conqueror for $21.0 million in March 2012, STI Matador for $16.2
million in April 2012, and STI Gladiator for $16.2 million in May 2012, and recorded a $4.5 million loss in connection with
the sales of these vessels and the availability of the 2010 Revolving Credit Facility decreased by $31.0 million.
We also completed the sales of two MR product tankers, STI Diamond and STI Coral, in August 2012 and
September 2012, respectively, for $25.25 million each, and recorded a $5.9 million loss in connection with the sales of these
vessels. A portion of the proceeds from the sale of STI Coral was used to repay $16.1 million under our 2011 Credit Facility.
STI Onyx, a newbuilding vessel which was delivered to us in September 2012, was substituted as collateral under our 2011
Credit Facility on our outstanding borrowings related to the STI Diamond. Please see “– Liquidity and Capital Resources –
Long Term Debt Obligations and Credit Arrangements – 2011 Credit Facility.”
Drydock
During 2012, we drydocked two of our owned vessels, STI Heritage and STI Spirit for an aggregated drydock cost
of $2.9 million and a total of 38 off-hire days.
As our fleet matures and expands, our drydock expenses will likely increase. Ongoing costs for compliance with
environmental regulations and society classification survey costs are a component of our vessel operating costs. We are not
currently aware of any regulatory changes or environmental liabilities that we anticipate will have a material impact on our
results of operations or financial condition.
Dividends
We do not have immediate plans to pay dividends, but we will continue to assess our dividend policy. In the future,
our board of directors may determine to pay dividends.
Share Buy-Back
On July 9, 2010, the board of directors authorized a share buyback program of up to $20 million. As of December
31, 2012, we have purchased $7.9 million of shares in the open market at an average price of $6.78. See Item 16E for further
information.
C. Research and Development, Patents and Licenses, Etc.
Not applicable.
D. Trend Information
See Item 4.B. “The International Tanker Industry.”
E. Off-Balance Sheet Arrangements
As of December 31, 2012, we were committed to make charter-hire payments to third parties for certain chartered-in
vessels. These arrangements are accounted for as operating leases. Additionally, we are committed to make payments on our
newbuilding vessel orders. See Item 5.B. – “Liquidity and Capital Resources” for further information.
67
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our total contractual obligations at December 31, 2012:
Amounts in thousands of US dollars
Less than
1 year
1 to 3
years
3 to 5
years
More than
5 years
Bank loan(1) .......................................................................... $
Estimated interest payments(2) ..............................................
Interest rate swap derivative contracts(3) ..............................
Bank loan - commitment fees(4)............................................
Time charter-in commitments(5) ...........................................
Technical management fees(6) ..............................................
Commercial management fees(7) ..........................................
Newbuilding installments (8) .................................................
Total ....................................................................................... $
7,608 $
5,662
635
2,516
62,612
1,156
—
157,149
237,338 $
34,974 $
10,010
748
1,094
23,771
263
—
173,575
244,435 $
26,446 $
7,374
—
—
—
—
—
—
33,820 $
76,913
3,491
—
—
—
—
—
—
80,404
(1) Represents principal payments due on our 2010 Revolving Credit Facility, 2011 Credit Facility, STI
Spirit Credit Facility and Newbuilding Credit Facility based on our outstanding borrowings as of
December 31, 2012.
(2) Represents estimated interest payments on the variable portion of our credit facilities:
For the 2010 Revolving Credit Facility, we used a weighted average of the 2 year and 3 year interest
swap rates of 0.43% (as published by the US Federal Reserve as of December 31, 2012) plus a margin of
3.50%, which is the margin for the 2010 Revolving Credit Facility. We used a weighted average of the 2-
year and 3-year interest swap rates to reflect the maturity date of this facility of June 2, 2015.
For the 2011 Credit Facility, we used a weighted average of the 4-year and 5-year interest swap rates of
0.73% (as published by the US Federal Reserve as of December 31, 2012) plus a margin of 3.50%, which
is the margin for the 2011 Credit Facility. We used the weighted average of the 4-year and 5-year interest
swap rates to reflect the maturity date of this facility of May 3, 2017.
For the STI Spirit Credit Facility, we used a weighted average of the 5-year and 7-year interest swap
rates of 0.88% (as published by the US Federal Reserve as of December 31, 2012) plus a margin of
2.75%, which is the margin for the STI Spirit Credit Facility. We used the weighted average of the 5-year
and 7-year interest swap rates to reflect the maturity date of this facility of March 17, 2018.
For the Newbuilding Credit Facility, we used a weighted average of the 5-year and 7-year interest swap
rates of 1.208% (as published by the US Federal Reserve as of December 31, 2012) plus a margin of
2.70%, which is the margin for our Newbuilding Credit Facility. We used the weighted average of the 5-
year and 7-year interest swap rates to reflect the maturity date of this facility of June 30, 2019.
(3) Represents estimated payments due under our interest rate swaps:
The three swaps relating to the 2010 Credit Facility with a total notional amount of $51.0 million carry
an average fixed interest rate of 1.27% during the time period the swap is outstanding (January 1, 2013
through June 2, 2015). The payments due were estimated by offsetting the fixed payments against the
estimated interest received using the forward swap curve at December 31, 2012 for each of the swaps.
The three swaps relating to the 2011 Credit Facility with a total notional amount of $15.0 million carry
an average fixed interest rate of 1.30% during the time period the swap is outstanding (January 1, 2013
through June 30, 2015). The payments due were estimated by offsetting the fixed payments against the
estimated interest received using the forward swap curve at December 31, 2012 for each of the swaps.
(4) A commitment fee equal to 40% of the applicable margin is payable on the unused daily portion of our 2010
Revolving Credit Facility and 2011 Credit Facility. The STI Spirit Credit Facility and Newbuilding Credit
Facility were fully drawn as of December 31, 2012.
(5) Represents amounts due under our time charter-in arrangements as of December 31, 2012.
(6) We pay our technical manager, SSM, $548 per day per owned vessel.
(7) We pay our commercial manager, SCM, $250 per day for owned Aframax/LR2 and LR1 vessels and $300
per day for owned MR and Handymax vessels plus 1.25% of gross revenue for vessels that are not in a pool.
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As of December 31, 2012, all our owned vessels were operating in the pools. See Item 7.B., “Related Party
Transactions” for changes to these fees effective January 1, 2013.
(8) Represents obligations under our agreements with HMD and SPP for the construction of eleven newbuilding
vessels, as of December 31, 2012.
G. Safe Harbor
See “Cautionary Statement Regarding Forward-Looking Statements” at the beginning of this annual report.
CRITICAL JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
In the application of the accounting policies, we are required to make judgments, estimates and assumptions about
the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future periods.
The significant judgments and estimates are as follows:
Revenue recognition
We currently generate all revenue from vessels operating in pools or in the spot market. From time to time we also
employ our vessels on time charters. Revenue recognition for time charters and pools is generally not as complex or as
subjective as voyage charters (spot voyages). Time charters are for a specific period of time at a specific rate per day. For
long-term time charters, revenue is recognized on a straight-line basis over the term of the charter. Pool revenues are
determined by the pool managers from the total revenues and expenses of the pool and allocated to pool participants using a
mechanism set out in the pool agreement.
We generated revenue from spot voyages during the year ended December 31, 2012. Within the shipping industry,
there are two methods used to account for spot voyage revenue: (1) ratably over the estimated length of each voyage or (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 and the method used by us. Under each method, voyages may be calculated on
either a load-to-load or discharge-to-discharge basis. In applying our revenue recognition method, we believe that the
discharge-to-discharge basis of calculating voyages more accurately estimates voyage results than the load-to-load basis. In
the application of this policy, we do not begin recognizing revenue until (i) the amount of revenue can be measured reliably,
(ii) it is probable that the economic benefits associated with the transaction will flow to the entity, (iii) the transactions stage
of completion at the balance sheet date can be measured reliably and (iv) the costs incurred and the costs to complete the
transaction can be measured reliably.
Vessel impairment
We evaluate the carrying amounts of our vessels to determine whether there is any indication that those vessels have
suffered an impairment loss. If any such indication exists, the recoverable amount of vessels is estimated in order to
determine the extent of the impairment loss (if any).
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have
not been adjusted. The projection of cash flows related to vessels is complex and requires us to make various estimates
including future freight rates, earnings from the vessels and discount rates. All of these items have been historically volatile.
As part of our process of assessing the fair value less cost to sell of the vessel, we obtain vessel valuations from leading,
independent and internationally recognized ship brokers on an annual basis or when there is an indication that an asset or
assets may be impaired. If an indication of impairment is identified, the need for recognising an impairment loss is assessed
by comparing the carrying amount of the vessels to the higher of the fair value less cost to sell and the value in use. Likewise,
if there is an indication that an impairment loss recognized in prior periods no longer exists or may have decreased, the need
for recognizing an impairment reversal is assessed by comparing the carrying amount of the vessels to the latest estimate of
recoverable amount.
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At December 31, 2012, the carrying amounts of all our vessels were greater than their fair values less costs to sell
(determined by taking into consideration two independent broker valuations) which served as indicators of impairment. In
line with our policy, for each vessel we performed a value in use calculation where we estimated the vessel’s future cash
flows based on a combination of the latest, published, forecast time charter rates for the next three years, a steady growth rate
in freight rates in each period thereafter which is based on management’s long-term view of the market, and our best estimate
of vessel operating expenses and drydock costs. These cash flows were then discounted to their present value, using a pre-tax
discount rate based on our current borrowing rates adjusted for certain credit risks. The value in use calculations were greater
than the carry amounts of the vessels in all instances, which resulted in no impairment being recognized in 2012.
Vessel lives and residual value
The carrying value of each of our vessels represents its original cost at the time it was delivered or purchased less
depreciation and impairment. We depreciate our vessels to their residual value on a straight-line basis over their estimated
useful lives. Effective April 1, 2010, we revised the estimated useful life of our vessels from 20 years to 25 years from the
date of initial delivery from the shipyard. The estimated useful life of 25 years is management’s best estimate and is also
consistent with industry practice for similar vessels. The residual value is estimated as the lightweight tonnage of each vessel
multiplied by a forecast scrap value per ton. The scrap value per ton is estimated taking into consideration the historical four
year scrap market rate average at the balance sheet date.
An increase in the estimated useful life of a vessel or in its scrap value would have the effect of decreasing the
annual depreciation charge and extending it into later periods. A decrease in the useful life of a vessel or scrap value would
have the effect of increasing the annual depreciation charge.
When regulations place significant limitations over the ability of a vessel to trade on a worldwide basis, the vessel’s
useful life is adjusted to end at the date such regulations become effective. The estimated salvage value of the vessels may
not represent the fair market value at any one time since market prices of scrap values tend to fluctuate.
Deferred drydock cost
We recognize drydock costs as a separate component of the vessels’ carrying amounts and amortize the drydock cost
on a straight-line basis over the estimated period until the next drydock. We use judgment when estimating the period
between drydocks performed, which can result in adjustments to the estimated amortization of the drydock expense. If the
vessel is disposed of before the next drydock, the remaining balance of the deferred drydock is written-off and forms part of
the gain or loss recognized upon disposal of vessels in the period when contracted. We expect that our vessels will be
required to be drydocked approximately every 30 to 60 months for major repairs and maintenance that cannot be performed
while the vessels are operating. Costs capitalized as part of the drydock include actual costs incurred at the drydock yard and
parts and supplies used in making such repairs. We only include 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.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Set forth below are the names, ages and positions of our directors and executive officers. Our board of directors is
elected annually, and each director elected holds office for a three-year term or until his successor shall have been duly
elected and qualified, except in the event of his death, resignation, removal or the earlier termination of his term of office.
The term of office of each director is as follows: One will serve for a term expiring at the 2013 annual meeting of
shareholders, two will serve for a term expiring at the 2014 annual meeting of the shareholders and two will serve for a term
expiring at the 2015 annual meeting of shareholders. Officers are elected from time to time by vote of our board of directors
and hold office until a successor is elected. The business address for each director and executive officer is the address of our
principal executive office which is Scorpio Tankers Inc., 9, Boulevard Charles III, Monaco 98000.
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Messrs. Lauro and Bugbee, our Chief Executive Officer and President, respectively, participate in business activities
not associated with us. As a result, Messrs. Lauro and Bugbee may devote less time to us than if they were not engaged in
other business activities and may owe fiduciary duties to the shareholders of both us as well as shareholders of other
companies which they may be affiliated, including other Scorpio Group companies. This may create conflicts of interest in
matters involving or affecting us and our customers and it is not certain that any of these conflicts of interest will be resolved
in our favor. While there will be no formal requirements or guidelines for the allocation of Messrs. Lauro’s and Bugbee’s
time between our business and the business of members of the Scorpio Group, Messrs. Lauro’s and Bugbee’s performance of
their duties will be subject to the ongoing oversight of our board of directors.
Name
Emanuele A. Lauro
Robert Bugbee
Brian Lee
Cameron Mackey
Luca Forgione
Sergio Gianfranchi
Alexandre Albertini
Ademaro Lanzara
Donald C. Trauscht
Age
34
52
46
44
36
68
36
69
78
Position
Chairman, Class I Director, and Chief Executive Officer
President and Class II Director
Chief Financial Officer
Chief Operating Officer
General Counsel
Vice President, Vessel Operations
Class III Director
Class I Director
Class II Director
Biographical information with respect to each of our directors and executive officers is set forth below.
Emanuele A. Lauro, Chairman & Chief Executive Officer
Emanuele A. Lauro, our founder, has served as Chairman and Chief Executive Officer since our initial public
offering in April 2010. He joined Scorpio Group in 2003 and has continued to serve there in a senior management position
since 2004. Under Mr. Lauro’s leadership, Scorpio Group has grown from an owner of three vessels in 2003 to become a
leading operator and manager of over 100 vessels in 2013. Over the course of the last years, Mr. Lauro has founded and
developed all of the Scorpio Group Tanker Pools in addition to several other ventures such as Scorpio Logistics in 2007,
which owns and operates specialized assets engaged in the transshipment of coal and invests in coastal transportation and
port infrastructure developments and Scorship Navigation in 2005, which engages in the identification, placement, and
management of certain international shipping investments on behalf of retail investors in Europe. Mr. Lauro has a degree in
international business from the European Business School, London. He currently serves as non-executive director in various
international companies and trade organizations.
Robert Bugbee, President and Director
Robert Bugbee, has more than 25 years of experience in the shipping industry and has served as President since our
initial public offering in April 2010. He joined Scorpio Group in February 2009 and has continued to serve there in senior
management. Prior to joining Scorpio Group, Mr. Bugbee was a partner at Ospraie Management LLP between 2007 and
2008, a company which advises and invests in commodities and basic industry. From 1995 to 2007, Mr. Bugbee was
employed at OMI Corporation, or OMI, a NYSE-listed tanker company sold in 2007. While at OMI, Mr. Bugbee most
recently served as President from January 2002 until the sale of the company, and he previously served as Executive Vice
President since January 2001, Chief Operating Officer since March 2000 and Senior Vice President of OMI from August
1995 to June 1998. Mr. Bugbee joined OMI in February 1993. Prior to this, he was employed by Gotaas-Larsen Shipping
Corporation since 1984. During this time he took a two year sabbatical from 1987 for the M.I.B. Programme at the
Norwegian School for Economics and Business administration in Bergen. He has a Fellowship from the International
Shipbrokers Association and a B.A. (Honors) from London University.
Brian Lee, Chief Financial Officer
Brian Lee has served as Chief Financial Officer since our initial public offering in April 2010. He joined Scorpio
Group in April 2009 where he continues to serve in a senior management position. He has been employed in the shipping
industry since 1998. Prior to joining Scorpio Group, he was the Controller of OMI Corporation from 2001 until the sale of
the company in 2007. Mr. Lee has a M.B.A. from the University of Connecticut and has B.S. in Business Administration
from the University at Buffalo, State University of New York.
Cameron Mackey, Chief Operating Officer
Cameron Mackey, has served as Chief Operating Officer since our initial public offering in April 2010. He joined
Scorpio Group in March 2009, where he continues to serve in a senior management position. Prior to joining Scorpio Group,
he was an equity and commodity analyst at Ospraie Management LLC from 2007-2008. Prior to that, he was Senior Vice
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President of OMI Marine Services LLC from 2004-2007 and in Business Development at OMI Corporation from 2002-2004.
He has been employed in the shipping industry since 1994 and, earlier in his career, was employed in unlicensed and licensed
positions in the merchant navy, primarily on tankers in the international fleet of Mobil Oil Corporation, where he held the
qualification of Master Mariner. He has an M.B.A. from the Sloan School of Management at the Massachusetts Institute of
Technology, a B.S. from the Massachusetts Maritime Academy and a B.A. from Princeton University.
Luca Forgione, General Counsel
Luca Forgione, has served as General Counsel since our initial public offering in April 2010. He joined Scorpio
Group in August 2009 where he continues to serve as General Counsel. He is licensed as a lawyer in his native Italy and as a
Solicitor of the Supreme Court of England & Wales. Mr. Forgione has eight years of shipping industry experience and has
worked in the fields of shipping, offshore logistics, commodity trading and energy since the beginning of his in-house career,
most recently with Constellation Energy Commodities Group Ltd. in London, which is part of Constellation Energy Group
Inc. listed on the NYSE under “CEG,” from 2007 to 2009, and previously with Coeclerici S.p.a. in Milan from 2004 to 2007.
He has experience with all aspects of the supply chain of drybulk and energy commodities (upstream and downstream), and
has developed considerable understanding of the regulatory and compliance regimes surrounding the trading of physical and
financial commodities as well as the owning, managing and chartering of vessels. Mr. Forgione was a Tutor in International
Trade Law and Admiralty Law at University College London (U.K.) and more recently a Visiting Lecturer in International
Trade Law at King’s College (U.K.). He has a Masters Degree in Maritime Law from the University of Southampton (U.K.)
and a Law Degree from the University of Genoa (Italy).
Sergio Gianfranchi, Vice President, Vessel Operations
Sergio Gianfranchi, has served as Vice President of Vessel Operations since our initial public offering in April 2010.
He served as Operations Manager of our technical manager, SSM, at its headquarters in Monaco from 2002 to 2004. He has
been instrumental in launching and operating the Scorpio Group Pools during the last five years, and was employed as the
Fleet Manager of SCM, the Scorpio Group affiliate that manages the commercial operations of approximately 50 vessels
grouped in the three Scorpio Group Pools, from 2007 to 2009. Mr. Gianfranchi is currently employed as the Pool Fleet
Manager of SCM. From 1999 to 2001, Mr. Gianfranchi served as the on-site owner’s representative of the Scorpio Group
affiliates named Doria Shipping, Tristan Shipping, Milan Shipping and Roma Shipping, to survey the construction of their
Panamax and Post-Panamax newbuilding tankers being built at the 3Maj Shipyard in Rijeka, Croatia. When Mr. Gianfranchi
joined SSM in 1989, he began as vessel master of its OBOs (multipurpose vessels that carry ore, heavy drybulk and oil).
Upon obtaining his Master Mariner License in 1972, he served until 1989 as a vessel master with prominent Italian shipping
companies, including NAI, which is the largest private Italian shipping company and owned by the Lolli-Ghetti family, and
Almare, initially a subsidiary of NAI but later controlled by Finmare, the Italian state shipping financial holding company. In
this position he served mostly on OBOs, tankers and drybulk carriers. He graduated from La Spezia Nautical Institute in Italy
in 1963.
Alexandre Albertini, Director
Alexandre Albertini has more than 10 years of experience in the shipping industry. He has been employed by Marfin
Management SAM, a drybulk ship management company, since 1997 and has served as Managing Director there since 2009,
working in fields related to crew and human resources, insurance, legal, financial, technical, commercial, and information
technology. He is a director of eight drybulk ship owning companies and serves as President of Ant. Topic srl, a vessel and
crewing agent based in Italy. The aggregate valuation of the drybulk shipping companies for which Mr. Albertini serves as a
Secretary or director is approximately $300 million. In 2008, Mr. Albertini was elected as a member of the Executive
Committee of InterManager. He is a founding member of the Chamber of Shipping of Monaco and has served as its Secretary
General since 2006. Mr. Albertini also holds various board positions in several other local business and associations.
Ademaro Lanzara, Director
Ademaro Lanzara has served as the Chairman of BPV Finance (International) Plc Dublin, a subsidiary of Banca
Popolare di Vicenza, Italy, since 2008. He has also served as the deputy Chairman and Chairman of the Audit Committee of
Cattolica Life Inc. Dublin since 2011 and Chairman of BPVI Fondi Sgr SpA, Milano since April 2012. From 1963 to 2006,
Mr. Lanzara held a number of positions with BNL spa Rome, a leading Italian banking group, including acting as the
Chairman of the Credit Committee, Chairman of the Finance Committee and Deputy CEO. He was also a director of Istituto
dell’Enciclopedia Italiana fondata da Giovanni Treccani Spa, Rome. He also served as Chairman and/or director of a number
of BNL controlled banks or financial companies in Europe, the United States and South America. He formerly served as a
director of each of the Institute of International Finance Inc. in Washington DC, Compagnie Financiere Edmond de
Rothschild Banque, in Paris, France, ABI—Italian Banking Association in Rome, Italy, FITD—Interbank deposit Protection
Fund, in Rome, Italy, ICC International Chamber of Commerce Italian section, Rome, Italy Co-Chairman Round Table of
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Bankers and Small and Medium Enterprises, European Commission, in Brussels, Belgium. Mr. Lanzara has an economics
degree (graduated magna cum laude) from the University of Naples, a law degree from the University of Naples and
completed the Program for Management Development (PMD) at Harvard Business School.
Donald C. Trauscht, Director
Donald C. Trauscht has served as the Chairman of BW Capital Corporation, a private investment company, since
1996. From 1967 to 1995, Mr. Trauscht held a number of positions at Borg-Warner Corporation, including Chairman and
Chief Executive Officer. While at Borg Warner, Mr. Trauscht supervised an annual capital budget of $250 million and was
responsible for risk assessment decisions involving the company’s investments. He has participated in acquisitions,
divestments, financings, public offerings and other transactions whose combined value is over $30 billion. Mr. Trauscht is a
director of Esco Technologies Inc., Hydac International Corporation, Bourns Inc., and Eyes For Learning LLC. He formerly
served as a director of Baker Hughes Inc., Cordant Technologies Inc., Blue Bird Corporation, Imo Industries Inc.,
Mannesmann Capital Corporation, Wynn International Inc., Recon Optical Inc., Global Motorsport Group Inc., OMI
Corporation, IES Corporation, and NSK-Warner Ltd. He has served as the Chairman, Lead Director, and Audit Committee,
Compensation Committee, and Governance Committee Chairman at numerous public and private companies.
B. Compensation
We did not pay any compensation to members of our senior executive officers in 2009. We paid an aggregate
compensation of $6.3 million and $6.1 million to our senior executive officers in 2012 and 2011, respectively. We paid an
aggregate compensation of $3.0 million to our senior executive officers in 2010 for the period April 6, 2010 to December 31,
2010. Executive management remuneration was as follows during these periods:
In thousands of US dollars
Short-term employee benefits (salaries) ................................................ $
Share-based compensation (1) .................................................................
Total ...................................................................................................... $
For the period ended December 31,
2011
2012
2010
2,896 $
3,368
6,264 $
2,875 $
3,189
6,064 $
2,060
922
2,982
(1) Represents the amortization of restricted stock issued under our equity incentive plans in June 2010, January
2011 and January 2012. See Note 14 in the consolidated financial statements for further description.
Each of our non-employee directors receive cash compensation in the aggregate amount of $45,000 annually, plus
an additional fee of $5,000 for each committee on which a director serves plus an additional fee of $15,000 for each
committee for which a director serves as Chairman, per year, plus an additional fee of $20,000 to the lead independent
director, plus reimbursements for actual expenses incurred while acting in their capacity as a director. During the year ended
December 31, 2012 and 2011, we paid an aggregate compensation of $0.4 million and $0.4 million to our directors,
respectively. Our officers and directors are eligible to receive awards under our equity incentive plan which is described
below under “—2010 Equity Incentive Plan.”
We believe that it is important to align the interests of our directors and management with that of our shareholders.
In this regard, we have determined that it will generally be beneficial to us and to our shareholders for our directors and
management to have a stake in our long-term performance. We expect to have a meaningful component of our compensation
package for our directors and management consisted of equity interests in us in order to provide them on an on-going basis
with a meaningful percentage of ownership in us.
We do not have a retirement plan for our officers or directors.
2010 Equity Incentive Plan
We have adopted an equity incentive plan, which we refer to as the plan, under which directors, officers, employees,
consultants and service providers of us and our subsidiaries and affiliates are eligible to receive incentive stock options and
non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and unrestricted common stock.
We have reserved a total of 1,148,916 common shares for issuance under the plan, subject to adjustment for changes in
capitalization as provided in the plan and it is not expected that any additional common shares will be reserved for issuance
under our equity incentive plan prior to the third anniversary of the closing of our initial public offering. The plan is
administered by our compensation committee. We issued a total of 559,458 restricted shares under the plan to our executive
officers in the second quarter of 2010 which will vest in three equal installments on the third, fourth and fifth anniversaries,
respectively, of the closing date of the initial public offering, which was April 6, 2010. In the second quarter of 2010, we also
issued 9,000 restricted shares to our independent directors, which vested on April 6, 2011. We issued a total of 281,000
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restricted shares under the plan to our executive officers in the first quarter of 2011 which will vest ratably in three equal
installments on the first, second and third anniversaries, respectively, of the grant date, which was January 31, 2011. In the
first quarter of 2011, we also issued 9,000 restricted shares to our independent directors, which vest on January 31, 2012. In
the first quarter of 2012, we issued a total of 281,000 restricted shares under the plan to our executive officers, which will
vest ratably in three equal installments on the first, second and third anniversaries of the grant date, which was January 31,
2012. In the first quarter of 2012, we also issued 9,000 restricted shares to our independent directors, which vest on January
31, 2013.
