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
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2011
OR
[ ]
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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………………………..
For the transition period from ………………… to …………………
Commission file number 1-12874
TEEKAY CORPORATION
(Exact name of Registrant as specified in its charter)
Republic of The Marshall Islands
(Jurisdiction of incorporation or organization)
4th floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
(Address of principal executive offices)
1. 4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
Mark Cave
Telephone: (441) 298-2530 Fax: (441) 292-3931
(Name, Telephone, E-mail and/or Facsimile 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 $0.001 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.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
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.
68,732,341 shares of Common Stock, par value of $0.001 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
1
Yes [ X ] No [ ]
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and ( 2) has been subject to
such filing requirements for the past 90 days.
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 [X] No [ ]
Yes [X] 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 and large accelerated filer‖ in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [X]
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 [X]
International Financial Reporting Standards as
issued by the International Accounting
Standards Board [ ]
Other [ ]
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 [ ] Item 18 [ ]
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
2
TEEKAY CORPORATION
INDEX TO REPORT ON FORM 20-F
PART I.
Item 1.
Item 2.
Item 3.
Identity of Directors, Senior Management and Advisors .........................................................................
Offer Statistics and Expected Timetable .................................................................................................
Key Information ......................................................................................................................................
Selected Financial Data ......................................................................................................................
Risk Factors .......................................................................................................................................
Tax Risks ............................................................................................................................................
Item 4.
Information on the Company ..................................................................................................................
A. Overview, History and Development ..............................................................................................
B. Operations .....................................................................................................................................
Our Fleet .....................................................................................................................................
Safety, Management of Ship Operations and Administration .....................................................
Risk of Loss and Insurance .........................................................................................................
Operations Outside of the United States ....................................................................................
Customers...................................................................................................................................
Flag, Classification, Audits and Inspections ................................................................................
Regulations .................................................................................................................................
C. Organizational Structure ................................................................................................................
D. Properties ......................................................................................................................................
E. Taxation of the Company ...............................................................................................................
1. United States Taxation ............................................................................................................
2. Marshall Islands Taxation........................................................................................................
3. Other Taxation ........................................................................................................................
Item 4A.
Unresolved Staff Comments ...................................................................................................................
Item 5.
Operating and Financial Review and Prospects .....................................................................................
Overview ............................................................................................................................................
Significant Developments in 2011 and Early 2012 ..............................................................................
Other Significant Projects and Developments ..................................................................................
Important Financial and Operational Terms and Concepts ..............................................................
Items You Should Consider When Evaluating Our Results ..............................................................
Results of Operations ......................................................................................................................
Liquidity and Capital Resources ......................................................................................................
Commitments and Contingencies ....................................................................................................
Off-Balance Sheet Arrangements ....................................................................................................
Critical Accounting Estimates ..........................................................................................................
Revenue Recognition ......................................................................................................................
Vessel Lives and Impairment ...........................................................................................................
Dry docking .....................................................................................................................................
Goodwill and Intangible Assets ........................................................................................................
Valuation of Derivative Financial Instruments ..................................................................................
Recent Accounting Pronouncements Not Yet Adopted ....................................................................
Item 6.
Directors, Senior Management and Employees .....................................................................................
3
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25
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65
65
Directors and Senior Management .....................................................................................................
Compensation of Directors and Senior Management .........................................................................
Options to Purchase Securities from Registrant or Subsidiaries .........................................................
Board Practices ..................................................................................................................................
Crewing and Staff ...............................................................................................................................
Share Ownership ................................................................................................................................
Item 7.
Major Shareholders and Certain Relationships and Related Party Transactions ....................................
Major Shareholders ............................................................................................................................
Other Major Shareholder ....................................................................................................................
Our Directors and Executive Officers ..................................................................................................
Relationships with Our Public Company Subsidiaries .........................................................................
Item 8.
Item 9.
Financial Information ..............................................................................................................................
The Offer and Listing ..............................................................................................................................
Item 10.
Additional Information .............................................................................................................................
Memorandum and Articles of Association ...........................................................................................
Material Contracts ..............................................................................................................................
Exchange Controls and Other Limitations Affecting Security Holders .................................................
Taxation..............................................................................................................................................
Material U.S. Federal Income Tax Considerations ..............................................................................
Non-United States Tax Consequences ...............................................................................................
Documents on Display ........................................................................................................................
Item 11.
Quantitative and Qualitative Disclosures About Market Risk ..................................................................
Item 12.
Description of Securities Other than Equity Securities ............................................................................
PART II.
Item 13.
Defaults, Dividend Arrearages and Delinquencies..................................................................................
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds .......................................
Item 15.
Controls and Procedures ........................................................................................................................
Management’s Report on Internal Control over Financial Reporting ....................................................
Item 16A.
Audit Committee Financial Expert ..........................................................................................................
Item 16B.
Code of Ethics ........................................................................................................................................
Item 16C.
Principal Accountant Fees and Services ................................................................................................
Item 16D.
Exemptions from the Listing Standards for Audit Committees ................................................................
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers .................................................
Item 16F.
Change in Registrant’s Certifying Accountant ........................................................................................
Item 16G.
Corporate Governance ...........................................................................................................................
Item 16H.
Mine Safety Disclosure ...........................................................................................................................
PART III.
Item 17.
Financial Statements ..............................................................................................................................
Item 18.
Financial Statements ..............................................................................................................................
Item 19.
Exhibits ..................................................................................................................................................
Signature
...............................................................................................................................................................
4
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PART I
This Annual Report should be read in conjunction with the consolidated financial statements and accompanying notes included in this report.
Unless otherwise indicated, references in this Annual Report to “Teekay,” "the Company,” “we,” “us” and “our” and similar terms refer to Teekay
Corporation and its subsidiaries.
In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. Such forward-
looking statements relate to future events and our operations, objectives, expectations, performance, financial condition and intentions. When used
in this Annual Report, the words "expect," "intend," "plan," "believe," "anticipate," "estimate" and variations of such words and similar expressions
are intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, in particular, statements regarding:
our future financial condition or results of operations and future revenues and expenses;
tanker market conditions and fundamentals, including the balance of supply and demand in these markets and spot tanker charter rates
and oil production;
offshore, liquefied natural gas (or LNG) and liquefied petroleum gas (or LPG) market conditions and fundamentals, including the balance
of supply and demand in these markets;
our future growth prospects;
future capital expenditure commitments and the financing requirements for such commitments;
delivery dates of and financing for newbuildings, and the commencement of service of newbuildings under long-term time-charter
contracts;
our acquisition of the Voyageur floating, production, storage and offloading (or FPSO) unit and the estimated remaining cost to complete
its upgrade;
the impact on the operating income of the Petrojarl Banff FPSO unit resulting from the storm damage to the unit which was incurred in
December 2011;
potential newbuilding order cancellations;
the expected timing and costs of upgrades to any vessels;
the future valuation of goodwill;
our expectations as to any impairment of our vessels;
the adequacy of restricted cash deposits to fund capital lease obligations;
our ability to fulfill our debt obligations;
compliance with financing agreements and the expected effect of restrictive covenants in such agreements;
declining market vessel values and the effect on our liquidity;
operating expenses, availability of crew and crewing costs, number of off-hire days, dry-docking requirements and durations and the
adequacy and cost of insurance;
our ability to capture some of the value from the volatility of the spot tanker market and from market imbalances by utilizing forward freight
agreements;
the effectiveness of our risk management policies and procedures and the ability of the counterparties to our derivative contracts to fulfill
their contractual obligations;
our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term contracts;
the cost of, and our ability to comply with, governmental regulations and maritime self-regulatory organization standards applicable to our
business;
the impact of future regulatory changes or environmental liabilities;
taxation of our company and of distributions to our stockholders;
the expected lifespans of our vessels;
5
the expected impact of heightened environmental and quality concerns of insurance underwriters, regulators and charterers;
anticipated funds for liquidity needs and the sufficiency of cash flows;
our hedging activities relating to foreign currency exchange and interest rate risks;
the condition of financial and economic markets, including interest rate volatility and the availability and cost of capital;
the growth of global oil demand;
our exemption from tax on our U.S. source international transportation income;
our expectation regarding uncertain tax positions;
the impact of the Foinaven FPSO unit’s amended contract on our future operating results;
the expected return on our investment in first-priority ship mortgage loans;
our ability to competitively pursue new FPSO projects;
our competitive positions in our markets;
our business strategy and other plans and objectives for future operations; and
our ability to pay dividends on our common stock.
Forward-looking statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently
subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not
limited to, those factors discussed below in ―Item 3. Key Information—Risk Factors‖ and other factors detailed from time to time in other reports we
file with the U.S. Securities and Exchange Commission (or SEC).
We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may
subsequently arise. You should carefully review and consider the various disclosures included in this Annual Report and in our other filings made
with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
Selected Financial Data
Set forth below is selected consolidated financial and other data of Teekay for fiscal years 2007 through 2011, which have been derived from our
consolidated financial statements. The data below should be read in conjunction with the consolidated financial statements and the notes thereto
and the Reports of Independent Registered Public Accounting Firms therein with respect to fiscal years 2011, 2010, and 2009 (which are included
herein) and ―Item 5. Operating and Financial Review and Prospects.‖
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (or GAAP).
6
2007
Years Ended December 31,
2009
(in thousands, except share and per share data)
2008
2010
2011
Income Statement Data:
Revenues
Total operating expenses (1)
Income from vessel operations
Interest expense
Interest income
Realized and unrealized (loss) gain on non-designated
derivative instruments
Equity (loss) income from joint ventures
Foreign exchange (loss) gain
(Loss) gain on notes repurchase
Other income (loss)
Income tax recovery (expense)
Net income (loss)
Less: Net (income) loss attributable to non-
controlling interests
Net income (loss) attributable to stockholders of
Teekay Corporation (2)
Per Common Share Data:
Basic earnings (loss) attributable to stockholders of
Teekay Corporation
Diluted earnings (loss) attributable to stockholders of
Teekay Corporation
Cash dividends declared
Balance Sheet Data (at end of year):
Cash and cash equivalents
Restricted cash
Vessels and equipment
Net investments in direct financing leases
Total assets
Total debt (including capital lease obligations)
Capital stock and additional paid-in capital
Non-controlling interest
Total equity
Number of outstanding shares of common stock
Other Financial Data:
Net revenues (3)
EBITDA (4)
Adjusted EBITDA (4)
Total debt to total capitalization (5)
Net debt to total net capitalization (6)
Capital expenditures:
Vessel and equipment purchases (7)
$2,387,625
(2,028,595)
359,030
(294,848)
101,199
$3,229,443
(2,969,324)
260,119
(290,933)
97,111
$2,181,605
(2,011,817)
169,788
(141,448)
19,999
$2,095,753
(1,861,630)
234,123
(136,107)
12,999
$1,953,782
(1,855,670)
98,112
(137,604)
10,078
(45,322)
(12,404)
(61,571)
(947)
23,170
3,192
72,446
(567,074)
(36,085)
24,727
3,010
(6,945)
56,176
(459,894)
140,046
52,242
(20,922)
(566)
13,527
(22,889)
209,777
(299,598)
(11,257)
31,983
(12,645)
7,527
6,340
(166,635)
(342,722)
(35,309)
12,654
-
12,360
(4,290)
(386,721)
(8,903)
(9,561)
(81,365)
(100,652)
17,805
63,543
(469,455)
128,412
(267,287)
(368,916)
$0.87
(6.48)
1.77
(3.67)
(5.25)
0.85
0.9875
(6.48)
1.1413
1.76
1.2650
(3.67)
1.2650
(5.25)
1.2650
$442,673
686,196
6,846,875
101,176
10,418,541
6,120,864
628,786
544,339
3,200,293
72,772,529
$814,165
650,556
7,267,094
79,508
10,215,001
5,770,133
642,911
583,938
2,652,405
72,512,291
$422,510
615,311
6,835,597
512,412
9,517,432
5,203,441
656,193
855,580
3,095,670
72,694,345
$779,748
576,271
6,771,375
487,516
9,912,348
5,170,198
672,684
1,353,561
3,332,008
72,012,843
$692,127
500,154
7,868,361
459,908
11,131,396
6,091,420
660,917
1,863,798
3,293,494
68,732,341
$1,856,552
592,016
660,485
65.7%
60.9%
$2,471,055
96,554
892,616
68.5%
61.9%
$1,887,514
791,291
563,217
62.7%
57.4%
$1,850,656
390,838
696,876
60.8%
53.4%
$1,777,168
173,703
638,161
64.9%
59.8%
$910,304
$716,765
$495,214
$343,091
$755,045
(1) Total operating expenses include, among other things, the following:
Asset impairments and net gain (loss) on sale of vessels
and equipment
Unrealized (losses) gains on derivative instruments
Restructuring charges
Goodwill impairment charge
Bargain purchase gain
2007
$16,531
(143)
-
-
-
2008
Years Ended December 31,
2009
(in thousands)
2010
2011
$50,267
(8,325)
(15,629)
(334,165)
-
($12,629)
14,915
(14,444)
-
-
($49,150)
(4,875)
(16,396)
-
-
($151,059)
(790)
(5,490)
(36,652)
58,235
$16,388
($307,852)
($12,158)
($70,421)
($135,756)
7
(2)
In January 2009, we adopted an amendment to Financial Accounting Standards Board (or FASB) Accounting Standards Codification (or ASC)
810, Consolidations, which requires us to include the portion of net income (loss) that is attributable to the non-controlling interest as part of our
total net income (loss).
(3) Consistent with general practice in the shipping industry, we use net revenues (defined as revenues less voyage expenses) as a measure of
equating revenues generated from voyage charters to revenues generated from time-charters, which assists us in making operating decisions
about the deployment of our vessels and their performance. Under time-charters the charterer pays the voyage expenses, which are all
expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls,
agency fees and commissions, whereas under voyage-charter contracts the ship-owner pays these expenses. Some voyage expenses are
fixed, and the remainder can be estimated. If we, as the ship-owner, pay the voyage expenses, we typically pass the approximate amount of
these expenses on to our customers by charging higher rates under the contract or billing the expenses to them. As a result, although revenues
from different types of contracts may vary, the net revenues after subtracting voyage expenses, which we call ―net revenues,‖ are comparable
across the different types of contracts. We principally use net revenues, a non-GAAP financial measure, because it provides more meaningful
information to us than revenues, the most directly comparable GAAP financial measure. Net revenues are also widely used by investors and
analysts in the shipping industry for comparing financial performance between companies and to industry averages. The following table
reconciles net revenues with revenues.
Revenues
Voyage expenses
Net revenues
2007
$2,387,625
(531,073)
$1,856,552
2008
Years Ended December 31,
2009
(in thousands)
$2,181,605
(294,091)
$1,887,514
$3,229,443
(758,388)
$2,471,055
$2,095,753
(245,097)
$1,850,656
2010
2011
$1,953,782
(176,614)
$1,777,168
(4) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA before restructuring
charges, unrealized foreign exchange (gain) loss, asset impairments and net (gain) loss on sale of vessels and equipment, goodwill impairment
charge, bargain purchase gain, amortization of in-process revenue contracts, unrealized (gains) losses on derivative instruments, realized
losses (gains) on interest rate swaps, realized losses on interest rate swap amendments and terminations, and share of unrealized losses
(gains) on interest rate swaps in non-consolidated joint ventures. EBITDA and Adjusted EBITDA are used as supplemental financial measures
by management and by external users of our financial statements, such as investors, as discussed below.
Financial and operating performance. EBITDA and Adjusted EBITDA assist our management and security holders by increasing the
comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our
industry that provide EBITDA or Adjusted EBITDA-based information. This increased comparability is achieved by excluding the potentially
disparate effects between periods or companies of interest expense, taxes, depreciation or amortization (or other items in determining
Adjusted EBITDA), which items are affected by various and possibly changing financing methods, capital structure and historical cost
basis and which items may significantly affect net income between periods. We believe that including EBITDA and Adjusted EBITDA as a
financial and operating measure benefits security holders in (a) selecting between investing in us and other investment alternatives and (b)
monitoring our ongoing financial and operational strength and health in assessing whether to continue to hold our equity, or debt
securities, as applicable.
Liquidity. EBITDA and Adjusted EBITDA allow us to assess the ability of assets to generate cash sufficient to service debt, pay dividends
and undertake capital expenditures. By eliminating the cash flow effect resulting from our existing capitalization and other items such as
dry-docking expenditures, working capital changes and foreign currency exchange gains and losses (which may vary significantly from
period to period), EBITDA and Adjusted EBITDA provide a consistent measure of our ability to generate cash over the long term.
Management uses this information as a significant factor in determining (a) our proper capitalization (including assessing how much debt
to incur and whether changes to the capitalization should be made) and (b) whether to undertake material capital expenditures and how to
finance them, all in light of our dividend policy. Use of EBITDA and Adjusted EBITDA as liquidity measures also permits security holders to
assess the fundamental ability of our business to generate cash sufficient to meet cash needs, including dividends on shares of our
common stock and repayments under debt instruments.
Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net income, operating income, cash flow from operating
activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and Adjusted EBITDA
exclude some, but not all, items that affect net income and operating income, and these measures may vary among other companies.
Therefore, EBITDA and Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.
The following table reconciles our historical consolidated EBITDA and Adjusted EBITDA to net income (loss), and our historical consolidated
Adjusted EBITDA to net operating cash flow.
8
Income Statement Data:
Reconciliation of EBITDA and Adjusted EBITDA to Net Income
(Loss)
Net income (loss)
Income tax (recovery) expense
Depreciation and amortization
Interest expense, net of interest income
EBITDA
Restructuring charges
Foreign exchange loss (gain)
Asset impairments and net (gain) loss on sale of vessels and
equipment
Goodwill impairment charge
Bargain purchase gain
Amortization of in-process revenue contracts
Unrealized losses (gains) on derivative instruments
Realized (gains) losses on interest rate swaps
Realized losses on interest rate swap amendments and terminations
Unrealized losses (gains) on interest rate swaps in non-consolidated
joint ventures
Adjusted EBITDA
Reconciliation of Adjusted EBITDA to Net Operating Cash Flow
Net operating cash flow
Expenditures for dry docking
Interest expense, net of interest income
Change in operating assets and liabilities
Gain on sale of marketable securities
Write-down of marketable securities
Write-down of equity accounted investments
Loss on notes repurchase
Equity (loss) income, net of dividends received
Other income (loss)
Employee stock option compensation
Restructuring charges
Realized (gains) losses on interest rate swaps and foreign exchange
contracts
Realized losses on interest rate swap amendments and terminations
Unrealized losses (gains) on interest rate swaps in non-consolidated
joint ventures
Adjusted EBITDA
(5) Total capitalization represents total debt and total equity.
2007
2008
Years Ended December 31,
2009
(in thousands)
2010
2011
$ 72,446
(3,192)
329,113
193,649
592,016
$ (459,894)
(56,176)
418,802
193,822
96,554
$ 209,777
22,889
437,176
121,449
791,291
$ (166,635)
(6,340)
440,705
123,108
390,838
$ (386,721)
4,290
428,608
127,526
173,703
16,396
(31,983)
5,490
(12,654)
-
61,571
(16,531)
-
-
(70,979)
99,055
(4,647)
-
-
660,485
304,429
85,403
193,649
43,871
9,577
-
-
(947)
(11,419)
50,245
(9,676)
-
15,629
(24,727)
(50,267)
334,165
-
(74,425)
530,283
32,445
-
32,959
892,616
523,641
101,511
193,822
28,816
4,576
(20,157)
-
(1,310)
(30,352)
25,153
(14,117)
15,629
14,444
20,922
12,629
-
-
(75,977)
(293,174)
127,936
-
(34,854)
563,217
368,251
78,005
121,449
(148,655)
-
-
-
(566)
49,299
(837)
(11,255)
14,444
49,150
-
-
(48,254)
140,187
154,098
-
26,444
696,876
411,750
57,483
123,108
(45,415)
1,805
-
-
(12,645)
(11,257)
(9,627)
(15,264)
16,396
(4,647)
32,445
127,936
154,098
-
-
-
-
-
660,485
32,959
892,616
(34,854)
563,217
26,444
696,876
151,059
36,652
(58,235)
(46,436)
70,822
132,931
149,666
35,163
638,161
107,193
55,620
127,526
84,347
2,906
-
(19,411)
-
(31,376)
4,368
(16,262)
5,490
132,931
149,666
35,163
638,161
(6) Net debt represents total debt less cash, cash equivalents and restricted cash. Total net capitalization represents net debt and total equity.
(7) Excludes vessels purchased in connection with our acquisitions of 50% of OMI Corporation (or OMI) in 2007, the remaining 35% of Teekay
Petrojarl ASA (or Teekay Petrojarl) in 2008 and our acquisition of FPSO units and Investment in Sevan Marine ASA (or Sevan) in 2011. Please
read ―Item 5. Operating and Financial Review and Prospects.‖ The expenditures for vessels and equipment exclude non-cash investing
activities. Please read ―Item 18. Financial Statements: Note 17 Supplemental Cash Flow Information.‖
Risk Factors
The cyclical nature of the tanker industry may lead to volatile changes in charter rates, which may adversely affect our earnings.
Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in the supply of , and demand for, tanker
capacity and changes in the supply of and demand for oil and oil products. If the tanker market is depressed, our earnings may decrease,
particularly with respect to our spot tanker sub-segment, a subset of our conventional tanker segment, which accounted for approximately 9% and
13% of our net revenues during 2011 and 2010, respectively. The cyclical nature of the tanker industry may cause significant increases or
9
decreases in the revenue we earn from our vessels and may also cause significant increases or decreases in the value of our vessels. The factors
affecting the supply of and demand for tankers are outside of our control, and the nature, timing and degree of changes in in dustry conditions are
unpredictable.
Factors that influence demand for tanker capacity include:
demand for oil and oil products;
supply of oil and oil products;
regional availability of refining capacity;
global and regional economic and political conditions;
the distance oil and oil products are to be moved by sea; and
changes in seaborne and other transportation patterns.
Factors that influence the supply of tanker capacity include:
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; and
environmental concerns and regulations.
Changes in demand for transportation of oil over longer distances and in the supply of tankers to carry that oil may materially affect our revenues,
profitability and cash flows.
Changes in the oil and natural gas markets could result in decreased demand for our vessels and services.
Demand for our vessels and services in transporting oil, petroleum products, LNG and LPG depend upon world and regional oil, petroleum and
natural gas markets. Any decrease in shipments of oil, petroleum products, LNG or LPG in those markets could have a material adverse effect on
our business, financial condition and results of operations. Historically, those markets have been volatile as a result of the many conditions and
events that affect the price, production and transport of oil, petroleum products, LNG or LPG, and competition from alternative energy sources. A
slowdown of the U.S. and world economies may result in reduced consumption of oil, petroleum products and natural gas and decreased demand
for our vessels and services, which would reduce vessel earnings.
Changes in the spot tanker market may result in significant fluctuations in the utilization of our vessels and our profitability.
During 2011 and 2010, we derived approximately 9% and 13%, respectively, of our net revenues from the vessels in our spot tanker sub-segment
(which includes vessels operating under charters with an initial term of less than one year). Our spot tanker sub-segment consists of conventional
crude oil tankers and product carriers operating on the spot tanker market or subject to time charters, or contracts of affreightment priced on a spot-
market basis or fixed-rate contracts with a term of less than one year. Part of our conventional Aframax and Suezmax tanker fleets and our large
and medium product tanker fleets are among the vessels included in our spot tanker sub-segment. Our shuttle tankers may also trade in the spot
tanker market when not otherwise committed to perform under time-charters or contracts of affreightment. Due to activity in the spot-charter market,
declining spot rates in a given period generally will result in corresponding declines in operating results for that period.
The spot-charter market is highly volatile and fluctuates based upon tanker and oil supply and demand. The successful operation of our vessels in
the spot-charter market depends upon, among other things, obtaining profitable spot charters and minimizing, to the extent possible, t ime spent
waiting for charters and time spent traveling unladen to pick up cargo. Future spot rates may not be sufficient to enable our vessels trading in the
spot tanker market to operate profitably or to provide sufficient cash flow to service our debt obligations.
Reduction in oil produced from offshore oil fields could harm our shuttle tanker and FPSO businesses.
As at December 31, 2011, we had 36 vessels operating in our shuttle tanker fleet and seven FPSO units operating in our FPSO fleet. A majority of
our shuttle tankers and all of our FPSO units earn revenue that depends upon the volume of oil we transport or the volume of oil produc ed from
offshore oil fields. Oil production levels are affected by several factors, all of which are beyond our control, including:
geologic factors, including general declines in production that occur naturally over time;
the rate of technical developments in extracting oil and related infrastructure and implementation costs; and
operator decisions based on revenue compared to costs from continued operations.
Factors that may affect an operator’s decision to initiate or continue production include: changes in oil prices; capital budget limitations; the
availability of necessary drilling and other governmental permits; the availability of qualified personnel and equipment; the quality of drilling
prospects in the area; and regulatory changes. In addition, the volume of oil we transport may be adversely affected by exten ded repairs to oil field
installations or suspensions of field operations as a result of oil spills, operational difficulties, strikes, employee lockouts or other labor unrest. The
rate of oil production at fields we service may decline from existing or future levels, and may be terminated, all of which c ould harm our business
and operating results. In addition, if such a reduction or termination occurs, the spot tanker market rates, if any, in the conventional oil tanker trades
10
at which we may be able to redeploy the affected shuttle tankers may be lower than the rates previously earned by the vessels under contracts of
affreightment, which would also harm our business and operating results.