Under the terms of the plan, stock options and stock appreciation rights granted under the plan will have an exercise
price equal to the fair market value of a common share on the date of grant, unless otherwise determined by the plan
administrator, but in no event will the exercise price be less than the fair market value of a common share on the date of
grant. Options and stock appreciation rights will be exercisable at times and under conditions as determined by the plan
administrator, but in no event will they be exercisable later than ten years from the date of grant.
The plan administrator may grant shares of restricted stock and awards of restricted stock units subject to vesting,
forfeiture and other terms and conditions as determined by the plan administrator. Following the vesting of a restricted stock
unit, the award recipient will be paid an amount equal to the number of vested restricted stock units multiplied by the fair
market value of a common share on the date of vesting, which payment may be paid in the form of cash or common shares or
a combination of both, as determined by the plan administrator. The plan administrator may grant dividend equivalents with
respect to grants of restricted stock units.
Adjustments may be made to outstanding awards in the event of a corporate transaction or change in capitalization
or other extraordinary event. In the event of a “change in control” (as defined in the plan), unless otherwise provided by the
plan administrator in an award agreement, awards then outstanding will become fully vested and exercisable in full.
Our board of directors may amend or terminate the plan and may amend outstanding awards, provided that no such
amendment or termination may be made that would materially impair any rights, or materially increase any obligations, of a
grantee under an outstanding award. Shareholder approval of plan amendments will be required under certain circumstances.
Unless terminated earlier by our board of directors, the plan will expire ten years from the date the plan is adopted.
Employment Agreements
In April 2010, we entered into employment agreements with each of our executives. These employment agreements
are in effect for a period of up to two years, and will automatically renew for the same successive employment periods unless
terminated in accordance with the terms of such agreements. Pursuant to the terms of their respective employment
agreements, our executives are prohibited from disclosing or unlawfully using any of our material confidential information.
Upon a change in control of us, the annual bonus provided under the employment agreement becomes a fixed bonus
of up to 150% of the executive’s base salary. If an executive’s employment is terminated within two years of a change in
control due to either disability or a reason other than “for cause,” he will be entitled to receive upon termination an assurance
bonus equal to such fixed bonus and an immediate lump-sum payment in an amount equal to three times the sum of the
executive’s then current base salary and the assurance bonus, and he will continue to receive all salary, compensation
payment and benefits, including additional bonus payments, otherwise due to him, to the extent permitted by applicable law,
for the remaining balance of his then-existing employment period. If an executive’s employment is terminated for cause or
voluntarily by the employee, he shall not be entitled to any salary, benefits or reimbursements beyond those accrued through
the date of his termination, unless he voluntarily terminated his employment in connection with certain conditions. Those
conditions include a change in control combined with a significant geographic relocation of his office, a material diminution
of his duties and responsibilities, and other conditions identified in the employment agreement.
C. Board Practices
Our board of directors currently consists of five directors, three of whom have been determined by our board of
directors to be independent under the rules of the New York Stock Exchange and the rules and regulations of the SEC. Our
board has an Audit Committee, a Nominating Committee and a Compensation Committee, each of which is comprised of our
three independent directors, who are Messrs. Alexandre Albertini, Ademaro Lanzara and Donald Trauscht. The Audit
Committee, among other things, reviews our external financial reporting, engage our external auditors and oversee our
internal audit activities, procedures and the adequacy of our internal controls. In addition, provided that no member of the
Audit Committee has a material interest in such transaction, the Audit Committee is responsible for reviewing transactions
that we may enter into in the future with other members of the Scorpio Group that our board believes may present potential
74
conflicts of interests between us and the Scorpio Group. The Nominating and Corporate Governance Committee is
responsible for recommending to the board of directors nominees for director and directors for appointment to board
committees and advising the board with regard to corporate governance practices. The Compensation Committee oversees
our equity incentive plan and recommends director and senior employee compensation. Our shareholders may also nominate
directors in accordance with procedures set forth in our bylaws.
D. Employees
As of December 31, 2012, we had ten employees. SSM and SCM were responsible for our commercial and
technical management.
E. Share Ownership
The following table sets forth information regarding the share ownership of the our common stock as of the date of
this annual report by our directors and officers, including the restricted shares issued to our executive officers and to our
independent directors as well as shares purchased in the open market.
Name
Emanuele A. Lauro (1) .....................................................................
Robert Bugbee (2) ............................................................................
All other officers and directors individually ...................................
No. of
Shares
704,145
611,958
*
% Owned
0.57%
0.50%
*
(1)
(2)
*
Includes 262,418 shares of restricted stock from the 2010 Equity Incentive Plan.
Includes 262,418 shares of restricted stock from the 2010 Equity Incentive Plan.
The remaining officers and directors individually each own less than 1% of our outstanding shares of common stock.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information regarding beneficial ownership of our common stock for owners of more
than five percent of our common stock, of which we are aware as of the date of this annual report.
Name
Galahad Securities Limited (1) ...............................................................................................
Claren Road Asset Management LLC (2)...............................................................................
Wellington Management Company, LLP (3) .........................................................................
Kensico Capital Management Corporation, Michael Lowenstein and
No. of Shares % Owned
13.1%
7.5%
12.2%
12,396,721
9,260,000
7,814,974
Thomas J. Coleman (4) .......................................................................................................
5,930,049
9.3%
Oceanic Hedge Fund, Oceanic Opportunities Master Fund, L.P., Oceanic Investment
Management Limited, Oceanic Opportunities GP Limited, Tufton Oceanic
(Isle of Man) Limited and Cato Brahde (5) .........................................................................
Wellington Trust Company, NA (6) .......................................................................................
4,900,040
3,497,676
5.2%
5.5%
(1)
(2)
(3)
(4)
(5)
(6)
This information is derived from Schedule 13G/A filed with the SEC on February 11, 2013.
This information is derived from Schedule 13G filed with the SEC on March 25, 2013
This Information is derived from a Schedule 13G/A filed with the SEC on February 14, 2013.
This Information is derived from a Schedule 13G/A filed with the SEC on February 13, 2013.
This Information is derived from a Schedule 13G/A filed with the SEC on February 14, 2013.
This Information is derived from a Schedule 13G/A filed with the SEC on February 14, 2013.
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B. Related Party Transactions
Management of Our Fleet
Commercial and Technical Management
Our vessels are commercially managed by SCM and technically managed by SSM, pursuant to a Master Agreement,
which may be terminated upon a two year notice. SCM and SSM are related parties of ours. We expect that additional vessels
that we may acquire in the future will also be managed under the Master Agreement.
SCM’s services include securing employment, in the spot market and on time charters, for our vessels. SCM also
manages the Scorpio Group Pools. For commercial management of our vessels that do not operate in any of the Scorpio
Group Pools, we pay SCM a fee of $250 per vessel per day for each Panamax, LR1, LR2 vessel and $300 per vessel per day
for each of our Handymax and MR vessels, plus 1.25% commission on gross revenues per charter fixture. Effective January
1, 2013, the Scorpio Group pool participants collectively pay SCM a pool management fee of $250 per vessel per day with
respect to our LR2 vessels, $300 per vessel per day with respect to each of our Panamax vessels and $325 per vessel per day
with respect to each of our Handymax and MR vessels, plus 1.50% commission on gross revenues per charter fixture. These
are the same fees that SCM charges other vessels in these pools, including third party owned vessels.
SSM’s services include day-to-day vessel operation, performing general maintenance, monitoring regulatory and
classification society compliance, customer vetting procedures, supervising the maintenance and general efficiency of
vessels, arranging the hiring of qualified officers and crew, arranging and supervising drydocking and repairs, purchasing
supplies, spare parts and new equipment for vessels, appointing supervisors and technical consultants and providing technical
support. We currently pay SSM $548 per vessel per day to provide technical management services for each of our vessels.
This fee is lower than that charged to third parties by SSM.
Administrative Services Agreement
Liberty Holding Company Ltd., or Liberty, is a Scorpio Group affiliate which provided us with administrative
services pursuant to an administrative services agreement until March 13, 2012 when the administrative services agreement
was assigned to SSH, a company controlled by the Lolli-Ghetti, family pursuant to a novation agreement to which we were a
party. The effective date of the novation was November 9, 2009, the date that we first entered into the agreement with
Liberty. The administrative services provided under the agreement primarily include accounting, legal compliance, financial,
information technology services, and the provision of administrative staff and office space. SSH also arranges vessel sales
and purchases for us. Further, pursuant to our administrative services agreement, SSH, on behalf of itself and other members
of the Scorpio Group, has agreed that it will not directly own product or crude tankers ranging in size from 35,000 dwt to
200,000 dwt. We expect that SSH will sub-contract many of its responsibilities to other entities within the Scorpio Group.
We reimburse SSH for the reasonable direct or indirect expenses it incurs in providing us with the administrative
services described above. We also pay SSH a fee for arranging vessel purchases and sales for us equal to 1% of the gross
purchase or sale price, payable upon the consummation of any such purchase or sale. We believe this 1% fee on purchases
and sales is customary in the tanker industry.
Tanker pools
To increase vessel utilization and thereby revenues, we participate in commercial pools with other shipowners of
similar modern, well-maintained 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 employ experienced commercial charterers and operators who have close working relationships with customers and
brokers, while technical management is performed by each shipowner. The managers of the pools negotiate charters with
customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization rates for pool
vessels by securing backhaul voyages and COAs, thus generating higher effective TCE revenues than otherwise might be
obtainable in the spot market while providing a higher level of service offerings to customers. When we employ a vessel in
the spot charter market, we generally place such vessel in a tanker pool managed by our commercial manager that pertains to
that vessel’s size class. The earnings allocated to vessels (charterhire expense for the pool) are aggregated and divided on the
basis of a weighted scale, or Pool Points, which reflect comparative voyage results on hypothetical benchmark routes. The
Pool Point system generally favors those vessels with greater cargo-carrying capacity and those with better fuel consumption.
Pool Points are also awarded to vessels capable of carrying clean products and to vessels capable of trading in certain ice
conditions. We currently participate in four pools: the Scorpio LR2 Tanker Pool, the Scorpio Panamax Tanker Pool, Scorpio
MR Tanker Pool and the Scorpio Handymax Tanker Pool.
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SCM is responsible for the commercial management of participating vessels in the pools, including the
marketing, chartering, operating and bunker (fuel oil) purchases of the vessels. The Scorpio LR2 Pool is administered by
Scorpio LR2 Pool Ltd., the Scorpio Panamax Tanker Pool is administered by Scorpio Panamax Tanker Pool Ltd., or
SPTP, the Scorpio MR Tanker Pool is administered by Scorpio MR Tanker Pool Ltd, or SMRP and the Scorpio
Handymax Tanker Pool is administered by Scorpio Handymax Tanker Pool Ltd., or SHTP. Our founder, Chairman and
Chief Executive Officer is a member of the Lolli-Ghetti family which owns all issued and outstanding stock of SLR2P,
SPTP, SMRP and SHTP. Taking into account the recommendations of a pool committee and a technical committee, each
of which is comprised of representatives of each pool participant, SLR2P, SPTP, SMRP and SHTP set the respective pool
policies and issues directives to the pool participants and SCM. The pool participants remain responsible for all other costs
including the financing, insurance, manning and technical management of their vessels. The earnings of all of the vessels
are aggregated and divided according to the relative performance capabilities of the vessel and the actual earning days
each vessel is available.
Our Relationship with Scorpio Group and its Affiliates
We were incorporated in the Republic of The Marshall Islands on July 1, 2009 by Simon Financial Limited, or
Simon, which is owned by the Lolli-Ghetti family and manages their shipping interests. On October 1, 2009, (i) Simon,
through its wholly-owned subsidiary, Liberty Holding Company Ltd., or Liberty, transferred three operating subsidiary
companies to us that owned the vessels in our initial fleet consisting of the Venice, Senatore and Noemi; (ii) Liberty became a
wholly-owned subsidiary and operating vehicle of Simon; (iii) Scorpio Owning Holding Ltd. became a wholly-owned
subsidiary of Liberty; and (iv) we became a wholly-owned subsidiary of Scorpio Owning Holding Ltd. Liberty’s operations
include chartered-in vessels, and interests in joint ventures and investments. Scorpio Group does not have an ownership
interest in any tanker vessels other than our tanker vessels, and will preclude itself from directly owning product or crude
tankers ranging in size from 35,000 dwt to 200,000 dwt.
Our board of directors consists of five individuals, three of whom are independent directors. The three independent
directors form the board’s Audit Committee and, pursuant to the Audit Committee charter, are required to review all potential
conflicts of interest between us and Scorpio Group. The two non-independent directors, Emanuele Lauro and Robert Bugbee,
serve in senior management positions within the Scorpio Group which is also our Administrator, and is an affiliate of the
Scorpio Group.
The Scorpio Group is owned and controlled by the Lolli-Ghetti family, of which Mr. Lauro is a member. Mr. Lauro
is considered to be the acting Chief Executive Officer and Mr. Bugbee is considered to be the acting President of the Scorpio
Group. Mr. Lauro is employed by Scorpio Commercial Management and Mr. Bugbee is employed by Scorpio USA LLC, and
both entities are affiliates within the Scorpio Group. Mr. Lauro, Mr. Bugbee and other senior management have a minority
equity interest in Scorpio Services Holding Limited. We are not affiliated with any other entities in the shipping industry
other than those that are members of the Scorpio Group.
In January 2011, Scorpio Owning Holding Ltd. distributed its shares in Scorpio Tankers Inc. (via a dividend) to the
shareholders of Liberty, which is owned by the Lolli-Ghetti family, of which our CEO and Chairman is a member.
SCM, SSM and SSH our commercial manager, technical manager and administrator, respectively, are affiliates of
the Scorpio Group. For information regarding the details regarding our relationship with SCM, SSM and SSH, please see “ –
Related Party Transactions – Management of our Fleet.”
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Transactions with Related Parties
Transactions with entities controlled by the Lolli-Ghetti family (herein referred to as related party affiliates) in the
consolidated statements of profit or loss and balance sheet are as follows:
In thousands of US dollars
Pool revenue(1)
For the year ended December 31,
2010
2011
2012
Scorpio Panamax Tanker Pool Limited ......................................................... $
Scorpio Handymax Tanker Pool Limited ......................................................
Scorpio MR Pool Limited .............................................................................
Scorpio LR2 Pool Limited ............................................................................
Scorpio Aframax Tanker Pool Limited .........................................................
Time charter revenue(2)
King Dustin ...................................................................................................
Liberty and subsidiaries.................................................................................
Vessel operating costs(3) ..................................................................................
Commissions(4) ................................................................................................
Administrative expenses(5) ..............................................................................
Other(6) ............................................................................................................
26,884 $
31,280
9,558
4,540
—
—
—
(2,280)
(532)
(1,862)
—
22,594 $
32,238
—
5,195
170
8,507
—
(2,203)
(270)
(1,937)
—
9,645
5,178
—
—
641
8,700
4,780
(1,059)
(234)
(932)
(131)
(1)
(2)
(3)
(4)
These transactions relate to revenue earned in the Scorpio LR2, Scorpio Aframax, Scorpio Panamax, Scorpio
MR and Scorpio Handymax Tanker Pools (the Pools). The Pools are owned by Scorpio LR2 Tanker Pool
Limited, Scorpio Aframax Pool Limited, Scorpio Panamax Tanker Pool Limited, Scorpio MR Pool Limited
and Scorpio Handymax Tanker Pool Limited, respectively. The Pools are related party affiliates.
The revenue earned was for Noemi’s time charter with King Dustin (which is 50% jointly controlled by a
related party affiliate). In 2010, STI Harmony and STI Heritage were on a time charter with Liberty, a related
party affiliate. See Note 16 to the consolidated financial statements for the terms of this time charter.
These transactions represent technical management fees charged by SSM, a related party affiliate, and
included in the vessel operating costs in the consolidated profit or loss statement. We believe our technical
management fees for the years ended December 31, 2012, 2011 and 2010 were at market rates because they
were the same rates charged to other vessels managed by SSM. Each vessel pays $548 per day for technical
management, which was, as noted, lower than that charged to third parties by SSM.
These transactions represent the expense due to SCM for commissions related to the commercial management
services provided by SCM under the Master Agreement (see description below). Each of the vessels paid a
commission of 1.25% of their revenue when not in the Pools. When our vessels were in the Pools, SCM, the
pool manager, charged fees of $250 per vessel per day with respect to our Panamax/LR1 and LR2 vessels,
$300 per vessel per day with respect to each of our Handymax and MR vessels, plus 1.25% commission on
gross revenues per charter fixture. These were the same fees that SCM charges other vessels in these pools,
including third party owned vessels.
(5) We have an Administrative Services Agreement with Scorpio Services Holding Limited, or SSH or our
Administrator, for the provision of administrative staff and office space, and administrative services,
including accounting, legal compliance, financial and information technology services. SSH is a related party
to us. Liberty Holding Company Ltd., or Liberty, a company affiliated with us, acted as our Administrator
until March 13, 2012 when the Administrative Services Agreement was assigned to SSH. The effective date
of the novation was November 9, 2009, the date that we first entered into the agreement with Liberty. We
reimburse our current Administrator for the reasonable direct or indirect expenses it incurs in providing us
with the administrative services described above. Our Administrator also arranges vessel sales and purchases
for us. The services provided to us by our Administrator may be sub-contracted to other entities within the
Scorpio Group.
Our Master Agreement with SCM includes a daily flat fee charged payable to SCM for the vessels that are
not in one of the pools managed by SCM. The flat fee was $250 per day for Panamaxes/LR1 and
Aframax/LR2 vessels and $300 per day for Handymax and MR vessels. The flat fee was the same rate
charged by SCM for vessels in the pools managed by SCM.
The expense for the year ended December 31, 2012 of $1.9 million included the flat fee of $0.7 million
charged by SCM and administrative fees of $1.2 million charged by SSH and were included in voyage
expenses and general and administrative expenses in the consolidated profit or loss statement.
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The expense for the year ended December 31, 2011 of $1.9 million included the flat fee of $0.3 charged
by SCM and administrative fees of $1.7 million charged by SSH and were both included in general and
administrative expenses in the consolidated profit or loss statement.
The expense for the year ended December 31, 2010 of $0.9 million included the flat fee of $0.2 million
charged by SCM and administrative fees of $0.7 million charged by SSH and were both included in
general and administrative expenses in the consolidated profit or loss statement.
(6)
In accordance with our Administrative Services Agreement with SSH, we have to reimburse SSH for any
direct expenses. These transactions represent reimbursements of $0.1 million to SSH for the year ended
December 31, 2010 for expenses related to the registration of the existing shares in the initial public offering
which closed on April 6, 2010. In addition, $0.3 million related to expenses for the registration of the shares
in the initial public offering were recorded as an offset against the proceeds from the offering. The cash
payment was made in 2010.
Furthermore, the Administrative Services Agreement with SSH includes a fee for arranging vessel
purchases and sales, on our behalf, equal to 1% of the gross purchase or sale price, payable upon the
consummation of any such purchase or sale. These fees are capitalized as part of the carrying value of the
related vessel. In the year ended December 31, 2012, we paid SSH an aggregate fee of $2.4 million,
which consisted of $0.5 million (recorded to loss from sale of vessels) on the sales of STI Conqueror, STI
Gladiator, and STI Matador and $1.9 million on the purchase and delivery of the first five Newbuilding
vessels. In the year ended December 31, 2011, we paid SSH an aggregate fee of $0.7 million in May
2011 for the purchase of the STI Coral and STI Diamond. In the year ended December 31, 2010, we paid
SSH an aggregate fee of $2.4 million for the purchases of the STI Harmony, STI Heritage, STI
Conqueror, STI Matador, STI Gladiator, STI Highlander and STI Spirit.
We had the following balances with related parties, which have been included in the consolidated balance sheets:
In thousands of US dollars
Assets:
Accounts receivable (due from the Pools) .............................................................................. $
As of December 31,
2011
2012
33,271 $
18,102
Liabilities:
Accounts payable (owed to the Pools) ....................................................................................
Accounts payable (SSM) ........................................................................................................
Accounts payable (SCM) ........................................................................................................
59
70
146
50
8
52
In 2011, we also entered into an agreement to reimburse costs to SSM as part of its supervision agreement for
newbuilding vessels. $0.1 million has been charged under this agreement during the year ended December 31, 2012. No
amounts were charged under this agreement during the year ended December 31, 2011.
Key management remuneration
Prior to April 6, 2010, our executive management services were provided by a related party affiliate and included in
the management fees described in (5) above. If we were not part of a related party affiliate, and had the same ownership
structure and a contract for administrative services for the periods up to April 6, 2010, we estimate our executive
management remuneration would have been comparable with the executive management remuneration presented within
general and administrative expenses in subsequent periods. Please see Item 6.B. “Compensation” for information regarding
the remuneration we pay our key management.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 18.
Legal Proceedings
To our knowledge, we are not currently a party to any lawsuit that, if adversely determined, would have a material
adverse effect on our financial position, results of operations or liquidity. As such, we do not believe that pending legal
proceedings, taken as a whole, should have any significant impact on our financial statements. From time to time in the future
we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and
property casualty claims. While we expect that these claims would be covered by our existing insurance policies, those
claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. We have not
been involved in any legal proceedings which may have, or have had, a significant effect on our financial position, results of
operations or liquidity, nor are we aware of any proceedings that are pending or threatened which may have a significant
effect on our financial position, results of operations or liquidity.
Dividend Policy
Since our initial public offering closed on April 6, 2010, we have not paid a dividend. We will continue to assess our
dividend policy and our board of directors may determine to pay dividends in the future. Depending on prevailing charter
market conditions, our operating results and capital requirements and other relevant factors, our board of directors may re-
evaluate our dividend policy. In addition, Marshall Islands law generally prohibits the payment of dividends other than from
surplus or when a company is insolvent or if the payment of the dividend would render the company insolvent. Any future
dividend payments will be subject to determination by our board of directors in its discretion.
B. Significant Changes
See Note 23 – Subsequent Events to our consolidated financial statements and notes thereto, included herein.
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ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Since our initial public offering, our shares of common stock have traded on the NYSE under the symbol “STNG”.
The high and low market prices for our shares of common stock on the NYSE are presented for the periods listed below:
For the Year Ended
December 31, 2010* ...................................................................... $
December 31, 2011 ........................................................................
December 31, 2012 ........................................................................
High
Low
13.01 $
12.18
7.50
9.50
4.28
4.93
* For the period beginning March 31, 2010
For the Quarter Ended:
March 31, 2011 ..............................................................................
June 30, 2011 .................................................................................
September 30, 2011 .......................................................................
December 31, 2011 ........................................................................
March 31, 2012 ..............................................................................
June 30, 2012 .................................................................................
September 30, 2012 .......................................................................
December 31, 2012 ........................................................................
March 31, 2013 (through and including March 27, 2013) .............
High
Low
10.82
12.18
10.08
7.03
7.50
7.50
6.88
7.14
8.93
9.62
9.25
4.93
4.28
4.93
5.14
5.14
5.19
6.92
Most Recent Six Months:
September 2012 ............................................................................. $
October 2012 .................................................................................
November 2012 .............................................................................
December 2012 ..............................................................................
January 2013 ..................................................................................
February 2013 ................................................................................
March 2013 (through and including March 27, 2013) ...................
High
Low
6.24 $
6.07
6.63
7.14
8.50
8.81
8.93
5.20
5.19
5.30
6.11
6.92
7.72
8.10
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable
B. Memorandum and Articles of Association
Our amended and restated articles of incorporation have been filed as exhibit 3.1 to Amendment No. 2 to our
Registration Statement on Form F-1 (Registration No. 333-164940), filed with the SEC on March 18, 2010. Our amended
and restated bylaws are filed as exhibit 1.2 to our Annual Report on Form 20-F filed on June 29, 2010. The information
contained in these exhibits is incorporated by reference herein.
Information regarding the rights, preferences and restrictions attaching to each class of our shares of common stock
is described in the section entitled “Description of Capital Stock” in the accompanying prospectus to our Registration
Statement on Form F-3 (Registration No. 333-186815) with an effective date of February 25, 2013, provided that since the
date of that Prospectus Supplement, our total issued and outstanding common shares has increased to 123,511,846 as of the
date of this annual report.
C. Material Contracts
Attached as exhibits to this annual report are the contracts we consider to be both material and not entered into in the
ordinary course of business. Descriptions are included within Item 5.B. with respect to our credit facilities, and Item 7.B.
with respect to our related party transactions.
Other than these contracts, we have no other material contracts, other than contracts entered into in the ordinary
course of business, to which we are a party.
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D. Exchange Controls
Under Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign
exchange controls or restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of
our common shares.
E. Taxation
Marshall Islands Tax Considerations
The following are the material Marshall Islands tax consequences of our activities to us and holders of our common
shares. We are incorporated in the Marshall Islands. Under current Marshall Islands law, we are not subject to tax on income
or capital gains, and no Marshall Islands withholding tax will be imposed upon payments of dividends by us to our
shareholders.
United States Federal Income Tax Considerations
The following are the material United States federal income tax consequences to us of our activities and to United
States Holders and Non-United States Holders, each as defined below, of the ownership of common shares. The following
discussion of United States federal income tax matters is based on the United States Internal Revenue Code of 1986, or the
Code, judicial decisions, administrative pronouncements, and existing and proposed regulations issued by the United States
Department of the Treasury, or the Treasury Regulations, all of which are subject to change, possibly with retroactive effect.
The discussion below is based, in part, on the description of our business in this Report and assumes that we conduct our
business as described herein. References in the following discussion to the “Company,” “we,” “our” and “us” are to Scorpio
Tankers Inc. and its subsidiaries on a consolidated basis.
United States Federal Income Taxation of Operating Income: In General
We earn and anticipate that we will continue to earn substantially all our income from the hiring or leasing of
vessels for use on a time charter basis, from participation in a pool or from the performance of services directly related to
those uses, all of which we refer to as “shipping income.”
Unless exempt from United States federal income taxation under the rules of Section 883 of the Code, or Section
883, as discussed below, a foreign corporation such as us will be subject to United States federal income taxation on its
“shipping income” that is treated as derived from sources within the United States, which we refer to as “United States
source shipping income.” For United States federal income tax purposes, “United States source shipping income” includes
50% of shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in
the United States.
Shipping income attributable to transportation exclusively between non-United States ports will be considered to be
100% derived from sources entirely outside the United States. Shipping income derived from sources outside the United
States will not be subject to any United States federal income tax.
Shipping income attributable to transportation exclusively between United States ports is considered to be 100%
derived from United States sources. However, we are not permitted by United States law to engage in the transportation of
cargoes that produces 100% United States source shipping income.
Unless exempt from tax under Section 883, our gross United States source shipping income would be subject to a
4% tax imposed without allowance for deductions, as described more fully below.
Exemption of Operating Income from United States Federal Income Taxation
Under Section 883 and the Treasury Regulations thereunder, a foreign corporation will be exempt from United
States federal income taxation on its United States source shipping income if:
(1)
it is organized in a “qualified foreign country,” which is one that grants an “equivalent exemption” from tax
to corporations organized in the United States in respect of each category of shipping income for which
exemption is being claimed under Section 883; and
(2)
one of the following tests is met:
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(A)
more than 50% of the value of its shares is beneficially owned, directly or indirectly, by “qualified
shareholders,” which as defined includes individuals who are “residents” of a qualified foreign
country, which we refer to as the “50% Ownership Test”; or
(B)
its shares are “primarily and regularly traded on an established securities market” in a qualified
foreign country or in the United States, to which we refer as the “Publicly-Traded Test”.
The Republic of The Marshall Islands, the jurisdiction where we and our ship-owning subsidiaries are incorporated,
has been officially recognized by the United States Internal Revenue Service, or the IRS, as a qualified foreign country that
grants the requisite “equivalent exemption” from tax in respect of each category of shipping income we earn and currently
expect to earn in the future. Therefore, we will be exempt from United States federal income taxation with respect to our
United States source shipping income if we satisfy either the 50% Ownership Test or the Publicly-Traded Test.
For our 2012 taxable tax year, we intend to take the position that we satisfy the Publicly-Traded Test and we
anticipate that we will continue to satisfy the Publicly-Traded Test for future taxable years. However, as discussed below,
this is a factual determination made on an annual basis. We do not currently anticipate a circumstance under which we would
be able to satisfy the 50% Ownership Test.
Publicly-Traded Test
The Treasury Regulations under Section 883 provide, in pertinent part, that shares of a foreign corporation will be
considered to be “primarily traded” on an established securities market in a country if the number of shares of each class of
stock that are traded during any taxable year on all established securities markets in that country exceeds the number of
shares in each such class that are traded during that year on established securities markets in any other single country. Our
common shares, which constitute our sole class of issued and outstanding stock, are “primarily traded” on the New York
Stock Exchange, or the NYSE.
Under the Treasury Regulations, our common shares will be considered to be “regularly traded” on an established
securities market if one or more classes of our stock representing more than 50% of our outstanding stock, by both total
combined voting power of all classes of stock entitled to vote and total value, are listed on such market, to which we refer as
the “Listing Threshold.” Since our common shares are listed on the NYSE, we expect to satisfy the Listing Threshold.
It is further required that with respect to each class of stock relied upon to meet the Listing Threshold, (i) such class
of stock is traded on the market, other than in minimal quantities, on at least 60 days during the taxable year or one-sixth of
the days in a short taxable year, or the “Trading Frequency Test”; and (ii) the aggregate number of shares of such class of
stock traded on such market during the taxable year is at least 10% of the average number of shares of such class of stock
outstanding during such year or as appropriately adjusted in the case of a short taxable year, or the “Trading Volume Test.”
We currently satisfy and anticipate that it will continue to satisfy the Trading Frequency Test and Trading Volume Test. Even
if this were not the case, the Treasury Regulations provide that the Trading Frequency Test and Trading Volume Tests will be
deemed satisfied if, as is the case with our common shares, such class of stock is traded on an established securities market in
the United States and such class of stock is regularly quoted by dealers making a market in such stock.
Notwithstanding the foregoing, the Treasury Regulations provide, in pertinent part, that a class of stock will not be
considered to be “regularly traded” on an established securities market for any taxable year during which 50% or more of the
vote and value of the outstanding shares of such class are owned, actually or constructively under specified attribution rules,
on more than half the days during the taxable year by persons who each own 5% or more of the vote and value of such class
of outstanding shares, to which we refer as the “5% Override Rule.”
For purposes of being able to determine the persons who actually or constructively own 5% or more of the vote
and value of our common shares, or “5% Shareholders,” the Treasury Regulations permit us to rely on those persons that
are identified on Schedule 13G and Schedule 13D filings with the United States Securities and Exchange Commission, or
the SEC, as owning 5% or more of our common shares. The Treasury Regulations further provide that an investment
company which is registered under the Investment Company Act of 1940, as amended, will not be treated as a 5%
Shareholder for such purposes.
In the event the 5% Override Rule is triggered, the Treasury Regulations provide that the 5% Override Rule will
nevertheless not apply if we can establish that within the group of 5% Shareholders, there are sufficient qualified 92
shareholders for purposes of Section 883 to preclude non-qualified shareholders in such group from owning 50% or more of
our common shares for more than half the number of days during the taxable year. In order to benefit from this exception to
the 5% Override Rule, we must satisfy certain substantiation requirements in regards to the identity of its 5% Shareholders.
83
We believe that we currently satisfy the Publicly-Traded Test and intend to take this position on our United States
federal income tax return for the 2012 taxable year However, there are factual circumstances beyond our control that could
cause us to lose the benefit of the Section 883 exemption. For example, if we trigger the 5% Override Rule for any future
taxable year, there is no assurance that we will have sufficient qualified 5% Shareholders to preclude nonqualified 5%
Shareholders from owning 50% or more of our common shares for more than half the number of days during such taxable
year, or that we will be able to satisfy the substantiation requirements in regards to our 5% Shareholders.
United States Federal Income Taxation In Absence of Section 883 Exemption
If the benefits of Section 883 are unavailable, our United States source shipping income would be subject to a 4%
tax imposed by Section 887 of the Code on a gross basis, without the benefit of deductions, which we refer to as the “4%
gross basis tax regime,” to the extent that such income is not considered to be “effectively connected” with the conduct of a
United States trade or business, as described below. Since under the sourcing rules described above, no more than 50% of our
shipping income would be treated as being United States source shipping income, the maximum effective rate of United
States federal income tax on our shipping income would never exceed 2% under the 4% gross basis tax regime.
To the extent our United States source shipping income is considered to be “effectively connected” with the conduct
of a United States trade or business, as described below, any such “effectively connected” United States source shipping
income, net of applicable deductions, would be subject to United States federal income tax, currently imposed at rates of up
to 35%. In addition, we would generally be subject to the 30% “branch profits” tax on earnings effectively connected with the
conduct of such trade or business, as determined after allowance for certain adjustments, and on certain interest paid or
deemed paid attributable to the conduct of our United States trade or business.
Our United States source shipping income would be considered “effectively connected” with the conduct of a
United States trade or business only if:
we have, or are considered to have, a fixed place of business in the United States involved in the earning of
United States source shipping income; and
substantially all of our United States source shipping income is attributable to regularly scheduled
transportation, such as the operation of a vessel that follows a published schedule with repeated sailings at
regular intervals between the same points for voyages that begin or end in the United States.
We do not currently have, intend to have, or permit circumstances that would result in having, any vessel sailing to
or from the United States on a regularly scheduled basis. Based on the foregoing and on the expected mode of our shipping
operations and other activities, it is anticipated that none of our United States source shipping income will be “effectively
connected” with the conduct of a United States trade or business.
United States Federal Income Taxation of Gain on Sale of Vessels
If we qualify for exemption from tax under Section 883 in respect of the shipping income derived from the
international operation of our vessels, then gain from the sale of any such vessel should likewise be exempt from United
States federal income tax under Section 883. If, however, our shipping income from such vessels does not for whatever
reason qualify for exemption under Section 883, then any gain on the sale of a vessel will be subject to United States federal
income tax if such sale occurs in the United States. To the extent possible, we intend to structure the sales of our vessels so
that the gain therefrom is not subject to United States federal income tax. However, there is no assurance we will be able to
do so.
United States Federal Income Taxation of United States Holders
The following is a discussion of the material United States federal income tax considerations relevant to an
investment decision by a United States Holder, as defined below, with respect to our common shares. This discussion does
not purport to deal with the tax consequences of owning common shares to all categories of investors, some of which may be
subject to special rules. This discussion only addresses considerations relevant to those United States Holders who hold the
common shares as capital assets, that is, generally for investment purposes. You are encouraged to consult your own tax
advisors concerning the overall tax consequences arising in your own particular situation under United States federal, state,
local or foreign law of the ownership of common shares.
As used herein, the term “United States Holder” means a beneficial owner of common shares that is an individual
United States citizen or resident, a United States corporation or other United States entity taxable as a corporation, an estate
the income of which is subject to United States federal income taxation regardless of its source, or a trust if a court within the
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United States is able to exercise primary jurisdiction over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
If a partnership holds our common shares, the tax treatment of a partner will generally depend upon the status of the
partner and upon the activities of the partnership. If you are a partner in a partnership holding common shares, you are
encouraged to consult your tax advisor.
Distributions
Subject to the discussion of passive foreign investment companies below, any distributions made by us with
respect to our common shares to a United States Holder will generally constitute dividends to the extent of our current or
accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess
of such earnings and profits will be treated first as a nontaxable return of capital to the extent of the United States Holder’s
tax basis in his common shares on a dollar-for-dollar basis and thereafter as capital gain. Because we are not a United
States corporation, United States Holders that are corporations will not be entitled to claim a dividends received deduction
with respect to any distributions they receive from us. Dividends paid with respect to our common shares will generally be
treated as “passive category income” for purposes of computing allowable foreign tax credits for United States foreign tax
credit purposes.
Dividends paid on our common shares to a United States Holder who is an individual, trust or estate (a “United
States Non-Corporate Holder”) will generally be treated as “qualified dividend income” that is taxable to such United States
Non-Corporate Holder at preferential tax rates provided that (1) the common shares are readily tradable on an established
securities market in the United States (such as the NYSE, on which our common shares are traded); (2) we are not a passive
foreign investment company for the taxable year during which the dividend is paid or the immediately preceding taxable year
(which, as discussed below, we believe we have not been, we believe we are not and do not anticipate being in the future); (3)
the United States Non-Corporate Holder has owned the common shares for more than 60 days in the 121-day period
beginning 60 days before the date on which the common shares become ex-dividend; and (4) the United States Non-
Corporate Holder is not under an obligation to make related payments with respect to positions in substantially similar or
related property. Any distributions out of earnings and profits we pay which are not eligible for these preferential rates will
be taxed as ordinary income to a United States Non-Corporate Holder.
Special rules may apply to any “extraordinary dividend”—generally, a dividend in an amount which is equal to or in
excess of 10% of a shareholder’s adjusted tax basis in his common shares—paid by us. If we pay an “extraordinary dividend”
on our common shares that is treated as “qualified dividend income,” then any loss derived by a United States Non-Corporate
Holder from the sale or exchange of such common shares will be treated as long-term capital loss to the extent of such
dividend.
Sale, Exchange or Other Disposition of Common Shares
Assuming we do not constitute a passive foreign investment company for any taxable year, a United States Holder
generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our common shares in an amount
equal to the difference between the amount realized by the United States Holder from such sale, exchange or other 94
disposition and the United States Holder’s tax basis in such shares. Such gain or loss will be treated as long-term capital gain
or loss if the United States Holder’s holding period is greater than one year at the time of the sale, exchange or other
disposition. Such capital gain or loss will generally be treated as United States source income or loss, as applicable, for
United States foreign tax credit purposes. Long-term capital gains of United States Non-Corporate Holders are currently
eligible for reduced rates of taxation. A United States Holder’s ability to deduct capital losses is subject to certain limitations.
3.8% Tax on Net Investment Income
For taxable years beginning after December 31, 2012, a United States Holder that is an individual will generally be
subject to a 3.8% tax on the lesser of (1) the United States Holder’s net investment income for the taxable year and (2) the
excess of the United States holder’s modified adjusted gross income for the taxable year over a certain threshold (which in
the case of individuals will be between $125,000 and $250,000). A United States Holder’s net investment income will
generally include dividends paid on our common shares and net gains from the sale, exchange or other disposition of our
common shares. Similar rules apply to estates and, in certain cases, trusts. If you are a United States Holder that is an
individual, estate or trust, you are encouraged to consult your tax advisors regarding the applicability of these rules.
85
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a United States Holder that holds shares in a foreign
corporation classified as a “passive foreign investment company”, or a PFIC, for United States federal income tax purposes.
In general, we will be treated as a PFIC with respect to a United States Holder if, for any taxable year in which such Holder
holds our common shares, either:
at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest,
capital gains and rents derived other than in the active conduct of a rental business); or
at least 50% of the average value of our assets during such taxable year produce, or are held for the production
of, passive income.
For purposes of determining whether we are a PFIC, we will be treated as earning and owning our proportionate
share of the income and assets, respectively, of any of our subsidiary corporations in which we own at least 25% of the value
of the subsidiary’s stock. Income earned, or deemed earned, by us in connection with the performance of services would not
constitute passive income. By contrast, rental income would generally constitute “passive income” unless we were treated
under specific rules as deriving our rental income in the active conduct of a trade or business.
Based on our current operations and future projections, we do not believe that we have been, are, nor do we
expect to become, a passive foreign investment company with respect to any taxable year. Although there is no legal
authority directly on point, our belief is based principally on the position that, for purposes of determining whether we are
a passive foreign investment company, the gross income we derive or are deemed to derive from the time chartering and
voyage chartering activities of our wholly-owned subsidiaries should constitute services income, rather than rental
income. Accordingly, such income should not constitute passive income, and the assets that we own and operate in
connection with the production of such income, in particular, the vessels, should not constitute assets that produce or are
held for the production of passive income for purposes of determining whether we are a PFIC. Therefore, based on our
current operations and future projections, we should not be treated as a PFIC with respect to any taxable year. There is
substantial legal authority supporting this position, consisting of case law and IRS pronouncements concerning the
characterization of income derived from time charters and voyage charters as services income for other tax purposes.
However, there is also authority that characterizes time charter income as rental income rather than services income for
other tax purposes. It should be noted that in the absence of any legal authority specifically relating to the statutory
provisions governing PFICs, the IRS or a court could disagree with our position. Furthermore, although we intend to
conduct our affairs in a manner to avoid being classified as a PFIC with respect to any taxable year, we cannot assure you
that the nature of our operations will not change in the future.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a United States Holder
would be subject to different United States federal income taxation rules depending on whether the United States Holder
makes an election to treat us as a “Qualified Electing Fund,” which election we refer to as a “QEF election.” As an
alternative to making a QEF election, a United States Holder should be able to make a “mark-to-market” election with
respect to our common shares, as discussed below. In addition, if we were to be treated as a PFIC for any taxable year
after 2010, a United States Holder would be required to file an annual report with the IRS for that year with respect to
such Holder’s common shares.
Taxation of United States Holders Making a Timely QEF Election
If a United States Holder makes a timely QEF election, which United States Holder we refer to as an “Electing
Holder,” the Electing Holder must report for United States federal income tax purposes his pro rata share of our ordinary
earnings and net capital gain, if any, for each of our taxable years during which we are a PFIC that ends with or within the
taxable year of the Electing Holder, regardless of whether distributions were received from us by the Electing Holder. No
portion of any such inclusions of ordinary earnings will be treated as “qualified dividend income.” Net capital gain inclusions
of United States Non-Corporate Holders would be eligible for preferential capital gain tax rates. The Electing Holder’s
adjusted tax basis in the common shares will be increased to reflect taxed but undistributed earnings and profits. Distributions
of earnings and profits that had been previously taxed will result in a corresponding reduction in the adjusted tax basis in the
common shares and will not be taxed again once distributed. An Electing Holder would not, however, be entitled to a
deduction for its pro rata share of any losses that we incur with respect to any taxable year. An Electing Holder would
generally recognize capital gain or loss on the sale, exchange or other disposition of our common shares. A United States
Holder would make a timely QEF election for our shares by filing one copy of IRS Form 8621 with his United States federal
income tax return for the first year in which he held such shares when we were a PFIC. If we were to be treated as a PFIC for
any taxable year, we would provide each United States Holder with all necessary information in order to make the QEF
election described above.
86
Taxation of United States Holders Making a “Mark-to-Market” Election
Alternatively, if we were to be treated as a PFIC for any taxable year and, as we anticipate will be the case, our
common shares are treated as “marketable stock,” a United States Holder would be allowed to make a “mark-to-market”
election with respect to our common shares, provided the United States Holder completes and files IRS Form 8621 in
accordance with the relevant instructions and related Treasury Regulations. If that election is made, the United States Holder
generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the common
shares at the end of the taxable year over such Holder’s adjusted tax basis in the common shares. The United States Holder
would also be permitted an ordinary loss in respect of the excess, if any, of the United States Holder’s adjusted tax basis in
the common shares over its fair market value at the end of the taxable year, but only to the extent of the net amount
previously included in income as a result of the mark-to-market election. A United States Holder’s tax basis in his common
shares would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition
of our common shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition
of the common shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market
gains previously included by the United States Holder.
Taxation of United States Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a PFIC for any taxable year, a United States Holder who does not make either a
QEF election or a “mark-to-market” election for that year, whom we refer to as a “Non-Electing Holder,” would be subject to
special rules with respect to (1) any excess distribution (i.e., the portion of any distributions received by the Non-Electing
Holder on the common shares in a taxable year in excess of 125% of the average annual distributions received by the Non-
Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding period for the common
shares), and (2) any gain realized on the sale, exchange or other disposition of our common shares. Under these special rules:
the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding
period for the common shares;
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we
were a PFIC, would be taxed as ordinary income and would not be “qualified dividend income”; and
the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect
for the applicable class of taxpayer for that year, and an interest charge for the deemed tax deferral benefit
would be imposed with respect to the resulting tax attributable to each such other taxable year.
United States Federal Income Taxation of “Non-United States Holders”
A beneficial owner of common shares (other than a partnership) that is not a United States Holder is referred to
herein as a “Non-United States Holder.”
If a partnership holds common shares, the tax treatment of a partner will generally depend upon the status of the
partner and upon the activities of the partnership. If you are a partner in a partnership holding common shares, you are
encouraged to consult your tax advisor.
Dividends on Common Stock
A Non-United States Holder generally will not be subject to United States federal income tax or withholding tax
on dividends received from us with respect to his common shares, unless that income is effectively connected with the
Non-United States Holder’s conduct of a trade or business in the United States. If the Non-United States Holder is entitled
to the benefits of a United States income tax treaty with respect to those dividends, that income is subject to United Stated
federal income tax only if it is attributable to a permanent establishment maintained by the Non-United States Holder in
the United States.
Sale, Exchange or Other Disposition of Common Shares
Non-United States Holders generally will not be subject to United States federal income tax or withholding tax on
any gain realized upon the sale, exchange or other disposition of our common shares, unless:
the gain is effectively connected with the Non-United States Holder’s conduct of a trade or business in the
United States (and, if the Non-United States Holder is entitled to the benefits of a United States income tax
treaty with respect to that gain, that gain is attributable to a permanent establishment maintained by the Non-
United States Holder in the United States); or
87
the Non-United States Holder is an individual who is present in the United States for 183 days or more during
the taxable year of disposition and other conditions are met.
If the Non-United States Holder is engaged in a United States trade or business for United States federal income tax
purposes, dividends on the common shares, and gains from the sale, exchange or other disposition of such shares, that are
effectively connected with the conduct of that trade or business will generally be subject to regular United States federal
income tax in the same manner as discussed in the previous section relating to the taxation of United States Holders. In
addition, if you are a corporate Non-United States Holder, your earnings and profits that are attributable to the effectively
connected income, subject to certain adjustments, may be subject to an additional “branch profits” tax at a rate of 30%, or at a
lower rate as may be specified by an applicable United States income tax treaty.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made within the United States to you will be subject to
information reporting requirements if you are a non-corporate United States Holder. Such payments or distributions may also
be subject to backup withholding if you are a non-corporate United States Holder and you:
fail to provide an accurate taxpayer identification number;
are notified by the IRS that you have failed to report all interest or dividends required to be shown on your
United States federal income tax returns; or
in certain circumstances, fail to comply with applicable certification requirements.
Non-United States Holders may be required to establish their exemption from information reporting and backup
withholding by certifying their status on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable.
If you are a Non-United States Holder and you sell your common shares to or through a United States office of a
broker, the payment of the proceeds is subject to both United States backup withholding and information reporting unless you
certify that you are a non-United States person, under penalties of perjury, or you otherwise establish an exemption. If you
sell your common shares through a non-United States office of a non-United States broker and the sales proceeds are paid to
you outside the United States, then information reporting and backup withholding generally will not apply to that payment.
However, United States information reporting requirements, but not backup withholding, will apply to a payment of sales
proceeds, even if that payment is made to you outside the United States, if you sell your common shares through a non-
United States office of a broker that is a United States person or has some other contacts with the United States. Such
information reporting requirements will not apply, however, if the broker has documentary evidence in its records that you
are a non-United States person and certain other conditions are met, or you otherwise establish an exemption.
Backup withholding is not an additional tax. Rather, you generally may obtain a refund of any amounts withheld
under backup withholding rules that exceed your United States federal income tax liability by filing a refund claim with
the IRS.
Pursuant to recently enacted legislation, individuals who are United States Holders (and to the extent specified in
applicable Treasury Regulations, certain individuals who are Non- United States Holders and certain United States entities)
who hold “specified foreign financial assets” (as defined in Section 6038D of the Code) are required to file IRS Form 8938
with information relating to the asset for each taxable year in which the aggregate value of all such assets exceeds $75,000 at
any time during the taxable year or $50,000 on the last day of the taxable year (or such higher dollar amount as prescribed by
applicable Treasury regulations). Specified foreign financial assets would include, among other assets, our common shares,
unless the shares are held through an account maintained with a United States financial institution. Substantial penalties apply
to any failure to timely file IRS Form 8938, unless the failure is shown to be due to reasonable cause and not due to willful
neglect. Additionally, in the event an individual United States Holder (and to the extent specified in applicable Treasury
Regulations, an individual Non- United States Holder or a United States entity) that is required to file IRS Form 8938 does
not file such form, the statute of limitations on the assessment and collection of United States federal income taxes of such
holder for the related tax year may not close until three years after the date that the required IRS Form 8938 is filed. United
States Holders (including United States entities) and Non- United States Holders are encouraged consult their own tax
advisors regarding their reporting obligations under this legislation.
F. Dividends and Paying Agents
Not applicable.
88
G. Statement by Experts
Not applicable.
H. Documents on Display
We file reports and other information with the SEC. These materials, including this annual report and the
accompanying exhibits, may be inspected and copied at the public reference facilities maintained by the Commission at 100
F Street, N.E. Washington, D.C. 20549, or from the SEC’s website http://www.sec.gov. You may obtain information on the
operation of the public reference room by calling 1 (800) SEC-0330, and you may obtain copies at prescribed rates.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
We are exposed to the impact of interest rate changes primarily through our unhedged variable-rate borrowings.
Significant increases in interest rates could adversely affect our operating margins, results of operations and our ability to
service our debt. From time to time, we will use interest rate swaps to reduce our exposure to market risk from changes in
interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our variable-rate
debt and is not for speculative or trading purposes. We had one interest rate swap which expired in April 2010 when the 2005
Credit Facility was repaid. We have six interest rate swaps which we entered into in August 2011 and went into effect on July
1, 2012 for an aggregate notional amount of $75 million, which was reduced to $66.0 million in September 2012. See Note
12 of the consolidated financial statements for further information. The fair market value of our interest rate swaps was a
liability of $1.4 million at December 31, 2012.
Based on the floating rate debt at December 31, 2012, a one-percentage point increase in the floating interest rate
would increase interest expense by $1.6 million per year. The following table presents the due dates for the principal
payments on our fixed and floating rate debt:
Amounts in thousands of US dollars
Principal payments floating rate debt (unhedged) ................ $
Principal payments fixed rate debt (hedged) .........................
Total principal payments on outstanding debt ...................... $
Spot Market Rate Risk
2013
As of December 31, 2012
2016 -2017
2014 -2015
3,007 $
4,600
7,607 $
27,410 $
7,564
34,974 $
Thereafter
76,913
—
76,913
26,784 $
—
26,784 $
The cyclical nature of the tanker industry causes significant increases or decreases in the revenue that we earn from
our vessels, particularly those vessels that operate in the spot market or participate in pools that are concentrated in the spot
market such as the Scorpio Group Pools. We currently do not have any vessels on time charter contracts. Additionally, we
have the ability to remove our vessels from the pools on relatively short notice if attractive time charter opportunities arise.