The redeployment risk of FPSO units is high given their lack of alternative uses and significant costs.
FPSO units are specialized vessels that have very limited alternative uses and high fixed costs. In addition, FPSO units typically require substantial
capital investments prior to being redeployed to a new field and production service agreement. Unless extended, certain of our FPSO production
service agreements will expire during the next seven years. Our clients may also terminate certain of our FPSO production service agreements prior
to their expiration under specified circumstances. Any idle time prior to the commencement of a new contract or our inability to redeploy the vessels
at acceptable rates may have an adverse effect on our business and operating results.
The duration of many of our shuttle tanker and FSO contracts is the life of the relevant oil field or is subject to extension by the field
operator or vessel charterer. If the oil field no longer produces oil or is abandoned or the contract term is not extended, we will no longer
generate revenue under the related contract and will need to seek to redeploy affected vessels.
Some of our shuttle tanker contracts have a ―life-of-field‖ duration, which means that the contract continues until oil production at the field ceases. If
production terminates for any reason, we no longer will generate revenue under the related contract. Other shuttle tanker and floating storage and
off-take (or FSO) contracts under which our vessels operate are subject to extensions beyond their initial term. The likelihood of these cont racts
being extended may be negatively affected by reductions in oil field reserves, low oil prices generally or other factors. If we are unable to promptly
redeploy any affected vessels at rates at least equal to those under the contracts, if at all, our operating results will be harmed. Any potential
redeployment may not be under long-term contracts, which may affect the stability of our business and operating results.
Charter rates for conventional oil and product tankers may fluctuate substantially over time and may be lower when we are attempting to
re-charter conventional oil or product tankers, which could adversely affect our operating results. Any changes in charter rates for LNG
or LPG carriers, shuttle tankers or FSO or FPSO units could also adversely affect redeployment opportunities for those vessels.
Our ability to re-charter our conventional oil and product tankers following expiration of existing time-charter contracts and the rates payable upon
any renewal or replacement charters will depend upon, among other things, the state of the conventional tanker market. Conventional oil and
product tanker trades are highly competitive and have experienced significant fluctuations in charter rates based on, among other things, oil, refined
petroleum product and vessel demand. For example, an oversupply of conventional oil tankers can significantly reduce their charter rates. There
also exists some volatility in charter rates for LNG and LPG carriers, shuttle tankers and FSO and FPSO units, which could also adversely affect
redeployment opportunities for those vessels.
Over time, the value of our vessels may decline, which could adversely affect our operating results.
Vessel values for oil and product tankers, LNG and LPG carriers and FPSO and FSO units can fluctuate substantially over time due to a number of
different factors. Vessel values may decline substantially from existing levels. If operation of a vessel is not profitable, or if we cannot re-deploy a
chartered vessel at attractive rates upon charter termination, rather than continue to incur costs to maintain and finance the vessel, we may seek to
dispose of it. Our inability to dispose of the vessel at a reasonable value could result in a loss on its sale and adversely affect our results of
operations and financial condition. Further, if we determine at any time that a vessel’s future useful life and earnings require us to impair its value
on our financial statements, we may need to recognize a significant charge against our earnings. Vessel values, particularly of tankers, have
declined over the past few years, and have contributed to charges against our earnings.
Our growth depends on continued growth in demand for LNG and LPG, and LNG and LPG shipping, as well as offshore oil transportation,
production, processing and storage services.
A significant portion of our growth strategy focuses on continued expansion in the LNG and LPG shipping sectors and on expansion in the shuttle
tanker, FSO and FPSO sectors.
Expansion of the LNG and LPG shipping sectors depends on continued growth in world and regional demand for LNG and LPG and LNG and LPG
shipping and the supply of LNG and LPG. Demand for LNG and LPG and LNG and LPG shipping could be negatively affected by a num ber of
factors, such as increases in the costs of natural gas derived from LNG relative to the cost of natural gas generally, increases in the production of
natural gas in areas linked by pipelines to consuming areas, increases in the price of LNG and LPG relative to other energy s ources, the availability
of new energy sources, and negative global or regional economic or political conditions. Reduced demand for LNG or LPG and LNG or LPG
shipping would have a material adverse effect on future growth of our liquefied gas segment, and could harm that segment’s results. Growth of the
LNG and LPG markets may be limited by infrastructure constraints and community and environmental group resistance to new LNG and LPG
infrastructure over concerns about the environment, safety and terrorism. If the LNG or LPG supply chain is disrupted or does not continue to grow,
or if a significant LNG or LPG explosion, spill or similar incident occurs, it could have a material adverse effect on growth and could harm our
business, results of operations and financial condition.
Expansion of the shuttle tanker, FSO and FPSO sectors depends on continued growth in world and regional demand for these offshore services,
which could be negatively affected by a number of factors, such as:
decreases in the actual or projected price of oil, which could lead to a reduction in or termination of production of oil at certain fields we
service or a reduction in exploration for or development of new offshore oil fields;
increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new,
pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets;
decreases in the consumption of oil due to increases in its price relative to other energy sources, other factors making consumption of oil
less attractive or energy conservation measures;
11
availability of new, alternative energy sources; and
negative global or regional economic or political conditions, particularly in oil consuming regions, which could reduce energy consumption
or its growth.
Reduced demand for offshore marine transportation, production, processing or storage services would have a material adverse effect on our future
growth and could harm our business, results of operations and financial condition.
The intense competition in our markets may lead to reduced profitability or expansion opportunities.
Our vessels operate in highly competitive markets. Competition arises primarily from other vessel owners, including major oil companies and
independent companies. We also compete with owners of other size vessels. Our market share is insufficient to enforce any degree of pricing
discipline in the markets in which we operate and our competitive position may erode in the future. Any new markets that we enter could include
participants that have greater financial strength and capital resources than we have. We may not be successful in entering new markets.
One of our objectives is to enter into additional long-term, fixed-rate time charters for our LNG and LPG carriers, shuttle tankers, FSO and FPSO
units. The process of obtaining new long-term time charters is highly competitive and generally involves an intensive screening process and
competitive bids, and often extends for several months. We expect substantial competition for providing services for potential LNG, LPG, shuttle
tanker, FSO and FPSO projects from a number of experienced companies, including state-sponsored entities and major energy companies. Some
of these competitors have greater experience in these markets and greater financial resources than do we. We anticipate that an increasing number
of marine transportation companies, including many with strong reputations and extensive resources and experience will enter the LNG and LPG
transportation, shuttle tanker, FSO and FPSO sectors. This increased competition may cause greater price competition for time-charters. As a result
of these factors, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all,
which would have a material adverse effect on our business, results of operations and financial condition.
The loss of any key customer or its inability to pay for our services could result in a significant loss of revenue in a given period.
We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of customers. Three
customers, international oil companies, accounted for an aggregate of 36%, or $698.9 million, of our consolidated revenues during 2011 (2010 –
three customers for 37% or $778.6 million, 2009 – three customers for 33% or $716.5 million). The loss of any significant customer or a substantial
decline in the amount of services requested by a significant customer, or the inability of a significant customer to pay for our services, could have a
material adverse effect on our business, financial condition and results of operations.
Future adverse economic conditions, including disruptions in the global credit markets, could adversely affect our results of operations.
Economic downturns and financial crises in the global markets could produce illiquidity in the capital markets, market volatility, heightened exposure
to interest rate and credit risks and reduced access to capital markets. If global financial markets and economic conditions significantly deteriorate in
the future, we may face restricted access to the capital markets or bank lending, which may make it more difficult and costly to fund future growth.
Decreased access to such resources could have a material adverse effect on our business, financial condition and results of operations.
Our operations are subject to substantial environmental and other regulations, which may significantly increase our expenses.
Our operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties and
conventions in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our
vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of ha zardous substances and
wastes. Many of these requirements are designed to reduce the risk of oil spills and other pollution. In addition, we believe that the heightened
environmental, quality and security concerns of insurance underwriters, regulators and charterers will lead to additional reg ulatory requirements,
including enhanced risk assessment and security requirements and greater inspection and safety requirements on vessels. We expect to incur
substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating
procedures.
These requirements can affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational
changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain
jurisdictional waters or ports, or detention in, certain ports. Under local, national and foreign laws, as well as international treaties and conventions,
we could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or other hazardous substances from
our vessels or otherwise in connection with our operations. We could also become subject to personal injury or property damage claims relating to
the release of or exposure to hazardous materials associated with our operations. In addition, failure to comply with applicable laws and regulations
may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations, including, in certain instances,
seizure or detention of our vessels. For further information about regulations affecting our business and related requirement s on us, please read
"Item 4. Information on the Company—B. Operations—Regulations.‖
We may be unable to make or realize expected benefits from acquisitions, and implementing our strategy of growth through acquisitions
may harm our financial condition and performance.
A principal component of our strategy is to continue to grow by expanding our business both in the geographic areas and markets where we have
historically focused as well as into new geographic areas, market segments and services. We may not be successful in expanding our operations
and any expansion may not be profitable. Our strategy of growth through acquisitions involves business risks commonly encountered in acquisitions
of companies, including:
interruption of, or loss of momentum in, the activities of one or more of an acquired company’s businesses and our businesses;
12
additional demands on members of our senior management while integrating acquired businesses, which would decrease the time t hey
have to manage our existing business, service existing customers and attract new customers;
difficulties in integrating the operations, personnel and business culture of acquired companies;
difficulties of coordinating and managing geographically separate organizations;
adverse effects on relationships with our existing suppliers and customers, and those of the companies acquired;
difficulties entering geographic markets or new market segments in which we have no or limited experience; and
loss of key officers and employees of acquired companies.
Acquisitions may not be profitable to us at the time of their completion and may not generate revenues sufficient to justify our investment. In
addition, our acquisition growth strategy exposes us to risks that may harm our results of operations and financial condition, including risks that we
may: fail to realize anticipated benefits, such as cost-savings, revenue and cash flow enhancements and earnings accretion; decrease our liquidity
by using a significant portion of our available cash or borrowing capacity to finance acquisitions; incur additional indebtedness, which may result in
significantly increased interest expense or financial leverage, or issue additional equity securities to finance acquisitions , which may result in
significant shareholder dilution; incur or assume unanticipated liabilities, losses or costs associated with the business acquired; or incur other
significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.
The strain that growth places upon our systems and management resources may harm our business.
Our growth has placed, and we believe it will continue to place, significant demands on our management, operational and financial resources. As we
expand our operations, we must effectively manage and monitor operations, control costs and maintain quality and control in geographically
dispersed markets. In addition, our three publicly traded subsidiaries have increased our complexity and placed additional demands on our
management. Our future growth and financial performance will also depend on our ability to recruit, train, manage and motivate our employees to
support our expanded operations and continue to improve our customer support, financial controls and information systems.
These efforts may not be successful and may not occur in a timely or efficient manner. Failure to effectively manage our growth and the system and
procedural transitions required by expansion in a cost-effective manner could have a material adverse affect on our business.
Our insurance may not be sufficient to cover losses that may occur to our property or as a result of our operations.
The operation of oil and product tankers, LNG and LPG carriers, and FSO and FPSO units is inherently risky. Although we carry hull and machinery
(marine and war risk) and protection and indemnity insurance, all risks may not be adequately insured against, and any particular claim may not be
paid. In addition, except for certain LNG carriers, we do not generally carry insurance on our vessels covering the loss of revenues resulting from
vessel off-hire time based on its cost compared to our off-hire experience. Any significant off-hire time of our vessels could harm our business,
operating results and financial condition. Any claims relating to our operations covered by insurance would be subject to deductibles, and since it is
possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain of our insurance
coverage is maintained through mutual protection and indemnity associations and as a member of such associations we may be required to make
additional payments over and above budgeted premiums if member claims exceed association reserves.
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent
environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks
of environmental damage or pollution. A catastrophic oil spill, marine disaster or natural disasters could result in losses that exceed our insurance
coverage, which could harm our business, financial condition and operating results. Any uninsured or underinsured loss could harm our business
and financial condition. In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships fai ling to
maintain certification with applicable maritime self-regulatory organizations.
Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In
addition, the insurance that may be available may be significantly more expensive than our existing coverage.
Marine transportation is inherently risky, and an incident involving significant loss of or environmental contamination by any of our
vessels could harm our reputation and business.
Our vessels and their cargoes are at risk of being damaged or lost because of events such as:
marine disaster;
bad weather or natural disasters;
mechanical failures;
grounding, fire, explosions and collisions;
piracy;
human error; and
war and terrorism.
An accident involving any of our vessels could result in any of the following:
death or injury to persons, loss of property or environmental damage or pollution;
13
delays in the delivery of cargo;
loss of revenues from or termination of charter contracts;
governmental fines, penalties or restrictions on conducting business;
higher insurance rates; and
damage to our reputation and customer relationships generally.
Any of these results could have a material adverse effect on our business, financial condition and operating results.
Our operating results are subject to seasonal fluctuations.
We operate our conventional tankers in markets that have historically exhibited seasonal variations in demand and, therefore, in charter rates. This
seasonality may result in quarter-to-quarter volatility in our results of operations. Tanker markets are typically stronger in the winter months as a
result of increased oil consumption in the Northern Hemisphere. In addition, unpredictable weather patterns in these months tend to disrupt vessel
scheduling, which historically has increased oil price volatility and oil trading activities in the winter months. As a result, our revenues have
historically been weaker during the fiscal quarters ended June 30 and September 30, and stronger in our fiscal quarters ended March 31 and
December 31.
Due to harsh winter weather conditions, oil field operators in the North Sea typically schedule oil platform and other infrastructure repairs and
maintenance during the summer months. Because the North Sea is our primary existing offshore oil market, this seasonal repair and maintenance
activity contributes to quarter-to-quarter volatility in our results of operations, as oil production typically is lower in the fiscal quarters ended June 30
and September 30 in this region compared with production in the fiscal quarters ended March 31 and December 31. Because a number of our North
Sea shuttle tankers operate under contracts of affreightment, under which revenue is based on the volume of oil transported, the results of our
shuttle tanker operations in the North Sea under these contracts generally reflect this seasonal production pattern. When we redeploy affected
shuttle tankers as conventional oil tankers while platform maintenance and repairs are conducted, the overall financial resul ts for our North Sea
shuttle tanker operations may be negatively affected if the rates in the conventional oil tanker markets are lower than the contract of affreightment
rates. In addition, we seek to coordinate some of the general dry docking schedule of our fleet with this seasonality, which may result in lower
revenues and increased dry docking expenses during the summer months.
We expend substantial sums during construction of newbuildings and the conversion of tankers to FPSO or FSO units without earning
revenue and without assurance that they will be completed.
We are typically required to expend substantial sums as progress payments during construction of a newbuilding or vessel conversion, but we do
not derive any revenue from the vessel until after its delivery. In addition, under some of our time charters if our delivery of a vessel to a customer is
delayed, we may be required to pay liquidated damages in amounts equal to or, under some charters, almost double the hire rate during the delay.
For prolonged delays, the customer may terminate the time charter and, in addition to the resulting loss of revenues, we may be responsible for
additional substantial liquidated charges.
Our newbuilding financing commitments typically have been pre-arranged. However, if we were unable to obtain financing required to complete
payments on any of our newbuilding orders, we could effectively forfeit all or a portion of the progress payments previously made. As of December
31, 2011, we had four shuttle tankers, one FPSO unit and the conversion of an existing Aframax tanker to an FPSO unit on order. The four shuttle
tankers are scheduled for delivery in 2013 and the two FPSO units are scheduled to be delivered between 2012 and 2013. As of December 31,
2011, progress payments made towards these newbuildings, excluding payments made by our joint venture partners, totalled $499.1 million.
In addition, conversion of tankers to FPSO and FSO units expose us to a numbers of risks, including lack of shipyard capacity and the difficulty of
completing the conversion in a timely and cost effective manner. During conversion of a vessel, we do not earn revenue from it. In addition,
conversion projects may not be successful.
We make substantial capital expenditures to expand the size of our fleet. Depending on whether we finance our expenditures through
cash from operations or by issuing debt or equity securities, our financial leverage could increase or our stockholders could be diluted.
We regularly evaluate and pursue opportunities to provide the marine transportation requirements for various projects, and we have currently
submitted bids to provide transportation solutions for LNG and LPG, FSO and FPSO projects. We may submit additional bids from time to time. The
award process relating to LNG and LPG transportation, FSO and FPSO opportunities typically involves various stages and takes several months to
complete. If we bid on and are awarded contracts relating to any LNG and LPG, FSO and FPSO projects, we will need to incur significant capital
expenditures to build the related LNG and LPG carriers, FSO and FPSO units.
To fund the remaining portion of existing or future capital expenditures, we will be required to use cash from operations or incur borrowings or raise
capital through the sale of debt or additional equity securities. Our ability to obtain bank financing or to access the capital markets for future offerings
may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among
other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for
necessary future capital expenditures could have a material adverse effect on our business, results of operations and financial condition. Even if we
are successful in obtaining necessary funds, incurring additional debt may significantly increase our interest expense and fi nancial leverage, which
could limit our financial flexibility and ability to pursue other business opportunities. Issuing additional equity securities may result in significant
stockholder dilution and would increase the aggregate amount of cash required to pay quarterly dividends.
Exposure to currency exchange rate and interest rate fluctuations results in fluctuations in our cash flows and operating results.
14
Substantially all of our revenues are earned in U.S. Dollars, although we are paid in Euros, Australian Dollars, Norwegian Kroner and British Pounds
under some of our charters. A portion of our operating costs are incurred in currencies other than U.S. Dollars. This partial mismatch in operating
revenues and expenses leads to fluctuations in net income due to changes in the value of the U.S. dollar relative to other currencies, in particular
the Norwegian Kroner, the Australian Dollar, the Canadian Dollar, the Singapore Dollar, the Japanese Yen, the British Pound and the Euro. We also
make payments under two Euro-denominated term loans. If the amount of these and other Euro-denominated obligations exceeds our Euro-
denominated revenues, we must convert other currencies, primarily the U.S. Dollar, into Euros. An increase in the strength of the Euro relative to the
U.S. Dollar would require us to convert more U.S. Dollars to Euros to satisfy those obligations.
Because we report our operating results in U.S. Dollars, changes in the value of the U.S. Dollar relative to other currencies also result in fluctuations
of our reported revenues and earnings. Under U.S. accounting guidelines, all foreign currency-denominated monetary assets and liabilities, such as
cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations, are revalued and
reported based on the prevailing exchange rate at the end of the period. This revaluation historically has caused us to report significant unrealized
foreign currency exchange gains or losses each period. The primary source of these gains and losses is our Euro-denominated term loans.
Many of our seafaring employees are covered by collective bargaining agreements and the failure to renew those agreements or any
future labor agreements may disrupt operations and adversely affect our cash flows.
A significant portion of our seafarers are employed under collective bargaining agreements. We may become subject to additional labor agreements
in the future. We may suffer to labor disruptions if relationships deteriorate with the seafarers or the unions that represen t them. Our collective
bargaining agreements may not prevent labor disruptions, particularly when the agreements are being renegotiated. Salaries are typically
renegotiated annually or bi-annually for seafarers and annually for onshore operational staff and may increase our cost of operation. Any labor
disruptions could harm our operations and could have a material adverse effect on our business, results of operations and financial condition.
We may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business.
Our success depends in large part on our ability to attract and retain highly skilled and qualified personnel. In crewing our vessels, we require
technically skilled employees with specialized training who can perform physically demanding work. Competition to attract and retain qualified crew
members is intense. If crew costs increase, and we are not able to increase our rates to customers to compensate for any crew cost increases, our
financial condition and results of operations may be adversely affected. Any inability we experience in the future to hire, train and retain a sufficient
number of qualified employees could impair our ability to manage, maintain and grow our business.
Terrorist attacks, piracy, increased hostilities or war could lead to further economic instability, increased costs and disruption of
business.
Terrorist attacks, piracy and the current conflicts in the Middle East, and other current and future conflicts, may adversely affect our business,
operating results, financial condition, and ability to raise capital and future growth. Continuing hostilities in the Middle East may lead to additional
armed conflicts or to further acts of terrorism and civil disturbance in the United States or elsewhere, which may contribute to economic instability
and disruption of oil production and distribution, which could result in reduced demand for our services.
In addition, oil facilities, shipyards, vessels, pipelines and oil fields could be targets of future terrorist attacks and our vessels could be targets of
pirates or hijackers. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increas ed
vessel operational costs, including insurance costs, and the inability to transport oil to or from certain locations. Terrori st attacks, war, piracy,
hijacking or other events beyond our control that adversely affect the distribution, production or transportation of oil to be shipped by us could entitle
customers to terminate the charters and impact the use of shuttle tankers under contracts of affreightment, which would harm our cash flow and
business.
Acts of piracy on ocean-going vessels have recently increased in frequency, which 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 and the Gulf of Aden off
the coast of Somalia. In recent years, the frequency and severity of piracy incidents has significantly increased, particularly in the Gulf of Aden and
Indian Ocean. If these piracy attacks result in regions in which our vessels are deployed being named on the Joint War Committee Listed Areas, war
risk insurance premiums payable for such coverage can 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 on-board 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, financial condition and results of operations.
Our substantial operations outside the United States expose us to political, governmental and economic instability, which could harm our
operations.
Because our operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental
conditions in the countries where we engage in business or where our vessels are registered. Any disruption caused by these f actors could harm
our business, including by reducing the levels of oil exploration, development and production activities in these areas. We derive some of our
revenues from shipping oil from politically unstable regions. Conflicts in these regions have included attacks on ships and other efforts to disrupt
shipping. Hostilities or other political instability in regions where we operate or where we may operate could have a material adverse effec t on the
growth of our business, results of operations and financial condition and ability to make cash distributions. In addition, tariffs, trade embargoes and
other economic sanctions by the United States or other countries against countries to which we trade may limit trading activities with those
countries, which could also harm our business and ability to make cash distributions. Finally, a government could requisition one or more of our
vessels, which is most likely during war or national emergency. Any such requisition would cause a loss of the vessel and could harm our cash flow
and financial results.
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Maritime claimants could arrest, or port authorities could detain, our vessels, which could interrupt our cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that
vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lienholder may enforce its lien by arresting a vessel through
foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of
funds to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the ―sister ship‖ theory of liability, a
claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any ―associated‖ vessel, 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. In addition, port authorities may seek to detain our vessels in port, which could adversely affect our operating results or relationships with
customers.
Declining market values of our vessels could adversely affect our liquidity and result in breaches of our financing agreements.
Market values of vessels fluctuate depending upon general economic and market conditions affecting relevant markets and industries and
competition from other shipping companies and other modes of transportation. In addition, as vessels become older, they gener ally decline in value.
Declining vessel values could adversely affect our liquidity by limiting our ability to raise cash by refinancing vessels. Declining vessel values could
also result in a breach of loan covenants and events of default under certain of our credit facilities that require us to maintain certain loan-to-value
ratios. If we are unable to pledge additional collateral in the event of a decline in vessel values, the lenders under these facilities could accelerate
our debt and foreclose on our vessels pledged as collateral for the loans. As of December 31, 2011, the total outstanding debt under credit facilities
with this type of covenant tied to conventional tanker values was $204.2 million and to LNG carrier values was $467.6 million. We have five
financing arrangements that require us to maintain vessel value to outstanding loan principal balance ratios ranging from 105% to 115%. At
December 31, 2011, we were in compliance with these required ratios.
Climate change and greenhouse gas restrictions may adversely impact our operations and markets.
Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regul atory frameworks to
reduce greenhouse gas emissions. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased
efficiency standards, and incentives or mandates for renewable energy. Compliance with changes in laws, regulations and obligations relating to
climate change could increase our costs related to operating and maintaining our vessels and require us to install new emission controls, acquire
allowances or pay taxes related to our greenhouse gas emissions, or administer and manage a greenhouse gas emissions program. Revenue
generation and strategic growth opportunities may also be adversely affected.
Adverse effects upon the oil and gas industry relating to climate change may also adversely affect demand for our services. Although we do not
expect that demand for oil and gas will lessen dramatically over the short-term, in the long-term climate change may reduce the demand for oil and
gas or increased regulation of greenhouse gases may create greater incentives for use of alternative energy sources. Any long-term material
adverse effect on the oil and gas industry could have a significant financial and operational adverse impact on our business that we c annot predict
with certainty at this time.
We have substantial debt levels and may incur additional debt.
As of December 31, 2011, our consolidated debt and capital lease obligations totalled $6.1 billion and we had the capacity to borrow an additional
$0.8 billion under our credit facilities. These credit facilities may be used by us for general corporate purposes. Our consolidated debt and capital
lease obligations could increase substantially. We will continue to have the ability to incur additional debt, subject to lim itations in our credit facilities.