Foreign Exchange Rate Risk
Our primary economic environment is the international shipping market. This market utilizes the US dollar as its
functional currency. Consequently, virtually all of our revenues and the majority of our operating expenses are in US dollars.
However, we incur some of our combined expenses in other currencies, particularly the Euro. The amount and frequency of
some of these expenses (such as vessel repairs, supplies and stores) may fluctuate from period to period. Depreciation in the
value of the US dollar relative to other currencies will increase the US dollar cost of us paying such expenses. The portion of
our business conducted in other currencies could increase in the future, which could expand our exposure to losses arising
from currency fluctuations.
There is a risk that currency fluctuations will have a negative effect on our cash flows. We have not entered into any
hedging contracts to protect against currency fluctuations. However, we have some ability to shift the purchase of goods and
services from one country to another and, thus, from one currency to another, on relatively short notice. We may seek to
hedge this currency fluctuation risk in the future.
89
Bunker Price Risk
Our operating results are affected by movement in the price of fuel oil consumed by the vessels – known in the
industry as bunkers. The price and supply of fuel is unpredictable and fluctuates based on events outside our control,
including geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum
Exporting Countries, or OPEC, and other oil and gas producers, war and unrest in oil producing countries and regions,
regional production patterns and environmental concerns. Further, fuel may become much more expensive in the future,
which may reduce the profitability. We do not hedge our exposure to bunker price risk.
Inflation
We do not expect inflation to be a significant risk to direct expenses in the current and foreseeable economic
environment.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
90
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed
in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,
summarized and reported within time periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Our controls and procedures are designed to provide
reasonable assurance of achieving their objectives.
We carried out an evaluation under the supervision, and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15e under the Securities Act of 1934) as of
December 31, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of December 31, 2012 to provide reasonable assurance that (1)
information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) that such information is
accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
B. Management’s Annual Report on Internal Control Over Financial Reporting.
In accordance with Rule 13a-15(f) of the Securities Exchange Act of 1934, the management of Scorpio Tankers Inc.
and its subsidiaries (the “Company”) is responsible for the establishment and maintenance of adequate internal 100 controls
over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on
the financial statements. Management has performed an assessment of the effectiveness of the Company’s internal controls
over financial reporting as of December 31, 2012 based on the provisions of Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment,
management determined that the Company’s internal controls over financial reporting was effective as of December 31, 2012
based on the criteria in Internal Control—Integrated Framework issued by COSO.
The Company’s internal control over financial reporting, at December 31, 2012, has been audited by Deloitte LLP,
an independent registered public accounting firm, who also audited the Company’s consolidated financial statements. Their
audit report on the effectiveness of internal control over financial reporting is presented below.
91
C. Attestation Report of the Registered Public Accounting Firm.
To the Board of Directors and Shareholders of Scorpio Tankers Inc.
Majuro, Marshall Island
We have audited the internal control over financial reporting of Scorpio Tankers Inc. and subsidiaries (the “Company”) as of
December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s
board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on
a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report dated
March 28, 2013 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE LLP
London, United Kingdom
March 28, 2013
92
D. Changes in Internal Control Over Financial Reporting.
None
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Ademaro Lanzara, who serves on the Audit Committee, qualifies as
an “audit committee financial expert” and that he is “independent” according to Securities and Exchange Commission rules.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics applicable to officers, directors and employees, which complies with applicable
guidelines issued by the SEC. Our code of ethics is filed as an exhibit to this annual report and can be found on our website at
www.scorpiotankers.com. We will also provide a hard copy of our code of ethics free of charge upon written request to
Scorpio Tankers Inc., 9 Boulevard Charles III, Monaco, 98000.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
A. Audit Fees
Our principal accountant for fiscal years ended December 31, 2012, 2011 and 2010 was Deloitte LLP (London,
United Kingdom), and the audit fees for those periods were $434,247, $380,174 and $218,167, respectively.
B. Audit-Related Fees
None.
C. Tax Fees
None.
D. All Other Fees
During 2012, our principal accountant provided services related to SEC comment letter review and follow-on
offerings were completed in April and December 2012. The fees for these services were $38,743, $80,675 and $97,128,
respectively. During 2011, our principal accountant provided services related to our F-3 shelf registration and follow-on
offerings were completed on May 10, 2011, May 18, 2011 and December 6, 2011, respectively. The fees for these services
were $28,982, $72,896 and $86,206, respectively.
E. Audit Committee’s Pre-Approval Policies and Procedures
Our Audit Committee pre-approves all audit, audit-related and non-audit services not prohibited by law to be
performed by our independent auditors and associated fees prior to the engagement of the independent auditor with respect to
such services.
F. Audit Work Performed by Other Than Principal Accountant if Greater Than 50%
Not applicable.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
93
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On July 9, 2010, the board of directors authorized a share buyback program of $20 million. We repurchase these
shares in the open market at the time and prices that we consider to be appropriate. During the year ended December 31,
2012, 447,322 shares have been purchased under the plan at an average price of $5.4546 per share, including commissions.
As of the date of this report, 1,170,987 shares have been purchased under the plan at an average price of $6.7793 per share.
The amounts purchased during 2012, by month, are set out in the table below:
Issuer Purchases of Equity Securities
(A) Total
Number
of Shares
Purchased
(B)
Average
Price Paid
Per
Shares
( C ) Total Number of
Shares Purchased as
Part of
Publicly Announced
Programs
(D) Maximum Amount
in US $
million that may Yet Be
Expected on Share
Repurchases
Under Programs
365,000 $
75,422 $
6,900 $
447,322 $
5.48
5.35
5.30
5.45
365,000 $
75,422 $
6,900 $
447,322 $
12,501,305
12,098,149
12,061,547
12,061,547
Period
June 2012 ........................................
August 2012 ....................................
September 2012 ..............................
Total ...............................................
Officers and directors acquired 163,994 shares during 2012.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Pursuant to an exception for foreign private issuers, we, as a Marshall Islands company, are not required to comply
with the corporate governance practices followed by U.S. companies under the NYSE listing standards. We believe that our
established practices in the area of corporate governance are in line with the spirit of the NYSE standards and provide
adequate protection to our shareholders. In this respect, we have voluntarily adopted NYSE required practices, such as (i)
having a majority of independent directors, (ii) establishing audit, compensation and nominating committees and (iii)
adopting a Code of Ethics.
There are two significant differences between our corporate governance practices and the practices required by the
NYSE. The NYSE requires that non-management directors meet regularly in executive sessions without management. The
NYSE also requires that all independent directors meet in an executive session at least once a year. The Marshall Islands law
and our bylaws do not require our non-management directors to regularly hold executive sessions without management.
During 2012 and through the date of this annual report, our non-management directors met in executive session four times.
The NYSE requires companies to adopt and disclose corporate governance guidelines. The guidelines must address, among
other things: director qualification standards, director responsibilities, director access to management and independent
advisers, director compensation, director orientation and continuing education, management succession and an annual
performance evaluation. We are not required to adopt such guidelines under Marshall Islands law and we have not adopted
such guidelines.
ITEM 16H. Mine Safety Disclosure
Not applicable
94
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable
ITEM 18. FINANCIAL STATEMENTS
The financial information required by this Item is set forth on pages F-1 to F-43 and is filed as part of this
annual report.
ITEM 19. EXHIBITS
Exhibit
Number
1.1
1.2
2.1
2.3
2.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
8.1
11.1
11.2
12.1
12.2
13.1
Description
Amended and Restated Articles of Incorporation of the Company (1)
Amended and Restated Bylaws of the Company (3)
Form of Stock Certificate (1)
Form of Senior Debt Securities Indenture (5)
Form of Subordinated Debt Securities Indenture (5)
Amended and Restated Loan Agreement
for $150 Million Revolving Credit Facility, dated
July 12, 2011 (6)
Letter Agreement to July 12, 2011 Amended and Restated Loan Agreement, dated September 22, 2011(6)
First Amendatory Agreement to July 12, 2011 Amended and Restated Loan Agreement, dated December 22,
2011 (6)
2010 Equity Incentive Plan (3)
Administrative Services Agreement between the Company and Liberty Holding Company Ltd. (2)
Master Agreement between the Company, SSM and SCM dated January 24, 2013
Loan Agreement for STI Spirit, dated March 9, 2011 (4)
Letter Agreement to March 9, 2011 Loan Agreement, dated September 28, 2011 (6)
First Amendatory Agreement to March 9, 2011 Loan Agreement, dated December 30, 2011 (6)
Loan Agreement for $150 Million Term Loan Credit Facility, dated May 3, 2011 (6)
Letter Agreement to May 3, 2011 Loan Agreement, dated September 22, 2011 (6)
First Amendatory Agreement to May 3, 2011 Loan Agreement, dated June 27, 2011 (6)
Second Amendatory Agreement to May 3, 2011 Loan Agreement, dated December 22, 2011 (6)
Loan Agreement for a $92,000,000 Term Loan Credit Facility, dated December 21, 2011 (6)
Subsidiaries of the Company
Code of Ethics
Whistleblower Policy
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
13.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
15.1
15.2
Consent of Independent Registered Public Accounting Firm
Consent of Drewry Shipping Consultants, Ltd.
(1)
(2)
(3)
(4)
(5)
(6)
Filed as an Exhibit to the Company’s Amended Registration Statement on Form F-1/A (Amendment No. 1) (File No.
333-164940) on March 10, 2010.
Filed as an Exhibit to the Company’s Amended Registration Statement on Form F-1/A (Amendment No. 2) (File No.
333-164940) on March 18, 2010.
Filed as an Exhibit to the Company’s Annual Report filed on Form 20-F on June 29, 2010.
Filed as an Exhibit to the Company’s Annual Report filed on Form 20-F on April 21, 2011.
Filed as an Exhibit to the Company’s Registration Statement on Form F-3 (File No. 333-173929) on May 4, 2011.
Filed as an Exhibit to the Company’s Annual Report on Form 20-F on April 13, 2012, as amended.
95
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Dated: March 28, 2013
Scorpio Tankers Inc.
(Registrant)
/s/Emanuele Lauro
Emanuele Lauro
Chief Executive Officer
96
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ................................................................................................. F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2012 and 2011 ........................................................................................
F-3
Consolidated Statements of Profit or Loss for the years ended December 31, 2012, 2011 and 2010 ...................................
F-4
Consolidated Statements of Comprehensive Income or Loss for the years ended December 31, 2012, 2011 and 2010 ......
F-5
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010 ....
F-6
Consolidated Cash Flow Statements for the years ended December 31, 2012, 2011 and 2010 ............................................
F-7
Notes to the Consolidated Financial Statements ...................................................................................................................
F-8
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Scorpio Tankers Inc.
Majuro, Marshall Island
We have audited the accompanying consolidated balance sheets of Scorpio Tankers Inc. and subsidiaries (the "Company") as
of December 31, 2012 and 2011, and the related consolidated statements of profit or loss, consolidated statements of
comprehensive loss or income, consolidated statements of changes in shareholders’ equity, and consolidated cash flow
statements for each of the three years in the period ended December 31, 2012. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Scorpio
Tankers Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2012, in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards Board.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 28, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE LLP
London, United Kingdom
March 28, 2013
F-2
Scorpio Tankers Inc. and Subsidiaries
Consolidated balance sheets
December 31, 2012 and 2011
In thousands of U.S. dollars
Assets
Current assets
Cash and cash equivalents ..............................................
Accounts receivable ........................................................
Prepaid expenses and other current assets ......................
Inventories ......................................................................
Total current assets ......................................................
Non-current assets
Vessels and drydock .......................................................
Vessels under construction .............................................
Other assets .....................................................................
Total non-current assets ...............................................
Total assets ....................................................................
Current liabilities
Bank loans ......................................................................
Accounts payable ............................................................
Accrued expenses ...........................................................
Derivative financial instruments .....................................
Total current liabilities .................................................
Non-current liabilities ..................................................
Bank loans ......................................................................
Derivative financial instruments .....................................
Total non-current liabilities .........................................
Total liabilities ..............................................................
Shareholders’ equity
Issued, authorized and fully paid in share capital:
Share capital ...............................................................
Additional paid in capital ............................................
Treasury shares ...............................................................
Hedging reserve ..............................................................
Accumulated deficit ........................................................
Total shareholders’ equity ...........................................
Total liabilities and shareholders’ equity ...................
Notes
December 31,
2012
December 31,
2011
As of
3
4
5
6
6
8
11
9
10
12
11
12
14
14
14
12
$
$
$
87,165
36,438
956
2,169
126,728
395,412
50,251
889
446,552
573,280
7,475
11,387
3,057
844
22,763
134,984
743
135,727
158,490
650
519,493
(7,938)
(329)
(97,086)
414,790
573,280
$
$
$
36,833
20,386
1,535
2,696
61,450
322,458
60,333
3,989
386,780
448,230
2,889
11,732
3,376
237
18,234
142,679
464
143,143
161,377
391
363,210
(5,498)
(701)
(70,549)
286,853
448,230
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Scorpio Tankers Inc. and Subsidiaries
Consolidated statements of profit or loss
For the years ended December 31, 2012, 2011 and 2010
In thousands of U.S. dollars except per share and share
data
Revenue:
Vessel revenue ................................................................
Notes
For the year ended December 31,
2012
2011
2010
16
$
115,381 $
82,110 $
38,798
Operating expenses:
Vessel operating costs .....................................................
Voyage expenses .............................................................
Charterhire ......................................................................
Impairment ......................................................................
Depreciation ....................................................................
Loss from sale of vessels ................................................
General and administrative expenses ..............................
Total operating expenses .................................................
Operating (loss)/profit ....................................................
Other (expense) and income, net
Financial expenses ..........................................................
Earnings from profit or loss sharing agreements ............
Realized loss on derivative financial instruments ...........
Unrealized loss on derivative financial instruments .......
Financial income .............................................................
Other expenses, net .........................................................
Total other expense, net ..................................................
Net loss .............................................................................
17
7
6
6
18
19
12
12
12
($
(30,353)
(21,744)
(43,701)
—
(14,818)
(10,404)
(11,536)
(132,556)
(17,175)
(8,512)
443
—
(1,231)
35
(97)
(9,362)
26,537)
($
(31,370 )
(6,881 )
(22,750 )
(66,611 )
(18,460 )
—
(11,637 )
(157,709 )
(75,599 )
(7,060 )
—
—
—
51
(119 )
(7,128 )
82,727 )
($
(18,440)
(2,542)
(276)
—
(10,179)
—
(6,200)
(37,637)
1,161
(3,231)
—
(280)
—
37
(509)
(3,983)
2,822)
Attributable to:
Equity holders of the parent ............................................
($
26,537)
($
82,727 )
($
2,822)
Loss per share
Basic and diluted .............................................................
Basic and diluted weighted average shares outstanding ....
21
21
($
0.64)
41,413,339
($
2.88 )
28,704,876
0.18)
($
15,600,813
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Scorpio Tankers Inc. and Subsidiaries
Consolidated statements of comprehensive income or loss
For the years ended December 31, 2012, 2011 and 2010
In thousands of U.S. dollars
Net loss ............................................................................................... ($
Other comprehensive income / (loss):
Items that may be reclassified subsequently to profit or loss
Cash flow hedges
Unrealized loss on derivative financial instruments .........................
Reclassification adjustment for derivative financial instruments
included in net loss............................................................................
Other comprehensive income / (loss) ...............................................
For the year ended December 31,
2011
2012
2010
26,537)
($
82,727)
($
2,822)
(904)
1,276
372
(701)
—
(701)
—
—
—
Total comprehensive loss .................................................................. ($
26,165)
($
83,428)
($
2,822)
Attributable to:
Equity holders of the parent .............................................................. ($
26,165)
($
83,428)
($
2,822)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Scorpio Tankers Inc. and Subsidiaries
Consolidated statements of changes in shareholders’ equity
For the years ended December 31, 2012, 2011 and 2010
In thousands of U.S. dollars
except share data
Number of
shares
outstanding
Share
capital
Additional
paid-in
capital
Treasury
shares
Merger
reserve
Accumulated
deficit
Hedging
reserve
Total
Balance at January 1, 2010 ..........................
Net loss for the period ..................................
Net proceeds from offerings ........................
Issuance of restricted shares ........................
Amortization of restricted shares .................
Purchase of treasury shares ..........................
Balance at December 31, 2010 ..................
Balance as of January 1, 2011 .....................
Net loss for the period ..................................
Other comprehensive loss ............................
Net proceeds from follow on offerings........
Issuance of restricted stock ..........................
Amortization of restricted stock ..................
Purchase of treasury shares ..........................
Transfer to/ (from) reserves .........................
Balance as of December 31, 2011 .............
Balance as of January 1, 2012 .....................
Net loss for the period ..................................
Other comprehensive income ......................
Net proceeds from follow on offerings........
Issuance of restricted stock ..........................
Amortization of restricted stock ..................
Purchase of treasury shares ..........................
Balance as of December 31, 2012 .............
5,589,147 $
—
18,721,454
568,458
—
(244,146)
24,634,913 $
24,634,913 $
—
—
13,900,000
290,000
—
(479,519)
—
38,345,394 $
38,345,394 $
—
—
25,639,774
290,000
—
(447,322)
63,827,846 $
56 $
—
187
6
—
—
249 $
249 $
—
—
139
3
—
—
—
391 $
391 $
—
—
256
3
—
—
650 $
46,272 $
—
207,750
(6)
988
—
255,004 ($
255,004 ($
—
—
104,847
(3)
3,362
—
—
363,210 ($
363,210 ($
—
—
152,796
(3)
3,490
—
519,493 ($
— $ 13,292 $
—
—
—
—
—
—
—
—
(2,647)
—
2,647) $ 13,292 ($
2,647) $ 13,292 ($
—
—
—
—
—
(2,851)
—
5,498) $
5,498) $
—
—
—
—
—
(2,440)
7,938) $
—
—
—
—
—
—
(13,292)
0 ($
— ($
—
—
—
—
—
—
0 ($
1,708 $ — $ 61,328
—
(2,822)
(2,822)
— 207,937
—
—
—
—
988
—
—
—
—
(2,647)
0 $ 264,784
1,114) $
(701)
1,114) $ — $ 264,784
— (82,727)
(701)
— 104,986
—
—
3,362
—
(2,851)
—
—
—
701) $ 286,853
(82,727)
—
—
—
—
—
13,292
70,549) ($
70,549) ($
(26,537)
—
—
—
—
—
97,086) ($
372
701) $ 286,853
— (26,537)
372
— 153,052
—
—
3,490
—
(2,440)
—
329) $ 414,790
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Scorpio Tankers Inc. and Subsidiaries
Consolidated cash flow statements
For the years ended December 31, 2012, 2011 and 2010
In thousands of U.S. dollars
Operating activities
Net loss ....................................................................................
Loss from sale of vessels .........................................................
Depreciation .............................................................................
Impairment ...............................................................................
Amortization of restricted stock...............................................
Amortization of deferred financing fees ..................................
Amortization of acquired time charter contracts ......................
Write off of vessel purchase options ........................................
Straight-line adjustment for charterhire expense .....................
Unrealized loss on derivative financial instruments ................
Changes in assets and liabilities:
Drydock payments ...................................................................
Decrease/(increase) in inventories ...........................................
Increase in accounts receivable ................................................
Decrease/(increase) in prepaid expenses and
other current assets ...............................................................
Decrease/(increase) in other assets ..........................................
Increase/(decrease) in accounts payable ..................................
Increase in accrued expenses ...................................................
Decrease in the value of derivative financial instruments .......
Interest rate swap termination payment ...................................
Decrease in shareholder receivable ..........................................
Net cash (outflow)/inflow from operating activities............
Investing activities
Acquisition of vessels and payments for vessels under
construction ..........................................................................
Proceeds from disposal of vessels............................................
Acquisition of time charter contracts .......................................
Purchases of other assets ..........................................................
Net cash outflow from investing activities ...........................
Financing activities ................................................................
Bank loan repayment ...............................................................
Bank loan drawdown ...............................................................
Debt issuance costs ..................................................................
Net proceeds from issuance of common stock .........................
Purchase of treasury shares ......................................................
Net cash inflow from financing activities .............................
Increase/(decrease) in cash and cash equivalents................
Cash and cash equivalents at January 1, ..................................
Cash and cash equivalents at December 31, ........................
Notes
($
6
7
For the year ended December 31,
2010
2011
2012
26,537) ($
10,404
14,818
—
3,490
4,093
—
—
41
1,231
7,540
82,727) ($
—
18,460
66,611
3,362
986
—
126
84
—
6,902
(1,702)
526
(16,052)
(2,516)
(1,410)
(13,031)
547
2,443
3,966
804
—
—
—
(9,468)
(1,928)
(1,075)
(1,374)
(954)
1,006
—
—
—
(19,354)
(12,452)
2,822)
—
10,179
—
988
246
2,345
—
—
—
10,936
(974)
(853)
(5,915)
123
(1,428)
2,600
175
165
(1,850)
1,928
(6,029)
4,907
(191,490)
101,335
—
—
(90,155)
(122,573)
—
—
—
(122,573)
(243,122)
—
(2,344)
(129)
(245,595)
(129,076)
124,172
(3,293)
153,052
(2,440)
142,415
50,332
36,833
87,165 $
(109,638)
115,308
(4,134)
104,986
(2,851)
103,671
(31,354)
68,187
36,833 $
(44,625)
150,000
(2,232)
207,936
(2,648)
308,431
67,743
444
68,187
$
Supplemental information:
2,277
Interest paid .............................................................................
As of December 31,2012 and 2011, we accrued $3.5 million and $9.4 million, respectively, for installment payments on our
newbuilding vessels (see Note 6) which represent significant non-cash transactions. These payments were made in January
2013 and 2012, respectively. There were no non-cash transactions during 2010 requiring disclosure.
6,618 $
5,349 $
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
1. General information and significant accounting policies
Company
Scorpio Tankers Inc. and its subsidiaries (together “we”, “our” or the “Company”) are engaged in seaborne
transportation of refined petroleum products and crude oil in the international shipping markets. Scorpio Tankers Inc. was
incorporated in the Republic of the Marshall Islands on July 1, 2009.
On April 6, 2010, we closed on our initial public offering. The stock trades on the New York Stock Exchange under
the symbol STNG.
Our owned fleet at December 31, 2012 consisted of 12 tankers (one LR2 tanker, four LR1 tankers, one Handymax
tanker, five MR tankers, and one post-Panamax tanker), 19 time chartered-in tankers (three LR2, three LR1, eight MR and
five Handymax tankers), and 11 newbuilding MR’s under construction.
Our vessels are commercially managed by Scorpio Commercial Management S.A.M. (“SCM”), which is currently
owned by the Lolli-Ghetti family of which, Emanuele Lauro, our founder, Chairman and Chief Executive Officer is a
member. SCM’s services include securing employment, in pools, in the spot market and on time charters.
Our vessels are technically managed by Scorpio Ship Management S.A.M. (“SSM”), which is also owned by the
Lolli-Ghetti family. SSM facilitates vessel support such as crew, provisions, deck and engine stores, insurance, maintenance
and repairs, and other services as necessary to operate the vessels such as drydocks and vetting/inspection under a technical
management agreement.
Until March 13, 2012, we had an administrative services agreement with Liberty Holding Company (“Liberty”),
which is owned by the Lolli-Ghetti family. On March 13, 2012, the agreement was assigned to Scorpio Services Holding Ltd
(“SSH”), an entity also owned by the Lolli-Ghetti family. The administrative services provided under the agreement
primarily include accounting, legal compliance, financial, information technology services, and the provision of
administrative staff and office space, which are contracted to SCM. We pay our managers fees for these services and
reimburse them for direct or indirect expenses that they incur in providing these services.
Basis of accounting
The consolidated financial statements incorporate the financial statements of Scorpio Tankers Inc. and its
subsidiaries. The consolidated financial statements have been presented in United States dollars (USD or $), which is the
functional currency of Scorpio Tankers Inc. and all its subsidiaries and have been authorized for issue on March 28, 2013.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRSs) as issued by the International Accounting Standards Board and on a historical cost basis, except for the revaluation
of certain financial instruments.
All inter-company transactions, balances, income and expenses were eliminated on consolidation. During the year-
ended December 31, 2012, our revenue recognition policy with regards to voyage charter revenue was amended to the policy
indicated below. This amendment did not have a material impact on each of vessel revenues, operating loss, and net loss as of
and for the years ended December 31, 2012, December 31, 2011 and December 31, 2010.
Going concern
The financial statements have been prepared in accordance with the going concern basis of accounting as described
further in the “Liquidity risk” section of Note 22.
Significant Accounting Policies
Revenue recognition
Vessel revenue is measured at the fair value of the consideration received or receivable and represents amounts
receivable for services provided in the normal course of business, net of discounts, and other sales-related or value
added taxes.
F-8
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Vessel revenue is comprised of time charter revenue, voyage revenue and pool revenue.
(1)
Time charter revenue is recognized as services are performed based on the daily rates specified in the time
charter contract.
(2) Voyage charter agreements are charter hires, where a contract is made in the spot market for the use of a
vessel for a specific voyage for a specified charter rate. Revenue from voyage charter agreements is
recognized as voyage revenue on a pro-rata basis over the duration of the voyage on a discharge to discharge
basis. In the application of this policy, we do not begin recognizing revenue until (i) the amount of revenue
can be measured reliably, (ii) it is probable that the economic benefits associated with the transaction will
flow to the entity, (iii) the transactions stage of completion at the balance sheet date can be measured reliably
and (iv) the costs incurred and the costs to complete the transaction can be measured reliably.
(3)
Pool revenue for each vessel is determined in accordance with the profit sharing terms specified within each
pool agreement. In particular, the pool manager aggregates the revenues and expenses of all of the pool
participants and distributes the net earnings to participants based on:
the pool points (vessel attributes such as cargo carrying capacity, fuel consumption, and construction
characteristics are taken into consideration); and
the number of days the vessel participated in the pool in the period. We recognize pool revenue on a
monthly basis, when the vessel has participated in a pool during the period and the amount of pool
revenue for the month can be estimated reliably. We receive estimated vessel earnings based on the
known number of days the vessel has participated in the pool, the contract terms, and the estimated
monthly pool revenue. On a quarterly basis, we receive a report from the pool which identifies the
number of days the vessel participated in the pool, the total pool points for the period, the total pool
revenue for the period, and the calculated share of pool revenue for the vessel. We review the quarterly
report for consistency with each vessel’s pool agreement and vessel management records. The
estimated pool revenue is reconciled quarterly, coinciding with our external reporting periods, to the
actual pool revenue earned, per the pool report. Consequently, in our financial statements, reported
revenues represent actual pooled revenues. While differences do arise in the performance of these
quarterly reconciliations, such differences are not material to total reported revenues.
Voyage expenses
Voyage expenses, which primarily include bunkers, port charges, canal tolls, cargo handling operations and
brokerage commissions paid by us under voyage charters are expensed ratably over the estimated length of each voyage,
which can be allocated between reporting periods based on the timing of the voyage. 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. Consistent with our revenue recognition for voyage charters, voyage expenses are
calculated on a discharge-to-discharge basis. The procurement of these services is managed on our behalf by our commercial
manager, SCM (see Note 15).
Vessel operating costs
Vessel operating costs, which include crewing, repairs and maintenance, insurance, stores, lube oils, communication
expenses, and technical management fees, are expensed as incurred. The procurement of these services is managed on our
behalf by our technical manager, SSM (see Note 15).
Loss per share
Basic loss per share is calculated by dividing the net loss attributable to equity holders of the common shares by the
weighted average number of common shares outstanding. Diluted earnings per share are calculated by adjusting the net loss
attributable to equity holders of the parent and the weighted average number of common shares used for calculating basic per
share for the effects of all potentially dilutive shares. Such dilutive common shares are excluded when the effect would be to
increase earnings per share or reduce a loss per share. In the years ended December 31, 2012, 2011 and 2010, there were
dilutive items as a result of our restricted stock plan (see Note 14). However, we were in a loss making position for those
years, and therefore there was no impact of these dilutive items on earnings per share.
F-9
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Charterhire expense
Charterhire expense is the amount we pay the owner for time chartered-in vessels. The amount is usually for a fixed
period of time at rates that are generally fixed, but may contain a variable component based on inflation, interest rates, profit
sharing, or current market rates. The vessel’s owner is responsible for crewing and other vessel operating costs. Charterhire
expense is recognized ratably over the charterhire period.
Operating leases
Costs in respect of operating leases are charged to the consolidated statement of profit or loss on a straight line basis
over the lease term.
Foreign currencies
The individual financial statements of Scorpio Tankers Inc. and each of its subsidiaries are presented in the currency
of the primary economic environment in which we operate (its functional currency), which in all cases is US dollars. For the
purpose of the consolidated financial statements, our results and financial position are also expressed in US dollars.
In preparing the financial statements of Scorpio Tankers Inc. and each of its subsidiaries, transactions in currencies
other than the US dollar are recorded at the rate of exchange prevailing on the dates of the transactions. At the end of each
reporting period, monetary assets and liabilities denominated in other currencies are retranslated into the functional currency
at rates ruling at that date. All resultant exchange differences have been recognized in the consolidated profit or loss
statement. The amount charged to the consolidated profit or loss statement during 2012, 2011 and 2010 was not material.
Segment reporting
During the years ended December 31, 2012 and 2011, we owned or chartered-in vessels spanning four different
classes, Handymax, MR, Panamax/LR1, and Aframax/LR2, all of which earn revenues in the seaborne transportation of
crude oil and refined petroleum products in the international shipping markets. Each vessel within its respective class
qualifies as an operating segment under IFRS. However, each vessel also exhibits similar long-term financial performance
and similar economic characteristics to the other vessels within the respective vessel class, thereby meeting the aggregation
criteria in IFRS. We have therefore chosen to present our segment information by vessel class using the aggregated
information from the individual vessels.
Segment results are evaluated based on reported profit or loss from each segment. The accounting policies applied to
the reportable segments are the same as those used in the preparation of our consolidated financial statements.
It is not practical to report revenue or non-current assets on a geographical basis due to the international nature of
the shipping market.
Vessels under construction
As of December 31, 2012 and 2011, we had 11 and six vessels under construction, respectively. Vessels under
construction are measured at cost and include costs incurred that are directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by management. These costs include
installment payments made to the shipyards, directly attributable financing costs, professional fees and other costs deemed
directly attributable to the construction of the asset.
Vessels and drydock
Our fleet is measured at cost, which includes directly attributable financing costs and the cost of work undertaken to
enhance the capabilities of the vessels, less accumulated depreciation and impairment losses.
Depreciation is calculated on a straight-line basis to the estimated residual value over the anticipated useful life of
the vessel from date of delivery. Vessels under construction are not depreciated until such time as they are ready for use. The
residual value is estimated as the lightweight tonnage of each vessel multiplied by scrap value per ton. The scrap value per
ton is estimated taking into consideration the historical four year average scrap market rates at the balance sheet date with
changes accounted for in the period of change and in future periods.
F-10
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
The vessels are required to undergo planned drydocks for replacement of certain components, major repairs and
maintenance of other components, which cannot be carried out while the vessels are operating, approximately every 30
months or 60 months depending on the nature of work and external requirements. These drydock costs are capitalized and
depreciated on a straight-line basis over the estimated period until the next drydock. We only include in deferred drydocking
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.
For an acquired or newly built vessel, a notional drydock is allocated from the vessel’s cost. The notional
drydock cost is estimated by us, based on the expected costs related to the next drydock, which is based on experience and
past history of similar vessels, and carried separately from the cost of the vessel. Subsequent drydocks are recorded at
actual cost incurred. The drydock asset is amortized on a straight-line basis to the next estimated drydock. The estimated
amortization period for a drydock is based on the estimated period between drydocks. We estimate the period between
drydocks to be 30 months to 60 months. When the drydock expenditure is incurred prior to the expiry of the period, the
remaining balance is expensed.
Impairment of vessels and drydock and vessels under construction
At each balance sheet date, we review the carrying amount of our vessels and drydock and vessels under
construction to determine whether there is any indication that those assets have suffered an impairment loss. If any such
indication exists, the recoverable amount of the vessels and drydock and vessels under construction is estimated in order to
determine the extent of the impairment loss (if any). We treat each vessel and the related drydock as a cash generating unit.
Recoverable amount is the higher of the fair value less cost to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have
not been adjusted.
If the recoverable amount of the cash generating unit is estimated to be less than its carrying amount, the
carrying amount of the cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized as
an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the cash generating unit is increased to the
revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount
that would have been determined had no impairment loss been recognized for the cash generating unit in the prior years. A
reversal of impairment is recognized as income immediately.
Inventories
Inventories consist of lubricating oils and other items including stock provisions, and are stated at the lower of cost
and net realizable value. Cost is determined using the first in first out method. Stores and spares are charged to vessel
operating costs when purchased.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are
assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of
those assets, until such time as the assets are substantially ready for their intended use or sale.
To the extent that variable rate borrowings are used to finance a qualifying asset and are hedged in an effective cash
flow hedge of interest rate risk, the effective portion of the derivative is recognised in other comprehensive income and
released to profit or loss when the qualifying asset impacts profit or loss. To the extent that fixed rate borrowings are used to
finance a qualifying asset and are hedged in an effective fair value hedge of interest rate risk, the capitalised borrowing costs
reflect the hedged interest rate.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on
qualifying assets is deducted from the borrowing costs eligible for capitalisation.
F-11
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
All other borrowing costs are recognised in the consolidated profit or loss statement in the period in which
they are incurred.
Financial instruments
Financial assets and financial liabilities are recognized in our balance sheet when we become a party to the
contractual provisions of the instrument.
Financial assets
All financial assets are recognized and derecognized on a trade date where the purchase or sale of a financial asset is
under a contract whose terms require delivery within the timeframe established by the market concerned, and are initially
measured at fair value, plus transaction costs, except for those financial assets classified as at fair value through profit or loss,
which are initially measured at fair value.
Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or
loss’ (FVTPL), and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and
is determined at the time of initial recognition.
Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as
at FVTPL.
Financial assets at FVTPL
Financial assets are classified as at FVTPL where the financial asset is held for trading.
A financial asset is classified as held for trading if:
it has been acquired principally for the purpose of selling in the near future; or
it is a part of an identified portfolio of financial instruments that we manage together and has a recent actual
pattern of short-term profit-taking; or
it is a derivative that is not designated and effective as a hedging instrument.
Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognized in profit or loss. The net
gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset. Fair value is
determined in the manner described in Note 22.
Loans and receivables
Amounts due from the pool and other receivables that have fixed or determinable payments and are not quoted in an
active market are classified as accounts receivable. Accounts receivable are measured at amortized cost using the effective
interest method, less any impairment. Interest income is recognized by applying the effective interest rate, except for short-
term receivables when the recognition of interest would be immaterial.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date.
Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the
initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.
Financial assets objective evidence of impairment could include:
significant financial difficulty of the issuer or counterparty; or
default or delinquency in interest or principal payments; or
it becomes probable that the borrower will enter bankruptcy or financial re-organization.
F-12
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly-liquid
investments with original maturities of three months or less, and that are readily convertible to a known amount of cash and
are subject to an insignificant risk of changes in value. The carrying value of cash and cash equivalents approximates fair
value due to the short-term nature of these instruments.
Financial liabilities
Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.
Financial liabilities at FVTPL
Financial liabilities are classified as at FVTPL where the financial liability is held for trading, using the criteria set
out above for financial assets.
Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognized in profit or loss. The
net gain or loss recognized in profit or loss incorporates any interest paid on the financial liability. Fair value is determined in
the manner described in Note 22.
Other financial liabilities
Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other
financial liabilities are subsequently measured at amortized cost using the effective interest method.
Effective interest method
The effective interest method is a method of calculating the amortized cost of a financial asset and a financial
liability. It allocates interest income and interest expense over the relevant period. The effective interest rate is the rate that
discounts estimated future cash flows (including all fees on points paid or received that form an integral part of the effective
interest rate, transaction costs and other premiums or discounts) over the expected life of the financial asset and financial
liability, or, where appropriate, a shorter period.
Derivative financial instruments
Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently
remeasured to their fair value at each balance sheet date. A derivative with a positive fair value is recognized as a financial
asset whereas a derivative with a negative fair value is recognized as a financial liability. The resulting gain or loss is
recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which
event the timing of the recognition in profit or loss depends on the nature of the hedging relationship. We designate certain
derivatives as hedges of highly probable forecast transactions (cash flow hedges) as described further below.
A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument
is more than 12 months, and it is not expected to be realized or settled within 12 months.
Our derivative financial instruments for the years ended December 31, 2012, 2011 and 2010 consisted of interest
rate swaps and profit or loss sharing arrangements on time-chartered in vessels with third parties. See Notes 12 and 22 to the
consolidated financial statements for further description.
Hedge accounting for cash flow hedges
Our policy is to designate certain hedging instruments, which can include derivatives, embedded derivatives and
non-derivatives in respect of foreign currency risk, as either fair value hedges, cash flow hedges, or hedges of net investments
in foreign operations. At the inception of the hedge relationship, we document the relationship between the hedging
instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge
transactions. Furthermore, at the inception of the hedge and on an ongoing basis, we document whether the hedging
instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item.
F-13
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
For the years ended December 31, 2012, 2011, and 2010 we were party to derivative financial instruments to
manage our exposure to interest rate fluctuations. In August 2011, we entered into six interest rate swap agreements to
manage interest costs and the risk associated with changing interest rates on our 2011 Credit Facility and 2010 Revolving
Credit Facility. The swaps relating to the 2011 Credit Facility were designated and accounted for as cash flow hedges at
December 31, 2012. The swaps relating to the 2010 Credit Facility were de-designated at December 31, 2012 as further
described below.
Derivative financial instruments are initially recognized in the balance sheet at fair value at the date the
derivative contract is entered into and are subsequently measured at their fair value as other assets or other liabilities,
respectively. Changes in fair value of derivative financial instruments, which are designated as cash flow hedges and
deemed to be effective, are recognized directly in other comprehensive income and classified as ‘hedging reserves’.
Changes in fair value of a portion of a hedge deemed to be ineffective are recognized in net profit or loss. Hedge
effectiveness is measured quarterly.
Amounts previously recognized in other comprehensive income and accumulated in the hedging reserve are
reclassified to profit or loss in the periods when the hedged item is recognized in profit or loss, in the same line of the
statement of profit or loss as the recognized hedged item. However, when the forecast transaction that is hedged results in the
recognition of a non-financial asset or a non-financial liability, the gains and losses previously accumulated in equity are
transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability.
Hedge accounting is discontinued when we revoke the hedging relationship, the hedging instrument expires or is
sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any gain or loss recognized in other
comprehensive income at that time is accumulated in the hedge reserve and is recognized when the forecast transaction is
ultimately recognized in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss
accumulated in the hedge reserve is recognized immediately in profit or loss.
In conjunction with the sales of STI Diamond and STI Coral in August and September 2012, respectively, we
reduced the notional amount on the interest rate swaps relating to the 2011 Credit Facility to $15.0 million from $24.0 million
in aggregate. As a result of the reduction, we recognized a loss of $0.2 million which was recorded as a component of the loss
from sale of STI Coral, which was reclassified out of Other Comprehensive Loss.
In December 2012, we raised net proceeds of $127.2 million from a registered direct placement of common shares
and as part of the use of proceeds of this offering, we voluntarily repaid $50.0 million into our 2010 Revolving Credit
Facility, as described in Note 11. After the payment, we had $17.2 million of debt outstanding under the 2010 Credit Facility,
which is less than the total notional amount of the three interest rate swaps related to the facility of $51.0 million. As such,
the swaps relating to the 2010 Revolving Credit Facility no longer met the criteria for hedge accounting, and we therefore de-
designated the hedge relationship prospectively and reclassified all amounts accumulated in other comprehensive loss for the
2010 Revolving Credit Facility to the statement of profit or loss as of December 31, 2012.
Equity instruments
An equity instrument is any contract that evidences a residual interest in our assets after deducting all of its
liabilities. Equity instruments issued by us are recorded at the proceeds received, net of direct issue costs.
We had 63,827,846 registered shares authorized and issued with a par value of $0.01 per share at December 31,
2012. These shares provide the holders with rights to dividends and voting rights.
Provisions
Provisions are recognized when we have a present obligation as a result of a past event, and it is probable that we
will be required to settle that obligation. Provisions are measured at our best estimate of the expenditure required to settle the
obligation at the balance sheet date, and are discounted to present value where the effect is material.
Dividends
A provision for dividends payable is recognized when the dividend has been declared in accordance with the terms
of the shareholder agreement.
F-14
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Dividend per share presented in these consolidated financial statements is calculated by dividing the aggregate
dividends declared by all of our subsidiaries by the number of our shares assuming these shares have been outstanding
throughout the periods presented.
Restricted stock
The restricted stock awards granted to our employees and directors in June 2010, January 2011 and January 2012
(Note 14) contain only service conditions and are classified as equity settled. Accordingly, the fair value of our restricted
stock awards was calculated by multiplying the average of the high and low share price on the grant date and the number of
restricted stock shares granted that are expected to vest. We believe that the share price at the grant date serves as a proxy for
the fair value of services to be provided by the employees and directors under the plan.
Compensation expense related to the awards is recognized ratably over the vesting period, based on our estimate of
the number of awards that will eventually vest. The vesting period is the period during which an employee or director is
required to provide service in exchange for an award and is updated at each balance sheet date to reflect any revisions in
estimates of the number of awards expected to vest as a result of the effect of non-market-based vesting conditions. The
impact of the revision of the original estimate, if any, is recognized in the profit or loss statement such that the cumulative
expense reflects the revised estimate, with a corresponding adjustment to equity reserves.
Critical accounting judgements and key sources of estimation uncertainty
In the application of the accounting policies, we are required to make judgements, estimates and assumptions about
the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated
assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are
recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future periods.
The significant judgements and estimates are as follows:
Revenue recognition
We currently generate all revenue from time charters, spot voyages, or pools. Revenue recognition for time charters
and pools is generally not as complex or as subjective as voyage charters (spot voyages). Time charters are for a specific
period of time at a specific rate per day. For long-term time charters, revenue is recognized on a straight-line basis over the
term of the charter. Pool revenues are determined by the pool managers from the total revenues and expenses of the pool and
allocated to pool participants using a mechanism set out in the pool agreement.
We generated revenue from spot voyages during the years ended December 31, 2012, 2011 and 2010. Within the
shipping industry, there are two methods used to account for spot voyage revenue: (1) ratably over the estimated length of
each voyage or (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 and the method used by us. Under each method, voyages
may be calculated on either a load-to-load or discharge-to-discharge basis. In applying our revenue recognition method, we
believe that the discharge-to-discharge basis of calculating voyages more accurately estimates voyage results than the load-
to-load basis. In the application of this policy, we do not begin recognizing revenue until (i) the amount of revenue can be
measured reliably, (ii) it is probable that the economic benefits associated with the transaction will flow to the entity, (iii) the
transactions stage of completion at the balance sheet date can be measured reliably and (iv) the costs incurred and the costs to
complete the transaction can be measured reliably.
Vessel impairment
We evaluate the carrying amounts of our vessels and vessels under construction to determine whether there is any
indication that those vessels have suffered an impairment loss. If any such indication exists, the recoverable amount of
vessels is estimated in order to determine the extent of the impairment loss (if any).
F-15
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have
not been adjusted. The projection of cash flows related to vessels is complex and requires us to make various estimates
including future freight rates, earnings from the vessels and discount rates. All of these items have been historically volatile.
As part of our process of assessing the fair value less cost to sell of the vessel, we obtain vessel valuations from leading,
independent and internationally recognized ship brokers on an annual basis or when there is an indication that an asset or
assets may be impaired. If an indication of impairment is identified, the need for recognising an impairment loss is assessed
by comparing the carrying amount of the vessels to the higher of the fair value less cost to sell and the value in use. Likewise,
if there is an indication that an impairment loss recognized in prior periods no longer exists or may have decreased, the need
for recognizing an impairment reversal is assessed by comparing the carrying amount of the vessels to the latest estimate of
recoverable amount.
At December 31, 2012, the carrying amounts of all our vessels were greater than their fair values less costs to sell
(determined by taking into consideration two independent broker valuations) which served as indicators of impairment. In
line with our policy, for each vessel and vessel under construction we performed a value in use calculation where we
estimated the vessel’s future cash flows based on a combination of the latest, published, forecast time charter rates for the
next three years, a steady growth rate in freight rates in each period thereafter which is based on management’s long-term
view of the market, and our best estimate of vessel operating expenses and drydock costs. These cash flows were then
discounted to their present value, using a pre-tax discount rate based on our current borrowing rates adjusted for certain credit
risks. The value in use calculations were greater than the carry amounts of the vessels in all instances, which resulted in no
impairment being recognized.
Vessel lives and residual value
The carrying value of each of our vessels represents its original cost at the time it was delivered or purchased less
depreciation and impairment. We depreciate our vessels to their residual value on a straight-line basis over their estimated
useful lives. Effective April 1, 2010, we revised the estimated useful life of our vessels from 20 years to 25 years from the
date of initial delivery from the shipyard. The estimated useful life of 25 years is management’s best estimate and is also
consistent with industry practice for similar vessels. The residual value is estimated as the lightweight tonnage of each vessel
multiplied by a forecast scrap value per ton. The scrap value per ton is estimated taking into consideration the historical four
year scrap market rate average at the balance sheet date.
An increase in the estimated useful life of a vessel or in its scrap value would have the effect of decreasing the
annual depreciation charge and extending it into later periods. A decrease in the useful life of a vessel or scrap value would
have the effect of increasing the annual depreciation charge.
When regulations place significant limitations over the ability of a vessel to trade on a worldwide basis, the vessel’s
useful life is adjusted to end at the date such regulations become effective. The estimated salvage value of the vessels may
not represent the fair market value at any one time since market prices of scrap values tend to fluctuate.
Deferred drydock cost
We recognize drydock costs as a separate component of the each vessel’s carrying amount and amortize the drydock
cost on a straight-line basis over the estimated period until the next drydock. We use judgment when estimating the period
between drydocks performed, which can result in adjustments to the estimated amortization of the drydock expense. If the
vessel is disposed of before the next drydock, the remaining balance of the deferred drydock is written-off and forms part of
the gain or loss recognized upon disposal of vessels in the period when contracted. We expect that our vessels will be
required to be drydocked approximately every 30 to 60 months for major repairs and maintenance that cannot be performed
while the vessels are operating. Costs capitalized as part of the drydock include actual costs incurred at the drydock yard and
parts and supplies used in making such repairs.
F-16
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Standards and Interpretations adopted during the period
IAS 24 (amended)
Related party disclosures
Improvements to IFRS (May 2010)
This standard did not have an impact on these consolidated financial statements.
Standards and Interpretations in issue not yet adopted
At the date of authorization of these consolidated financial statements, the following Standards and Interpretations which
have not been applied in these consolidated financial statements were in issue but not yet effective:
IFRS 7
Amendments to IFRS 7 (Oct 2010)
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IFRIC 19
IAS 27 (revised May 2011)
IAS 32
Amendment to IAS 32 (Oct. 2009)
Financial Instruments: Disclosures
Disclosures – Transfers of Financial Assets
Financial Instruments
Consolidated Financial Statements
Joint Arrangements
Disclosure of Interests in Other Entities
Fair Value Measurement
Extinguishing Financial Liabilities with Equity Instruments
Separate Financial Statements
Financial Instruments: Presentation
Classification of Rights Issues
We do not expect that the adoption of these Standards and Interpretations in future periods will have a material impact on our
financial statements.
2. Cash and cash equivalents
In thousands of U.S. dollars
Cash at banks .................................................................................... $
Deposits (1) ........................................................................................
Cash on vessels .................................................................................
$
(1) Represents bank deposits with original maturities of three months or less
3. Accounts receivable
At December 31,
2012
2011
87,023
—
142
87,165
$
$
26,678
10,000
155
36,833
In thousands of US dollars
Scorpio MR Pool Limited ................................................................. $
Scorpio Panamax Tanker Pool Limited ............................................
Scorpio Handymax Tanker Pool Limited .........................................
Scorpio LR2 Tanker Pool Limited ....................................................
Freight receivables ............................................................................
Insurance receivables ........................................................................
Scorpio Aframax Tanker Pool Limited .............................................
Other receivables ..............................................................................
$
At December 31,
2012
2011
12,010
11,289
6,369
3,244
2,192
191
—
1,143
36,438
$
$
—
6,405
6,062
1,721
3,197
282
1,127
1,592
20,386
Scorpio MR Pool Limited, Scorpio Panamax Tanker Pool Limited, Scorpio Handymax Tanker Pool Limited,
Scorpio LR2 Tanker Pool Limited, and Scorpio Aframax Tanker Pool Limited are related parties, as described in Note 15.
The Scorpio MR Pool was established in August 2012 and accordingly, no vessels were in that pool during the year ended
December 31, 2011.
F-17
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Freight receivables primarily represent amounts collectible from customers for our vessels operating in the
spot market.
Insurance receivables primarily represent the amounts collectible on our insurance policies in relation to vessel repairs.
We consider that the carrying amount of accounts receivable approximates their fair value due to the short maturity
thereof. Accounts receivable are non-interest bearing. At December 31, 2012 and December 31, 2011, no material receivable
balances were either past due or impaired.
4. Prepaid expenses and other current assets
In thousands of US dollars
Vessel related prepaid expenses............................................................................... $
Prepaid insurance .....................................................................................................
Derivative financial instruments (profit and loss agreements) .................................
$
5. Inventories
In thousands of US dollars
Lubricating oils ........................................................................................................ $
Stock bunkers ..........................................................................................................
Other ........................................................................................................................
$
At December 31,
2012
2011
683
247
26
956
$
$
1,231
304
—
1,535
At December 31,
2012
2011
1,796
329
44
2,169
$
$
1,629
1,028
39
2,696
The balance in stock bunkers as of December 31, 2012 relates to Pacific Duchess, which was our only vessel
operating in the spot market at year end. The balance in stock bunkers as of December 31, 2011 relates to STI Coral and STI
Diamond which were operating in the spot market at year end.
During the years ended December 31, 2012 and 2011, we expensed inventory items of $16.7 million and $6.9
million, respectively.
F-18
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
6. Vessels
Vessels and drydock
In thousands of US dollars
Cost
Vessels
Drydock
Total
As of January 1, 2012 ...................................................... $
Additions(1) ......................................................................
Disposals (2) ......................................................................
Write-offs (3) .....................................................................
As of December 31, 2012 ................................................
Accumulated depreciation and impairment
As of January 1, 2012 ......................................................
Charge for the period .......................................................
Disposals (2) ......................................................................
Write-offs (3) .....................................................................
As of December 31, 2012 ................................................
Net book value
$
450,658
192,413
(142,375)
—
500,696
(132,019)
(12,595)
32,039
—
(112,575)
7,137
6,619
(2,023)
(809)
10,924
(3,319)
(2,038)
1,098
625
(3,634)
As of December 31, 2012 ................................................ $
388,121
$
7,291
Cost
As of January 1, 2011 ...................................................... $
Additions (4) ......................................................................
Write-offs (5) .....................................................................