Our level of debt could have important consequences to us, including:
our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be
impaired or such financing may not be available on favorable terms;
we will need a substantial portion of our cash flow to make principal and interest payments on our debt, reducing the funds that would
otherwise be available for operations, future business opportunities and dividends to stockholders;
our debt level may make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our industry or
the economy generally; and
our debt level may limit our flexibility in obtaining additional financing, pursuing other business opportunities and responding to changing
business and economic conditions.
Our ability to service our debt will depend on certain financial, business and other factors, many of which are beyond our control.
Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control. In addition, we rely on
distributions and other intercompany cash flows from our subsidiaries to repay our obligations. Financing arrangements between some of our
subsidiaries and their respective lenders contain restrictions on distributions from such subsidiaries.
If we are unable to generate sufficient cash flow to service our debt service requirements, we may be forced to take actions such as:
restructuring or refinancing our debt;
seeking additional debt or equity capital;
seeking bankruptcy protection;
reducing distributions;
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reducing or delaying our business activities, acquisitions, investments or capital expenditures; or
selling assets.
Such measures might not be successful and might not enable us to service our debt. In addition, any such financing, refinancing or sale of assets
might not be available on economically favorable terms. In addition, our credit agreements and the indenture governing our debt securities may
restrict our ability to implement some of these measures.
Financing agreements containing operating and financial restrictions may restrict our business and financing activities.
The operating and financial restrictions and covenants in our revolving credit facilities, term loans and in any of our futur e financing agreements
could adversely affect our ability to finance future operations or capital needs or to pursue and expand our business activities. For example, these
financing arrangements restrict our ability to:
pay dividends;
incur or guarantee indebtedness;
change ownership or structure, including mergers, consolidations, liquidations and dissolutions;
grant liens on our assets;
sell, transfer, assign or convey assets;
make certain investments; and
enter into a new line of business.
Our ability to comply with covenants and restrictions contained in debt instruments may be affected by events beyond our control, including
prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, we may fail to comply with these
covenants. If we breach any of the restrictions, covenants, ratios or tests in the financing agreements, our obligations may become immediately due
and payable, and the lenders’ commitment under our credit facilities, if any, to make further loans may terminate. A default under financing
agreements could also result in foreclosure on any of our vessels and other assets securing related loans.
Certain of Teekay LNG's lease arrangements contain provisions whereby it has provided a tax indemnification to third parties, which may
result in increased lease payments or termination of favorable lease arrangements.
Teekay LNG and a joint venture partner are the lessee under 30-year capital lease arrangements with a third party for three LNG carriers. Under the
terms of these capital lease arrangements, the lessor claims tax depreciation on the capital expenditures it incurred to acquire these vessels. As is
typical in these leasing arrangements, tax and change of law risks are assumed by the lessee. The rentals payable under the lease arrangements
are predicated on the basis of certain tax and financial assumptions at the commencement of the leases. If an assumption proves to be incorrect or
there is a change in the applicable tax legislation or the interpretation thereof by the United Kingdom taxing authority, the lessor is entitled to
increase the rentals so as to maintain its agreed after-tax margin. Teekay LNG does not have the ability to pass these increased rentals onto the
charter party. However, the terms of the lease arrangements enable Teekay LNG and the joint venture partner jointly to terminate the lease
arrangement on a voluntary basis at any time. In the event of an early termination of the lease arrangements, the joint venture may be obliged to
pay termination sums to the lessor sufficient to repay its investment in the vessels and to compensate it for the tax effect of the terminations,
including recapture of tax depreciation, if any. Although the exact amount of any such payments upon termination would be negotiated between
Teekay LNG and the lessor, we expect the amount would be significant.
Recently, the U.K. taxing authority has been urging lessors under capital lease arrangements that have tax benefits similar to the ones provided by
the capital lease arrangements for our LNG carriers to terminate such capital lease arrangements and has in other circumstanc es challenged the
use of similar tax structures, although under facts we believe are different from ours. As a result, the lessor has requested that Teekay LNG enter
into negotiations for a mutually agreed upon termination of these leases. Teekay LNG has declined the request to negotiate. Based on discussions
with our counsel, we do not believe that the U.K. taxing authority would be able to successfully challenge the availability t o the lessor of these
benefits. This assessment is partially based on a January 2012 court decision, regarding a similar financial lease of an LNG carrier, that was ruled in
favor of the taxpayer. However, it is possible that the U.K. taxing authority may appeal that decision. If the U.K. taxing authority were able to
successfully challenge Teekay LNG’s leases, the joint venture, in which Teekay LNG owns a 70% interest, could be subject to significant costs
associated with the termination of the lease or increased lease payments to compensate the lessor for the lost tax benefits. The estimate of Teekay
LNG’s 70% share of the potential exposure ranges from $54 million to $77 million.
In addition, the subsidiaries of another joint venture formed to service the Tangguh LNG project in Indonesia have entered into lease arrangements
with a third party for two LNG carriers. Teekay LNG purchased our interest in this joint venture in 2009. The terms of the lease arrangements
provide similar tax and change of law risk assumption by this joint venture as with the three LNG carriers above.
Our joint venture arrangements impose obligations upon us but limit our control of the joint ventures, which may affect our ability to
achieve our joint venture objectives.
For financial or strategic reasons, we conduct a portion of our business through joint ventures. Generally, we are obligated to provide proportionate
financial support for the joint ventures although our control of the business entity may be substantially limited. Due to this limited control, we
generally have less flexibility to pursue our own objectives through joint ventures than we would with our own subsidiaries. There is no assurance
that our joint venture partners will continue their relationships with us in the future or that we will be able to achieve our financial or strategic
objectives relating to the joint ventures and the markets in which they operate. In addition, our joint venture partners may have business objectives
17
that are inconsistent with ours, experience financial and other difficulties that may affect the success of the joint venture, or be unable or unwilling to
fulfill their obligations under the joint ventures, which may affect our financial condition or results of operations.
Tax Risks
In addition to the following risk factors, you should read "Item 4. Information on the Company—Taxation of the Company‖ and "Item 10. Additional
Information—Material U.S. Federal Income Tax Considerations‖ and ―—Non-United States Tax Considerations‖ for a more complete discussion of
the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of our common stock.
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax
consequences to U.S. holders.
A non-U.S. entity taxed as a corporation for U.S. federal income tax purposes will be treated as a ―passive foreign investment company‖ (or PFIC)
for U.S. federal income tax purposes if at least 75% of its gross income for any taxable year consists of certain types of ―passive income,‖ or at least
50% of the average value of the entity’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 that are received from unrelated parties in connection with the active conduct of a trade or business. By contrast, income derived
from the performance of services does not constitute ―passive income.‖
There are legal uncertainties involved in determining whether the income derived from our time-chartering activities constitutes rental income or
income derived from the performance of services, including the decision in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), which held
that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign
sales corporation provision of the U.S. Internal Revenue Code of 1986, as amended (or the Code). However, the Internal Revenue Service (or
IRS) stated in an Action on Decision (AOD 2010-001) that it disagrees with, and will not acquiesce to, the way that the rental versus
services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in
Tidewater would be treated as producing services income for PFIC purposes. The IRS's statement with respect to Tidewater cannot be
relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specif ically relating to
the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would not fo llow the Tidewater decision in
interpreting the PFIC provisions of the Code. Nevertheless, based on our current assets and operations, we intend to take the position that we
are not now and have never been a PFIC. No assurance can be given, however, that the IRS or a court of law, will accept our position, or that we
would not constitute a PFIC for any future taxable year if there were to be changes in our assets, income or operations.
If the IRS were to determine that we are or have been a PFIC for any taxable year, U.S. holders of our common stock will face adverse U.S. federal
income tax consequences. Under the PFIC rules, unless those U.S. holders make certain elections available under the Code, such holders would
be liable to pay tax at ordinary income tax rates plus interest upon certain distributions and upon any gain from the disposition of our common stock,
as if such distribution or gain had been recognized ratably over the U.S. holder’s holding period. Please read "Item 10. Additional Information–
Material U.S. Federal Income Tax Considerations—United States Federal Income Taxation of U.S. Holders—Consequences of Possible PFIC
Classification.‖
The preferential tax rates applicable to qualified dividend income are temporary, and the absence of legislation extending the term would
cause our dividends to be taxed at ordinary graduated tax rates.
Certain of our distributions may be treated as qualified dividend income eligible for preferential rates of U.S. federal income tax to U.S. individual
stockholders (and certain other U.S. stockholders). In the absence of legislation extending the term for these preferential tax rates or providing for
some other treatment, all dividends received by such U.S. taxpayers in taxable years beginning after December 31, 2012 will be taxed at ordinary
graduated tax rates. Please read "Item 10. Additional Information—Material U.S. Federal Income Tax Considerations—United States Federal
Income Taxation of U.S. Holders—Distributions."
We may be subject to taxes, which could affect our operating results.
We or our subsidiaries are subject to tax in certain jurisdictions in which we or our subsidiaries are organized, own assets or have operations, which
reduces our operating results. In computing our tax obligations in these jurisdictions, we are required to take various tax accounting and reporting
positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot
assure you that upon review of these positions, the applicable authorities will agree with our positions. A successful challenge by a tax authority
could result in additional tax imposed on us or our subsidiaries, further reducing our operating results. In addition, changes in our operations or
ownership could result in additional tax being imposed on us or on our subsidiaries in jurisdictions in which operations are conducted. For example,
changes in the ownership of our stock may cause us and certain of our subsidiaries to be unable to claim an exemption from U.S. federal income
tax under Section 883 of the Code. If we were not exempt from tax under Section 883 of the Code, we or our subsidiaries that are currently claiming
exemptions will be subject to U.S. federal income tax on shipping income attributable to our subsidiaries’ transportation of cargoes to or from the
U.S., the amount of which is not within our complete control. Also, jurisdictions in which we or our subsidiaries are organized, own assets or have
operations may change their tax laws, or we may enter into new business transactions relating to such jurisdictions, which could result in increased
tax liability and reduce our operating results. Please read "Item 4. Information on the Company—Taxation of the Company.‖
Item 4. Information on the Company
A. Overview, History and Development
Overview
We are a leading provider of international crude oil and gas marine transportation services and we also offer offshore oil production, storage and
offloading services, primarily under long-term, fixed-rate contracts. Over the past decade, we have undergone a major transformation from being
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primarily an owner of ships in the cyclical spot tanker business to being a growth-oriented asset manager in the ―Marine Midstream‖ sector. This
transformation has included our expansion into the liquefied natural gas (or LNG) and liquefied petroleum gas (or LPG) shipping sectors through our
publicly-listed subsidiary Teekay LNG Partners L.P. (NYSE: TGP) (or Teekay LNG), further growth of our operations in the offshore production,
storage and transportation sector through our publicly-listed subsidiary Teekay Offshore Partners L.P. (NYSE: TOO) (or Teekay Offshore) and
through our 100% ownership interest in Teekay Petrojarl AS, and expansion of our conventional tanker business through our publicly-listed
subsidiary, Teekay Tankers Ltd. (NYSE: TNK) (or Teekay Tankers). We are responsible for managing and operating consolidated assets of over
$11 billion, comprised of approximately 150 liquefied gas, offshore, and conventional tanker assets. With offices in 16 countries and approximately
6,400 seagoing and shore-based employees, Teekay provides a comprehensive set of marine services to the world’s leading oil and gas
companies, and its reputation for safety, quality and innovation has earned it a position with its customers as The Marine Midstream Company.
Our shuttle tanker and FSO segment and our FPSO segment include our shuttle tanker operations, floating storage and off-take (or FSO) units, and
our floating production, storage and offloading (or FPSO) units, which primarily operate under long-term fixed-rate contracts. As of December 31,
2011, our shuttle tanker fleet, including newbuildings on order, had a total cargo capacity of approximately 5.0 million deadweight tonnes (or dwt),
which represented approximately 44% of the total tonnage of the world shuttle tanker fleet. Please read ―Item 4.Information on the Company: Our
Fleet.‖
Our liquefied gas segment includes our LNG and LPG carriers. Substantially all of our LNG and LPG carriers are subject to long-term, fixed-rate
charter contracts. As of December 31, 2011, this fleet, including newbuildings on order, had a total cargo carrying capacity of approximately 3.3
million cubic meters. Please read ―Item 4.Information on the Company: Our Fleet.‖
Our conventional tanker segment includes our conventional crude oil tankers and product carriers. In order to provide investors with additional
information about our conventional tanker segment, we have divided this operating segment into the fixed-rate tanker sub-segment and the spot
tanker sub-segment.
Our spot tanker sub-segment consists of conventional crude oil tankers and product tankers operating in the spot-tanker market or subject to time-
charters or contracts of affreightment that are priced on a spot-market basis or are short-term, fixed-rate contracts. We consider contracts that have
an original term of less than one year in duration to be short-term. Our conventional Aframax, Suezmax, and large and medium product tankers are
among the vessels included in the spot tanker sub-segment. Our fixed-rate tanker sub-segment includes our conventional crude oil and product
tankers on fixed-rate time-charter contracts with an initial duration of at least one year. Please read ―Item 4.Information on the Company: Our Fleet.‖
The Teekay organization was founded in 1973. We are incorporated under the laws of the Republic of The Marshall Islands as Teekay Corporation
and maintain our principal executive headquarters at 4th floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda. Our telephone
number at such address is (441) 298-2530. Our principal operating office is located at Suite 2000, Bentall 5, 550 Burrard Street, Vancouver, British
Columbia, Canada, V6C 2K2. Our telephone number at such address is (604) 683-3529.
Recent Business Acquisition
Acquisition of FPSO Units and Investment in Sevan Marine ASA
On November 30, 2011, we acquired from Sevan the FPSO unit Sevan Hummingbird (or Hummingbird) and its existing customer contract for
approximately $184 million (including an adjustment for working capital) and made an investment of approximately $25 million to obtain a 40%
ownership interest in a recapitalized Sevan. We also entered into a cooperation agreement with Sevan relating to joint marketing of offshore
projects, the development of future projects, and the financing of such projects. Concurrently, our subsidiary, Teekay Offshore acquired from Sevan
the FPSO unit Sevan Piranema (or Piranema) and its existing customer contract for approximately $164 million (including an adjustment for working
capital). The purchase price for the acquisitions of the Hummingbird and the Piranema and the investment in Sevan Marine were paid in cash and
financed by a combination of new debt facilities, a private placement offering of Teekay Offshore common units and existing liquidity.
On November 30, 2011, we also entered into an agreement to acquire the FPSO unit Sevan Voyageur (or Voyageur) and its existing customer
contract from Sevan. We will acquire the Voyageur once the existing upgrade project is completed and the Voyageur commences operations under
its customer contract, currently expected to be in the fourth quarter of 2012. We will pay Sevan $94.0 million to acquire the Voyageur, will assume
the Voyageur’s existing $230.0 million credit facility, which had an outstanding balance of $220.0 million on November 30, 2011, and are
responsible for all remaining upgrade costs, which are estimated to be between $110 and $130 million. We have control over the upgrade project
and have guaranteed the repayment of the existing credit facility. The Voyageur has been consolidated by us effective November 30, 2011, as the
Voyageur has been determined to be a variable interest entity (or VIE) and we have been determined to be the primary beneficiary.
Please read "Item 5. Operating and Financial Review and Prospects—Management's Discussion and Analysis of Financial Condition and Results of
Operations—Significant Developments in 2011 and Early 2012" for more information.
Recent Equity Offerings and Transactions by Subsidiaries
Equity Offerings and Transactions by Teekay Tankers
During June 2009, Teekay Tankers completed a public offering of 7.0 million common shares of its Class A Common Stock at a price of $9.80 per
share, for gross proceeds of $68.6 million. Teekay Tankers used the total net offering proceeds of approximately $65.6 million to acquire a 2003-
built Suezmax tanker from us for $57.0 million and to repay a portion of its outstanding debt under its revolving credit facility.
During April 2010, Teekay Tankers completed a public offering of 8.8 million common shares of its Class A Common Stock (including 1.1 million
common shares issued upon the partial exercise of the underwriter’s overallotment option) at a price of $12.25 per share, for gross proceeds of
$107.5 million. Teekay Tankers used the net proceeds from the offering as partial consideration to acquire from us for a total purchase price of
$168.7 million the following three vessels: two Suezmax tankers, the Yamuna Spirit and the Kaveri Spirit, and one Aframax tanker, the Helga Spirit.
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As part of the purchase price for these vessels, Teekay Tankers concurrently issued to us 2.6 million unregistered shares of Class A Common Stock
at the public offering price of $12.25 per share.
During October 2010, Teekay Tankers completed a public offering of 8.6 million common shares of its Class A Common Stock (including 395,000
common shares issued upon the partial exercise of the underwriter’s overallotment option) at a price of $12.15 per share, for gross proceeds of
$104.4 million. Teekay Tankers used part of the net proceeds from the offering to repay a portion of its outstanding debt under a term loan.
During February 2011, Teekay Tankers completed a public offering of 9.9 million common shares of its Class A Common Stock (including 1.3 million
common shares issued upon the exercise of the underwriter’s overallotment option) at a price of $11.33 per share, for gross proceeds of
approximately $112.1 million. Teekay Tankers used the net proceeds from the offering to prepay a portion of its outstanding debt under a revolving
credit facility.
During February 2012, Teekay Tankers completed a public offering of 17.3 million common shares of its Class A common stock (including 2.3
million common shares issued upon the full exercise of the underwriter’s overallotment option) at a price of $4.00 per share, for gross proceeds of
$69 million. Please read "Item 18. Financial Statements: Note 25(c)—Subsequent Events." Teekay Tankers used the net proceeds from the offering
to repay a portion of its outstanding debt under a revolving credit facility.
As a result of these transactions, our ownership of Teekay Tankers was reduced to 20.4% as of March 1, 2012. We maintain voting control of
Teekay Tankers through our ownership of shares of Class A and Class B Common Stock and continue to consolidate this subsidiary. Please read
"Item 18. Financial Statements: Note 5—Equity Offerings by Subsidiaries."
During April 2012, Teekay Tankers reached an agreement to acquire from Teekay, a fleet of 13 double-hull conventional oil and product tankers and
related time-charter contracts, debt facilities and other assets and rights, for an aggregate purchase price of approximately $455 million. Please read
―Item 18. Financial Statements: Note 25(f)—Subsequent Events.‖ As a result of this transaction, our ownership in Teekay Tankers will increase from
approximately 20% to approximately 25%. The transaction is subject to final documentation, receiving relevant third party consents, as well as other
customary closing conditions, and is expected to be completed in the second quarter of 2012.
Equity Offerings and Transactions by Teekay Offshore and the Sale of Remaining Interest in OPCO to Teekay Offshore
During August 2009, Teekay Offshore completed a public offering of 7.5 million common units (including 975,000 units issued upon the exercise of
the underwriter’s overallotment option) at a price of $14.32 per unit, for total gross proceeds of $107.0 million (including the general partner’s 2%
proportionate capital contribution). Teekay Offshore used the net proceeds from the offering to reduce amounts outstanding under one of its
revolving credit facilities.
During March 2010, Teekay Offshore completed a public offering of 5.1 million common units (including 660,000 units issued upon the exercise of
the underwriter’s overallotment option) at a price of $19.48 per unit, for gross proceeds of $100.6 million (including the general partner’s 2%
proportionate capital contribution). Teekay Offshore used the net proceeds from the offering to repay the vendor financing of $60.0 million we
provided for the acquisition from us of the FPSO unit, the Petrojarl Varg and to finance a portion of the April 2010 acquisition from us of the FSO
unit, the Falcon Spirit, for $44.1 million.
During August 2010, Teekay Offshore completed a public offering of 6.0 million common units (including 787,500 units issued upon the exercise of
the underwriter’s overallotment option) at a price of $22.15 per unit, for gross proceeds of $136.5 million (including the general partner’s 2%
proportionate capital contribution). Teekay Offshore used the net proceeds from the offering to repay a portion of its outstanding debt under one of
its revolving credit facilities.
During December 2010, Teekay Offshore completed a public offering of 6.4 million common units (including 840,000 units issued upon the exercise
of the underwriter’s overallotment option) at a price of $27.84 per unit, for gross proceeds of $182.9 million (including the general partner’s 2%
proportionate capital contribution). Teekay Offshore used the net proceeds from the offering to repay a portion of its outstanding debt under one
revolving credit facility.
During March 2011, we sold our 49% interest in OPCO to Teekay Offshore for a combination of $175 million in cash (less $15 million in distributions
made by OPCO to us between December 31, 2010 and the date of acquisition) and 7.6 million of Teekay Offshore's common units. In addition,
Teekay Offshore’s general partner made a proportionate capital contribution to maintain its 2% general partner interest. The sale increased Teekay
Offshore's ownership of OPCO from 51% to 100%.
During July 2011, Teekay Offshore completed a private placement of 0.7 million common units at a price of $28.04 per unit to an institutional
investor for gross proceeds of approximately $20.4 million (including the general partner’s 2% proportionate capital contribution). Teekay Offshore
used the proceeds from the issuance of common units to partially fund the acquisition of four newbuilding shuttle tankers to be chartered under long-
term fixed-rate charters with a subsidiary of BG Group plc (or BG) to provide shuttle tanker services in Brazil.
During November 2011, Teekay Offshore completed a private placement of 7.3 million common units at a price of $23.90 to a group of institutional
investors for gross proceeds of approximately $173.5 million (including the general partner's 2% proportionate capital contribution). Teekay Offshore
used the proceeds from the issuance of common units to finance its acquisition from Sevan in November 2011 of the Piranema and four BG
newbuilding shuttle tankers that are scheduled to deliver in mid-2013.
During November 2011, Teekay Offshore acquired a 100% interest in the Piranema from Sevan. The total purchase price of $164.3 million
(including an adjustment for working capital) was paid in cash and was financed through the concurrent issuance of 7.3 million common units in a
private placement with third-party investors. The 2007-built Piranema Spirit FPSO unit is currently operating under a long-term charter to Petroleo
Brasileiro S.A. (or Petrobras) on the Piranema field located offshore Brazil. The charter includes a firm contract period through March 2018, with up
to 11 one-year extension options and includes cost escalation clauses.
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As a result of these transactions, our ownership of Teekay Offshore was reduced to 33.0% (including our 2% general partner interest) as of March
1, 2012. We maintain control of Teekay Offshore by virtue of our control of the general partner and will continue to consolidate this subsidiary.
Equity Offerings, Unit Issuances and Transactions by Teekay LNG
During March 2009, Teekay LNG completed a public offering of 4.0 million of its common units at a price of $17.60 per unit, for gross proceeds of
$71.8 million (including the general partner’s 2% proportionate capital contribution). Teekay LNG used the net proceeds from the offering to prepay
amounts outstanding on two of its revolving credit facilities.
During November 2009, Teekay LNG completed a public offering of 4.0 million of its common units (including 450,650 units issued upon the
exercise of the underwriter’s overallotment option) at a price of $24.40 per unit, for gross proceeds of $98.3 million (including the general partner’s
2% proportionate capital contribution). Teekay LNG used the net proceeds from the offering to prepay amounts outstanding under its revolving
credit facilities.
During July 2010, Teekay LNG completed a direct equity placement of 1.7 million common units at a price of $29.18 per unit, for gross proceeds of
$51 million (including the general partner’s 2% proportionate capital contribution).
During November 2010, Teekay LNG acquired a 50% interest in companies that own two LNG carriers (collectively the Exmar Joint Venture) from
Exmar NV for a total purchase price of approximately $72.5 million net of assumed debt. Teekay LNG paid $37.3 million of the purchase price by
issuing to Exmar NV 1.1 million of its common units and the balance was financed by borrowing under one of its revolving credit facilities.
During April 2011, Teekay LNG completed a public offering of 4.3 million of its common units (including 551,800 million units issued upon the partial
exercise of the underwriters’ overallotment option) at a price of $38.88 per unit, for gross proceeds of $168.7 million (including the general partner’s
2% proportionate capital contribution). Teekay LNG used the net proceeds from the offering to fund the equity purchase price of its acquisition from
Teekay of a 33% interest in four newbuilding LNG carriers to provide services to the Angola LNG Project.
During November 2011, Teekay LNG completed a public offering of 5.5 million of its common units at a price of $33.40 per unit, for gross proceeds
of $187.4 million (including the general partner’s 2% proportionate capital contribution). Teekay LNG used the proceeds from the offering to partially
finance the acquisition, through a joint venture with Marubeni Corporation (or Marubeni), of six LNG carriers from A.P. Moller-Maersk A/S (or
Maersk).
During February 2012, Teekay LNG and Marubeni acquired, through their joint venture (or the Teekay LNG-Marubeni Joint Venture), a 100%
interest in the six LNG carriers from Maersk for an aggregate purchase price of approximately $1.3 billion. Teekay LNG and Marubeni have 52%
and 48% economic interests, respectively, but share control in the joint venture that was formed to hold the ownership interests in these LNG
carriers. The Teekay LNG-Marubeni Joint Venture’s share of the equity contribution was approximately $138 million.