As of December 31, 2011 ................................................
$
379,723
70,935
—
450,658
Accumulated depreciation and impairment
As of January 1, 2011 ......................................................
Charge for the period .......................................................
Impairment (6) ...................................................................
Write-offs (5) .....................................................................
As of December 31, 2011 ................................................
Net book value
(49,502)
(15,907)
(66,611)
—
(132,019)
4,589
3,168
(620)
7,137
(1,385)
(2,292)
—
358
(3,319)
$
$
$
457,795
199,032
(144,398)
(809)
511,620
(135,338)
(14,634)
33,137
625
(116,209)
395,412
384,312
74,103
(620)
457,795
(50,887)
(18,199)
(66,611)
358
(135,337)
As of December 31, 2011 ................................................ $
318,639
$
3,818
$
322,458
(1) Additions in 2012 relate to (i) the delivery of the first five vessels under our Newbuilding program and corresponding
calculation of notional drydock on these vessels and (ii) $2.9 million of drydock costs for STI Spirit and STI Heritage.
(2) Represents the write off of the net book value of vessels sold during 2012 as further described below.
(3) Represents the write off of the net book value of drydock costs for STI Spirit of $0.2 million, which was drydocked in
November 2012.
(4) Additions in 2011 relate to the purchases of STI Coral and STI Diamond in May 2011 and corresponding calculation
of notional drydock on these vessels.
(5) Represents the write off of the net book value of drydock costs for STI Harmony of $0.2 million, which was drydocked
in August 2011 and STI Highlander of $37,869 which was drydocked in October 2011.
(6) See Note 7 for impairment discussion.
F-19
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Loss from sale of vessels
In March, April and May 2012, we sold three of our Handymax vessels, STI Conqueror for $21.0 million, STI
Gladiator for $16.2 million, and STI Matador for $16.2 million; as part of these sales, we recorded a $4.5 million loss from
disposal. Additionally, the availability of our 2010 Revolving Credit Facility decreased by $31.0 million as a consequence of
these disposals.
In August and September 2012, we sold STI Diamond and STI Coral for $25.25 million each. As part of these sales,
we recorded a $5.9 million total loss from disposal. See Note 11 for the impact on our 2011 Credit Facility resulting from
these sales.
Total proceeds from the sale of vessels was $103.9 million and was reduced by selling costs of $2.5 million.
Newbuilding vessel deliveries
During the third quarter of 2012, we took delivery of the first five vessels under our Newbuilding program, STI
Amber in July, STI Topaz in August and STI Ruby, STI Garnet and STI Onyx in September 2012. As a result of these
deliveries, we transferred $195.3 million from Vessels under construction to Vessels and drydock (the remaining 2012
additions of $0.8 million of costs related to the newbuilding vessels recorded directly into Vessels and drydock and $2.9
million related to drydock expenditures for STI Heritage and STI Spirit.)
Vessels under construction
We had eleven newbuilding MR’s (seven with Hyundai Mipo Dockyard Co. Ltd of South Korea (“HMD”) and four
with SPP Shipbuilding Co. Ltd. of South Korea (“SPP”) under construction as of December 31, 2012 for an aggregate
purchase price of $376.3 million, of which $45.3 million was paid as of that date. Subsequent to December 31, 2012, we
signed agreements for an additional 24 newbuilding vessels at these yards as further described in Note 23
A roll-forward of activity within Vessels under construction is as follows:
In thousands of US dollars
Balance as of January 1, 2011 ........................................................................................................ $
Installment payments and other capitalized expenses .......................................................................
Capitalized interest ...........................................................................................................................
Balance as of December 31, 2011 ................................................................................................... $
Installment payments and other capitalized expenses .......................................................................
Capitalized interest ...........................................................................................................................
Transferred to Vessels and drydock ..................................................................................................
Balance as of December 31, 2012 ................................................................................................... $
The following table is a timeline of future expected payments and dates as of December 31, 2012*:
—
59,760
573
60,333
182,016
3,221
(195,319)
50,251
Q1 2013 ................................................................ $
Q2 2013 ................................................................
Q3 2013 ................................................................
Q4 2013 ................................................................
Q1 2014 ................................................................
Q2 2014 ................................................................
Q3 2014 ................................................................
Total ...................................................................... $
71.0 million**
31.6 million
22.7 million
22.5 million
58.4 million
104.5 million
20.3 million
331.0 million
* These are estimates only and are subject to change as construction progresses.
** As of the date of this report, all Q1 2013 payments have been made, which includes the delivery installments of STI
Sapphire and STI Emerald in January 2013 and March 2013, respectively.
F-20
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Capitalized interest
In accordance with IAS 23 “Borrowing Costs”, applicable interest costs are capitalized during the period that vessels
are under construction. For the years ended December 31, 2012 and 2011, we capitalized interest expense for the vessels
under construction of $3.2 million and $0.6 million, respectively. The interest capitalized was calculated by applying a rate of
4.5% to expenditure on such assets.
Collateral agreements
Noemi, Senatore, Venice, STI Harmony, STI Heritage, and STI Highlander with an aggregated net book value of
$164.4 million as of December 31, 2012 were provided as collateral under a loan agreement dated June 2, 2010 and amended
on July 13, 2011 (the "2010 Revolving Credit Facility", See Note 11).
In August and September 2012, we sold STI Diamond and STI Coral for $25.25 million each, which were provided
as collateral under a loan agreement dated May 3, 2011 and amended on July 20, 2012 (the “2011 Credit Facility, See Note
11”). A portion of the proceeds from the sales was used to repay $16.1 million of debt outstanding under the 2011 Credit
Facility relating to STI Coral. The fifth newbuilding vessel, STI Onyx with a net book value of $38.8 million as of December
31, 2012, was substituted as collateral under the 2011 Credit Facility on the outstanding borrowing relating to STI Diamond.
STI Spirit, with a net book value of $37.4 million as of December 31, 2012, was provided as collateral under a loan
agreement dated March 9, 2011 (the “STI Spirit Credit Facility,” See Note 11).
STI Amber, STI Topaz, STI Ruby and STI Garnet, with an aggregated net book value of $154.8 million as of
December 31, 2012 were provided as collateral under a loan agreement dated December 21, 2011 (the “Newbuilding Credit
Facility,” See Note 11).
The vessels which collateralize the 2011 Credit Facility and 2010 Revolving Credit Facility also serve as collateral
for the designated interest rate swap agreements (as described in Note 12), subordinated to the outstanding borrowings under
each credit facility.
7. Carrying Values of Vessels
At the end of each reporting period, we evaluate the carrying amounts of vessels and related drydock costs and
vessels under construction to determine if there is any indication that those vessels and related drydock costs and vessels
under construction have suffered an impairment loss. If such indication exists, the recoverable amount of the vessels and
related drydock costs is estimated in order to determine the extent of the impairment loss (if any). As part of this evaluation,
we consider certain indicators of potential impairment, such as market conditions including forecast time charter rates and
values for second hand product tankers, discounted projected vessel operating cash flows and our overall business plans.
At December 31, 2012, the carrying amounts of all our vessels were greater than their fair values less costs to sell
(determined by taking into consideration two independent broker valuations) which served as indicators of impairment. In
line with our policy, for each vessel and vessel under construction we performed a value in use calculation where we
estimated the vessel’s future cash flows based on a combination of the latest forecast, published, time charter rates for the
next three years, a steady growth rate in freight rates in each period thereafter which is based on management’s long-term
view of the market, and our best estimate of vessel operating expenses and drydock costs. These cash flows were then
discounted to their present value, using a pre-tax discount rate of 7.91% based on our current borrowing rates adjusted for
certain credit risks. The value in use calculations were greater than the carrying amounts of the vessels and vessels under
construction in all instances, which resulted in no impairment being recognized. The calculation of value in use is sensitive to
changes in the key assumptions made above. At December 31, 2011, we determined fair value less estimated costs to sell for
our vessels, taking into consideration three independent broker valuations for each vessel and adjusting for estimated disposal
costs. Our estimate of fair value less costs to sell was then compared to each vessel’s respective carrying amount. The fair
value less estimated costs to sell were lower than the carrying amount for all vessels indicating that an impairment might
exist. We then performed a value in use calculation and the value in use calculations for all vessels were less than the fair
value less estimated costs to sell and accordingly, the recoverable amount of all vessels was determined to be its fair value
less costs to sell. As a result, we recorded an impairment loss of $66.6 million to adjust the carrying amounts of our vessels to
their fair value less estimated selling costs. The value in use calculations were greater than the carrying amounts for our
vessels under construction in all instances, which resulted in no impairment being recognized.
F-21
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
At December 31, 2010, the carrying amounts of our vessels were greater than the independent broker valuations
(after adjusting for estimated selling costs) for six of our ten owned vessels, which served as indicators of impairment. In line
with our policy, for each of the aforementioned six vessels we performed a value in use calculation using similar principles to
those outlined above. The value in use calculations were greater than the carrying amounts of the vessels in all instances,
which resulted in no impairment being recognized.
8. Other non-current assets
In thousands of US dollars
Capitalized loan fees (1) ................................................................................................ $
Scorpio Handymax Tanker Pool Ltd. pool working capital contributions (2) ...............
$
At December 31,
2012
2011
530 $
359
889 $
1,187
2,802
3,989
(1)
Primarily represents upfront loan fees on our Newbuilding credit facilities being used to finance our newbuilding
vessels. These are reclassified to Bank Loans when the tranche of the loan to which the newbuilding vessel relates is
drawn.
(2) Upon entrance into the Scorpio Handymax Tanker Pool (“SHTP”), all vessels are required to make working capital
contributions of both cash and bunkers. The contribution amount is repaid, without interest, upon a vessel’s exit from
the SHTP no later than six months after the exit date. Bunkers on board a vessel exiting the SHTP are credited against
such repayment at the actual invoice price of the bunkers. For all owned vessels we assume that these contributions
will not be repaid within 12 months and for time chartered-in vessels we classify the amounts according to the
expiration of the contract. The decrease from December 31, 2011 is attributable to (i) the sale of three Handymax
vessels during 2012 and (ii) the reclassification of amounts relating to time chartered-in vessels whose terms expire
within one year of the balance sheet date to current assets (other receivables within accounts receivable).
9. Accounts payable
In thousands of US dollars
Suppliers .................................................................................................................... $
Progress payments due for vessels under construction(1) ...........................................
Scorpio Commercial Management ............................................................................
Scorpio Ship Management .........................................................................................
Scorpio Handymax Tanker Pool Limited ..................................................................
$
At December 31,
2012
2011
7,612 $
3,500
146
70
59
11,387 $
2,323
9,351
—
8
50
11,732
(1)
The progress payment of $3.5 million as of December 31, 2012 related to Hull 2369 and was made in January 2013.
The majority of accounts payable are settled with a cash payment within 90 days. No interest is charged on accounts
payable. We consider that the carrying amount of accounts payable approximates fair value.
10. Accrued expenses
In thousands of US dollars
Other accruals ............................................................................................................ $
Upfront fees due on loan facilities (1) .........................................................................
$
At December 31,
2012
2011
3,057 $
—
3,057 $
2,189
1,187
3,376
(1)
Primarily represents upfront fees due for our Newbuilding Credit Facility at December 31, 2011. This facility was
executed on December 21, 2011 and these fees were paid in February 2012.
F-22
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
11. Bank loans
The following is a breakdown of the current and non-current portion of our bank loans outstanding at December 31,
2012 and 2011:
In thousands of US dollars
Current portion (1)....................................................................................................... $
Non-current portion (1) ...............................................................................................
$
2012
7,475
134,984
142,459
$
$
2011
2,889
142,679
145,568
(1)
The current portion and non-current portion at December 31, 2012 were net of unamortized deferred financing fees of
$0.1 million and $3.3 million, respectively. The current portion and non-current portion at December 31, 2011 were
net of unamortized deferred financing fees of $1.4 million and $3.9 million, respectively.
As of December 31,
2010 Revolving Credit Facility
On June 2, 2010, we executed a credit facility with Nordea Bank Finland plc, acting through its New York branch,
DNB Bank ASA, acting through its New York branch, and ABN AMRO Bank N.V, for a senior secured term loan facility of
up to $150 million. On July 12, 2011, we amended and restated the credit facility to convert it from a term loan to a reducing
revolving credit facility. This gave us the ability to pay down and re-borrow from the total available commitments under the
loan. In March, April and May 2012, we sold three of our Handymax vessels, STI Conqueror for $21.0 million, STI
Gladiator for $16.2 million, and STI Matador for $16.2 million. The availability of the 2010 Revolving Credit Facility
decreased by $31.0 million as a consequence of these disposals. The total available commitments, after taking into
consideration the impact of these sales, reduces by $3.1 million each quarter, with a lump sum reduction of $39.9 million at
the maturity date of June 2, 2015. Our subsidiaries that own vessels that are collateralized by this loan act as guarantors
under the amended and restated credit facility. All terms mentioned are defined in the agreement.
Drawdowns under the credit facility bear interest as follows: (1) through December 29, 2011, at LIBOR plus an
applicable margin of 3.00% per annum when our debt to capitalization (total debt plus equity) ratio is equal to or less than
50% and 3.50% per annum when our debt to capitalization ratio is greater than 50%; (2) from December 30, 2011 through
September 30, 2013, at LIBOR plus an applicable margin of 3.50% per annum; and (3) from October 1, 2013 and at all times
thereafter, at LIBOR plus an applicable margin of 3.25% per annum when our debt to capitalization (total debt plus equity)
ratio is equal to or less than 50% and 3.50% per annum when our debt to capitalization ratio is greater than 50%. A
commitment fee equal to 40% of the applicable margin is payable on the unused daily portion of the credit facility. The credit
facility matures on June 2, 2015 and can only be used to refinance amounts outstanding from the original loan agreement and
for general corporate purposes.
The credit facility requires us to comply with a number of covenants, including financial covenants; delivery of
quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws
(including environmental); compliance with ERISA (Employee Retirement Income Security Act); maintenance of flag and
class of the initial vessels; restrictions on consolidations, mergers or sales of assets; approval on changes in the Manager of
our initial vessels; limitations on liens; limitations on additional indebtedness; prohibitions on paying dividends if a covenant
breach or an event of default has occurred or would occur as a result of payment of a dividend; prohibitions on transactions
with affiliates; and other customary covenants.
The financial covenants include:
The ratio of net debt to capitalization shall be no greater than 0.60 to 1.00.
Consolidated tangible net worth (i.e. total shareholders’ equity) shall be no less than US$150,000,000 plus 25% of
cumulative positive net income (on a consolidated basis) for each fiscal quarter from July 1, 2010 going forward and
50% of the value of any new equity issues from July 1, 2010 going forward.
The ratio of EBITDA to interest expense shall be no less than 1.25 to 1.00 commencing with the fourth fiscal quarter
of 2011 until the fourth quarter of 2012, at which point it will increase to 1.50 to 1.00 for the first quarter of 2013,
1.75 to 1.00 for the second quarter of 2013, 2.00 to 1.00 at all times thereafter. Such ratio shall be calculated
quarterly on a trailing four quarter basis. In addition, we are restricted from paying dividends until our EBITDA to
F-23
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as defined in the loan agreement, excludes non-cash
charges such as impairment.
Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) needs to
be not less than $25.0 million, of which unrestricted cash and cash equivalents shall be not less than $15.0 million,
until we own, directly or indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each
additional vessel.
The aggregate fair market value of the collateral vessels (see note 6) shall at all times be no less than 150% of the
then aggregate outstanding principal amount of loans under the credit facility.
We drew down $16.0 million and $16.2 million in February and August 2012, respectively from the 2010 Revolving
Credit Facility. We made payments of $14.0 million, $16.0 million, $26.0 million and $50 million in March, April, May, and
December 2012, respectively.
The outstanding balance at December 31, 2012 and December 31, 2011 was $17.2 million and $91.0 million, respectively.
There was $67.4 and $37.9 million available to be drawn at December 31, 2012 and December 31, 2011, respectively.
We were in compliance with the financial covenants relating to this facility as of December 31, 2012.
STI Spirit Credit Facility
On March 9, 2011, we executed a credit facility with DVB Bank SE for a senior secured term loan facility of $27.3
million for STI Spirit, which was acquired on November 10, 2010. The credit facility was drawn down on March 17, 2011
and matures on March 17, 2018. The loan bears interest at LIBOR plus a margin of 2.75% per annum. The loan will be
repaid over 28 equal quarterly installments and a lump sum payment at maturity. The quarterly installments commenced three
months after the drawdown and were calculated using an 18 year amortization profile. Our subsidiary, STI Spirit Shipping
Company Limited, which owns the vessel, is the borrower and Scorpio Tankers Inc. is the guarantor. The credit facility
requires us to comply with a number of covenants, including financial covenants; delivery of quarterly and annual financial
statements and annual projections; maintaining adequate insurances; compliance with laws (including environmental);
compliance with ERISA (Employee Retirement Income Security Act); maintenance of flag and class of the vessel;
restrictions on consolidations, mergers or sales of assets; approval of changes in the Manager of our vessels; limitations on
liens; limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has
occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other
customary covenants.
All terms mentioned are defined in the agreement.
The financial covenants of the credit facility are described below.
The ratio of debt to capitalization shall be no greater than 0.60 to 1.00.
Consolidated tangible net worth (i.e. shareholders equity) shall be no less than $ 150.0 million plus 25% of
cumulative positive net income (on a consolidated basis) for each fiscal quarter.
The ratio of EBITDA to interest expense shall be no less than 1.25 to 1.00 for the period commencing with the
fourth quarter of 2011 through the fourth quarter of 2012, at which time it will increase to 1.50 to 1.00 for the first
quarter of 2013, 1.75 to 1.00 for the second quarter of 2013 and 2.00 to 1.00 at all times thereafter. Such ratio shall
be calculated quarterly on a trailing four quarter basis. In addition, we are restricted from paying dividends until our
EBITDA to interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as defined in the loan agreement, excludes
non-cash charges such as impairment.
Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) needs to
be not less than $25.0 million, of which unrestricted cash and cash equivalents shall be not less than $15.0 million,
until we own, directly or indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each
additional vessel.
The aggregate fair market value of the STI Spirit shall at all times be no less than (i) 140% of the then outstanding
loan balance if the vessel is operating in a pool or in the spot market or (ii) 130% of the then outstanding loan if the
vessel is on time charter with a duration of at least one year.
F-24
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
As described above, the credit facility requires that the charter-free market value of the STI Spirit shall be no less
than 140% of the then outstanding loan balance. In order to stay in compliance with this covenant, we made a prepayment
of $0.8 million in June 2012, and a prepayment of $1.3 million in December 2012, which is being applied to the next four
quarterly payments.
The outstanding balance at December 31, 2012 and December 31, 2011 was $23.4 million and $26.2 million,
respectively, which considers the aforementioned payments along with principal payments of $0.4 million made in March
2012 and June 2012, respectively.
We were in compliance with the financial covenants relating to this facility as of December 31, 2012.
2011 Credit facility
On May 3, 2011, we executed a credit facility with Nordea Bank Finland plc, acting through its New York
branch, DnB NOR Bank ASA, acting through its New York branch, and ABN AMRO Bank N.V., for a senior secured
term loan facility of up to $150.0 million. On July 20, 2012, we extended the availability period of the 2011 Credit
Facility until January 31, 2014. The availability period was previously scheduled to expire in May 2013. Due to the
amendment, we wrote-off $3.0 million in deferred financing fees within Financial Expenses (see note 19), which includes
all loan fees from May 2011.
All terms mentioned in this section are defined in the agreement.
Drawdowns under this credit facility are available until January 31, 2014 and bear interest as follows: (1) until
December 29, 2011, at LIBOR plus an applicable margin of (i) 2.75% per annum when our debt to capitalization (total debt
plus equity) ratio is less than 45%, (ii) 3.00% per annum when our debt to capitalization ratio is greater than or equal to 45%
but less than or equal to 50% and (iii) 3.25% when our debt to capitalization ratio is greater than 50%; (2) from December 30,
2011 through September 30, 2013, at LIBOR plus an applicable margin of 3.50% per annum and (3) from October 1, 2013
and at all times thereafter, at LIBOR plus an applicable margin of (i) 3.25% per annum when our debt to capitalization (total
debt plus equity) ratio is equal to or less than 50% and (ii) 3.50% per annum when our debt to capitalization ratio is greater
than 50%. A commitment fee equal to 40% of the applicable margin is payable on the unused daily portion of the credit
facility. The credit facility matures on May 3, 2017 and can only be used to finance up to 50% of the cost of future vessel
acquisitions, which vessels would be the collateral for the credit facility.
Borrowings for each vessel financed under this facility represent a separate tranche, with repayment terms
dependent on the age of the vessel at acquisition. Each tranche under the credit facility is repayable in equal quarterly
installments, with a lump sum payment at maturity, based on a full repayment of such tranche when the vessel to which it
relates is sixteen years of age. Our subsidiaries, which may at any time, own one or more of our vessels, will act as
guarantors under the credit facility.
The credit facility requires us to comply with a number of covenants, including financial covenants; delivery of
quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws
(including environmental); compliance with ERISA (Employee Retirement Income Security Act); maintenance of flag and
class of the initial vessels; restrictions on consolidations, mergers or sales of assets; approvals on changes in the Manager of
our initial vessels; limitations on liens; limitations on additional indebtedness; prohibitions on paying dividends if a covenant
breach or an event of default has occurred or would occur as a result of payment of a dividend; prohibitions on transactions
with affiliates; and other customary covenants.
F-25
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
The financial covenants include:
The ratio of net debt to capitalization shall be no greater than 0.60 to 1.00.
Consolidated tangible net worth (i.e. shareholders’ equity) shall be no less than $150.0 million plus 25% of
cumulative positive net income (on a consolidated basis) for each fiscal quarter from July 1, 2010 going forward and
50% of the value of any new equity issues from July 1, 2010 going forward.
The ratio of EBITDA to interest expense shall be no less than 1.25 to 1.00 commencing with the fourth fiscal quarter
of 2011 until the fourth quarter of 2012, at which point it will increase to 1.50 to 1.00 for the first quarter of 2013,
1.75 to 1.00 for the second quarter of 2013 and 2.00 to 1.00 at all times thereafter. Such ratio shall be calculated
quarterly on a trailing four quarter basis. In addition, we are restricted from paying dividends until our EBITDA to
interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as defined in the loan agreement, excludes non-cash
charges such as impairment.
Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) needs to
be not less than $25 million, of which unrestricted cash and cash equivalents shall be not less than $15.0 million,
until we own, directly or indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each
additional vessel.
The aggregate fair market value of the collateral vessels shall at all times be no less than 150% of the then aggregate
outstanding principal amount of loans under the credit facility.
In August and September 2012, we sold STI Diamond and STI Coral for $25.25 million each. A portion of the
proceeds from the sales was used to repay $16.1 million of debt outstanding on the 2011 Credit Facility relating to STI Coral.
In addition, the fifth newbuilding vessel, STI Onyx was substituted as collateral under the 2011 Credit Facility on the
outstanding borrowing relating to STI Diamond.
As of December 31, 2012, there was $115 million available for borrowing which can be used to finance up to 50%
of future vessel acquisitions. $2.0 million of principal payments were made during 2012 in addition to the $16.1 million
repayment relating to the sale of STI Coral. The outstanding balance at December 31, 2012 and December 31, 2011 was
$15.5 million and $33.6 million, respectively.
We were in compliance with the financial covenants relating to this facility as of December 31, 2012.
Newbuilding Credit Facility
On December 21, 2011, we executed a credit facility agreement with Credit Agricole Corporate and Investment
Bank and Skandinaviska Enskilda Banken AB for a senior secured term loan facility of up to $92.0 million. During the year
ended December 31, 2012, we drew down an aggregate of $92.0 million from this facility to partially finance the deliveries
of STI Amber, STI Topaz, STI Ruby and STI Garnet ($23.0 million per vessel). These vessels are owned individually by
certain of our subsidiaries, who together are the borrowers under this credit facility, and Scorpio Tankers Inc. is the
guarantor. Borrowings under the credit facility bear interest at LIBOR plus an applicable margin of 2.70% per annum. A
commitment fee equal to 1.10% per annum was payable on the unused daily portion of the credit facility, and the facility was
fully drawn as of December 31, 2012. All terms mentioned in this section are defined in the agreement.
The facility is separated into four tranches (one per each vessel) and repayment of the tranche relating to the
respective vessel commenced after delivery of that vessel in quarterly installments of $375,000, which equates to a repayment
profile of 15.33 years. Each tranche is scheduled to mature approximately seven years after delivery of the relevant vessel
from the shipyard.
The credit facility requires us to comply with a number of covenants, including financial covenants; delivery of
quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws
(including environmental); compliance with ERISA; maintenance of flag and class of the initial vessels; restrictions on
consolidations, mergers or sales of assets; approvals on changes in the Manager of our initial vessels; limitations on liens;
limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has
occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other
customary covenants.
F-26
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
The financial covenants include:
The ratio of debt to capitalization shall be no greater than 0.60 to 1.00.
Consolidated tangible net worth (i.e. shareholders equity) shall be no less than US$ 150,000,000 plus 25% of
cumulative positive net income (on a consolidated basis) for each fiscal quarter from July 1, 2010 going forward and
50% of the value of any new equity issues from July 2, 2010 going forward.
The ratio of EBITDA to interest expense shall be no less than 2.00 to 1.00 commencing with the third fiscal quarter
of 2011 until the fourth quarter of 2012, and 2.50 to 1.00 for all times thereafter. Such ratio shall be calculated
quarterly on a trailing four quarter basis. EBITDA, as defined in the loan agreement, excludes non-cash charges
such as impairment.