As a result of these transactions, our ownership of Teekay LNG has been reduced to 40.1% (including our 2% general partner interest) as of March
1, 2012. We maintain control of Teekay LNG by virtue of our control of the general partner and will continue to consolidate this subsidiary. Please
read "Item 18. Financial Statements: Note 5—Equity Offerings by Subsidiaries.
Please read "Item 5. Operating and Financial Review and Prospects—Management's Discussion and Analysis of Financial Condition and Results of
Operations—Significant Developments in 2011 and Early 2012" for more information on recent transactions.
B. Operations
Our organization is divided into the following key areas: the shuttle tanker and FSO segment (included in our Teekay Shuttle and Offshore business
unit), the FPSO segment (included in our Teekay Petrojarl business unit), the liquefied gas segment (included in our Teekay Gas Services business
unit) and the conventional tanker segment, consisting of the spot tanker sub-segment and fixed-rate tanker sub-segment (both included in our
Teekay Tanker Services business unit). These centers of expertise work closely with customers to ensure a thorough understanding of our
customers’ requirements and to develop tailored solutions.
The Teekay Shuttle and Offshore and Teekay Petrojarl business units provide marine transportation, production and storage services to
the offshore oil industry, including shuttle tanker, FSO and FPSO services. Our expertise and partnerships with third parties allow us to
create solutions for customers producing crude oil from offshore installations.
The Teekay Gas Services business unit provides gas transportation services, primarily under long-term fixed-rate contracts to major
energy and utility companies. These services currently include the transportation of LNG and LPG.
The Teekay Tanker Services business unit is responsible for the commercial management of our conventional crude oil and product tanker
transportation services. We offer a full range of shipping solutions through our worldwide network of commercial offices.
Shuttle Tanker and FSO Segment and FPSO Segment
The main services our shuttle tanker and FSO segment and our FPSO segment provide to customers are:
offloading and transportation of cargo from oil field installations to onshore terminals via dynamically positioned, offshore loading shuttle
tankers;
floating storage for oil field installations via FSO units; and
floating production, processing and storage services via FPSO units.
21
Shuttle Tankers
A shuttle tanker is a specialized ship designed to transport crude oil and condensates from offshore oil field installations to onshore terminals and
refineries. Shuttle tankers are equipped with sophisticated loading systems and dynamic positioning systems that allow the ve ssels to load cargo
safely and reliably from oil field installations, even in harsh weather conditions. Shuttle tankers were developed in the North Sea as an alternative to
pipelines. The first cargo from an offshore field in the North Sea was shipped in 1977, and the first dynamically positioned shuttle tankers were
introduced in the early 1980s. Shuttle tankers are often described as ―floating pipelines‖ because these vessels typically shuttle oil from offshore
installations to onshore facilities in much the same way a pipeline would transport oil along the ocean floor.
Our shuttle tankers are primarily subject to long-term, fixed-rate time-charter contracts or bareboat charter contracts for a specific offshore oil field,
where a vessel is hired for a fixed period of time, or under contracts of affreightment for various fields, where we commit to be available to transport
the quantity of cargo requested by the customer from time to time over a specified trade route within a given period of time. The number of voyages
performed under these contracts of affreightment normally depends upon the oil production of each field. Competition for charters is based primarily
upon price, availability, the size, technical sophistication, age and condition of the vessel and the reputation of the vessel's manager. Technical
sophistication of the vessel is especially important in harsh operating environments such as the North Sea. Although the size of the world shuttle
tanker fleet has been relatively unchanged in recent years, conventional tankers can be converted into shuttle tankers by adding specialized
equipment to meet customer requirements. Shuttle tanker demand may also be affected by the possible substitution of sub-sea pipelines to
transport oil from offshore production platforms.
As of December 31, 2011, there were approximately 95 vessels in the world shuttle tanker fleet (including 28 newbuildings), the majority of which
operate in the North Sea. Shuttle tankers also operate in Africa, Brazil, Canada, Russia and the United States Gulf. As of December 31, 2011, we
had ownership interests in 36 shuttle tankers (including four newbuildings) and chartered-in an additional four shuttle tankers. Other shuttle tanker
owners include Knutsen NYK Offshore Tankers AS, Transpetro, Viken Shipping and J. Lauritzen which, as of December 31, 2011, controlled small
fleets of 3 to 22 shuttle tankers each. We believe that we have significant competitive advantages in the shuttle tanker market as a result of the
quality, type and dimensions of our vessels combined with our market share in the North Sea.
FSO Units
FSO units provide on-site storage for oil field installations that have no storage facilities or that require supplemental storage. An FSO unit is
generally used in combination with a jacked-up fixed production system, floating production systems that do not have sufficient storage facilities or
as supplemental storage for fixed platform systems, which generally have some on-board storage capacity. An FSO unit is usually of similar design
to a conventional tanker, but has specialized loading and off-take systems required by field operators or regulators. FSO units are moored to the
seabed at a safe distance from a field installation and receive the cargo from the production facility via a dedicated loading system. An FSO unit is
also equipped with an export system that transfers cargo to shuttle or conventional tankers. Depending on the selected moorin g arrangement and
where they are located, FSO units may or may not have any propulsion systems. FSO units are usually conversions of older single-hull conventional
oil tankers. These conversions, which include installation of a loading and off-take system and hull refurbishment, can generally extend the lifespan
of a vessel as an FSO unit by up to 20 years over the normal conventional tanker lifespan of 25 years.
Our FSO units are generally placed on long-term, fixed-rate time-charters or bareboat charters as an integrated part of the field development plan,
which provides more stable cash flow to us. Under a bareboat charter, the customer pays a fixed daily rate for a fixed period of time for the full use
of the vessel and is responsible for all crewing, management and navigation of the vessel and related expenses.
As of December 2011, there were approximately 98 FSO units operating and five FSO units on order in the world fleet. As at December 31, 2011,
we had ownership interests in five FSO units. The major markets for FSO units are Asia, the Middle East, the North Sea, South America and West
Africa. Our primary competitors in the FSO market are conventional tanker owners, who have access to tankers available for conversion, and oil
field services companies and oil field engineering and construction companies who compete in the floating production system market. Competition
in the FSO market is primarily based on price, expertise in FSO operations, management of FSO conversions and relationships with shipyards, as
well as the ability to access vessels for conversion that meet customer specifications.
FPSO Units
FPSO units are offshore production facilities that are ship-shaped or cylindrical-shaped and store processed crude oil in tanks located in the hull of
the vessel. FPSO units are typically used as production facilities to develop marginal oil fields or deepwater areas remote from existing pipeline
infrastructure. Of four major types of floating production systems, FPSO units are the most common type. Typically, the other types of floating
production systems do not have significant storage and need to be connected into a pipeline system or use an FSO unit for storage. FPSO units are
less weight-sensitive than other types of floating production systems and their extensive deck area provides flexibility in process plant layouts. In
addition, the ability to utilize surplus or aging tanker hulls for conversion to an FPSO unit provides a relatively inexpensive solution compared to the
new construction of other floating production systems. A majority of the cost of an FPSO comes from its top-side production equipment and thus
FPSO units are expensive relative to conventional tankers. An FPSO unit carries on-board all the necessary production and processing facilities
normally associated with a fixed production platform. As the name suggests, FPSO units are not fixed permanently to the seabed but are designed
to be moored at one location for long periods of time. In a typical FPSO unit installation, the untreated well-stream is brought to the surface via
subsea equipment on the sea floor that is connected to the FPSO unit by flexible flow lines called risers. The risers carry oil, gas and water from the
ocean floor to the vessel, which processes it on board. The resulting crude oil is stored in the hull of the vessel and subsequently transferred to
tankers either via a buoy or tandem loading system for transport to shore.
Traditionally for large field developments, the major oil companies have owned and operated new, custom-built FPSO units. FPSO units for smaller
fields have generally been provided by independent FPSO contractors under life-of-field production contracts, where the contract's duration is for the
useful life of the oil field. FPSO units have been used to develop offshore fields around the world since the late 1970s. As of December 2011 there
were approximately 160 FPSO units operating and 40 FPSO units on order in the world fleet. At December 31, 2011, we had ownership interests in
nine FPSO units (including one newbuilding under construction and one unit in conversion). Most independent FPSO contractors have backgrounds
22
in marine energy transportation, oil field services or oil field engineering and construction. Other major independent FPSO contractors are SBM
Offshore NV, BW Offshore, MODEC, Bluewater, Bumi Armada and Maersk FPSOs.
During 2011, a total of approximately 55% of our net revenues were earned by the vessels in our shuttle tankers and FSO segment and FPSO
segment, compared to approximately 53% in 2010 and 47% in 2009. Please read "Item 5. Operating and Financial Review and Prospects: Results
of Operations."
Liquefied Gas Segment
The vessels in our liquefied gas segment compete in the LNG and LPG markets. LNG carriers are usually chartered to carry LNG pursuant to time-
charter contracts with durations between 20 and 25 years, and with charter rates payable to the owner on a monthly basis. LNG shipping historically
has been transacted with these long-term, fixed-rate time-charter contracts. LNG projects require significant capital expenditures and typically
involve an integrated chain of dedicated facilities and cooperative activities. Accordingly, the overall success of an LNG project depends heavily on
long-range planning and coordination of project activities, including marine transportation. Most shipping requirements for new LNG projects
continue to be provided on a long-term basis, though the level of spot voyages (typically consisting of a single voyage), short-term time-charters and
medium-term time-charters have grown in the past few years.
In the LNG markets, we compete principally with other private and state-controlled energy and utilities companies, which generally operate captive
fleets, and independent ship owners and operators. Many major energy companies compete directly with independent owners by transporting LNG
for third parties in addition to their own LNG. Given the complex, long-term nature of LNG projects, major energy companies historically have
transported LNG through their captive fleets. However, independent fleet operators have been obtaining an increasing percentage of charters for
new or expanded LNG projects as major energy companies have continued to divest non-core businesses. Other major operators of LNG carriers
are BW Gas, Golar LNG, Kawasaki Kisen Kaisha, Malaysian International Shipping, Mitsui O.S.K., NYK Line and Qatar Gas Transport.
LNG carriers transport LNG internationally between liquefaction facilities and import terminals. After natural gas is transported by pipeline from
production fields to a liquefaction facility, it is super-cooled to a temperature of approximately negative 260 degrees Fahrenheit. This process
reduces its volume to approximately 1 / 600th of its volume in a gaseous state. The reduced volume facilitates economical storage and transportation
by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to meet
their demand for natural gas. LNG carriers include a sophisticated containment system that holds and insulates the LNG so it maintains its liquid
form. The LNG is transported overseas in specially built tanks on double-hulled ships to a receiving terminal, where it is offloaded and stored in
heavily insulated tanks. In regasification facilities at the receiving terminal, the LNG is returned to its gaseous state (or regasified) and then shipped
by pipeline for distribution to natural gas customers.
LPG carriers are mainly chartered to carry LPG on time charters of three to five years, on contracts of affreightment or spot voyage charters. The
two largest consumers of LPG are residential users and the petrochemical industry. Residential users, particularly in developing regions where
electricity and gas pipelines are not developed, do not have fuel switching alternatives and generally are not LPG price sensitive. The petrochemical
industry, however, has the ability to switch between LPG and other feedstock fuels depending on price and availability of alternatives.
Most new LNG carriers, including all of our vessels, are being built with a membrane containment system. These systems consist of insulation
between thin primary and secondary barriers and are designed to accommodate thermal expansion and contraction without overstressing the
membrane. New LNG carriers are generally expected to have a lifespan of approximately 40 years. New LPG carriers are generally expected to
have a lifespan of approximately 30 to 35 years. Unlike the oil tanker industry, there are currently no regulations that require the phase-out from
trading of LNG and LPG carriers after they reach a certain age. As at December 31, 2011, there were approximately 373 vessels in the world LNG
fleet, with an average age of approximately 10 years, and an additional 60 LNG carriers under construction or on order for delivery through 2015. As
of December 31, 2011, the worldwide LPG tanker fleet consisted of approximately 1,219 vessels with an average age of approximately 16 years and
approximately 80 additional LPG vessels were on order for delivery through 2014. LPG carriers range in size from approximately 250 to
approximately 85,000 cubic meters (or cbm). Approximately 54% (in terms of vessel numbers) of the worldwide fleet is less than 5,000 cbm.
Our liquefied gas segment primarily consists of LNG and LPG carriers subject to long-term, fixed-rate charter contracts. As at December 31, 2011,
we had ownership interests in 20 LNG carriers, as well as an additional newbuilding LNG carrier on order which commenced operations upon
delivery in January 2012 under a long-term fixed-rate time-charter in which our interest is 33%. In addition, as at December 31, 2011, we had
ownership interests in five LPG carriers.
During 2011, approximately 15% of our net revenues were earned by the vessels in our liquefied gas segment, compared to approximately 13% in
2010, and 13% in 2009. Please read "Item 5. Operating and Financial Review and Prospects: Results of Operations."
Conventional Tanker Segment
a) Spot Tanker Sub-Segment
Our spot tanker sub-segment consists of conventional crude oil tankers and product tankers operating in the spot-tanker market or subject to time-
charters or contracts of affreightment that are priced on a spot-market basis or are short-term, fixed-rate contracts. We consider contracts that have
an original term of less than one year in duration to be short-term. The vessels in our spot tanker sub-segment compete primarily in the Aframax and
Suezmax tanker markets. In these markets, international seaborne oil and other petroleum products transportation services are provided by two
main types of operators: captive fleets of major oil companies (both private and state-owned) and independent ship-owner fleets. Many major oil
companies and other oil trading companies, the primary charterers of our vessels, also operate their own vessels and transport their own oil and oil
for third-party charterers in direct competition with independent owners and operators. Competition for charters in the Aframax and Suezmax spot
charter market is intense and is based upon price, location, the size, age, condition and acceptability of the vessel, and the reputation of the vessel's
manager.
23
We compete principally with other owners in the spot-charter market through the global tanker charter market. This market is comprised of tanker
broker companies that represent both charterers and ship-owners in chartering transactions. Within this market, some transactions, referred to as
"market cargoes," are offered by charterers through two or more brokers simultaneously and shown to the widest possible range of owners; other
transactions, referred to as "private cargoes," are given by the charterer to only one broker and shown selectively to a limi ted number of owners
whose tankers are most likely to be acceptable to the charterer and are in position to undertake the voyage.
Certain of our vessels in the spot tanker sub-segment operate pursuant to pooling arrangements. Under a pooling arrangement, different vessel
owners pool their vessels, which are managed by a pool manager, to improve utilization and reduce expenses. In general, revenues generated by
the vessels operating in a pool, less related voyage expenses (such as fuel and port charges) and pool administrative expenses, are pooled and
allocated to the vessel owners according to a pre-determined formula. As of December 31, 2011, we participated in three main pooling
arrangements. These include an Aframax tanker pool, an LR2 product tanker pool (or the Taurus Pool) and a Suezmax tanker pool (or the Gemini
Pool). As of December 31, 2011, 13 of our Aframax tankers operated in the Aframax tanker pool, three of our LR2 tankers operated in the Taurus
pool and nine of our Suezmax tankers operated in the Gemini Pool. Each of these pools is either solely or jointly managed by us.
Our competition in the Aframax (80,000 to 119,999 dwt) market is also affected by the availability of other size vessels that compete in that market.
Suezmax (120,000 to 199,999 dwt) vessels and Panamax (55,000 to 79,999 dwt) vessels can compete for many of the same charters for which our
Aframax tankers compete. Similarly, Aframax tankers and Very Large Crude Carriers (200,000 to 319,999 dwt) (or VLCCs) can compete for many of
the same charters for which our Suezmax vessels compete. Because VLCCs comprise a substantial portion of the total capacity of the market,
movements by such vessels into Suezmax trades or of Suezmax vessels into Aframax trades would heighten the already intense competition.
We believe that we have competitive advantages in the Aframax and Suezmax tanker market as a result of the quality, type and dimensions of our
vessels and our market share in the Indo-Pacific and Atlantic Basins. As of December 31, 2011, our Aframax tanker fleet (excluding Aframax-size
shuttle tankers and newbuildings) had an average age of approximately 10 years and our Suezmax tanker fleet (excluding Suezmax-size shuttle
tankers and newbuildings) had an average age of approximately five years. This compares to an average age for the world oil tanker fleet of
approximately 8.4 years, for the world Aframax tanker fleet of approximately 8.1 years and for the world Suezmax tanker fleet of approximately 7.7
years.
As of December 31, 2011, other large operators of Aframax tonnage (including newbuildings on order) included Malaysian International Shipping
Corporation (approximately 58 Aframax vessels), Sovcomflot (approximately 49 vessels), the Sigma Pool (approximately 47 vessels) and the
Aframax International Pool (approximately 39 Aframax vessels). Other large operators of Suezmax tonnage (including newbuildings on order)
included the Orion Tankers Pool (approximately 30 vessels), the Stena Sonangol Pool (approximately 29 vessels), the Blue Fin Pool (approximately
19 vessels) and Sovcomflot (approximately 18 vessels).
We have chartering staff located in Tokyo, Japan; Singapore; London, England; Houston, Texas; and Stamford, Connecticut. Each office serves our
clients headquartered in that office's region. Fleet operations, vessel positions and charter market rates are monitored around the clock. We believe
that monitoring such information is critical to making informed bids on competitive brokered business.
During 2011, approximately 9% of our net revenues were earned by the vessels in our spot tanker sub-segment, compared to approximately 13% in
2010 and 20% in 2009. Please read ―Item 5. Operating and Financial Review and Prospects: Results of Operations.‖
b) Fixed-Rate Tanker Sub-Segment
The vessels in our fixed-rate tanker sub-segment primarily consist of Aframax and Suezmax tankers that are employed on long-term time-charters.
We consider contracts that have an original term of less than one year duration to be short-term. The only difference between the vessels in the spot
tanker sub-segment and the fixed-rate tanker sub-segment is the duration of the contracts under which they are employed. During 2011,
approximately 21% of our net revenues were earned by the vessels in the fixed-rate tanker sub-segment, compared to approximately 20% in 2010
and 20% in 2009. Please read "Item 5. Operating and Financial Review and Prospects: Results of Operations."
Our Fleet
As at December 31, 2011, our fleet (excluding vessels managed for third parties) consisted of 151 vessels, including chartered-in vessels, and
newbuildings/conversions on order. The following table summarizes our fleet as at December 31, 2011:
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Shuttle Tanker and FSO Segment
Shuttle Tankers
FSO Units
Total Shuttle Segment
FPSO Segment
Shuttle Tankers
FSO Unit
FPSO Units
Total FPSO Segment
Liquefied Gas Segment
LNG Carriers
LPG Carriers
Total Liquefied Gas Segment
Spot Tanker Sub-Segment
Suezmax Tankers
Aframax Tankers
Large Product Tankers
Total Spot Tanker Sub-Segment
Fixed-Rate Tanker Sub-Segment
Conventional Tankers
Total Fixed-Rate Tanker Sub-Segment
Total
Owned
Vessels
Chartered-in
Vessels
Newbuildings /
Conversions
Total
Number of Vessels
30(1)
4(3)
34
2(1)
1(3)
7(4)
10
20(6)
5
25
8(8)
9(9)
2
19
34(10)
34
122
4(2)
-
4
-
-
-
-
-
-
-
1
11
1
13
4
4
21
4
-
4
-
-
2(5)
2
1(7)
-
1
-
-
-
-
1(11)
1
8
38
4
42
2
1
9
12
21
5
26
9
20
3
32
39
39
151
The following footnotes indicate the vessels in the table above that are owned or chartered-in by non-wholly owned subsidiaries of Teekay or have
been or will be offered by us to Teekay LNG, Teekay Offshore or Teekay Tankers:
(1)
Includes 32 vessels owned by Teekay Offshore (including six through 50% controlled subsidiaries and three through 67% controlled subsidiaries).
(2) All four vessels chartered-in by Teekay Offshore.
(3)
Includes four FSO units owned 100% by Teekay Offshore and one FSO unit owned through an 89% subsidiary of Teekay Offshore.
(4)
Includes four FPSO units owned 100% by Teekay Petrojarl. Teekay is required to offer to sell to Teekay Offshore any of these units that are servicing contracts in
excess of three years in length. Three FPSO units are owned 100% by Teekay Offshore. Certain of our FPSO contracts include the services of shuttle tankers and
an FSO unit, and as such, these vessels are included in the FPSO segment.
(5)
Includes one Aframax tanker being converted to an FPSO unit which is scheduled to be delivered in mid-2012.
(6)
(7)
Includes the following interests of Teekay LNG: a 100% interest in nine LNG carriers, a 70% interest in two LNG carriers, a 40% interest in four LNG carriers, a
50% interest in two LNG carriers, and a 33% interest in three LNG carriers.
Includes Teekay’s 33% interest in one LNG newbuilding. In March 2011, Teekay LNG agreed to acquire Teekay’s interest in this vessel. This vessel delivered in
January 2012.
(8)
Includes three Suezmax tankers owned by Teekay Tankers.
(9)
Includes six vessels owned 100% by Teekay Offshore, all of which are chartered to Teekay, and three vessels owned 100% by Teekay Tankers.
(10) Includes eleven vessels owned 100% by Teekay LNG, four vessels owned 100% by Teekay Offshore, and nine vessels owned 100% by Teekay Tankers.
(11) Includes Teekay Tanker’s 50% interest in one VLCC newbuilding.
Our vessels are of Bahamian, Belgian, Cayman Islands, Isle of Man, Liberian, Marshall Islands, Norwegian, Norwegian International Ship,
Panamanian, Singapore, and Spanish registry.
Many of our Aframax and Suezmax vessels and some of our shuttle tankers have been designed and constructed as substantially identical sister
ships. These vessels can, in many situations, be interchanged, providing scheduling flexibility and greater capacity utilizat ion. In addition, spare
parts and technical knowledge can be applied to all the vessels in the particular series, thereby generating operating efficiencies.
As of December 31, 2011, we had four shuttle tankers, one FPSO unit and the conversion of an existing Aframax tanker to an FPSO on order. In
addition, we had a 33% interest in one LNG newbuilding and a 50% interest in one VLCC newbuilding on order. Please read "Item 5. Operating and
Financial Review and Prospects: Management’s Discussion and Analysis of Financial Condition and Results of Operations," and "Item 18. Financial
Statements: Notes 16(a) and 16(b)—Commitments and Contingencies—Vessels Under Construction and Joint Ventures."
Please read "Item 18. Financial Statements: Note 8—Long-Term Debt for information with respect to major encumbrances against our vessels."
Safety, Management of Ship Operations and Administration
Safety and environmental compliance are our top operational priorities. We operate our vessels in a manner intended to protec t the safety and
health of our employees, the general public and the environment. We seek to manage the risks inherent in our business and are committed to
25
eliminating incidents that threaten the safety and integrity of our vessels, such as groundings, fires, collisions and petrol eum spills. In 2008, we
introduced the Quality Assurance and Training Officers Program to conduct rigorous internal audits of our processes and provide our seafarers with
on-board training. In 2007, we introduced a behavior-based safety program called ―Safety in Action‖ to improve the safety culture in our fleet. We are
also committed to reducing our emissions and waste generation.
Key performance indicators facilitate regular monitoring of our operational performance. Targets are set on an annual basis to drive continuous
improvement, and indicators are reviewed monthly to determine if remedial action is necessary to reach the targets.
We, through certain of our subsidiaries, assist our operating subsidiaries in managing their ship operations. All vessels are operated under our
comprehensive and integrated Safety Management System that complies with the International Safety Management Code (or ISM Code), the
International Standards Organization’s (or ISO) 9001 for Quality Assurance, ISO 14001 for Environment Management Systems, and Occupational
Health and Safety Advisory Services (or OHSAS) 18001. The management system is certified by Det Norske Veritas (or DNV), the Norwegian
classification society. It has also been separately approved by the Australian and Spanish Flag administrations. Although certification is valid for five
years, compliance with the above mentioned standards is confirmed on a yearly basis by a rigorous auditing procedure that includes both internal
audits as well as external verification audits by DNV and certain flag states.
We provide, through certain of our subsidiaries, expertise in various functions critical to the operations of our operating subsidiaries. We believe this
arrangement affords a safe, efficient and cost-effective operation. Our subsidiaries also provide to us access to human resources, financial and
other administrative functions pursuant to administrative services agreements.
Ship management services are provided by our Teekay Marine Management (or TMM) and Innovation, Technology and Projects (or ITP) divisions,
located in various offices around the world. These include such critical ship management functions as:
vessel maintenance (including repairs and dry docking) and certification;
crewing by competent seafarers;
procurement of stores, bunkers and spare parts;
management of emergencies and incidents;
supervision of shipyard and projects during new-building and conversions;
insurance; and
financial management services.
Integrated onboard and onshore systems support the management of maintenance, inventory control and procurement, crew management and
training and assist with budgetary controls.
Our day-to-day focus on cost efficiencies is applied to all aspects of our operations. We believe that the generally uniform design of s ome of our
existing and new-building vessels and the adoption of common equipment standards provides operational efficiencies, including with respect to crew
training and vessel management, equipment operation and repair, and spare parts ordering. In addition, we and two other shipping companies have
a purchasing alliance, Teekay Bergesen Worldwide, which leverages the purchasing power of the combined fleets, mainly in such commodity areas
as lube oils, paints and other chemicals.