Unrestricted cash and cash equivalents shall at all times be no less than$15.0 million, until we own, directly or
indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each additional vessel.
The aggregate fair market value of the collateral vessels shall at all times be no less than 140% (120% if the vessel is
subject to acceptable long term employment) of the aggregate principal amount outstanding plus a pro rata amount
of any allocable swap exposure for the credit facility.
This facility is now fully drawn, and there is currently $89.8 million outstanding under this facility as of
December 31, 2012, which reflects principal payments of $0.7 million and $1.5 million made in September and December
2012, respectively.
We had no borrowings under this facility outstanding at December 31, 2011. We were in compliance with the
financial covenants relating to this facility as of December 31, 2012.
12. Derivative financial instruments
Interest rate swaps
In August 2011, we entered into six interest rate swap agreements to manage interest costs and the risk associated
with changing interest rates on our 2011 and 2010 Credit Facilities with three different banks. Pursuant to these interest rate
swap contracts, we agreed to exchange the difference between fixed and floating rate interest amounts calculated on agreed
notional principal amounts. Such contracts enable us to partially mitigate the risk of changing interest rates on the cash flow
exposures on the issued variable rate debt held. We determined the estimated fair value of our derivatives by discounting the
future cash flows using the curves at the reporting date and the credit risk inherent in the contract. These swaps have been
designated and accounted for as cash flow hedges.
In August and September 2012, we completed the sales of STI Coral and STI Diamond, respectively and as a result,
we reduced the notional amount on the interest rate swaps relating to the 2011 Credit Facility to $15.0 million from $24.0
million in aggregate. As a result of the reduction, we recognized a realized loss of $0.2 million, which was reclassified out of
other comprehensive loss and recorded as a component of loss from sale of vessels.
The notional principal amounts of these swaps aggregate $66 million, the details of which are as follows as of
December 31, 2012 and 2011, respectively:
As of December 31, 2012
Hedged item
2010 Credit Facility
2011 Credit Facility
Notional amount Start date
July 2, 2012
$51 million
July 2, 2012
$15 million
Expiration date Fixed interest rate Floating interest rate
1.27%
June 2, 2015
1.30%
June 30, 2015
3 mo. LIBOR
3 mo. LIBOR
As of December 31, 2011
Hedged item
2010 Credit Facility
2011 Credit Facility
Notional amount Start date
July 2, 2012
$51 million
July 2, 2012
$24 million
Expiration date Fixed interest rate Floating interest rate
1.27%
June 2, 2015
1.30%
June 30, 2015
3 mo. LIBOR
3 mo. LIBOR
F-27
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
The vessels which collateralize the 2011 Credit Facility and 2010 Revolving Credit Facility also serve as collateral
for the designated interest rate swap agreements, subordinated to the outstanding borrowings under each credit facility.
In December 2012, we raised net proceeds of $127.2 million from a registered direct placement of common shares
and as part of the use of proceeds of this offering, we voluntarily repaid $50.0 million into our 2010 Revolving Credit
Facility. After the payment, we had $17.2 million of debt outstanding under the 2010 Credit Facility, which is less than the
total notional amount of $51 million for the three interest rate swaps related to the facility. As such, the swaps related to the
2010 Revolving Credit Facility no longer met the criteria for hedge accounting and we therefore de-designated the hedge
relationship prospectively and reclassified all amounts accumulated in other comprehensive income ($1.0 million) to the
statement of profit or loss for the year ended December 31, 2012 as a component of Financial Expenses.
The interest rate swaps relating to the 2011 Credit Facility continue to qualify for hedge accounting. Accordingly,
changes in their fair value, which the hedge is deemed to be effective, are recognized directly in other comprehensive income
and classified as ‘hedging reserves’. Changes in their fair value for any portion deemed to be ineffective are recognized in the
consolidated statement of profit or loss.
Profit or loss sharing agreements
In July 2012, we entered into a profit or loss sharing arrangement on the earnings of an LR1 vessel that is not owned
or operated by us. The agreement stipulates that 50% of the profits and losses will be shared with the counterparty. The
counterparty to this agreement was time chartering-in this vessel for a period of six months at $12,750 per day and this
agreement expired in January 2013.
In September 2012, we took delivery of an LR1, FPMC P Eagle, on a time charter-in arrangement for one year
at $12,800 per day. We also entered into a profit and loss sharing arrangement whereby 50% of the profits and losses
relating to this vessel above or below the charterhire rate will be shared with a third party who neither owns nor
operates FPMC P Eagle.
Both of these agreements are being treated as derivatives, recorded at fair value with any resultant gain or loss
recognized in the statement of profit or loss. Changes in fair value are recorded as unrealized gains and losses on derivative
financial instruments and actual earnings are recorded as earnings from profit or loss sharing agreements, within the
consolidated statement of profit or loss. The fair value of these instruments is determined by comparing published time
charter rates to the charterhire rate and discounting those cash flows to their estimated present value.
The following table summarizes the fair value of our derivative financial instruments as of December 31, 2012 and
2011, which are included in the consolidated balance sheet:
In thousands of US dollars
Assets
At December 31,
2012
2011
Prepaid expenses and other current assets (profit and loss agreements) ........................... $
26 $
—
Liabilities
Derivative financial instrument (profit and loss agreements - current) ...........................
Derivative financial instrument (interest rate swap - current) ..........................................
Total current liabilities ...........................................................................................................
(211)
(633)
(844)
Derivative financial instrument (interest rate swap - non-current) ...................................
Total liabilities ........................................................................................................................ $
(743)
(1,587) $
—
(237)
(237)
(464)
(701)
F-28
—
(904)
(904)
(701)
(701)
—
—
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
The following has been recorded as realized and unrealized losses from changes in the fair value of our derivative
financial instruments:
Fair value adjustments
Statement of profit or loss
In thousands of US dollars
Profit and loss agreements .............................................................
Interest rate swap ...........................................................................
Realized gain/
(loss)
Unrealized
gain/ (loss)
Recognized
in equity
443
(229)(1)
(184) $
(1,047)
Total period ended December 31, 2012 ..................................... $
214
$
(1,231) $
Interest rate swap ...........................................................................
—
—
Total period ended December 31, 2011 ..................................... $
—
$
— $
Interest rate swap ...........................................................................
(280)(2)
—
Total period ended December 31, 2010 ..................................... $
(280)
$
— $
(1)
(2)
The realized loss on our interest rate swaps related to the 2011 Credit Facility due to the disposal of STI Coral and STI
Diamond was recorded as a component of the loss from sale of vessels on the consolidated statement of profit or loss.
The realized loss of $0.3 million in the year ended December 31, 2010 relates to the loss recorded upon settlement of
an interest rate swap in April 2010
13. Segment reporting
Information about our reportable segments for the years ended December 31, 2012, 2011 and 2010 is as a follows:
For the year ended December 31, 2012
In thousands of US dollars
Panamax/LR1 Handymax Aframax/LR2 MR
Reportable
segments
subtotal
Corporate
and
eliminations Total
Vessel revenue ........................... $
Vessel operating costs ................
Voyage expenses .......................
Charterhire .................................
Depreciation ...............................
Loss from sale of vessels ...........
General and administrative
expenses .................................
Financial expenses .....................
Earnings from profit and loss
sharing agreements .................
Unrealized loss on derivative
financial instruments ..............
Financial income ........................
Other expenses, net ....................
Segment profit or loss .............. $
28,602 $
(14,137)
(999)
(1,629)
(7,352)
—
35,381 $
(5,428)
(2,741)
(23,192)
(1,716)
(4,525)
4,541 $ 46,857 $ 115,381 $
(30,353)
(7,484)
(3,304)
(21,744)
(25) (17,979)
(43,701)
(1,287) (17,593)
(14,818)
(4,015)
(1,735)
(10,404)
(5,879)
—
— $ 115,381
— (30,353)
— (21,744)
— (43,701)
— (14,818)
— (10,404)
(495)
—
(195)
—
(100)
(1,086)
(398)
—
(1,188)
(1,086)
(10,348) (11,536)
(8,512)
(7,426)
443
—
—
—
443
—
443
(184)
6
(62)
(1,231)
35
(97)
7,710) ($ 18,827) ($ 26,537)
(1,047)
29
(35)
(184)
—
—
4,249 ($
—
—
—
2,416) ($
—
—
(11)
—
6
(51)
3,007) ($ 6,536) ($
F-29
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
For the year ended December 31, 2011
In thousands of US dollars
Vessel revenue ........................... $
Vessel operating costs ...............
Voyage expenses .......................
Charterhire .................................
Impairment ................................
Depreciation ..............................
General and administrative
Panamax/LR1 Handymax Aframax/LR2 MR
32,238 $
(11,217)
(26)
(17,357)
(12,962)
(5,069)
6,484 $ 12,287 $
(3,178)
(2,547)
(6,842)
—
—
(839)
(12,459) (12,574)
(2,038)
31,101 $
(14,428)
(13)
(4,554)
(28,616)
(9,279)
(2,074)
expenses .................................
Financial expenses .....................
Financial income .......................
Other expenses, net ....................
Segment profit or loss .............. ($
(692)
—
—
23
(762)
—
—
—
26,458) ($ 15,155) ($
For the year ended December 31, 2010
(136)
(841)
—
(134)
(314)
—
—
—
12,546) ($ 12,659) ($ 66,818) ($
(1,904)
(841)
—
(111)
Reportable
segments
subtotal
82,110
(31,370)
(6,881)
(22,750)
(66,611)
(18,460)
Corporate
and
eliminations Total
— $ 82,110
— (31,370)
—
(6,881)
— (22,750)
— (66,611)
— (18,460)
(9,733) (11,637)
(7,060)
(6,219)
51
51
(119)
(8)
15,909) ($ 82,727)
In thousands of US dollars
Vessel revenue ........................... $
Vessel operating costs ...............
Voyage expenses .......................
Charterhire .................................
Depreciation ..............................
General and administrative
Panamax/LR1 Handymax Aframax/LR2 MR
8,812 $
(5,650)
(2,289)
—
(2,390)
641 $ — $
(427) —
— —
— —
(293) —
29,345 $
(12,364)
(253)
(276)
(7,494)
Reportable
segments
subtotal
Corporate
and
eliminations Total
38,798 $
(18,440)
(2,542)
(276)
(10,177)
— $ 38,798
— (18,440)
—
(2,542)
(276)
—
(2) (10,179)
expenses .................................
Financial expenses .....................
Financial income .......................
Realized loss on derivative
financial instruments ..............
Other expense, net .....................
Segment profit or loss .............. $
(600)
(135)
1
(267)
—
1
(15) —
— —
1 —
(882)
(135)
3
(5,318)
(3,096)
34
(6,200)
(3,231)
37
(280)
(4)
—
—
7,940 ($ 1,782) ($
— —
— —
93) $ — $
(280)
(4)
6,065 ($
(280)
—
(509)
(505)
8,887) ($ 2,822)
The Panamax/LR1and Handymax segments each contained revenue from at least one major customer representing
greater than 10% of total revenue. The revenue from those customers within their respective segments was:
In thousands of US dollars
Segment
Panamax/LR1
Customer
2012
2011
2010
Scorpio Panamax Tanker Pool Limited (1)
King Dustin (1)
Liberty (1)
BP
$
26,884 $
—
—
—
22,594 $
8,507
—
—
9,645
8,700
4,780
5,937
Handymax
Scorpio Handymax Tanker Pool Limited (1)
$
31,280
58,164 $
32,238
63,339 $
5,178
34,240
(1) These customers are related parties (see Note 15)
F-30
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
14. Common shares
At December 31, 2010, we had 24,634,913 registered shares authorized and issued with a par value of $0.01 per
share. These shares provide the holders with rights to dividends and voting rights.
In May 2011, we closed on a follow-on public offering of 6,000,000 shares of common stock at $10.50 per share.
On the same day, the underwriters exercised their over-allotment option to purchase an additional 900,000 shares at
$10.50 per share After deducting underwriters’ discounts and paying offering expenses, the net proceeds of the follow-on
public offering and the over-allotment were approximately $68.5 million. Total fees and commissions relating to the
follow-on offering and exercise of the over-allotment option were $4.0 million and were recorded as a reduction to
additional paid-in capital.
In December 2011, we closed on the sale 7,000,000 shares of common stock in an underwritten public offering at an
offering price of $5.50 per share. We received net proceeds of approximately $36.5 million, after deducting underwriters’
discounts and offering expenses. Total fees and commissions relating to the follow-on offering and exercise of the over-
allotment option were $2.0 million and were recorded as a reduction to additional paid-in capital.
In April 2012, we closed on the sale of 4,000,000 shares common stock in a registered direct placement of common
shares at an offering price of $6.75 per share. We received net proceeds of approximately $25.9 million, after deducting the
placement agents’ discounts and offering expenses. Total fees and commissions relating to the registered direct placement
were $1.1 million and were recorded as a reduction to additional paid-in capital.
In December 2012, we closed on the sale of 21,639,774 shares of common stock in a registered direct placement of
common shares at an offering price of $6.10 per share. We received net proceeds of approximately $127.2 million, after
deducting the placement agents’ discount and offering expenses. Total fees and commissions relating to the registered direct
placement were $4.8 million and were recorded as a reduction to additional paid-in capital.
Stock buyback plan
On July 9, 2010, the board of directors authorized a share buyback program of $20.0 million. We repurchase these
shares in the open market at the times and prices that we consider to be appropriate. During 2012, we repurchased 447,322
shares at an average price of $5.4546 per share, including commissions. As of December 31, 2012 and December 31, 2011,
1,170,987 and 723,665 shares, respectively have been purchased under the plan at an average price of $6.7793 and $7.5981,
respectively, per share including commissions. As of December 31, 2012, the remaining stock buyback authorization was
$12.1 million.
Restricted stock issuance
On June 18, 2010, we issued 559,458 shares of restricted stock to our employees for no cash consideration. The
share price at the date of issue was $10.99 per share. The vesting schedule of the restricted stock is (i) one-third of the shares
vest on April 6, 2013, (ii) one-third of the shares vest on April 6, 2014, and (iii) one-third of the shares vest on April 6, 2015.
Compensation expense is recognized ratably over the vesting periods for each tranche using the straight-line method.
On June 18, 2010, we issued 9,000 shares of restricted stock to our directors for no cash consideration. The share
price at the date of issue was $10.85 per share and these shares vested on April 6, 2011.
On January 31, 2011, we issued 281,000 shares of restricted stock to the employees for no cash consideration. The
share price at the date of issue was $9.83 per share. The vesting schedule of the restricted stock is (i) one-third of the shares
vest on January 31, 2012, (ii) one-third of the shares vest on January 31, 2013, and (iii) one-third of the shares vest on
January 31, 2014. Compensation expense is recognized ratably over the vesting periods for each tranche using the straight-
line method. 93,667 shares vested on January 31, 2012.
On January 31, 2011, we issued 9,000 shares of restricted stock to our independent directors for no cash
consideration. The share price at the date of issue was $9.83 per share. These shares vested on January 31, 2012.
F-31
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
On January 31, 2012, we issued 281,000 shares of restricted stock to employees for no cash consideration. The share
price at the date of issue was $5.65 per share. The vesting schedule of the restricted stock is (i) one-third of the shares vest on
January 31, 2013, (ii) one-third of the shares vest on January 31, 2014, and (iii) one-third of the shares vest on January 31,
2015. Compensation expense is recognized ratably over the vesting periods for each tranche using the straight-line method.
On January 31, 2012, we issued 9,000 shares of restricted stock to our independent directors for no cash
consideration. The share price at the date of issue was $5.65 per share. These shares vest on January 31, 2013.
We recognized $3.5 million, $3.4 million and $0.9 million in expense relating to these issuances during the years
ended December 31, 2012, 2011 and 2010, respectively. No shares were forfeited during these periods.
Assuming that all the restricted stock will vest, the stock compensation expense in future periods, including that
related to restricted stock issued in prior periods will be:
In thousands of US dollars
For the year ending December 31, 2013 ................................ $
For the year ending December 31, 2014 ................................
For the year ending December 31, 2015 ................................
$
Employees
Directors
Total
1,982
787
122
2,891
$
$
4 $
—
—
4 $
1,986
787
122
2,895
Shares outstanding
As of December 31, 2012, we had 275,000,000 registered shares of which 250,000,000 are designated as common
shares with a par value of $0.01 and 25,000,000 designated as preferred shares with a par value of $0.01,
As of December 31, 2012 we had 63,827,846 shares outstanding.
15. Related party transactions
Transactions with entities controlled by the Lolli-Ghetti family (herein referred to as related party affiliates) in the
consolidated profit or loss statement and balance sheet are as follows:
In thousands of US dollars
Pool revenue(1)
Scorpio Panamax Tanker Pool Limited ........................ $
Scorpio Handymax Tanker Pool Limited .....................
Scorpio MR Pool Limited ............................................
Scorpio LR2 Pool Limited ............................................
Scorpio Aframax Tanker Pool Limited ........................
Time charter revenue(2)
King Dustin ..................................................................
Liberty and subsidiaries ................................................
Vessel operating costs(3) ........................................................
Commissions(4) ......................................................................
Administrative expenses(5) .....................................................
Other(6) ...................................................................................
For the year ended December 31,
2011
2012
2010
26,884 $
31,280
9,558
4,540
—
—
—
(2,280)
(532)
(1,862)
—
22,594 $
32,238
—
5,195
170
8,507
—
(2,203)
(270)
(1,937)
—
9,645
5,178
—
—
641
8,700
4,780
(1,059)
(234)
(932)
(131)
(1)
(2)
These transactions relate to revenue earned in the Scorpio LR2, Scorpio Aframax, Scorpio Panamax, Scorpio MR and
Scorpio Handymax Tanker Pools (the Pools). The Pools are owned by Scorpio LR2 Tanker Pool Limited, Scorpio
Aframax Pool Limited, Scorpio Panamax Tanker Pool Limited, Scorpio MR Pool Limited and Scorpio Handymax
Tanker Pool Limited, respectively. The Pools are related party affiliates.
The revenue earned was for Noemi’s time charter with King Dustin (which is 50% jointly controlled by a related party
affiliate). In 2010, STI Harmony and STI Heritage were on a time charter with Liberty, a related party affiliate. See
Note 16 for the terms of this time charter.
F-32
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
(3)
(4)
These transactions represent technical management fees charged by SSM, a related party affiliate, and included in the
vessel operating costs in the consolidated statement of profit or loss. We believe our technical management fees for the
years ended December 31, 2012, 2011 and 2010 were at market rates because they were the same rates charged to
other vessels managed by SSM. Each vessel pays $548 per day for technical management, which was, lower than that
charged to third parties by SSM.
These transactions represent the expense due to SCM for commissions related to the commercial management services
provided by SCM under the Commercial Management Agreement (see description below). Each of the vessels pays a
commission of 1.25% of their revenue when not in the Pools. When our vessels were in the Pools, SCM, the pool
manager, charged fees of $250 per vessel per day with respect to our Panamax/LR1 and LR2 vessels, $300 per vessel
per day with respect to each of our Handymax and MR vessels, plus 1.25% commission on gross revenues per charter
fixture. These were the same fees that SCM charges other vessels in these pools, including third party owned vessels.
(5) We have an Administrative Services Agreement with Scorpio Services Holding Limited, or SSH or our Administrator,
for the provision of administrative staff and office space, and administrative services, including accounting, legal
compliance, financial and information technology services. SSH is a related party to us. Liberty Holding Company
Ltd., or Liberty, a company affiliated with us, acted as our Administrator until March 13, 2012 when the
Administrative Services Agreement was assigned to SSH. The effective date of the novation was November 9, 2009,
the date that we first entered into the agreement with Liberty. We reimburse our current Administrator for the
reasonable direct or indirect expenses it incurs in providing us with the administrative services described above. Our
Administrator also arranges vessel sales and purchases for us. The services provided to us by our Administrator may
be sub-contracted to other entities within the Scorpio Group.
Our Commercial Management Agreement with SCM includes a daily flat fee charged payable to SCM for the vessels
that are not in one of the pools managed by SCM. The flat fee was $250 per day for Panamaxes/LR1 and
Aframax/LR2 vessels and $300 per day for Handymax and MR vessels. The flat fee was the same rate charged by
SCM for vessels in the pools managed by SCM.
The expense for the year ended December 31, 2012 of $1.9 million included the flat fee of $0.7 million charged
by SCM and administrative fees of $1.2 million charged by SSH and were included in voyage expenses and
general and administrative expenses in the consolidated statement of profit or loss.
The expense for the year ended December 31, 2011 of $1.9 million included the flat fee of $0.3 charged by
SCM and administrative fees of $1.7 million charged by SSH and were both included in general and
administrative expenses in the consolidated statement of profit or loss.
The expense for the year ended December 31, 2010 of $0.9 million included the flat fee of $0.2 million charged
by SCM and administrative fees of $0.7 million charged by SSH and were both included in general and
administrative expenses in the consolidated statement of profit or loss.
(6)
In accordance with our Administrative Services Agreement with SSH, we have to reimburse SSH for any direct
expenses. These transactions represent reimbursements of $0.1 million to SSH for the year ended December 31, 2010
for expenses related to the registration of the existing shares in the initial public offering which closed on April 6,
2010. In addition, $0.3 million related to expenses for the registration of the shares in the initial public offering were
recorded as an offset against the proceeds from the offering. The cash payment was made in 2010.
Furthermore, the Administrative Services Agreement with SSH includes a fee for arranging vessel purchases and sales,
on our behalf, equal to 1% of the gross purchase or sale price, payable upon the consummation of any such purchase or
sale. These fees are capitalized as part of the carrying value of the related vessel for a vessel purchase and are included
as part of the gain or loss on sale for a vessel disposal. In the year ended December 31, 2012, we paid SSH an
aggregate fee of $2.4 million, which consisted of $0.5 million (recorded within loss from sale of vessels) on the sales
of STI Conqueror, STI Gladiator, and STI Matador and $1.9 million on the purchase and delivery of the first five
Newbuilding vessels. In the year ended December 31, 2011, we paid SSH an aggregate fee of $0.7 million in May
2011 for the purchase of the STI Coral and STI Diamond. In the year ended December 31, 2010, we paid SSH an
aggregate fee of $2.4 million for the purchases of the STI Harmony, STI Heritage, STI Conqueror, STI Matador, STI
Gladiator, STI Highlander and STI Spirit.
F-33
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
We had the following balances with related parties, which have been included in the consolidated balance sheets:
In thousands of US dollars
Assets:
Accounts receivable (due from the Pools) ................................................................... $
As of December 31,
2012
2011
33,271 $
18,102
Liabilities:
Accounts payable (owed to the Pools) ........................................................................
Accounts payable (SSM) .............................................................................................
Accounts payable (SCM) ............................................................................................
59
70
146
50
8
52
In 2011, we also entered into an agreement to reimburse costs to SSM as part of its supervision agreement for
newbuilding vessels. $0.1 million has been charged under this agreement during the year ended December 31, 2012 and
capitalized within vessels under construction. No amounts were charged under this agreement during the year ended
December 31, 2011.
Key management remuneration
Prior to April 6, 2010, our executive management services were provided by a related party affiliate and included in
the management fees described in (5) above. If we were not part of a related party affiliate, and had the same ownership
structure and a contract for administrative services for the periods up to April 6, 2010, we estimate our executive
management remuneration would have been comparable with the executive management remuneration presented within
general and administrative expenses in subsequent periods. The table below therefore depicts key management remuneration
for the periods April 6, 2010 through December 31, 2010 and the years ended December 31, 2012 and 2011 as follows:
In thousands of US dollars
Short-term employee benefits (salaries) ...................................... $
Share-based compensation (1) ......................................................
$
Total ............................................................................................
For the period ended December 31,
2011
2012
2010
2,896 $
3,368
6,264 $
2,875 $
3,189
6,064 $
2,060
922
2,982
(1) Represents the amortization of restricted stock issued under our equity incentive plans in June 2010, January 2011 and
January 2012. See note 14.
There are no post employment benefits.
16. Vessel revenue
During the years ended December 31, 2011, and 2010 we had two and four vessels, respectively that earned revenue
through time charter contracts. During the year ended December 31, 2012, there were no vessels on time charter contracts.
The remaining revenue was generated from vessels operating in pools or in the spot market.
Revenue Sources
In thousands of US dollars
Pool revenue ................................................................................ $
Voyage revenue ...........................................................................
Time charter revenue ...................................................................
$
For the year ended December 31,
2011
2012
2010
72,262 $
43,119
—
115,381 $
60,197 $
12,287
9,626
82,110 $
15,464
3,917
19,417
38,798
F-34
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Time charter out contracts:
Vessel
Noemi (1)
Senatore (2)
STI Spirit (3)
STI Harmony (4)
STI Heritage (4)
Time Charter Out
From
To
Daily rate
Jan 2007
Sep 2007
Jan 2011
Jun 2010
Jun 2010
Dec 2011
Aug 2010
Mar 2011
Sep 2010
Nov 2010
$
$
$
$
$
24,500
26,000
15,000
25,500
25,500
(1)
(2)
(3)
(4)
The time charter contract with the Noemi was terminated on December 22, 2011.
The time charter contract with the Senatore was terminated on August 26, 2010.
The STI Spirit was on a short term time charter from January 11, 2011 through March 3, 2011 at a charterhire rate of
$15,000 per day. From March 4, 2011 through March 26, 2011, the date the vessel entered the Scorpio LR2 Pool, the
charterhire rate increased to $17,000 per day.
STI Harmony and STI Heritage were acquired in June 2010 with existing time charter contracts that commenced in
October 2007 and January 2008, respectively. The vessels were chartered to subsidiaries of Liberty, which are
related parties.