Risk of Loss and Insurance
The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters, death or injury of persons and property losses
caused by adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, the
transportation of crude oil, petroleum products, LNG and LPG is subject to the risk of spills and to business interruptions due to political
circumstances in foreign countries, hostilities, labor strikes and boycotts. The occurrence of any of these events may result in loss of revenues or
increased costs.
We carry hull and machinery (marine and war risks) and protection and indemnity insurance coverage to protect against most of the accident-related
risks involved in the conduct of our business. Hull and machinery insurance covers loss of or damage to a vessel due to marine perils such as
collision, grounding and weather. Protection and indemnity insurance indemnifies us against liabilities incurred while operat ing vessels, including
injury to our crew or third parties, cargo loss and pollution. The current available amount of our coverage for pollution is $1 billion per vessel per
incident. We also carry insurance policies covering war risks (including piracy and terrorism) and, for some of our LNG carriers, loss of revenues
resulting from vessel off-hire time due to a marine casualty. We believe that our current insurance coverage is adequate to protect against most of
the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution
insurance coverage. However, we cannot guarantee that all covered risks are adequately insured against, that any particular c laim will be paid or
that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental
regulations have resulted in increased costs for, and may result in the lack of availability of, insurance against risks of environmental damage or
pollution.
We use in our operations a thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance
and assessment programs, a seafarers competence training program, seafarers workshops and membership in emergency response organizations.
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We have achieved certification under the standards reflected in ISO 9001 for quality assurance, ISO 14001 for environment management systems,
OHSAS 18001, and the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention on a fully integrated basis.
Operations Outside of the United States
Because our operations are primarily conducted outside of the United States, we are affected by currency fluctuations and by changing economic,
political and governmental conditions in the countries where we engage in business or where our vessels are registered. Past political conflicts in
that region, particularly in the Arabian Gulf, have included attacks on tankers, mining of waterways and other efforts to disrupt shipping in the area.
Vessels trading in the region have also been subject to acts of piracy. In addition to tankers, targets of terrorist attacks could include oil pipelines,
LNG facilities and offshore oil fields. The escalation of existing, or the outbreak of future, hostilities or other political instability in this region or other
regions where we operate could affect our trade patterns, increase insurance costs, increase tanker operational costs and otherwise adversely
affect our operations and performance. In addition, tariffs, trade embargoes, and other economic sanctions by the United States or other countries
against countries in the Indo-Pacific Basin or elsewhere as a result of terrorist attacks or otherwise may limit trading activities with those countries,
which could also adversely affect our operations and performance.
Customers
We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of customers. Our
customers include major energy and utility companies, major oil traders, large oil and LNG consumers and petroleum product producers,
government agencies, and various other entities that depend upon marine transportation. Two customers, international oil companies, accounted for
a total of 27%, or $508.6 million, of our consolidated revenues during 2011 (2010 - three customers for 38% or $778.6 million, 2009 - two customers
for 26% or $564.5 million). No other customer accounted for more than 10% of our consolidated revenues during 2011, 2010, or 2009. The loss of
any significant customer or a substantial decline in the amount of services requested by a significant customer could have a material adverse effect
on our business, financial condition and results of operations.
Flag, Classification, Audits and Inspections
Our vessels are registered with reputable Flag states, and the hull and machinery of all of our vessels have been ―Classed‖ by one of the major
classification societies and members of International Association of Classification Societies ltd (IACS): DNV, Lloyd’s Register of Shipping or
American Bureau of Shipping.
The applicable classification society certifies that the vessel’s design and build conforms to the applicable Class rules and meets the requirements
of the applicable rules and regulations of the country of registry of the vessel and the international conventions to which that country is a signatory.
Class also verifies throughout the vessel’s life that it continues to be maintained in accordance with those rules. In order to validate this, the vessels
are surveyed by the class society (under Authority of the Flag state), in accordance to the classification society rules, which in the case of our
vessels follows a comprehensive five-year Special Survey cycle, renewed every fifth year. During each five-year period, the vessel undergoes
Annual and Intermediate surveys, the scrutiny and intensity of which is primarily dictated by the age of the vessel. As our vessels are modern and
we have enhanced the resiliency of the underwater coatings of each vessel hull and marked the hull to facilitate underwater inspections by divers,
their underwater areas are inspected in a dry dock at five-year intervals. In-water inspection is carried out during the second or third annual
inspection (i.e., during an Intermediate Survey).
In addition to Class surveys, the vessel’s Flag state also verifies the condition of the vessel during annual Flag State inspections, either
independently or by additional authorization to Class. Also, Port State Authorities of a vessel’s port of call are authorized under international
conventions to undertake regular and spot checks of vessels calling their jurisdiction.
Processes on board followed are audited by either the Flag state or the classification society acting on behalf of the Flag state to ensure that they
meet the requirements of the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code). In our case,
DNV as the certifying authority of our Safety Management System typically carries out this task. We also follow an internal process of internal audits
undertaken at each office and vessel annually.
We follow a comprehensive inspections scheme supported by our sea staff, shore-based operational and technical specialists and members of our
QATO program. We carry out a minimum of two such inspections, which helps us to ensure that:
our vessels and operations adhere to our operating standards;
the structural integrity of the vessel is being maintained; for this we use a comprehensive ―Structural Integrity Management System‖ we
developed. The system closely monitors the condition of the hulls of our vessels to ensure that structural strength and integrity are
maintained throughout a vessel’s life;
machinery and equipment is being maintained to give full reliability in service;
we are optimizing performance in terms of speed and fuel consumption; and
the vessel’s appearance supports our brand and meets customer expectations.
Our customers also often carry out inspections under the Ship inspection Report Program, which is a significant safety initiative introduced by Oil
Companies International Marine Forum to specifically address concerns about sub-standard shipping. The inspection results permit charterers to
screen a vessel to ensure that it meets their general and specific risk-based shipping requirements.
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We believe that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will generally lead to
greater scrutiny, inspection and safety requirements on all vessels in the oil tanker and LNG and LPG carrier markets and will accelerate the
scrapping or phasing out of older vessels throughout these markets.
Overall we believe that our relatively new, well-maintained and high-quality vessels provide us with a competitive advantage in the current
environment of increasing regulation and customer emphasis on quality of service.
Regulations
General
Our business and the operation of our vessels are significantly affected by international conventions and national, state and local laws and
regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. Because these conventions,
laws and regulations change frequently, we cannot predict the ultimate cost of compliance or their impact on the resale price or useful life of our
vessels. Additional conventions, laws, and regulations may be adopted that could limit our ability to do business or increase the cost of our doing
business and that may materially adversely affect our operations. We are required by various governmental and quasi-governmental agencies to
obtain permits, licenses and certificates with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits,
licenses and certificates required for the operations of the vessels we own will depend on a number of factors, we believe that we will be able to
continue to obtain all permits, licenses and certificates material to the conduct of our operations.
International Maritime Organization (or IMO)
The IMO is the United Nations’ agency for maritime safety. IMO regulations relating to pollution prevention for oil tankers have been adopted by
many of the jurisdictions in which our tanker fleet operates. Under IMO regulations and subject to limited exceptions, a tanker must be of double-hull
construction, be of a mid-deck design with double-side construction or be of another approved design ensuring the same level of protection against
oil pollution. All of our tankers are double hulled.
Many countries, but not the United States, have ratified and follow the liability regime adopted by the IMO and set out in the International Convention
on Civil Liability for Oil Pollution Damage, 1969, as amended (or CLC). Under this convention, 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 (e.g., crude oil, fuel oil, heavy diesel oil or
lubricating oil), subject to certain defenses. The right to limit liability to specified amounts that are periodically revised is forfeited under the CLC
when the spill is caused by the owner’s actual fault or when the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to
contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC has not been
adopted, various legislative regimes or common law governs, and liability is imposed either on the basis of fault or in a manner similar to the CLC.
IMO regulations also include the International Convention for Safety of Life at Sea (or SOLAS), including amendments to SOLAS implementing the
International Security Code for Ports and Ships (or ISPS), the ISM Code, the International Convention on Load Lines of 1966, and, specifically with
respect to LNG and LPG carriers, the International Code for Construction and Equipment of Ships Carrying Liquefied Gases in Bulk (the IGC Code).
The IMO Marine Safety Committee has also published guidelines for vessels with dynamic positioning (DP) systems, which would apply to shuttle
tankers and DP-assisted FSO units and FPSO units. SOLAS provides rules for the construction of and equipment required for commercial vessels
and includes regulations for safe operation. Flag states which have ratified the convention and the treaty generally employ the classification
societies, which have incorporated SOLAS requirements into their class rules, to undertake surveys to confirm compliance.
SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, l ifesaving appliances,
radio equipment and the global maritime distress and safety system, are applicable to our operations. Non-compliance with IMO regulations,
including SOLAS, the ISM Code, ISPS, the IGC Code for LNG and LPG carriers, and the specific requirements for shuttle tankers, FSO units and
FPSO units under the NPD (Norway) and HSE (United Kingdom) regulations, may subject us to increased liability or penalties, may lead to
decreases in available insurance coverage for affected vessels and may result in the denial of access to or detention in some ports. For example,
the U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from
trading in U.S. and European Union ports. The ISM Code requires vessel operators to obtain a safety management certification for each vessel
they manage, evidencing the shipowner’s development and maintenance of an extensive safety management system. Each of the existing vessels
in our fleet is currently ISM Code-certified, and we expect to obtain safety management certificates for each newbuilding vessel upon delivery.
LNG and LPG carriers are also subject to regulation under the IGC Code. Each LNG and LPG carrier must obtain a certificate of compliance
evidencing that it meets the requirements of the IGC Code, including requirements relating to its design and construction. Each of our LNG and LPG
carriers is currently IGC Code certified, and each of the shipbuilding contracts for our LNG newbuildings, and for the LPG newbuildings requires ICG
Code compliance prior to delivery.
Annex VI to the IMO's International Convention for the Prevention of Pollution from Ships (or Annex VI) sets limits on sulfur oxide and nitrogen oxide
emissions from ship exhausts and prohibits emissions of ozone depleting substances, emissions of volatile compounds from cargo tanks and the
incineration of specific substances. Annex VI also includes a world-wide cap on the sulfur content of fuel oil and allows for special areas to be
established with more stringent controls on sulfur emissions.
In addition, the IMO has proposed that all tankers of the size we operate that are built starting in 2012 contain ballast water treatment systems, and
that all other similarly sized tankers install treatment systems by their first intermediate or renewal survey after 2016. This convention has not yet
been ratified, but when it becomes effective, we estimate that the installation of ballast water treatment systems on our tankers may cost between
$2 million and $3 million per vessel.
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European Union (or EU)
Like the IMO, the EU has adopted regulations phasing out single-hull tankers. All of our tankers are double-hulled. On May 17, 2011 the European
commission carried out a number of ―dawn raids‖, or unannounced inspections, at the offices of some of the world’s largest container line operators
starting an antitrust investigation. We are not directly affected by this investigation and believe that we are compliant wit h antitrust rules.
Nevertheless, it is possible that the investigation could be widened and new companies and practices come under scrutiny within the EU.
The EU has also adopted legislation (directive 2009/16/Econ Port State Control) which is in force from January 1, 2011 that: bans from European
waters manifestly sub-standard vessels (defined as vessels that have been detained twice by EU port authorities, in the preceding two years, after
July 2003); creates obligations on the part of EU member port states to inspect at least 24% of vessels using these ports annually; provides for
increased surveillance of vessels posing a high risk to maritime safety or the marine environment; and provides the EU with greater authority and
control over classification societies, including the ability to seek to suspend or revoke the authority of negligent societies.
Two new regulations were introduced by the European Commission in September 2010, as part of the implementation of the Port State Control
Directive. These came into force on January 1, 2011 and introduce a ranking system (published on a public website and updated daily) displaying
shipping companies operating in the EU with the worst safety records. The ranking is judged upon the results of the technical inspections carried out
on the vessels owned be a particular shipping company. Those shipping companies that have the most positive safety records are rewarded by
subjecting them to fewer inspections, whilst those with the most safety shortcomings or technical failings recorded upon inspection will in turn be
subject to a greater frequency of official inspections to their vessels.
The EU has, by way of Directive 2005/35/EC, which has been amended by Directive 2009/123/EC created a legal framework for imposing criminal
penalties in the event of discharges of oil and other noxious substances from ships sailing in its waters, irrespective of their flag. This relates to
discharges of oil or other noxious substances from vessels. Minor discharges shall not automatically be considered as offences, except where
repetition leads to deterioration in the quality of the water. The persons responsible may be subject to criminal penalties if they have acted with
intent, recklessly or with serious negligence and the act of inciting, aiding and abetting a person to discharge a polluting substance may also lead to
criminal penalties.
Several regulatory requirements to use low sulfur fuel are in force or upcoming. The EU Directive 33/2005 (or the Directive) came into force on
January 1, 2010. Under this legislation, vessels are required to burn fuel with sulfur content below 0.1% while berthed or anchored in an EU port.
The California Air Resources Board will require vessels to burn fuel with 0.1% sulfur content or less within 24 nautical miles of California as of
January 1, 2014. As of January 1, 2015, all vessels operating within Emissions Control Areas worldwide must comply with 0.1% sulfur requirements.
Currently, the only grade of fuel meeting 0.1% sulfur content requirement is low sulfur marine gas oil (or LSMGO). Certain modifications were
necessary in order to optimize operation on LSMGO of equipment originally designed to operate on Heavy Fuel Oil (or HFO). In addition, LSMGO is
more expensive than HFO and this impacts the costs of operations. However, for vessels employed on fixed term business, all fuel costs, including
any increases, are borne by the charterer. Our exposure to increased cost is in our spot trading vessels, although our competitor s bear a similar
cost increase as this is a regulatory item applicable to all vessels. All required vessels in our fleet trading to and within regulated low sulfur areas are
able to comply with fuel requirements.
North Sea and Brazil
Our shuttle tankers primarily operate in the North Sea and Brazil. In addition to the regulations imposed by the IMO and EU, countries having
jurisdiction over North Sea areas impose regulatory requirements in connection with operations in those areas, including HSE in the United Kingdom
and NPD in Norway. These regulatory requirements, together with additional requirements imposed by operators in North Sea oil fields, require that
we make further expenditures for sophisticated equipment, reporting and redundancy systems on the shuttle tankers and for the training of seagoing
staff. Additional regulations and requirements may be adopted or imposed that could limit our ability to do business or further increase the cost of
doing business in the North Sea.
In Norway, the Norwegian Pollution Control Authority requires the installation of volatile organic compound emissions (or VOC equipment) on most
shuttle tankers serving the Norwegian continental shelf. Oil companies bear the cost to install and operate the VOC equipment onboard the shuttle
tankers.
In Brazil, Petrobras serves in a regulatory capacity, and has adopted standards similar to those in the North Sea.
United States
The United States has enacted an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills, including
discharges of oil cargoes, bunker fuels or lubricants, primarily through the Oil Pollution Act of 1990 (or OPA 90) and the Comprehensive
Environmental Response, Compensation and Liability Act (or CERCLA). OPA 90 affects all owners, bareboat charterers, and operators whose
vessels trade to the United States or its territories or possessions or whose vessels operate in United States waters, which include the U.S.
territorial sea and 200-mile exclusive economic zone around the United States. CERCLA applies to the discharge of ―hazardous substances‖ rather
than ―oil‖ and imposes strict joint and several liability upon the owners, operators or bareboat charterers of vessels for cleanup costs and damages
arising from discharges of hazardous substances. We believe that petroleum products and LNG and LPG should not be considered hazardous
substances under CERCLA, but additives to oil or lubricants used on LNG or LPG carriers and other vessels might fall within its scope.
Under OPA 90, vessel owners, operators and bareboat charterers are ―responsible parties‖ and are jointly, severally and strictly liable (unless the oil
spill results solely from the act or omission of a third party, an act of God or an act of war and the responsible party reports the incident and
reasonably cooperates with the appropriate authorities) for all containment and cleanup costs and other damages arising from discharges or
threatened discharges of oil from their vessels. These other damages are defined broadly to include:
natural resources damages and the related assessment costs;
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real and personal property damages;
net loss of taxes, royalties, rents, fees and other lost revenues;
lost profits or impairment of earning capacity due to property or natural resources damage;
net cost of public services necessitated by a spill response, such as protection from fire, s afety or health hazards; and
loss of subsistence use of natural resources.
OPA 90 limits the liability of responsible parties in an amount it periodically updates. The liability limits do not apply if the incident was proximately
caused by violation of applicable U.S. federal safety, construction or operating regulations, including IMO conventions to which the United States is
a signatory, or by the responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to
cooperate and assist in connection with the oil removal activities. Liability under CERCLA is also subject to limits unless t he incident is caused by
gross negligence, willful misconduct or a violation of certain regulations. We currently maintain for each of our vessel’s pollution liability coverage in
the maximum coverage amount of $1 billion per incident. A catastrophic spill could exceed the coverage available, which could harm our business,
financial condition and results of operations.
Under OPA 90, with limited exceptions, all newly built or converted tankers delivered after January 1, 1994 and operating in U.S. waters must be
double-hulled. All of our tankers are double-hulled.
OPA 90 also requires owners and operators of vessels to establish and maintain with the United States Coast Guard (or Coast Guard) evidence of
financial responsibility in an amount at least equal to the relevant limitation amount for such vessels under the statute. The Coast Guard has
implemented regulations requiring that an owner or operator of a fleet of vessels must demonstrate evidence of financial responsibility in an amount
sufficient to cover the vessel in the fleet having the greatest maximum limited liability under OPA 90 and CERCLA. Evidence of financial
responsibility may be demonstrated by insurance, surety bond, self-insurance, guaranty or an alternate method subject to approval by the Coast
Guard. Under the self-insurance provisions, the shipowner or operator must have a net worth and working capital, measured in assets located in the
United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with
the Coast Guard regulations by using self-insurance for certain vessels and obtaining financial guaranties from a third party for the remaining
vessels. If other vessels in our fleet trade into the United States in the future, we expect to provide guaranties through self-insurance or obtain
guaranties from third-party insurers.
OPA 90 and CERCLA permit individual U. S. states to impose their own liability regimes with regard to oil or hazardous substance pollution
incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited strict liability for spills. Several coastal
states, such as California, Washington and Alaska require state-specific evidence of financial responsibility and vessel response plans. We intend to
comply with all applicable state regulations in the ports where our vessels call.
Owners or operators of vessels, including tankers operating in U.S. waters, are required to file vessel response plans with the Coast Guard, and
their tankers are required to operate in compliance with their Coast Guard approved plans. Such response plans must, among other things:
address a ―worst case‖ scenario and identify and ensure, through contract or other approved means, the availability of necess ary
private response resources to respond to a ―worst case discharge‖;
describe crew training and drills; and
identify a qualified individual with full authority to implement removal actions.
We have filed vessel response plans with the Coast Guard and have received its approval of such plans. In addition, we conduc t regular oil spill
response drills in accordance with the guidelines set out in OPA 90. The Coast Guard has announced it intends to propose simi lar regulations
requiring certain vessels to prepare response plans for the release of hazardous substances.
OPA 90 and CERCLA do not preclude claimants from seeking damages resulting from the discharge of oil and hazardous substances under other
applicable law, including maritime tort law. Such claims could include attempts to characterize the transportation of LNG or LPG aboard a vessel as
an ultra-hazardous activity under a doctrine that would impose strict liability for damages resulting from that activity. The applicat ion of this doctrine
varies by jurisdiction.
The U.S. Clean Water Act also prohibits the discharge of oil or hazardous substances in U.S. navigable waters and imposes strict liability in the form
of penalties for unauthorized discharges. The Clean Water Act imposes substantial liability for the costs of removal, remediation and damages and
complements the remedies available under OPA 90 and CERCLA discussed above.
Our vessels that discharge certain effluents, including ballast water, in U.S. waters must obtain a Clean Water Act permit fr om the Environmental
Protection Agency (or EPA) titled the "Vessel General Permit" and comply with a range of best management practices, reporting, inspections and
other requirements. The Vessel General Permit incorporates Coast Guard requirements for ballast water exchange and includes specific
technology-based requirements for vessels. Several U.S. states have added specific requirements to the Vessel General Permit and, in some
cases, may require vessels to install ballast water treatment technology to meet biological performance standards. We believe that the EPA may
add requirements related to ballast water treatment technology to the Vessel General Permit requirements between 2012 and 201 6 to correspond
with the IMO's adoption of similar requirements as discussed above.
Since 2009, several environmental groups and industry associations have filed challenges in U.S. federal court to the EPA’s issuance of the Vessel
General Permit. The EPA issued a revised Vessel General Permit in 2011, and has stated that it expects to take final action with respect to the
revised Vessel General Permit to be issued by November 2012.
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Greenhouse Gas Regulation
In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (or the Kyoto Protocol) entered into force.
Pursuant to the Kyoto Protocol, adopting countries are required to implement national programs to reduce emissions of greenhouse gases. In
December 2009, more than 27 nations, including the United States, entered into the Copenhagen Accord. The Copenhagen Accord is non-binding,
but is intended to pave the way for a comprehensive, international treaty on climate change. The IMO is evaluating various mandatory measures to
reduce greenhouse gas emissions from international shipping, which may include market-based instruments or a carbon tax. The EU also has
indicated that it intends to propose an expansion of an existing EU emissions trading regime to include emissions of greenhouse gases from
vessels, and individual countries in the EU may impose additional requirements. In the United States, the EPA issued an ―endangerment finding‖
regarding greenhouse gases under the Clean Air Act. While this finding in itself does not impose any requirements on our industry, it authorizes the
EPA to regulate directly greenhouse gas emissions through a rule-making process. In addition, climate change initiatives are being considered in
the United States Congress and by individual states. Any passage of new climate control legislation or other regulatory init iatives by the IMO, EU,
the United States or other countries or states where we operate that restrict emissions of greenhouse gases could have a significant financial and
operational impact on our business that we cannot predict with certainty at this time.
Vessel Security
The ISPS was adopted by the IMO in December 2002 in the wake of heightened concern over worldwide terrorism and became effective on July 1,
2004. The objective of ISPS is to enhance maritime security by detecting security threats to ships and ports and by requiring the development of
security plans and other measures designed to prevent such threats. The United States implemented ISPS with the adoption of the Maritime
Transportation Security Act of 2002 (or MTSA), which requires vessels entering U.S. waters to obtain certification by the Coast Guard of plans to
respond to emergency incidents there, including identification of persons authorized to implement the plans. Each of the exis ting vessels in our fleet
currently complies with the requirements of ISPS and MTSA.
C. Organizational Structure
Our organizational structure includes, among others, our interests in Teekay Offshore, Teekay LNG and Teekay Tankers, which are our publicly
listed subsidiaries. We created Teekay Offshore and Teekay LNG primarily to hold our assets that generate long-term fixed-rate cash flows. The
strategic rationale for establishing these two limited partnerships was to:
illuminate higher value of fixed-rate cash flows to Teekay investors;
realize advantages of a lower cost of equity when investing in new offshore or LNG projects; and
enhance returns to Teekay through fee-based revenue and ownership of the limited partnership’s incentive distribution rights, which entitle
the holder to disproportionate distributions of available cash as cash distribution levels to unit holders increase.
We also established Teekay Offshore, Teekay LNG and Teekay Tankers to increase our access to capital to grow each of our businesses in the
offshore, LNG, and conventional tanker markets.
The following chart provides an overview of our organizational structure as at March 1, 2012. Please read Exhibit 8.1 to this Annual Report for a list
of our significant subsidiaries as at March 1, 2012.
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Teekay Corporation (NYSE: TK)
Teekay Holdings Limited (Bermuda)
31.0% Limited Partner
Interest and 2% General
Partner Interest (1)
38.1% Limited Partner
Interest and 2% General
Partner Interest (1)
20.4% Interest (2)
Teekay Offshore
Partners L.P. (NYSE:
TOO)
Teekay LNG
Partners L.P.
(NYSE: TGP)
Teekay Tankers Ltd.
(NYSE: TNK)
Operating
Subsidiaries (3)
Operating
Subsidiaries
Operating
Subsidiaries
Operating
Subsidiaries
(1) The partnership is controlled by its general partner. Teekay Corporation has a 100% beneficial ownership in the general partner. However in certain limited cases,
approval of a majority or supermajority of the common unit holders is required to approve certain actions.
(2) Proportion of voting power held is 51.2%.
(3)
Including our 100% interest in Teekay Petrojarl.
Teekay LNG is a Marshall Islands limited partnership formed by us in 2005 as part of our strategy to expand our operations in the LNG and LPG
shipping sectors. Teekay LNG provides LNG, LPG and crude oil marine transportation service under long-term, fixed-rate contracts with major
energy and utility companies. As of December 31, 2011, Teekay LNG operated a fleet of 20 LNG carriers, five LPG carriers, ten Suezmax tankers
and one product tanker. Teekay LNG’s ownership interests in these vessels range from 33% to 100%.
Teekay Offshore is a Marshall Islands limited partnership formed by us in 2006 as part of our strategy to expand our operations in the offshore oil
marine transportation, processing and storage sectors. As of December 31, 2011, Teekay Offshore owned and operated a fleet of 40 shuttle tankers
(including four chartered-in vessels and four newbuildings), five FSO units, 10 conventional Aframax tankers and three FPSO units. Teekay
Offshore’s ownership interests in its owned vessels range from 50% to 100%. Most of Teekay Offshore’s vessels operate under long-term, fixed-rate
contracts. At December 31, 2011, we owned 33.0% of Teekay Offshore, including our 2% general partner interest. Pursuant to an omnibus
agreement we entered into in connection with Teekay Offshore's initial public offering in 2006, we have agreed to offer to Teekay Offshore FPSO
units that are servicing contracts in excess of three years in length.
In December 2007, we added Teekay Tankers to our structure. Teekay Tankers is a Marshall Islands corporation formed by us to facilitate the
growth of our conventional tanker business. As of December 31, 2011, Teekay Tankers owned a fleet of nine double-hull Aframax tankers, six
double-hull Suezmax tankers and one VLCC newbuilding, which trade either in the spot tanker market or under short- or medium-term, fixed-rate
time-charter contracts. Teekay Tankers owns 100% of its fleet other than a 50% interest in the VLCC and the time-charter in of two Aframax tankers
from third parties. Teekay Tanker’s primary objective is to grow through the acquisition of conventional tanker assets from third parties and from us.
Through a wholly-owned subsidiary, we provide Teekay Tankers with commercial, technical, administrative, and strategic services under a long-
term management agreement. In exchange, Teekay Tankers has agreed to pay us both a market-based fee and a performance fee under certain
circumstances to motivate us to increase Teekay Tankers’ cash available for distribution to its stockholders. In February 2012, Teekay Tankers
completed a public offering of 17.3 million common shares of its Class A common stock (including 2.3 million common shares issued upon the full
exercise of the underwriter’s overallotment option) at a price of $4.00 per share, for gross proceeds of $69 million. Please read "Item 18. Financial
Statements: Note 25(c)—Subsequent Events."
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We entered into an omnibus agreement with Teekay LNG, Teekay Offshore and related parties governing, among other things, when we, Teekay
LNG, and Teekay Offshore may compete with each other and certain rights of first offer on LNG carriers, oil tankers, shuttle tankers, FSO units and
FPSO units. In addition, Teekay Tankers has agreed that we may pursue business opportunities attractive to both parties.
D. Properties
Other than our vessels, we do not have any material property.
E. Taxation of the Company
The following discussion is a summary of the principal tax laws applicable to us. The following discussion of tax matters, as well as the conclusions
regarding certain issues of tax law that are reflected in such discussion, are based on current law. No assurance can be given that changes in or
interpretation of existing laws will not occur or will not be retroactive or that anticipated future factual matters and circumstances will in fact occur.
Our views have no binding effect or official status of any kind, and no assurance can be given that the conclusions discussed below would be
sustained if challenged by taxing authorities.
United States Taxation
The following discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended (or the Code), legislative history,
applicable U.S. Treasury Regulations promulgated thereunder (or Treasury Regulations), judicial authority and administrative interpretations, as of
the date of this Annual Report, all of which are subject to change, possibly with retroactive effect, or are subject to different interpretations.
Taxation of Operating Income. A significant portion of our gross income will be attributable to the transportation of crude oil and related products.
For this purpose, gross income attributable to transportation (or Transportation Income) includes income derived from, or in connection with, the use
(or hiring or leasing for use) of a vessel to transport cargo, or the performance of services directly related to the use of any vessel to transport cargo,
and thus includes both time-charter or bareboat charter income.
Transportation Income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States (or U.S.
Source International Transportation Income) will be considered to be 50% derived from sources within the United States. Transportation Income
attributable to transportation that both begins and ends in the United States (or U.S. Source Domestic Transportation Income) will be considered to
be 100%derived from sources within the United States. Transportation Income attributable to transportation exclusively between non-
U.S. destinations will be considered to be 100% derived from sources outside the United States. Transportation Income derived from sources
outside the United States generally will not be subject to U.S. federal income tax.
We believe that we have not earned any U.S. Source Domestic Transportation Income, and we except that we will not earn any such income in
future years. However, certain of our subsidiaries which have made special U.S. tax elections to be treated as partnerships or disregarded as
entities separate from us for U.S. federal income tax purposes are potentially engaged in activities which could give rise to U.S. Source International
Transportation Income. Unless the exemption from tax under Section 883 of the Code (or the Section 883 Exemption) applies, our U.S. Source
International Transportation Income generally will be subject to U.S. federal income taxation under either the net basis tax and the branch profits tax
or the 4% gross basis tax, all of which are discussed below. Certain of our other subsidiaries also are engaged in activities which could give rise to
U.S. Source International Transportation Income and rely on our ability to claim exemption under the Section 883 Exemption.
The Section 883 Exemption. In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section
883 of the Code and the Treasury Regulations thereunder (or the Section 883 Regulations), it will not be subject to the net basis and branch profits
taxes or 4% gross basis tax described below on its U.S. Source International Transportation Income. As discussed below, we believe the Section
883 Exemption will apply and we will not be taxed on our U.S. Source International Transportation Income. The Section 883 Exemption does not
apply to U.S. Source Domestic Transportation Income.
A non-U.S. corporation will qualify for the Section 883 Exemption if it is organized in a jurisdiction outside the United States that grants an equivalent
exemption from tax to corporations organized in the United States (or an Equivalent Exemption), it meets one of three ownership tests described in
the Section 883 Regulations (or the Ownership Test), and it meets certain substantiation, reporting and other requirements (or the Substantiation
Requirements).
We are organized under the laws of the Republic of The Marshall Islands. The U.S. Treasury Department has recognized the Republic of The
Marshall Islands as a jurisdiction that grants an Equivalent Exemption. We also believe that we will be able to satisfy the Substantiation
Requirements necessary to qualify for the Section 883 Exemption. Consequently, our U.S. Source International Transportation Income (including for
this purpose, any such income earned by our subsidiaries that have properly elected to be treated as partnerships or disregarded as entities
separate from us for U.S. federal income tax purposes) will be exempt from U.S. federal income taxation provided we satisfy the Ownership Test.
We believe that we should satisfy the Ownership Test because our stock is primarily and regularly traded on an established securities market in the
United States within the meaning of Section 883 of the Code and the Section 883 Regulations. We can give no assurance, however, that changes in
the ownership of our stock subsequent to the date of this report will permit us to continue to qualify for the Section 883 exemption.
The Net Basis Tax and Branch Profits Tax. If we earn U.S. Source International Transportation Income and the Section 883 Exemption does not
apply, such income may be treated as effectively connected with the conduct of a trade or business in the United States (or Effectively Connected
Income) if we have a fixed place of business in the United States and substantially all of our U.S. Source International Transportation Income is
attributable to regularly scheduled transportation or, in the case of income derived from bareboat charters, is attributable to a fixed place of
business in the United States. Based on our current operations, none of our potential U.S. Source International Transportation Income is attributable
to regularly scheduled transportation or is derived from bareboat charters attributable to a fixed place of business in the United States. As a result,
we do not anticipate that any of our U.S. Source International Transportation Income will be treated as Effectively Connected Income. However,
there is no assurance that we will not earn income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of
business in the United States in the future, which would result in such income being treated as Effectively Connected Income.
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U.S. Source Domestic Transportation Income generally will be treated as Effectively Connected Income. However, we do not anticipate that any of
our income has or will be U.S. Source Domestic Transportation Income.
Any income we earn that is treated as Effectively Connected Income would be subject to U.S. federal corporate income tax (the highest statutory
rate currently is 35%). In addition, if we earn income that is treated as Effectively Connected Income, a 30% branch profits tax imposed under
Section 884 of the Code generally would apply to such income, and a branch interest tax could be imposed on certain interest paid or deemed paid
by us.
On the sale of a vessel that has produced Effectively Connected Income, we could be subject to the net basis corporate income tax and to the 30%
branch profits tax with respect to our gain not in excess of certain prior deductions for depreciation that reduced Effectively Connected Income.
Otherwise, we would not be subject to U.S. federal income tax with respect to gain realized on the sale of a vessel, provided the sale is considered
to occur outside of the United States under U.S. federal income tax principles.
The 4% Gross Basis Tax. If the Section 883 Exemption does not apply and the net basis tax does not apply, we would be subject to a 4% U.S.
federal income tax on the U.S. source portion of our gross U.S. Source International Transportation Income, without benefit of deductions. For 2011,
we estimate that, if the Section 883 Exemption and the net basis tax did not apply, the U.S. federal income tax on such U.S. Source International
Transportation Income would have been approximately $2.5 million. In addition, we estimate that certain of our subsidiaries that are unable to claim
the Section 883 Exemption were subject to less than $400,000 in the aggregate of U.S. federal income tax on the U.S. source portion of their U.S.
Source International Transportation Income for 2011 and we estimate that these subsidiaries will be subject to less than $400,000 in the aggregate
of U.S. federal income tax on the U.S. source portion of their U.S. Source International Transportation Income in subsequent years. The amount of
such tax for which we or our subsidiaries may be liable for in any year will depend upon the amount of income we earn from voyages into or out of
the United States in such year, however, which is not within our complete control.
Marshall Islands Taxation
We believe that neither we nor our subsidiaries will be subject to taxation under the laws of the Marshall Islands, or that distributions by our
subsidiaries to us will be subject to any taxes under the laws of the Marshall Islands.
Other Taxation
We and our subsidiaries are subject to taxation in certain non- U.S. jurisdictions because we or our subsidiaries are either organized, or conduct
business or operations, in such jurisdictions. We intend that our business and the business of our subsidiaries will be conducted and operated in a
manner that minimizes taxes imposed upon us and our subsidiaries. However, we cannot assure this result as tax laws in these or other jurisdictions
may change or we may enter into new business transactions relating to such jurisdictions, which could affect our tax liability. Please read "Item 18.
Financial Statements: Note 21—Income Taxes."
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Teekay Corporation (or Teekay) is a leading provider of international crude oil and gas marine transportation services and we also offer offshore oil
production, storage and offloading services, primarily under long-term, fixed-rate contracts. Over the past decade, we have undergone a major
transformation from being primarily an owner of ships in the cyclical spot tanker business to being a growth-oriented asset manager in the ―Marine
Midstream‖ sector. This transformation has included our expansion into the liquefied natural gas (or LNG) and liquefied petroleum gas (or LPG)
shipping sectors through our publicly listed subsidiary Teekay LNG Partners L.P. (or Teekay LNG), further growth of our operations in the offshore
production, storage and transportation sector through our publicly listed subsidiary Teekay Offshore Partners L.P. (or Teekay Offshore) and through
our 100% ownership interest in Teekay Petrojarl AS (or Teekay Petrojarl), and expansion of our conventional tanker business through our publicly
listed subsidiary Teekay Tankers Ltd. (or Teekay Tankers). We are responsible for managing and operating a fleet of approximately 150 liquefied
gas, offshore, and conventional tanker assets with a combined value of over $11 billion. With offices in 16 countries and approximately 6,400
seagoing and shore-based employees, Teekay provides a comprehensive set of marine services to the world’s leading oil and gas companies, and
its reputation for safety, quality and innovation has earned it a position with its customers as The Marine Midstream Company.
34
SIGNIFICANT DEVELOPMENTS IN 2011 AND EARLY 2012
Public Offerings by Teekay Tankers
During February 2011, our publicly traded subsidiary Teekay Tankers Ltd. (NYSE: TNK) (or Teekay Tankers) completed a public offering of 9.9
million shares of its Class A Common Stock (including 1.3 million shares issued upon the exercise of the underwriters’ overallotment option) at a
price of $11.33 per share, for gross proceeds of approximately $112.1 million. Teekay Tankers used the net offering proceeds to repay a portion of
its outstanding debt under its revolving credit facility and the balance for general corporate purposes. As a result of the transaction, our ownership of
Teekay Tankers was reduced to 26.0%.
During February 2012, Teekay Tankers completed a public offering of 17.3 million shares of its Class A Common Stock (including 2.3 million shares
issued upon the exercise of the underwriters’ overallotment option) at a price of $4.00 per share, for gross proceeds of approximately $69.0 million.
Teekay Tankers used the net offering proceeds to repay a portion of its outstanding debt under a revolving credit facility. As a result of the
transaction our ownership of Teekay Tankers was reduced to 20.4%. We maintain majority voting control of Teekay Tankers through our ownership
of shares of Class A and Class B Common Stock and consolidate this subsidiary.
First Priority Ship Mortgage Loan
In February 2011, we made a $70 million loan to a third party ship-owner. The loan bears interest at an interest rate of 9% per annum and has a
fixed term of three years, which is repayable in full on maturity and is collateralized by a first-priority mortgage on one 2011-built Very Large Crude
Carrier (or VLCC).
Acquisition of Vessels by Teekay Tankers
In April 2012, Teekay Tankers reached an agreement to acquire from Teekay, a fleet of 13 double-hull conventional oil and product tankers and
related time-charter contracts, debt facilities and other assets and rights, for an aggregate purchase price of approximately $455 million. The
transaction will be partially financed with the issuance to Teekay of $25 million of newly issued shares of Teekay Tankers Class A common stock,
and the remaining amount will be financed through a combination of cash payments to Teekay and the assumption by Teekay Tankers of existing
debt secured by the acquired vessels. As a result of this share issuance, Teekay's economic interest in Teekay Tankers will increase from
approximately 20% to approximately 25% and its voting interest as a result of its combined ownership of Class A and Class B s hares will increase
from approximately 51% to approximately 53%.
As part of this transaction, Teekay and Teekay Tankers will enter into a non-competition agreement, which will provide Teekay Tankers with a right
of first refusal to participate in any future conventional crude oil tanker and product tanker opportunities developed by Teekay for a period of three
years from the closing date of this transaction. The transaction is subject to final documentation, receiving relevant third party consents, and other
customary closing conditions and is expected to be completed in the second quarter of 2012.
Sale of Remaining Interest in OPCO to Teekay Offshore
In March 2011, we sold our remaining 49% interest in Teekay Offshore Operating L.P. (or OPCO), a subsidiary of Teekay Offshore, to Teekay
Offshore for a combination of $175 million in cash (less $15 million in distributions made by OPCO to us between December 31, 2010 and the date
of acquisition) and 7.6 million Teekay Offshore common units issued to us in a private placement. In addition, Teekay Offshore issued to its general
partner for cash a sufficient general partner interest in order for it to maintain its 2% general partner interest. The sale increased Teekay Offshore's
ownership of OPCO from 51% to 100%. As a result of the transaction, our ownership of Teekay Offshore increased to 36.9% (including our 2%
general partner interest).
Private Placements by Teekay Offshore
In July 2011, Teekay Offshore completed a private placement of 0.7 million common units at a price of $28.04 per unit to an institutional investor for
gross proceeds (including the general partner’s 2% proportionate capital contribution) of approximately $20.4 million. Teekay Offshore used the
proceeds from the issuance of common units to partially fund the acquisition of the four newbuilding shuttle tankers to be chartered under long-term
fixed-rate charters with a subsidiary of BG Group plc (or BG) to provide shuttle tanker services in Brazil. These vessels are scheduled to deliver
during mid to late 2013. As a result of the private placement, our ownership of Teekay Offshore was reduced to 36.5% (including our 2% general
partner interest).
In November 2011, Teekay Offshore sold approximately 7.1 million common units in a private placement to a group of institutional investors for
proceeds of approximately $170 million (excluding the general partner's 2% proportionate capital contribution). Teekay Offshore used the proceeds
from the sale of common units to partially finance its acquisition from Sevan Marine ASA (or Sevan) in November 2011 of the Sevan Piranema (or
Piranema) FPSO unit and of the four BG newbuilding shuttle tankers. As a result of this private placement, our ownership of Teekay Offshore was
reduced to 33.0% (including our 2% general partner interest). We maintain control of Teekay Offshore by virtue of our control of the general partner
and will continue to consolidate the subsidiary.
Public Offerings of Senior Unsecured Bonds
In January 2012, Teekay Offshore issued NOK 600 million in senior unsecured bonds that mature in January 2017 in the Norwegian bond market.
The aggregate principal amount of the bonds is equivalent to approximately $100.0 million U.S. dollars and all interest and principal repayments
were swapped into U.S. dollars and interest payments were fixed. The proceeds of the bonds were used by Teekay Offshore for general corporate
purposes.
In April 2012, Teekay LNG issued NOK 700 million in senior unsecured bonds that mature in May 2017 in the Norwegian bond market and all
interest and principal payments will be swapped into U.S. dollars. The proceeds of the bonds, which will be available to Teekay LNG upon
35
settlement in early May 2012, are expected to be used for general corporate purposes. Teekay LNG will apply for listing of the bonds on the Oslo
Stock Exchange.
Public Offerings by Teekay LNG
In April 2011, Teekay LNG completed a public offering of 4.3 million common units (including 0.6 million common units issued upon the partial
exercise of the underwriters’ overallotment option) at a price of $38.88 per unit, for gross proceeds (including the general partner’s 2% proportionate
capital contribution) of approximately $168.7 million. Teekay LNG used the net offering proceeds to fund the equity purchase price of its acquisition
from Teekay of a 33% interest in three newbuilding LNG carriers to provide service to the Angola LNG Project. Between August and October 2011,
three of the Angola LNG carriers delivered and commenced their charter contracts. The fourth Angola LNG carrier delivered in January 2012. As a
result of the public offering, our ownership of Teekay LNG was reduced to 43.6% (including our 2% general partner interest).
In November 2011, Teekay LNG completed a public offering of 5.5 million common units at a price of $33.40 per unit, for net proceeds (including the
general partner’s 2% proportionate capital contribution) of approximately $179.5 million. Teekay LNG used the proceeds from the common units to
partially finance the acquisition, through its joint venture with Marubeni Corporation, of six LNG carriers from A.P. Moller-Maersk A/S discussed
below. As a result of the public offering, our ownership of Teekay LNG was reduced to 40.1% (including our 2% general partner interest). We
maintain control of Teekay LNG by virtue of our control of the general partner and will continue to consolidate the subsidiary.
Recent Offshore Business Developments
In October 2011, we entered into an agreement with Sevan and holders of more than two-thirds of each of Sevan’s bond loans for Teekay to acquire
three FPSO units from Sevan and to make an equity investment in a recapitalized Sevan. Under the terms of the agreement, we agreed to: (a)
acquire from Sevan three FPSO units, the Sevan Piranema (or Piranema), the Sevan Hummingbird (or Hummingbird) and the Sevan Voyageur (or
Voyageur), along with their existing charter contracts, for an aggregate purchase price of $668 million plus the remaining cost required to complete
the upgrade of the Voyageur, which is estimated to be $110 to $130 million; (b) invest $25 million in a new issuance of Sevan equity, which was
expected to provide us with a 40% ownership interest in a recapitalized Sevan; and (c) enter into a cooperation agreement whereby, among other
things, we will have the right to acquire future FPSO projects developed by Sevan. In November 2011, we acquired the Hummingbird for
approximately $184 million (including an adjustment for working capital) and made an investment of approximately $25 million to obtain a 40%
ownership interest in a recapitalized Sevan. Teekay Offshore acquired the Piranema directly from Sevan in November 2011 for approximately $164
million (including an adjustment for working capital). Our purchase of the Voyageur is expected to be completed in the fourth quarter of 2012. Please
read "Item 18. Financial Statements: Note 3—Acquisition of FPSO Units and Investment in Sevan Marine ASA."
We recently entered into an agreement with Odebrecht Oil & Gas S.A. (or Odebrecht) to jointly pursue FPSO projects in Brazil. We are currently
working with Odebrecht on potential project opportunities and in 2012 agreed with Odebrecht to be a 50% partner in the Tiro and Sidon FPSO
project. Odebrecht is a well-established Brazil-based company that operates globally in the engineering and construction, petrochemical, bio-
energy, energy, oil and gas, real estate and environmental engineering sectors.
In June 2011, we entered into long-term, fixed-rate charters with BG to provide shuttle tanker services in Brazil. Under the terms of the contract, we
will provide four Suezmax newbuilding shuttle tankers to be constructed by Samsung Heavy Industries (or Samsung) in South Korea. As at
December 31, 2011, payments made towards these commitments totalled $44.6 million and the remaining payments required to be made under
these newbuilding contracts were $78.1 million (2012) and $323.3 million (2013). Upon delivery, which is scheduled for mid- to late-2013, the
vessels will commence operations under 10-year time-charters. The contract with BG also includes certain extension options and vessel purchase
options.
In addition, in June 2011, we entered into an agreement with BG Norge Limited (or BG Norge) to provide an FPSO unit for the Knarr oil and gas
field located in the North Sea. Under the terms of the contract, we will provide a newly-built FPSO unit to be constructed by Samsung in South
Korea for an estimated fully built-up project cost of approximately $1 billion. The FPSO unit, which will have a maximum design production capacity
of 63,000 barrels per day, is scheduled to deliver late 2013, after which time it will commence operations under its charter contract with BG Norge
for a firm period of either six or ten years plus extension options for a total period of up to 20 years. Under the terms of the agreement, BG Norge
has until the end of 2012 to decide on the firm period of the charter contract.
Acquisition of LNG carriers by Teekay LNG
In October 2011, Teekay LNG Partners and the Marubeni Corporation (or Marubeni) entered into an agreement to acquire, through a joint venture,
ownership interests in six LNG carriers from Denmark-based A.P. Moller-Maersk A/S (or Maersk) for an aggregate purchase price of approximately
$1.3 billion. Teekay LNG and Marubeni have 52% and 48% economic interests, respectively, but share control in the joint venture (or the Teekay
LNG-Marubeni Joint Venture). On February 28, 2012, Teekay LNG-Marubeni Joint Venture acquired a 100% interest in the six LNG carriers (or the
Maersk LNG Carriers). Four of the six Maersk LNG Carriers are currently operating under long-term, fixed-rate time-charter contracts, with an
average remaining firm contract period of approximately 17 years, plus extension options. The other two vessels are currently operating under
medium-term, fixed-rate time-charters with an average remaining firm contract period of approximately three years. Since control of the Teekay
LNG-Marubeni Joint Venture will be shared jointly between Teekay LNG and Marubeni, Teekay LNG expects to account for the Teekay LNG-
Marubeni Joint Venture using the equity method.
The Teekay LNG-Marubeni Joint Venture financed approximately $1.06 billion of its acquisition from secured loan facilities, and the $266 million
from equity contributions from Teekay LNG and Marubeni Corporation. Teekay LNG has a 52% economic interest in the Teekay-Marubeni Joint
Venture and consequently its share of the equity contribution was approximately $138 million. Teekay LNG financed its equity contribution from its
November 2011 equity offering.
Teekay Corporation will take over technical management of the acquired vessels after a transition period. Please read "Item 18. Financial
Statements: Note 25(d)—Subsequent Events.
36
OTHER SIGNIFICANT PROJECTS AND DEVELOPMENTS
Angola LNG Project
We have a 33% interest in a joint venture to charter four newbuilding 160,400-cubic meter LNG carriers for a period of 20 years to the Angola LNG
Project, which is being developed by subsidiaries of Chevron Corporation, Sociedade Nacional de Combustiveis de Angola EP, BP Plc, Total S.A.,
and Eni SpA. The charters are at fixed rates, with inflation adjustments, commencing upon the vessel deliveries. The other members of the joint
venture are Mitsui & Co., Ltd. and NYK Bulkship (Europe) Ltd., which hold 34% and 33% interests in the joint venture, respectively. In connection
with this award, the joint venture entered into agreements with Samsung to construct the four LNG carriers at a total cost of approximately $906.0
million (of which our 33% portion is $299.0 million) excluding capitalized interest and other miscellaneous construction costs. In February 2011, we
offered to sell to Teekay LNG our 33% ownership interest in these vessels and related charter contracts, in accordance with existing agreements. In
March 2011, the transaction was approved by the Board of Directors of Teekay LNG’s general partner and by its Conflicts Committee. From August
to October 2011, three of the Angola LNG carriers delivered and commenced their 20 year fixed-rate charter contracts. The fourth Angola LNG
carrier delivered in January 2012. Please read "Item 18. Financial Statements: Note 16(b)—Commitments and Contingencies—Joint Ventures."
Storm Damage to Banff FPSO Unit
On December 7, 2011 the Petrojarl Banff FPSO unit (or Banff FPSO), which operates on the Banff field in the U.K. sector of the North Sea,
encountered a severe storm event and sustained damage to its moorings, turret and subsea equipment which necessitated the shutdown of
production on the unit. Due to damage incurred, on December 8, 2011 we declared force majeure and the Banff FPSO commenced a period of off
hire which is currently expected to continue until the second quarter of 2013 while repairs are assessed and completed. As a result, for the year
ended December 31, 2011 we experienced a loss of revenue of approximately $3 million. In addition, we expect to incur a loss of operating cash
flow of approximately $35 million and $15 million in 2012 and 2013, respectively. Following repairs, the Banff FPSO unit is expected to resume
production on the Banff field where it is expected to remain under contract until the end of 2018.