17. Charterhire
The following table depicts our time chartered-in vessel commitments during the years ended December 31, 2012,
2011 and 2010:
Name
Year built
Type
Delivery
Active as of December 31, 2012
Charter
Expiration(1)
Rate ($/ day)
1 Kraslava
2 Krisjanis Valdemars
3 Histria Azure
4 Histria Coral
5 Histria Perla
6 Endeavour
7 STX Ace 6
8 Pacific Duchess
9 Targale
10 Freja Lupus
11 Valle Bianca
12 Gan-Trust
13 Usma
14 SN Federica
15 Hellespont Promise
16 FPMC P Eagle
17 FPMC P Hero
18 FPMC P Ideal
19 Fair Seas
2007
2007
2007
2006
2005
2004
2007
2009
2007
2012
2007
2013
2007
2003
2007
2009
2011
2012
2008
Expired as of December 31, 2012
1 Kazdanga
2 BW Zambesi
3 Khawr Aladid
2007
2010
2006
July-13
June-13
April-14
July-13
July-13
Handymax
January-11
Handymax February-11
Handymax
Handymax
Handymax
MR
MR
MR
MR
MR
MR
MR
MR
LR1
LR1
LR1
LR2
LR2
LR2
April-12
July-11
July-11
July-12
May-12
March-12
May-12
April-12
August-12
January-13
January-13
February-13
December-12 December-13
September-12 September-13
February-13
May-14
March-13
May-14
April-14
March-13
January-16
January-14
February-15
October-13
July-13
July-13
April-13
January-13
January-13
12,070 (2)
12,000 (3)
12,000 (4)
13,000 (5)
13,000 (5)
11,525 (6)
14,150 (7)
13,800 (8)
14,500 (9)
14,760 (10)
12,000 (11)
16,250 (12)
13,500 (13)
11,250 (14)
12,500 (15)
12,800 (16)
14,750 (17)
14,750 (17)
16,000 (18)
Handymax May-11
June-12
LR1
LR2
December-10 November-11
October-11
April-12
12,345
13,850
12,000
(1) Redelivery is plus or minus 30 days from the expiry date.
(2) We have an option to extend the charter for an additional year at $13,070 per day.
(3) We have an option to extend the charter for an additional year at $13,000 per day. The agreement also contains a 50%
profit and loss sharing provision whereby we split all of the vessel’s profits and losses above or below the daily base
rate with the vessel’s owner.
F-35
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
(4)
In April 2013, the daily base rate will increase to $12,600 per day for one year thereafter. We have an option to extend
the term of the charter for an additional year at $13,550 per day.
(5) Represents the average rate for the two year duration of the agreement. The rate for the first year is $12,750 per day
and the rate for the second year is $13,250 per day. We have an option to extend the charter for an additional year at
$14,500 per day.
(6)
This vessel was redelivered in February 2013.
(7) We have an option to extend the charter for an additional year at $15,150 per day.
(8) We have an option to extend the charter for an additional year at $14,800 per day.
(9) We have options to extend the charter for up to three consecutive one year periods at $14,850 per day, $15,200 per day
and $16,200 per day, respectively.
(10) We have an option to extend the charter for an additional year at $16,000 per day.
(11) We have an option to extend the charter for an additional six months at $13,000 per day.
(12) The daily base rate represents the average rate for the three year duration of the agreement. The rate for the first year
is $15,750 per day, the rate for the second year is $16,250 per day, and the rate for the third year is $16,750 per day.
We have options to extend the charter for up to two consecutive one year periods at $17,500 per day and $18,000 per
day, respectively.
(13) We have an option to extend the charter for an additional year at $14,500 per day.
(14) We have an option to extend the charter for an additional year at $12,500 per day. We have also entered into an
agreement with the owner whereby we split all of the vessel’s profits above the daily base rate.
(15) We have an option to extend the charter for an additional six months at $14,250 per day.
(16) We have options to extend the charter for up to two consecutive one year periods at $13,400 per day and $14,400 per
day, respectively. We have also entered into an agreement with a third party whereby we split all of the vessel’s
profits and losses above or below the daily base rate.
(17) We have options to extend the charters for three consecutive six month periods at $15,000 per day, $15,250 per day,
and $15,500 per day respectively. FPMC P Hero is expected to be delivered in April 2013 and FPMC P Ideal was
delivered in January 2013.
(18) We have options to extend the charter for three consecutive six month periods at $16,250 per day, $16,500 per day,
and $16,750 per day respectively.
The undiscounted remaining future minimum lease payments under these arrangements as of December 31, 2012 are
$86.3 million. The obligations under these agreements will be repaid as follows:
In thousands of US dollars
Less than 1 year ....................................................................................................... $
1-5 years ..................................................................................................................
5+ years ...................................................................................................................
Total ........................................................................................................................ $
As of December 31,
2012
2011
62,612 $
23,771
—
86,383 $
21,004
5,943
—
26,947
The total expense recognized under charter hire agreements during the year ended December 31, 2012, 2011 and
2010 was $43.7 million, $22.8 million and $0.3 million, respectively.
F-36
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
18. General and administrative expenses
General and administrative expenses primarily represent employee benefit expenses, professional fees and
administration/commercial management fees (see note 15). Employee benefit expenses consist of:
In thousands of US dollars
Short term employee benefits (salaries) .................................. $
Share based compensation (see note 14) .................................
$
For the year ended December 31,
2011
2012
2010
4,066 $
3,490
7,556 $
3,796 $
3,362
7,158 $
2,390
988
3,378
19. Financial expenses
Financial expenses comprise:
In thousands of US dollars
Interest payable on bank loans ................................................ $
Amortization of deferred financing fees ..................................
Commitment fees on undrawn portions of bank loans ............
Total financial expenses .......................................................... $
For the year ended December 31,
2011
2012
2010
3,421 $
4,093
998
8,512 $
4,951 $
986
1,123
7,060 $
2,985
246
—
3,231
The amortization of deferred financing fees in the year ended December 31, 2012 includes a $3.0 million charge
arising from the amendment of the 2011 Credit Facility (see note 11).
20. Tax
Scorpio Tankers Inc. and its subsidiaries are incorporated in the Republic of the Marshall Islands, and in accordance
with the income tax laws of the Marshall Islands, are not subject to Marshall Islands’ income tax. We are also exempt from
income tax in other jurisdictions including the United States of America due to tax treaties; therefore, we did not have any tax
charges, benefits, or balances as of or for the periods ended December 31, 2012, 2011 and 2010.
21. Loss per share
The calculation of both basic and diluted loss/earnings per share is based on net loss attributable to equity holders of
the parent and weighted average outstanding shares of:
In thousands of US dollars except for share data
Net loss attributable to equity holders of the parent ................ $
Basic and diluted weighted average number of shares ............
For the year ended December 31,
2011
2012
2010
(26,537) $
41,413,339
(82,727) $
28,704,876
(2,822)
15,600,813
We incurred a loss in the years ended December 31, 2012, 2011 and 2010. As a result, the inclusion of potentially
dilutive shares (being the restricted shares outlined in note 14) in the diluted loss per share calculation would have an
antidilutive effect on the loss per share for the period. Therefore, all restricted shares (1,036,791, 849,458 and 568,458 for the
years ended December 31, 2012, 2011 and 2010, respectively) have been excluded from the diluted loss per share calculation
for these periods.
F-37
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
22. Financial instruments
Funding and capital risk management
We manage our funding and capital resources to ensure our ability to continue as a going concern while maximizing
the return to the shareholder through optimization of the debt and equity balance.
Categories of financial instruments
Carrying value
As of December 31
2012
2011
87,165 $
36,797
26
36,833
23,187
—
701
—
160,676
In thousands of US dollars
Financial assets
Cash and cash equivalents ......................................................................................... $
Loans and receivables ...............................................................................................
Derivatives at fair value through profit or loss ..........................................................
Financial liabilities
Derivatives designated in a cash flow hedge .............................................................
Derivatives at fair value through profit or loss ..........................................................
Other liabilities (at amortized cost) ...........................................................................
329
1,257
156,903
Derivative financial instruments in 2012 consisted of(i) interest rate swaps, recorded at the present value of future
cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates to determine the
fair value, and (ii) profit or loss sharing agreements on time charter-in agreements with third parties, where the fair value of
these instruments is determined by comparing published time charter rates to the charterhire rate and discounting those cash
flows to their estimated present value.
Derivative financial instruments in 2011 and 2010 solely comprised of interest rate swaps, recorded at the present
value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates to
determine the fair value.
IFRS 7 requires classification of fair value measures into Levels 1, 2 and 3. Level 1 fair value measurements are
those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value
measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 fair value measurements are
those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market
data (unobservable inputs). In accordance with IFRS 7, the fair value measurement for the interest rate swaps and profit or
loss sharing agreements in 2012, 2011 and 2010 were classified as Level 2.
The fair value of other financial assets and liabilities are approximately equal to their carrying values.
Financial risk management objectives
We identify and evaluate significant risks on an ongoing basis with the objective of managing the sensitivity of
our results and financial position to those risks. These risks include market risk, credit risk, liquidity risk and foreign
exchange risk.
The use of financial derivatives is governed by our policies as approved by the board of directors.
Market risk
Our activities expose us to the financial risks of changes in interest rates.
In the years ended December 31, 2012, 2011, and 2010, we were party to interest rate swaps to mitigate the risk of
rising interest rates. In August 2011, we entered into six interest rate swap agreements to manage interest costs and the risk
associated with changing interest rates on our 2011 Credit Facility and 2010 Revolving Credit Facility with three different
banks. Additionally, in April 2010, we paid $1.9 million to settle an interest rate swap that was entered into in April 2005.
F-38
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Details of the amounts recorded in the consolidated statement of profit or loss and statement of other comprehensive
income in respect of such instruments are provided in note 12.
Sensitivity analysis – Interest rate risk
The sensitivity analyses below have been determined based on the exposure to interest rates for non-derivative
instruments at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability
outstanding at balance sheet date was outstanding for the whole year.
If interest rates had been 1% higher/lower and all other variables were held constant, our net income for the year
ended December 31, 2012 would have decreased/increased by $1.6 million. This is mainly attributable to our exposure to
interest rate movements on our Newbuilding Credit Facility, 2010 Revolving Credit Facility, 2011 Credit Facility and STI
Spirit Credit Facility.
If interest rates had been 1% higher/lower and all other variables were held constant, our net income for the year
ended December 31, 2011 would have decreased/increased by $1.6 million. This is mainly attributable to our exposure to
interest rate movements on our 2010 Revolving Credit Facility, 2011 Credit Facility and STI Spirit Credit Facility.
If interest rates had been 1% higher/lower and all other variables were held constant, our net income for the year
ended December 31, 2010 would have decreased/increased by $0.7 million. This is mainly attributable to our exposure to
interest rate movements in our 2010 Revolving Credit Facility.
Credit risk
Credit risk is the potential exposure of loss in the event of non-performance by customers and derivative instrument
counterparties.
We only place cash deposits with major banks covered with strong and acceptable credit ratings.
Accounts receivable are generally not collateralized; however, we believe that the credit risk is partially offset by the
creditworthiness of our counterparties including the commercial and technical managers. We did not experience material
credit losses on our accounts receivables portfolio in the years ended December 31, 2012, 2011, and 2010.
The carrying amount of financial assets recognized in the consolidated financial statements represents the maximum
exposure to credit risk without taking account of the value of any collateral obtained. We did not experience any impairment
losses on financial assets in the years ended December 31, 2012, 2011, and 2010.
We monitor exposure to credit risk, and believe that there is no substantial credit risk arising from counterparties.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated
with financial instruments.
We manage liquidity risk by maintaining adequate reserves and borrowing facilities and by continuously monitoring
forecast and actual cash flows.
Current economic conditions make forecasting difficult, and there is the possibility that our actual trading
performance during the coming year may be materially different from expectations. It is also likely that additional,
currently uncommitted, sources of financing will be required to fully meet the financial commitments under our
newbuilding program, further details of which are provided in note 6 and note 23. However, based on internal forecasts
and projections that take into account reasonably possible changes in our trading performance, we believe that we have
adequate financial resources to continue in operation and meet our financial commitments (including but not limited to
newbuilding instalments, debt service obligations and charterhire commitments) for a period of at least twelve months
from the date of approval of these consolidated financial statements. Accordingly, we continue to adopt the going concern
basis in preparing our financial statements.
F-39
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Remaining contractual maturity on secured bank loans (Note 11)
The following table details our remaining contractual maturity for our secured bank loan. The amounts represent the
future undiscounted cash flows of the financial liability based on the earliest date on which we can be required to pay. The
table includes both interest and principal cash flows and takes into consideration the amount fixed via the interest rate swap
discussed above.
As the interest cash flows are not fixed, the interest amount included has been determined by reference to the
projected interest rates as illustrated by the yield curves existing at the reporting date.
To be repaid as follows:
Amounts in thousands of US dollars
Less than 1 month...................................................................................................... $
1-3 months .................................................................................................................
3 months to 1 year .....................................................................................................
1-5 years ....................................................................................................................
5+ years .....................................................................................................................
Total .......................................................................................................................... $
As of December 31
2012
2011
— $
3,228
10,042
78,804
80,404
172,478 $
—
2,768
8,376
126,827
39,686
177,657
The following table details our remaining contractual maturity for our interest rate swaps. The amounts represent the
future undiscounted cash flows of the financial liability based on the earliest date on which we can be required to pay.
In thousands of US dollars
Less than 1 month...................................................................................................... $
1 - 3 months ...............................................................................................................
3 months to 1 year .....................................................................................................
1 - 5 years ..................................................................................................................
5+ years .....................................................................................................................
$
All other current liabilities fall due within less than one month.
Foreign Exchange Rate Risk
As of December 31
2012
2011
— $
160
475
748
—
1,383 $
—
—
238
469
—
707
Our primary economic environment is the international shipping market. This market utilizes the U.S. Dollar as its
functional currency. Consequently, virtually all of our revenues and the majority of our operating expenses are in U.S.
Dollars. However, we incur some of our combined expenses in other currencies, particularly the Euro. The amount and
frequency of some of these expenses (such as vessel repairs, supplies and stores) may fluctuate from period to period.
Depreciation in the value of the U.S. dollar relative to other currencies will increase the U.S. dollar cost of us paying such
expenses. The portion of our business conducted in other currencies could increase in the future, which could expand our
exposure to losses arising from currency fluctuations.
There is a risk that currency fluctuations will have a negative effect on our cash flows. We have not entered into any
hedging contracts to protect against currency fluctuations. However, we have some ability to shift the purchase of goods and
services from one country to another and, thus, from one currency to another, on relatively short notice. We may seek to
hedge this currency fluctuation risk in the future.
F-40
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
23. Subsequent events
2013 Credit Facility
In February 2013, we signed a commitment letter for a $267.0 million senior secured credit facility, or the 2013
Credit Facility, with Nordea Bank Finland plc, acting through its New York branch, ABN AMRO Bank N.V., and
Skandinaviska Enskilda Banken AB.
The 2013 Credit Facility is expected to consist of a $114.0 million delayed draw term loan facility and a $153.0
million revolving credit facility. The 2013 Credit Facility is expected to be secured by, among other things, a first-priority
cross-collateralized mortgage on certain vessels for which we have entered into newbuilding contracts, or the Firm Vessels,
and certain vessels for which we may exercise construction options, or the Option Vessels, and together with the Firm
Vessels, the Collateral Vessels. Our subsidiaries that own the Collateral Vessels are expected to act as joint and several
guarantors under the 2013 Credit Facility.
A single drawdown of the term loan may occur in connection with the delivery of each Firm Vessel in an amount
equal to the lesser of 60% of (i) the loan amount allocated for such vessel or (ii) its fair market value. The initial drawdown
of each revolving loan may occur in connection with the delivery of an Option Vessel and is similarly capped at the lesser of
60% of the loan amount or fair market value, with such amount, once drawn, available on a revolving basis. Drawdowns
under the term loan are expected to be available until January 31, 2015 and drawdowns under the revolving loan are expected
to be available until July 31, 2015 and each will bear interest at LIBOR plus an applicable margin of 3.50%.
Under the terms outlined in the commitment letter, the term loan shall be repaid and the revolving loans reduced, in
each case, in an amount equal to 1/60th of such loan on a consecutive quarterly basis until final maturity on the sixth
anniversary of the facility.
In addition to restrictions imposed upon the owners of the Collateral Vessels (such as, limitations on liens and
limitations on the incurrence of additional indebtedness), the 2013 Credit Facility is expected to include financial covenants
that require us to maintain:
minimum liquidity of at least the greater of $25 million or 5% of total indebtedness;
a consolidated tangible net worth no less than (i) $150 million plus 25% of cumulative positive net income (on a
consolidated basis) for each fiscal quarter beginning on July 1, 2010 and (ii) 50% of the value of any new equity
issues from July 1, 2010 going forward;
a ratio of net debt to total capitalization no greater than 0.60 to 1.00;
a ratio of EBITDA to net interest expense greater than 2.00 to 1.00 through September 30, 2013 and 2.50 to
1.00 thereafter;
the aggregate fair market value of the Collateral Vessels shall at all times be no less than 140% of the then
aggregate outstanding principal amount of loans under the credit facility.
Our ability to close the 2013 Credit Facility and our ability to draw down on the facility are each subject to usual
and customary conditions precedent, including the negotiation and execution of final documentation.
Follow-on offerings
In February 2013, we closed on the sale of 30,672,000 shares of common stock in a registered direct placement of
common shares at an offering price of $7.50 per share. We received net proceeds of approximately $222.1 million, after
deducting the placement agents’ discount and offering expenses.
In March 2013, we closed on the sale 29,012,000 shares of common stock in a registered direct placement of
common shares at an offering price of $8.10 per share. We received net proceeds of $226.7 million, after deducting
placement agents’ discounts and offering expenses. After the close of this offering, we had 123,511,846 shares outstanding.
F-41
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
February 2013 Shelf Registration statement
On February 22, 2013, we filed a Form F-3 with the Securities and Exchange Commission, with an effective date of
February 25, 2013, which can be used to issue common shares, preferred shares, debt securities, warrants, purchase contracts,
and units. If a debt security is issued, all of our subsidiaries may guarantee the securities issued by the parent company. Each
subsidiary is 100% owned and each guarantee of the registered security will be full, unconditional, and join and several with
all other subsidiary guarantees.
Delivery of Newbuilding Vessels
In January and March 2013, we took delivery of our sixth and seventh vessels under our Newbuilding program, STI
Sapphire and STI Emerald, respectively. These vessels were partially financed by drawing down $34.4 million from our 2011
Credit Facility. As of the date of this report, there is $49.9 million outstanding under this facility and $80.6 million available
for borrowing which can be used to finance up to 50% of future vessel acquisitions.
Time chartered-in vessels
In January 2013, we agreed to time charter-in and took delivery of a 2007 built MR ice-class 1B product tanker on a
one year time charter-in agreement at $14,000 per day. The agreement also contains an option for us to extend the charter by
one year at $15,000 per day.
In January 2013, we took delivery of a 2013 built MR product tanker. This vessel is a sister ship of our newbuilding
vessels from HMD. The vessel will be chartered-in for three years at $15,750 per day in year one, $16,250 per day in year
two and $16,750 per day in year three. The agreement includes two consecutive options for us to extend the charter for up to
two consecutive one year periods at $17,500 per day and $18,000 per day.
In January 2013, we took delivery of a 2007 built MR ice-class 1B product tanker on a one year time charter-in
agreement at $13,500 per day. The agreement includes an option for us to extend the charter for an additional year at $14,500
per day.
In January 2013, we took delivery of a 2003 built LR1product tanker on a two year time charter-in agreement at
$11,250 per day with a 50% profit sharing provision whereby we split any of the vessel’s profits above $11,250 per day with
the vessel owner. The agreement includes an option for us to extend the charter for an additional year at $12,500 per day with
a 50% profit sharing provision.
In January 2013, we took delivery of a 2012 built LR2 product tanker on a six month time charter-in agreement at
$14,750 per day. We have options to extend the charter for three consecutive six month periods at $15,000 per day, $15,250
per day, and $15,500 per day respectively.
In January 2013, we took delivery of a 2008 built LR2 product tanker on a six month time charter-in agreement at
$16,000 per day. We have options to extend the charter for three consecutive six month periods at $16,250 per day, $16,500
per day, and $16,750 per day respectively.
In March 2013, we took delivery of a 2013 built MR product tanker on a two year time charter-in agreement at $
14,300 per day. We have an option to extend the charter for an additional year at $15,700 per day.
In March 2013, we agreed to time charter-in a 2010 built LR2 product tanker and a 2011 built LR2 product
tanker, each on a one year time charter-in agreements at $16,125 per day. We expect to take delivery of these two vessels
in April 2013.
In March 2013, we agreed to time charter-in 2004 built ice class 1B Handymax product tanker for one year at
$12,700 per day. We have an option to extend the charter for an additional year at $14,000 per day. This vessel is expected to
be delivered by the middle of April 2013.
F-42
Scorpio Tankers Inc. and Subsidiaries
Notes to the consolidated financial statements
Newbuilding vessels
In January 2013, we reached an agreement with HMD for the construction of two MR product tankers for $32.5
million each. These vessels will be delivered in May and June 2014.
In February 2013, we exercised options with HMD for the construction of four MR product tankers for
approximately $33.0 million each and two Handymax ice class-1A product tankers for $31.25 million each. Two of the MR’s
will deliver in the second quarter of 2014 with the third and fourth MR’s to be delivered in the third and fourth quarter of
2014, respectively. The two Handymax vessels will be delivered in the second quarter of 2014.
In February 2013, we exercised options with HMD for the construction of four Handymax, ice class 1A product
tankers for $31.3 million each. These vessels will be delivered in the third quarter of 2014.
In February 2013, we reached an agreement with SPP for the construction of four MR product tankers for $32.5
million each. These vessels will be delivered in the third and fourth quarters of 2014.
In March 2013, we reached an agreement with Hyundai Samho Heavy Industries Co. Ltd., or HSHI for the
construction of six additional 114,000 dwt LR2 product tankers for approximately $50.5 million each. These vessels are
expected to be delivered to us in the third and fourth quarter of 2014.
In March 2013, we reached an agreement with and Daewoo Shipbuilding & Marine Engineering Co., Ltd or DSME
for the construction of two 114,000 dwt LR2 product tankers for approximately $50.0 million each. These vessels are
expected to be delivered to us in the fourth quarter of 2014.
As of the date of this report, we have a total of 33 newbuilding product tanker orders with HMD, SPP, HSHI and
DSME which include 19 MR, six Handymax ice class-1A vessels and eight LR2. One of the newbuildings is expected to be
delivered to us by April 2013 and the remaining 32 within 2014. We also have fixed-price options to construct additional
newbuilding product tankers at these yards.
We made $152.5 million of installment payments during the first quarter of 2013, which includes $44.2 million in
aggregate for the delivery installment payments on STI Sapphire in January 2013 and STI Emerald in March 2013. Our
commitments at the date of this report under all newbuilding vessel agreements, including the above mentioned vessels are
as follows*:
Q2 2013 ................................................. $
Q3 2013 .................................................
Q4 2013 .................................................
Q1 2014 .................................................
Q2 2014 .................................................
Q3 2014 .................................................
Q4 2014 .................................................
Total ....................................................... $
41.6
114.3
74.1
77.6
302.0
241.0
250.9
1,101.5
million
million
million
million
million
million
million
million
*These are estimates only and are subject to change as construction progresses.
F-43
Corporate Information
Senior Management and Directors
Corporate Offices
Emanuele A. Lauro
Chairman & Chief Executive Officer
Robert Bugbee
President and Director
Brian Lee
Chief Financial Officer
Cameron Mackey
Chief Operating Officer
Monaco
Le Millenium—9, Boulevard Charles III—
MC 98000 Monaco
Tel +377 9798 5716
New York
150 East 58th Street—New York, NY 10155
Tel +1 212 542 1616
info@scorpiotankers.com
Luca Forgione
General Counsel & Company Secretary
Stock Listing
Sergio Gianfranchi
Vice President, Vessel Operations
Alexandre Albertini
Director
Ademaro Lanzara
Director
Donald C. Trauscht
Director
Scorpio Tankers Inc.’s common stock is
traded on the New York Stock Exchange
under the symbol STNG.
Transfer Agent
Computershare
250 Royall Street
Canton, MA 02021
USA
Legal Counsel
Seward & Kissel LLP
One Battery Park Plaza
New York, NY 10004
USA
Investor Relations
Brian Lee
Chief Financial Officer
Scorpio Takers Inc.
150 East 58th Street
New York, NY 10155
Tel +1 212 542 1616
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
About Us
Scorpio Tankers Inc. is a provider of marine transportation of petroleum products worldwide. As of April 4, 2013, our
owned fleet consisted of 14 tankers (one LR2 tanker, four LR1 tankers, one Handymax tanker, seven MR tankers, and one
post-Panamax tanker) with an average age of 4.5 years, 24 time chartered-in product tankers (seven LR2, three LR1, seven
MR and seven Handymax tankers), and 39 newbuilding product tankers (23 MR, eight LR2 and eight Handymax ice class-1A
vessels), five of which are expected to be delivered to us by September 2013 and the remaining 34 within 2014. Scorpio
Tankers Inc. is incorporated in the Republic of the Marshall Islands and has its principal offices in Monaco and New York.
Scorpio Tankers is listed on the New York Stock Exchange (NYSE) under the symbol STNG.
Monaco
Le Millenium—9, Boulevard Charles III—MC 98000 Monaco
Tel +377 9798 5716
New York
150 East 58th Street—New York, NY 10155
Tel +1 212 542 1616
info@scorpiotankers.com