We are insured against all damage to the Banff FPSO and associated equipment related to this incident, subject to a $0.8 million deductible. We
expect repair costs to the Banff FPSO and equipment and costs associated with the emergency response to prevent loss or further damage during
the December 7, 2011 storm event, will be reimbursed through our insurance coverage subject to the terms and conditions of the applicable
policies.
IMPORTANT FINANCIAL AND OPERATIONAL TERMS AND CONCEPTS
We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:
Revenues. Revenues primarily include revenues from voyage charters, pool arrangements, time-charters accounted for under operating and direct
financing leases, contracts of affreightment and FPSO contracts. Revenues are affected by hire rates and the number of days a vessel operates and
the daily production volume on FPSO units. Revenues are also affected by the mix of business between time-charters, voyage charters, contracts of
affreightment and vessels operating in pool arrangements. Hire rates for voyage charters are more volatile, as they are typically tied to prevailing
market rates at the time of a voyage.
Forward Freight Agreements. We are exposed to freight rate risk for vessels in our spot tanker sub-segment from changes in spot tanker market
rates for vessels. In certain cases, we use forward freight agreements (or FFAs) to manage this risk. FFAs involve contracts to provide a fixed
number of theoretical voyages at fixed rates, thus hedging a portion of our exposure to the spot-charter market. These agreements are recorded as
assets or liabilities and measured at fair value. We have not designated these contracts as cash flow hedges for accounting purposes. Net gains
and losses from FFAs are recorded within realized and unrealized gain (loss) on non-designated derivative instruments in the consolidated
statements of income (loss).
Voyage Expenses. Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading
and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the customer under time-charters and
FPSO service contracts and by us under voyage charters and contracts of affreightment.
Net Revenues. Net revenues represent revenues less voyage expenses. Because the amount of voyage expenses we incur for a particular charter
depends upon the form of the charter, we use net revenues to improve the comparability between periods of reported revenues that are generated
by the different forms of charters and contracts. We principally use net revenues, a non-GAAP financial measure, because it provides more
meaningful information to us about the deployment of our vessels and their performance than revenues, the most directly comparable financial
measure under United States generally accepted accounting principles (or GAAP).
Vessel Operating Expenses. Under all types of charters and contracts for our vessels, except for bareboat charters, we are responsible for vessel
operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expen ses. The two largest
components of our vessel operating expenses are crew costs and repairs and maintenance. We expect these expenses to increase as our fleet
matures and to the extent that it expands.
Income from Vessel Operations. To assist us in evaluating our operations by segment, we analyze our income from vessel operations for each
segment, which represents the income we receive from the segment after deducting operating expenses, but prior to the deduction of interest
expense, realized and unrealized gains (losses) on non-designated derivative instruments, income taxes, foreign currency and other income and
losses.
Dry docking. We must periodically dry dock each of our vessels for inspection, repairs and maintenance and any modifications to comply with
industry certification or governmental requirements. Generally, we dry dock each of our vessels every two and a half to five years, depending upon
the type of vessel and its age. In addition, a shipping society classification intermediate survey is performed on our LNG carriers between the
second and third year of the five-year dry docking period. We capitalize a substantial portion of the costs incurred during dry docking and for the
37
survey and amortize those costs on a straight-line basis from the completion of a dry docking or intermediate survey over the estimated useful life of
the dry dock. We expense as incurred costs for routine repairs and maintenance performed during dry docking that do not improve or extend the
useful lives of the assets and annual class survey costs for our FPSO units. The number of dry dockings undertaken in a given period and the
nature of the work performed determine the level of dry docking expenditures.
Depreciation and Amortization. Our depreciation and amortization expense typically consists of:
charges related to the depreciation and amortization of the historical cost of our fleet (less an estimated residual value) over the estimated
useful lives of our vessels;
charges related to the amortization of dry docking expenditures over the useful life of the dry dock; and
charges related to the amortization of intangible assets, including the fair value of the time-charters, contracts of affreightment and
customer relationships where amounts have been attributed to those items in acquisitions; these amounts are amortized over the period in
which the asset is expected to contribute to our future cash flows.
Time-Charter Equivalent (TCE) Rates. Bulk shipping industry freight rates are commonly measured in the shipping industry at the net revenues
level in terms of ―time-charter equivalent‖ (or TCE) rates, which represent net revenues divided by revenue days.
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, dry dockings or special or intermediate surveys. Consequently, revenue days
represent the total number of days available for the vessel to earn revenue. Idle days, which are days when the vessel is available for the vessel to
earn revenue, yet is not employed, are included in revenue days. We use revenue days to explain changes in our net revenues between periods.
Calendar-Ship-Days. Calendar-ship-days are equal to the total number of calendar days that our vessels were in our possession during a period.
As a result, we use calendar-ship-days primarily in explaining changes in vessel operating expenses, time-charter hire expense and depreciation
and amortization.
Restricted Cash Deposits. Under the terms of the tax leases for four of our LNG carriers, we are required to have on deposit with financial
institutions an amount of cash that, together with interest earned on the deposit, will equal the remaining amounts owing under the leases, including
the obligations to purchase the LNG carriers at the end of the lease periods, where applicable. During vessel construction, however, the amount of
restricted cash approximates the accumulated vessel construction costs. In December 2011, the capital lease on one of the four LNG carriers
expired and the purchase obligation was fully funded with restricted cash deposits. These cash deposits are restricted to being used for capital lease
payments and have been fully funded with term loans and loans from our joint venture partners. Please read "Item 18. Financial Statements: Note
10 – Capital Lease Obligations and Restricted Cash."
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 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 we trade in the spot market. This could affect the amount of
dividends, if any, we pay on our common stock from period to period.
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 increased refinery maintenance. In addition, unpredictable weather patterns during the winter months tend
to disrupt vessel scheduling, which historically has increased oil price volatility and 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 December 31 and March 31.
The size of our fleet continues to change. Our results of operations reflect changes in the size and composition of our fleet due to
certain vessel deliveries, vessel dispositions and changes to the number of vessels we charter in. Please read ―—Results of Operations‖
below for further details about vessel dispositions, deliveries and vessels chartered in. Due to the nature of our business, we expect our
fleet to continue to fluctuate in size and composition.
Vessel operating expenses and other costs are facing industry-wide cost pressures. The oil shipping industry and offshore services
market continues to experience a global manpower shortage of qualified seafarers due to growth in the world fleet, which in turn has
resulted in upward pressure on manning costs. Going forward we expect that there will be increases in crew compensation which will
result in higher crewing costs as we keep pace with market conditions. In addition, factors such as pressure on raw material prices and
changes in regulatory requirements could also increase operating expenditures. Although we continue to take measures to improve
operational efficiencies and mitigate the impact of inflation and price escalations, future increases to operational costs are likely to occur.
Our net income is affected by fluctuations in the fair value of our derivative instruments. Our cross currency and interest rate swap
agreements and some of our foreign currency forward contracts are not designated as hedges for accounting purposes. Although we
believe these derivative instruments are economic hedges, the changes in their fair value are included in our statements of income (loss)
as unrealized gains or losses on non-designated derivatives. The changes in fair value do not affect our cash flows or liquidity.
The amount and timing of dry dockings of our vessels can affect our revenues between periods. Our vessels are off hire at various
times due to scheduled and unscheduled maintenance. During 2011 and 2010 we incurred 617 and 1,083 off-hire days relating to dry
38
docking, respectively. The financial impact from these periods of off hire, if material, is explained in further detail below in "—Results of
Operations‖. Fourteen vessels are scheduled for dry docking in 2012.
RESULTS OF OPERATIONS
In accordance with GAAP, we report gross revenues in our consolidated income statements and include voyage expenses among our operating
expenses. However, ship-owners base economic decisions regarding the deployment of their vessels upon anticipated TCE rates, and industry
analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time-charter contracts and FPSO contracts the
customer usually pays the voyage expenses, while under voyage charters and contracts of affreightment the ship-owner usually pays the voyage
expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net revenues
and TCE rates of our four reportable segments where applicable.
We manage our business and analyze and report our results of operations on the basis of four segments: the shuttle tanker and FSO segment, the
FPSO segment, the liquefied gas segment, and the conventional tanker segment. In order to provide investors with additional information about our
conventional tanker segment, we have divided this operating segment into the fixed-rate tanker sub-segment and the spot tanker sub-segment.
Please read "Item 18. Financial Statements: Note 2—Segment Reporting."
Year Ended December 31, 2011 versus Year Ended December 31, 2010
Shuttle Tanker and FSO Segment
Our shuttle tanker and FSO segment (which includes our Teekay Shuttle and Offshore business unit) includes our shuttle tankers and FSO units.
The shuttle tanker and FSO segment had four shuttle tankers under construction as at December 31, 2011. The four shuttle tank ers are scheduled
for delivery in 2013. Please read "Item 18. Financial Statements: Note 16(a) – Commitments and Contingencies – Vessels Under Construction. " We
use our shuttle tankers and FSO units to provide transportation and storage services to oil companies operating offshore oil field installations. All of
these shuttle tankers provide transportation services to energy companies, primarily in the North Sea and Brazil. Our shuttle tankers service the
conventional spot market from time to time.
The following table presents our shuttle tanker and FSO segment’s operating results and compares its net revenues (which is a non-GAAP financial
measure) to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in
calendar-ship-days by owned and chartered-in vessels for our shuttle tanker and FSO segment:
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments and net loss on sale of vessels and equipment
Restructuring charges
Income from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
Year Ended
December 31,
2011
2010
% Change
613,768
97,743
516,025
196,536
74,478
129,293
60,359
43,356
5,351
6,652
13,053
2,007
15,060
622,195
111,003
511,192
182,614
89,768
127,438
51,281
19,480
704
39,907
11,221
2,626
13,847
(1.4)
(11.9)
0.9
7.6
(17.0)
1.5
17.7
122.6
660.1
(83.3)
16.3
(23.6)
8.8
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the shuttle tanker and FSO segment based on
estimated use of corporate resources). For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average fleet size of our shuttle tanker and FSO segment (including vessels chartered-in), as measured by calendar-ship-days, increased
during 2011 compared to 2010, primarily due to an increase in owned shuttle tankers with the delivery of four newbuilding shuttle tankers, being the
Amundsen Spirit and the Nansen Spirit (together, the 2010 Newbuilding Shuttle Tanker Acquisitions), and the Peary Spirit and the Scott Spirit
(together, the 2011 Newbuilding Shuttle Tanker Acquisitions) in July 2010, October 2010, June 2011 and October 2011, respectively. This increase
in shuttle tankers was partially offset by the sale of the Karratha Spirit FSO unit in March 2011.
Net Revenues. Net revenues increased to $516.0 million for 2011, from $511.2 million for 2010, primarily due to:
an increase of $38.5 million for 2011 due to the 2010 and 2011 Newbuilding Shuttle Tanker Acquisitions;
an increase of $16.4 million for 2011 due to an increase in revenues in our time-chartered-out fleet from entering into a new contract and
increases in rates as provided in certain bareboat and time-charter-out contracts,
39
an increase of $1.8 million for 2011 related to an increase in reimbursable bunker costs as provided for in new contracts during 2010,
partially offset by higher bunkers costs during 2011 as compared to the prior year; and
an increase of $0.7 million for 2011 from short-term offshore projects in the North Sea, which require the use of shuttle tankers;
partially offset by
a decrease of $24.4 million for 2011 due to lower revenues from our contract of affreightment shuttle tanker fleet from the declining oil
production at mature oil fields in the North Sea compounded by fewer opportunities compared to the prior period to trade this excess
capacity in the fleet in the conventional spot tanker market as a result of decreased demand for conventional crude transportation;
a decrease of $11.7 million for 2011 due to lower revenues related to the sale of the Karratha Spirit in March 2011;
decrease of $10.0 million for 2011, due to the redelivery of one vessel to us in March 2011 upon termination of the time-charter-out
contract;
a decrease of $4.2 million for 2011 due to a lower charter rate on the Navion Saga in accordance with the charter contract, which took
effect during the second quarter of 2010; and
a decrease of $0.9 million due to more off-hire days in our time-chartered-out fleet for 2011 as compared to 2010.
Vessel Operating Expenses. Vessel operating expenses increased to $196.5 million for 2011, from $182.6 million for 2010, primarily due to:
an increase of $15.6 million for 2011 due to the 2010 and 2011 Newbuilding Shuttle Tanker Acquisitions;
an increase of $8.3 million for 2011 in crew and manning costs as compared to the prior year resulting primarily from planned increases in
wages; and
an increase of $3.3 million for 2011 due to an increase in the number of vessels dry docked, and costs related to services and spares
(certain repair and maintenance items are more efficient to complete while a vessel is in dry dock; consequently, repair and maintenance
costs will typically increase in periods when there is an increase in the number of vessels dry docked);
partially offset by
a decrease of $8.8 million for 2011 related to the sale of the Karratha Spirit in March 2011;
a decrease of $3.5 million relating to the layup of one of our vessels in July 2011as it awaits suitable projects;
a decrease of $1.1 million for 2011 relating to the settlement of a claim with a customer in 2010; and
a decrease of $1.1 million for 2011 relating to the net realized and unrealized changes in fair value of our foreign currency forward contracts
that are or have been designated as hedges for accounting purposes.
Time-Charter Hire Expense. Time-charter hire expense decreased to $74.5 million for 2011, from $89.8 million for 2010, primarily due to:
a decrease of $13.5 million for 2011 due to the redelivery of three time-chartered-in vessels to their owners in October 2011, February 2010
and November 2010;
a decrease of $2.3 million due to the acquisition of one previously chartered-in vessel in February 2010; and
a decrease of $1.2 million due to decreases in rates on certain contracts in the time-chartered-in fleet during 2011;
partially offset by
an increase of $1.2 million due to increased spot in-chartering during 2011; and
an increase of $0.5 million due to less offhire in the in-chartered fleet during 2011.
Depreciation and Amortization. Depreciation and amortization expense increased to $129.3 million for 2011, from $127.4 million for 2010, primarily
due to the 2010 and 2011 Newbuilding Shuttle Tanker Acquisitions, partially offset by adjustments to the carrying value of certain capitalized dry
docking expenditures in 2010, the write-down of one of our shuttle tankers in 2010, and the sale of the Karratha Spirit in March 2011.
Asset Impairments and Net Loss on Sale of Vessels and Equipment. Asset impairments and net loss on the sale of vessels and equipment were
$43.4 million for 2011. The impairments primarily relate to three 1992-built shuttle tankers, all of which will be 20-years old in 2012, and one FSO
unit. We determined these vessels were impaired and wrote down the carrying values of these vessels to their estimated fair value, which is either
the estimated sales price of the vessel or the estimated scrap value. We identified the following indicators of impairment related to these vessels:
the age of the vessels, the requirements of operating in the North Sea, a change in the operating plans for certain vessels, escalating dry dock
costs, a continued decline in the fair market value of vessels, and a general decline in the future outlook for shipping and the global economy
combined with delayed optimism on when the recovery may occur. Asset impairments and net loss on the sale of vessels and equipment for 2010
were $19.5 million, resulting from the write-down of certain shuttle equipment, as the carrying value exceeded its estimated fair value, and the
40
impairment of a 1992-built shuttle tanker, as the shuttle tanker net carrying value exceeded the net undiscounted cash flows expected to be
generated over its remaining useful life. Due to the termination of the vessel’s charter contract and recent economic developments it was
determined in 2010 that the shuttle tanker may not generate the future cash flows that were anticipated when originally purchased. The vessel was
written down to its estimated fair value. The shuttle tanker equipment was originally purchased for use in future shuttle tanker conversions or new
shuttle tankers.
Restructuring Charges. During 2011 and 2010, we incurred restructuring charges of $5.4 million and $0.7 million, respectively, in connection with
the termination of employment for certain of the crew members of the Karratha Spirit following the sale of the vessel in March 2011, as well as the
termination of the time-charter-out contract of one of our shuttle tankers. The restructuring charges from 2010 primarily resulted from the completion
of the reflagging of certain vessels and a change in the nationality mix of our crews.
FPSO Segment
Our FPSO segment (which includes our Teekay Petrojarl business unit) includes our FPSO units and other vessels used to service our FPSO
contracts. We use these units and vessels to provide transportation, production, processing and storage services to oil companies operating
offshore oil field installations. These services are typically provided under long-term, fixed-rate time-charter contracts, contracts of affreightment or
FPSO service contracts. Historically, the utilization of FPSO units and other vessels in the North Sea is higher in the winter months, as favorable
weather conditions in the summer months provide opportunities for repairs and maintenance to offshore oil platforms, which generally reduces oil
production.
The following table presents our FPSO segment’s operating results and also provides a summary of the changes in calendar-ship-days for our
FPSO segment:
(in thousands of U.S. dollars, except calendar-ship-days and
percentages)
Year Ended
December 31,
Revenues
Vessel operating expenses
Depreciation and amortization
General and administrative (1)
Gain on sale of vessels and equipment
Bargain purchase gain
Income from vessel operations
Calendar-Ship-Days
Owned Vessels
2011
464,810
242,332
96,915
52,854
(4,888)
(58,235)
135,832
2010
% Change
463,931
209,283
95,784
42,714
-
-
116,150
0.2
15.8
1.2
23.7
(100.0)
(100.0)
16.9
2,982
2,920
2.1
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the FPSO segment based on estimated use of
corporate resources). For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average fleet size of our FPSO segment, as measured by calendar-ship-days, increased during 2011 compared to 2010 due to the acquisition
of the Hummingbird FPSO unit by Teekay and the Piranema FPSO unit by Teekay Offshore (or the Sevan Acquisitions) on November 30, 2011.
Revenues. Revenues increased to $464.8 million for 2011, from $463.9 million for 2010, primarily due to:
an increase of $28.3 million due to supplemental efficiency and tariff payments received under the amended Petrojarl Foinaven FPSO
contract;
an increase of $14.5 million due to the Sevan Acquisitions;
an increase of $6.7 million due to increased rates on the Rio das Ostras FPSO unit effective April 2011, concurrent with starting a new
contract on the Aruana field off of Brazil;
an increase of $4.4 million due to a planned maintenance shutdown of the Petrojarl Foinaven FPSO unit in the third quarter of 2010;
an increase of $4.0 million due to foreign currency exchange differences in 2011 as compared to 2010;
an increase of $3.5 million relating to back-pay negotiated payments to us for services previously rendered to the charterer of the Rio das
Ostras FPSO unit; and
an increase of $3.1 million due to a planned maintenance shutdown for 13 days on the Petrojarl Varg FPSO unit in the third quarter of
2010;
partially offset by
a decrease of $59.2 million for one-time payments received in 2010 under the amended operating contract for the Petrojarl Foinaven
related to operations in previous years and recognized in 2010; and
41
a decrease of $3.2 million due to the weather related incident involving the Banff FPSO unit. Please read ―—Other Significant Projects and
Developments.‖
As part of our acquisition of Teekay Petrojarl in July 2008 and Sevan in November 2011, we assumed certain FPSO service contracts that had less
favorable terms than prevailing market terms at the time of the acquisitions. This contract value liability, which was initially recognized on the date of
acquisition, is being amortized to revenue over the remaining firm period of the current FPSO contracts on a weighted basis, based on the projected
revenue to be earned under the contracts. The amount of amortization relating to these contracts included in revenue for 2011 was $46.2 million
(2010 - $47.6 million). The decrease in 2011, compared to 2010, was due to increases in the amortization periods resulting from operating contract
amendments and changes to expected contract durations for two of our FPSO units. Please read "Item 18. Financial Statements: Note 6—Goodwill,
Intangible Assets and In-Process Revenue Contracts."
Vessel Operating Expenses. Vessel operating expenses increased to $242.3 million for 2011, from $209.3 million for 2010, primarily due to:
an increase of $10.3 million due to increased inspections, repairs, crew and travel costs in 2011 relating to the Petrojarl I FPSO unit
compared to 2010;
an increase of $6.9 million due to higher repairs and maintenance costs associated with the Apollo Spirit, an FSO unit used to service the
Petrojarl Banff FPSO unit, due to a scheduled dry dock in 2011;
an increase of $6.7 million due to the Sevan Acquisitions;
an increase of $6.4 million due to the weakening of the U.S. Dollar against the Norwegian Kroner in 2011 compared to 2010;
an increase of $3.2 million due to increased repairs on the Rio das Ostras FPSO unit while on yard stay and higher consumables and
spares in 2011 compared to 2010; and
an increase of $3.1 million due to planned crew and manning wage increases during 2011;
partially offset by
a decrease of $3.9 million due to a planned maintenance shutdown for 13 days on the Petrojarl Varg FPSO unit in the third quarter of
2010.
Depreciation and Amortization. Depreciation and amortization expense increased to $96.9 million for 2011, from $95.8 million for 2010, primarily due
capital upgrades on the Rio das Ostras FPSO unit for the Aruana field in the first quarter of 2011 and the Sevan Acquisitions.
Gain on Sale of Vessels and Equipment. Gain on sale of vessels and equipment of $4.9 million for 2011 relates to a gain on sale of equipment
related to the Tiro and Sidon FPSO project.
Bargain purchase gain. As part of the acquisition of FPSO units by us and Teekay Offshore from Sevan and our 40% equity investment in Sevan,
we recognized a bargain purchase gain on acquisition of $58.2 million. Please read "Item 18. Financial Statements—Note 3: Acquisition of FPSO
Units from and investment in Sevan Marine ASA."
Liquefied Gas Segment
Our liquefied gas segment (which includes our Teekay Gas Services business unit) consists of LNG and LPG carriers subject to long-term, fixed-
rate time-charter contracts. We expect our liquefied gas segment to increase due to Teekay LNG’s 52% interest in the Teekay-Marubeni Joint
Venture and its acquisition on February 28, 2012 of the six LNG carriers from Maersk.
The following table presents our liquefied gas segment’s operating results and compares its net revenues (which is a non-GAAP financial measure)
to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in calendar-ship-
days by owned vessels for our liquefied gas segment:
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Depreciation and amortization
General and administrative (1)
Gain on sale of vessels and equipment
Restructuring charges
Income from vessel operations
Year Ended
December 31,
2011
2010
% Change
272,041
4,862
267,179
48,158
63,641
20,586
-
-
134,794
248,378
29
248,349
46,497
62,904
20,147
(4,340)
394
122,747
9.5
16,665.5
7.6
3.6
1.2
2.2
100.0
(100.0)
9.8
Calendar-Ship-Days
Owned Vessels and Vessels under Direct Financing Lease
5,126
5,051
1.5
42
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the liquefied gas segment based on estimated
use of resources).
The increase in the average fleet size of our liquefied gas segment, as measured by calendar-ship-days, was primarily due to the deliveries of two
Multigas carriers, the Norgas Unikum and Norgas Vision, on June 15, 2011 and October 17, 2011, respectively, and the delivery of an LPG carrier,
the Norgas Camilla, on September 15, 2011 (collectively, the 2011 Gas Carrier Deliveries); partially offset by the sale of an LPG carrier, the Dania
Spirit, on November 5, 2010.
During 2011, two of our LNG carriers, the Arctic Spirit and Polar Spirit, were off hire for approximately 11 days and 50 days, respectively, relating to
scheduled dry dockings, compared to 288 off-hire days in 2010, of which 44 days were related to scheduled dry dockings of the two vessels, with
the remainder due to the Arctic Spirit being idle with no contract.
Net Voyage Revenues. Net voyage revenues increased to $267.2 million for 2011, from $248.3 million for 2010, primarily due to:
an increase of $15.6 million due to an increase in the hire rates under new charter contracts for the Arctic Spirit and Polar Spirit during 2011 as
compared to the prior year;
an increase of $5.3 million due to the 2011 Gas Carrier Deliveries;
an increase of $4.1 million due to the effect on our Euro-denominated revenues from the strengthening of the Euro against the U.S. Dollar
during 2011 compared to the prior year; and
an increase of $0.9 million, due to operating expense recovery adjustments during 2011 in the charter-hire rates for the Tangguh LNG Carriers;
partially offset by
a decrease of $4.0 million due to the sale of the Dania Spirit on November 5, 2010; and
a decrease of $1.2 million for 2011 due to the Arctic Spirit and Polar Spirit being offhire for 11 days and 13 days, respectively, in the second
quarter of 2011 for scheduled dry dockings.
Vessel Operating Expenses. Vessel operating expenses increased to $48.2 million for 2011, from $46.5 million for 2010, primarily due to:
an increase of $2.9 million due to the scope and extent of service and maintenance activities performed in 2011 compared to 2010 and an
increase in manning costs for certain of our LNG carriers;
an increase of $0.8 million due to unemployment for the Arctic Spirit for most of 2010. As a result, we were able to operate the vessel
throughout 2010 with a reduced average number of crew on board and we reduced the amount of repair and maintenance activities performed;
and
an increase of $0.7 million due to the effect on our Euro-denominated crew manning expenses from the strengthening of the Euro against the
U.S. Dollar during 2011 compared to 2010 (a portion of our vessel operating expenses are denominated in Euros, which is primarily due to the
nationality of our crew);
partially offset by
a decrease of $2.3 million due to the sale of the Dania Spirit on November 5, 2010; and
a decrease of $1.0 million due to lower insurance rates upon renewal in 2011.
Depreciation and Amortization. Depreciation and amortization increased to $63.6 million for 2011, from $62.9 million for 2010, primarily due to:
an increase of $1.5 million due to the 2011 Gas Carrier Deliveries; and
an increase of $1.2 million as a result of amortization of dry-dock expenditures incurred during 2011;
partially offset by
a decrease of $0.9 million due to the sale of the Dania Spirit on November 5, 2010.
Gain on Sale of Vessels and Equipment. The $4.3 million gain on sale of vessel in 2010 relates to the sale of the Dania Spirit in November 2010.
Conventional Tanker Segment
Our conventional tanker segment (which includes our Teekay Tankers Services business unit) consists of conventional crude oil and product
tankers that (i) are subject to long-term, fixed-rate time-charter contracts (which have an original term of one year or more), (ii) operate in the spot
tanker market, or (iii) are subject to time-charters or contracts of affreightment that are priced on a spot market basis or are short-term, fixed-rate
contracts (which have an original term of less than one year).
43
a) Fixed-Rate Tanker Sub-Segment
Our fixed-rate tanker sub-segment, a subset of our conventional tanker segment, includes conventional crude oil and product tankers on fixed-rate
time charters with an original duration of more than one year. In addition, we have a 50% interest in a VLCC under construction that is scheduled for
delivery in 2013, which will be accounted for under the equity basis. Upon delivery, this vessel will commence operation under a time-charter for a
term of five years. Please read "Item 18. Financial Statements: Note 16(b)—Commitments and Contingencies—Joint Ventures."
The following table presents our fixed-rate tanker sub-segment’s operating results and compares its net revenues (which is a non-GAAP financial
measure) to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in
calendar-ship-days by owned vessels for our fixed-rate tanker sub-segment:
(in thousands of U.S. dollars, except calendar-ship-days and
percentages)
Year Ended
December 31,
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments and net loss on sale of vessels and equipment
Goodwill impairment
Restructuring charges
Income from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
2011
369,849
4,406
365,443
123,027
33,623
84,256
44,618
58,252
10,809
16
10,842
12,199
1,911
14,110
2010
% Change
382,577
4,446
378,131
109,483
60,466
82,746
43,147
154
-
330
81,805
11,919
2,626
14,545
(3.3)
(0.9)
(3.4)
12.4
(44.4)
1.8
3.4
37,726.0
100.0
(95.2)
(86.7)
2.4
(27.2)
(3.0)
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses allocated to the fixed-rate tanker sub-segment based on
estimated use of corporate resources. For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average fleet size of our fixed-rate tanker sub-segment (including vessels chartered-in), as measured by calendar-ship-days, decreased for
2011 compared to the prior year, primarily due to:
the transfer to the spot-rate tanker sub-segment of two Aframax tankers, on a net basis, (consisting of the transfer-in of three owned
vessels from the spot tanker sub-segment, and the transfer-out of three owned vessels and two in-chartered vessels to the spot tanker
sub-segment);
an overall decrease in the number of in-chartered vessel days during 2011;
the sale of one product tanker in August 2010; and
the redelivery by us of one VLCC and one Aframax tanker to their owners during 2011 upon expiration of in-charters;
partially offset by
the transfer of one Suezmax tanker from the spot tanker sub-segment in April 2010; and
the deliveries of two product tankers in April 2011.
The collective impact from the above noted fleet changes are referred to below as the Net Fleet Reduction.
Net Revenues. Net revenues decreased to $365.4 million in 2011, from $378.1 million for 2010, primarily due to:
a decrease of $14.4 million from the redeliveries of in-chartered vessels; and
a decrease of $9.0 million from the sale of a product tanker in August 2010;
partially offset by
an increase of $11.5 million resulting from interest income from our investment in term loans, as discussed below.
We earned interest income of $16.8 million and $5.3 million, respectively, for 2011 and 2010 from our investment in three term loans which totalled
$187 million as at December 31, 2011, which are collateralized by first-priority mortgages on three modern VLCCs.
44
Vessel Operating Expenses. Vessel operating expenses increased to $123.0 million in 2011, from $109.5 million in 2010, primarily due to $12.7
million related to the addition of two product tankers and $5.5 million related to an increase in manning for certain of our conventional tankers and
the timing of services and maintenance. These increases were partially offset by $4.5 million as a result of the Net Fleet Reduction.
Time-Charter Hire Expense. Time-charter hire expense decreased to $33.6 million in 2011, from $60.5 million in 2010, primarily due to a net
decrease in the number of in-chartered vessel days as vessels were redelivered to their owners upon expiration of in-charter contracts, and vessels
transferring to the spot tanker sub-segment.
Depreciation and Amortization. Depreciation and amortization expense increased to $84.3 million in 2011, from $82.7 million in 2010, primarily due
to an increase in capitalized dry docking expenditures incurred during 2011.
Asset Impairments and Net loss on Sale of Vessels and Equipment. Asset impairments and net loss on sale of vessels and equipment were $58.3
million for 2011. The impairments relate to three vessels built in 2000, 2004 and 2005. We determined these vessels were impaired and wrote down
the carrying values of these vessels to their estimated fair value, which is either the estimated sales price of the vessel or the estimated scrap value.
We identified the following indicators of impairment related to these vessels: a change in the operating plans for certain vessels, escalating dry dock
costs, a continued decline in the fair market value of vessels, and a general decline in the future outlook for shipping and the global economy
combined with delayed optimism on when the recovery may occur. "Please read Item 18. Financial Statements: Note 18(b) Write-downs and Note
11(a) Fair Value Measurements."
Goodwill Impairment. Goodwill impairment was $10.8 million for 2011 as a result of a write-down of goodwill relating to Suezmax tankers. The
recognition of the goodwill impairment charge was driven by the continuing weak tanker market, which has largely been caused by an oversupply of
vessels relative to demand. Please read "Item 18. Financial Statements: Note 6 Goodwill, Intangible Assets and In-Process Revenue Contracts."
b) Spot Tanker Sub-Segment
Our spot tanker sub-segment, a subset of our conventional tanker segment, consists of conventional crude oil tankers and product tankers operating
on the spot tanker market or subject to time-charters or contracts of affreightment that are priced on a spot market basis or are short-term, fixed-rate
contracts. We consider contracts that have an original term of less than one year in duration to be short-term. Certain of our conventional Aframax,
Suezmax, and large and medium product tankers are among the vessels included in the spot tanker sub-segment.
Our spot tanker market operations contribute to the volatility of our revenues, cash flow from operations and net income (los s). Historically, the
tanker industry has been cyclical, experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for,
vessel capacity. In addition, spot tanker markets historically have exhibited seasonal variations in charter rates. Spot tank er markets are typically
stronger in the winter months as a result of increased oil consumption in the Northern Hemisphere and unpredictable weather patterns that tend to
disrupt vessel scheduling.
The following table presents our spot tanker sub-segment’s operating results and compares its net revenues (which is a non-GAAP financial
measure) to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in
calendar-ship-days by owned vessels for our spot tanker sub-segment:
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Year Ended
December 31,
2011
2010
% Change
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments and net loss on sale of vessels and equipment
Goodwill impairment
Restructuring charge
Loss from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
233,314
69,603
163,711
67,634
106,078
54,503
45,199
54,339
25,843
123
(190,008)
7,367
5,555
12,922
378,672
129,619
249,053
82,670
135,758
71,833
36,454
33,856
-
14,968
(126,486)
8,185
6,372
14,557
(38.4)
(46.3)
(34.3)
(18.2)
(21.9)
(24.1)
24.0
60.5
100.0
(99.2)
50.2
(10.0)
(12.8)
(11.2)
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses allocated to the spot tanker sub-segment based on
estimated use of corporate resources. For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average size of our spot tanker fleet (including vessels chartered-in), as measured by calendar-ship-days, decreased for 2011, compared to the
prior year, primarily due to:
the sale of two Aframax tankers in 2010 and one in 2011;
45
the redelivery by us of four Aframax tankers and six Suezmax tankers to their owners during 2011 upon expiration of in-charters; and
the transfer of one Suezmax tanker to the fixed-rate tanker sub-segment in April 2010;
partially offset by
the transfer to the spot-rate tanker sub-segment of two Aframax tankers, on a net basis, (consisting of the transfer-out of three owned
vessels to the fixed tanker sub-segment, and the transfer-in of three owned vessels and two in-chartered vessels from the fixed tanker
sub-segment); and
the transfer by us of one in-chartered VLCC from the fixed-rate tanker sub-segment in February 2011 before redelivery to its owner in
May 2011.
The collective impact from the above noted fleet changes are referred to below as the Net Spot Fleet Reductions.
Tanker Market and TCE Rates
Crude tanker rates strengthened during the fourth quarter of 2011 due to seasonal factors and an increase in global oil production to record highs. In
the Atlantic, weather in the North Sea and Baltic Sea and transit delays through the Turkish Straits led to an increase in European Aframax and
Suezmax rates. The return of Libyan oil production to approximately 1.0 million barrels per day (mb/d) by the end of the year also provided support
to tanker rates in the Mediterranean. In the Pacific, an increase in Asian oil imports to meet peak winter demand caused rates to firm up, particularly
in the large crude oil tanker sectors. Weather disruptions in the Atlantic have continued to give support to crude tanker rates in early 2012.
The world tanker fleet grew by 26.1 million deadweight tonnes (mdwt), or 5.8%, during 2011, compared to an increase of 17.7 mdwt, or 4.1 %,
during 2010. A total of 39.6 mdwt of new tankers entered the global fleet in 2011, a decrease from 41.5 mdwt in the prior year. A total of 13.6 mdwt
of tankers were removed for scrapping or conversion during 2011, a decrease from 23.8 mdwt in the prior year. Approximately 50 mdwt of tankers
are scheduled for delivery during 2012; however, we anticipate an order book slippage rate of around 33% due to construction delays and order
cancellations and estimate actual deliveries of approximately 33.5 mdwt. Assuming scrapping of 12 mdwt occurs, we estimate that the tanker fleet
will grow by approximately 21.5 mdwt, or 4.5%, during 2012.
Based on the average range of forecasts from the International Energy Agency (IEA), the Energy Information Agency (EIA) and the Organization of
Petroleum Exporting Countries (OPEC), global oil demand is expected to grow by 1.0 mb/d in 2012, with growth expected to be driven entirely by
non-OECD regions. This increase in oil demand is expected to increase demand for tankers through 2012. In addition, we anticipate that average
voyage distances will lengthen during 2012 due to a narrowing in the price spread between crude oil produced in the Atlantic—such as Brent—and
Middle Eastern grades, which we expect will make Atlantic basin crude more attractive to Asian buyers.
With tanker supply growth expected to exceed demand growth for at least the first half of 2012, the current seasonal strength is expected to give
way to spot tanker rate weakness and volatility similar to that experienced in 2011. These conditions are expected to persist through much of 2012
before an anticipated reduction in tanker supply growth begins to provide support for potentially stronger rates in the latter part of the year.
Year Ended
December 31, 2011
December 31, 2010
December 31, 2009
Net
Revenues Revenue
($000’s)
Days
TCE
Rate
$
Net
Revenues Revenue
($000’s)
Days
TCE
Rate
$
Net
Revenues Revenue
($000’s)
Days
TCE
Rate
$
64,529
76,606
23,486
(850)
4,387
6,332
1,832
-
14,709
12,098
12,820
-
116,986
110,437
26,020
(4,390)
4,983
7,006
1,768
-
23,477
15,763
14,717
-
118,279
208,437
45,091
3,078
4,851
11,650
2,748
-
24,382
17,892
16,409
-
163,771
12,551
13,048
249,053
13,757
18,104
374,885
19,249
19,476
Vessel Type
Spot Fleet (1)
Suezmax Tankers
Aframax Tankers
Large/Medium Product Tankers
Other (2)
Totals
(1) Spot fleet includes short-term time-charters and fixed-rate contracts of affreightment with an initial term of less than one year.
(2)
Includes the cost of spot in-charter vessels servicing fixed-rate contract of affreightment cargoes, the amortization of in-process revenue contracts and the cost of
fuel while off hire.
Average spot tanker TCE rates decreased for 2011 compared to the prior year. The TCE rates generally reflect continued weak global oil demand
caused by the global economic slowdown. Partially in response to this global economic slowdown, we reduced our exposure to the spot tanker
market through the sale of certain vessels that were trading on the spot market, entered into fixed-rate time charters for certain tankers that were
previously trading in the spot market, and re-delivered in-chartered vessels. This shift away from our spot tanker employment to fixed-rate
employment provided increased cash flow stability in light of a volatile spot tanker market.
46
Net Revenues. Net revenues decreased to $163.7 million in 2011, from $249.1 million for 2010, primarily due to decreases of $65.2 million from
decreases in our average spot tanker TCE rates due to the relative weakening of the spot tanker market and $19.3 million from the Net Spot Fleet
Reductions.
Vessel Operating Expenses. Vessel operating expenses decreased to $67.6 million in 2011, from $82.7 million for 2011, primarily due to $15.9
million from the Net Spot Fleet Reductions.
Time-Charter Hire Expense. Time-charter hire expense decreased to $106.1 million for 2011, from $135.8 million for 2010, primarily due to
redeliveries of previously chartered-in vessels upon expiration of their in-charter contracts and a decrease in average in-charter contract hire rates.
Depreciation and Amortization. Depreciation and amortization expense decreased to $54.5 million in 2011, from $71.8 million for 2010, primarily due
to a decrease of amortization of certain intangible contracts that were fully amortized in 2010 and the Net Spot Fleet Reductions.
Asset Impairments and Net loss on Sale of Vessels and Equipment. Asset impairments and net loss on sale of vessels and equipment were $54.3
million for 2011. The impairments relate to two 1992-built vessels, one 1993-built vessel, one 1994-built vessel and one 1997-built vessel. We
determined these vessels were impaired and wrote down the carrying values of these vessels to their estimated fair value, which is either the
estimated sales price of the vessel or the estimated scrap value. We identified the following indicators of impairment relat ed to these vessels: a
change in the operating plans for certain vessels, escalating dry dock costs, a continued decline in the fair market value of vessels, and a general
decline in the future outlook for shipping and the global economy combined with delayed optimism on when the recovery may occ ur. Asset
impairments and net loss on sale of vessels and equipment for 2010 of $33.9 million, were primarily due to write-downs of $31.7 million for certain
customer contracts and three vessel purchase options which either expired unexercised or were unlikely to be exercised by us and a $1.9 million
loss on the sale of a 1995-built Aframax tanker in August 2010.
Goodwill Impairment. Goodwill impairment was $25.8 million for 2011 as a result of a write-off of goodwill relating to Suezmax tankers. The
recognition of the goodwill impairment charge was driven by the continuing weak tanker market, which has largely been caused by an oversupply of
vessels relative to demand. Please read "Item 18. Financial Statements: Note 6 Goodwill, Intangible Assets and In-Process Revenue Contracts."
Restructuring Charges. Restructuring charges for 2011 and 2010 primarily relate to costs incurred for certain vessel crew changes. We changed the
crew operations being managed by an external management company to our own international seafarers in order to reduce future crewing costs.
Other Operating Results
The following table compares our other operating results for 2011 and 2010.
(in thousands of U.S. dollars, except percentages)
General and administrative
Interest expense
Interest income
Realized and unrealized losses on non-designated derivative instruments
Equity loss
Foreign exchange gain
Loss on notes repurchase
Other income
Income tax (expense) recovery
Year Ended
December 31,
2011
2010
% Change
(223,616)
(137,604)
10,078
(342,722)
(35,309)
12,654
-
12,360
(4,290)
(193,743)
(136,107)
12,999
(299,598)
(11,257)
31,983
(12,645)
7,527
6,340
15.4
1.1
(22.5)
14.4
213.7
(60.4)
(100.0)
64.2
(167.7)
General and Administrative Expenses. General and administrative expenses increased to $223.6 million for 2011, from $193.7 million for 2010,
primarily due to:
an increase of $30.9 million in salaries and benefits primarily due to a one-time pension expense of $11.0 million related to the retirement
of our former President and Chief Executive Officer on March 31, 2011, $1.7 million from the weakening of the U.S. Dollar against the
Norwegian Kroner, Canadian dollar, Australian dollar, and other currencies, $4.9 million from an increase in the average number of
employees, and $2.8 million from salary increases effective April 2011;
an increase of $7.2 million in corporate expenses due to higher business development and consulting fees, primarily in our Shuttle Tanker
and FSO and FPSO segments, and an increase in directors' fees;
an increase of $3.9 million in travel related primarily to increased business development activities; and
an increase of $1.1 million in acquisition costs related to the Sevan Acquisition;
partially offset by
a decrease of $6.3 million in lower short-term incentive compensation.
47
Interest Expense. Interest expense increased to $137.6 million for 2011, from $136.1 million for 2010, primarily due to an increase in average debt
balance from $4.4 billion in 2010 to $4.9 billion in 2011, and
an increase of $7.9 million due to the effect of the November 2010 issuance of the 600 million Norwegian Kroner-denominated senior
unsecured bonds due November 2013; and
an increase of $2.8 million due to increased EURIBOR rates relating to Euro-denominated debt;
partially offset by
a decrease due to the retirement at maturity of 8.875% senior unsecured notes due in July 2011;
a decrease of $7.6 million due to capitalized interest on the Tiro and Sidon FPSO project and Knarr FPSO unit; and
a decrease of $1.8 million from the scheduled capital lease repayments on the Madrid Spirit (the Madrid Spirit was financed pursuant to a
Spanish tax lease arrangement, under which we borrowed under a term loan and deposited the proceeds into a restricted cash account
and entered into a capital lease for the vessel; as a result, this decrease in interest expense from the capital lease is offset by a
corresponding decrease in the interest income from restricted cash). During the fourth quarter of 2011 the Madrid Spirit lease expired and
the purchase obligation was fully funded with restricted cash deposits.
The debt repayments under long-term revolving credit facilities that contributed to a decrease in interest expense for 2011 were primarily funded
with net proceeds from the issuance of equity securities by our publicly listed subsidiaries and from the sale of assets to our public company
subsidiaries and to third parties. When one of our publicly listed subsidiaries acquires an asset from us, a significant portion of the acquisition
typically has been financed through the issuance to the public or private investors of equity securities by the subsidiary. To the extent that there are
no immediate investment opportunities, we have generally applied the proceeds from the equity issuances and from the sale of assets to these
subsidiaries and third parties towards debt reduction or increasing our cash balances. Please read "Item 4. Information on the Company—Recent
Equity Offerings and Transactions by Subsidiaries.‖
Interest Income. Interest income decreased to $10.1 million for 2011, compared to $13.0 million for 2010, primarily due to lower cash account
balances and a scheduled capital lease repayment on one of our LNG carriers that was funded from restricted cash deposits that earn interest.
Realized and Unrealized Losses on Non-designated Derivative Instruments. Realized and unrealized losses related to derivative instruments
that are not designated as hedges for accounting purposes are included as a separate line item in the consolidated statements of income (loss). The
realized (losses) gains relate to the amounts we actually received or paid to settle such derivative instruments and the unrealized (losses) gains
relate to the change in fair value of such derivative instruments. Net realized and unrealized losses on non-designated derivatives were $342.7
million for 2011, compared to net realized and unrealized losses on non-designated derivatives of $299.6 million for 2010, as detailed in the table
below:
(in thousands of U.S. Dollars)
Realized (losses) gains relating to:
Interest rate swap agreements
Interest rate swap agreement amendments and terminations
Foreign currency forward contracts
Forward freight agreements, bunker fuel swaps and other
Unrealized gains (losses) relating to:
Interest rate swaps
Foreign currency forward contracts
Forward freight agreements, bunker fuel swaps and other
Total realized and unrealized losses on non-designated derivative instruments
Year Ended
December 31,
2011
2010
(132,931)
(149,666)
9,965
36
(272,596)
(58,405)
(11,399)
(322)
(70,126)
(342,722)
(154,098)
-
(2,274)
(7,914)
(164,286)
(146,780)
6,307
5,161
(135,312)
(299,598)
The total realized and unrealized losses on non-designated derivative instruments were $342.7 million and $299.6 million for 2011 and 2010,
respectively. The realized losses relate to amounts we actually realized or paid to settle such derivative instruments, or for interest rate swap
agreement amendments and terminations. The unrealized losses on interest rate swaps for 2011 were primarily due to changes in the forward
interest swap rates.
During 2011 and 2010, we had interest rate swap agreements with aggregate average net outstanding notional amounts of approximately $3.0
billion and $2.7 billion, respectively, with average fixed rates of approximately 3.5% and 4.1%, respectively. Short-term variable benchmark interest
rates during these periods were generally less than 1.1% and, as such, we incurred realized losses of $132.9 million and $154.1 million,
respectively, during 2011 and 2010 under the interest rate swap agreements. We incurred realized losses of $149.7 million and $nil, respectively,
during 2011 and 2010 for amending the terms of five interest rate swaps to reduce the weighted average fixed interest rate from 5.1% to 2.5%, and
for the termination of two interest rate swaps.
48
As a result of significant decreases in long-term benchmark interest rates in 2011 and 2010, we recognized unrealized losses of $70.1 million in
2011 and $135.3 million in 2010. Please see "Item 5. Operating and Financial Review and Prospects: Valuation of Derivative Instruments," which
explains how our derivative instruments are valued, including a description of significant factors and uncertainties in determining the estimated fair
value and why changes in these factors result in material variances in realized and unrealized (losses) gain on derivative instruments.
Equity Loss. Equity losses were $35.3 million and $11.3 million for 2011 and 2010, respectively. The loss was primarily comprised of our share of
the earnings (loss) from the Angola LNG Project, the RasGas 3 Joint Venture and from the Exmar Joint Venture. Please read "Item 18. Financial
Statements: Note 23—Equity Accounted Investments." Of the equity loss for 2011, $35.3 million relates to our share of unrealized loss on interest
rate swaps for 2011. This compares to unrealized loss on interest rate swaps of $26.3 million included in equity loss for 2010. In addition, the equity
loss for 2011 includes the impairment of an investment in a joint venture of $19.4 million.
Foreign Exchange Gain. Foreign exchange gains were $12.7 million and $32.0 million for 2011 and 2010, respectively. These foreign currency
exchange gains, substantially all of which were unrealized, are due primarily to the relevant period end revaluation of our Euro-denominated term
loans, capital leases and restricted cash for financial reporting purposes. Gains reflect a strengthening U.S. Dollar against the Euro on the date of
revaluation. Losses reflect a weaker U.S. Dollar against the Euro on the date of revaluation.
Other Income. Other income of $12.4 million for 2011 was primarily comprised of leasing income of $2.9 million in 2011, a $3.4 million gain in 2011
related to a gain on sale of marketable securities, and $6.1 million in miscellaneous income.
Income Tax Recovery (Expense). Income tax expense was $4.3 million for 2011, compared to an income tax recovery of $6.3 million for 2010. The
increase to income tax expense was primarily due to taking a full valuation allowance against the deferred tax asset relating to Norwegian tax losses
carried forward, partially offset by an increase in deferred income tax recovery relating to unrealized foreign exchange translation losses and a tax
loss on the sale of a vessel.
Net Loss. As a result of the foregoing factors, net loss amounted to $386.7 million for 2011, compared to net loss of $166.6 million for 2010.
Year Ended December 31, 2010 versus Year Ended December 31, 2009
Shuttle Tanker and FSO Segment
The following table presents our shuttle tanker and FSO segment’s operating results and compares its net revenues (which is a non-GAAP financial
measure) to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in
calendar-ship-days by owned and chartered-in vessels for our shuttle tanker and FSO segment:
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Year Ended
December 31,
2010
2009
% Change
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments and net loss on sale of vessels and equipment
Restructuring charges
Income from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
622,195
111,003
511,192
182,614
89,768
127,438
51,281
19,480
704
39,907
11,221
2,626
13,847
583,320
86,499
496,821
173,463
113,786
122,630
50,923
1,902
7,032
27,085
10,950
2,727
13,677
6.7
28.3
2.9
5.3
(21.1)
3.9
0.7
924.2
(90.0)
47.3
2.5
(3.7)
1.2
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the shuttle tanker and FSO segment based
on estimated use of corporate resources). For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average fleet size of our shuttle tanker and FSO segment (including vessels chartered-in), as measured by calendar-ship-days, increased
during 2010 compared to 2009. This was primarily the due to an FSO unit commencing operations in December 2009, the acquisition of a shuttle
tanker in February 2010, the delivery of two shuttle tankers, and partially offset by a decrease in the number of chartered-in shuttle tankers.
Net Revenues. Net revenues increased to $511.2 million for 2010, from $496.8 million for 2009, primarily due to:
an increase of $16.5 million due to increased rates on certain bareboat and time-charter contracts and contracts of affreightment, primarily
as a result of contract renewals at higher rates;
an increase of $10.6 million due to the inclusion of the Falcon Spirit FSO unit commencing in December 2009;
49
an increase of $4.6 million due to the delivery of the two new shuttle tankers, the Amundsen Spirit and the Nansen Spirit, commencing in
July 2010 and October 2010, respectively;
an increase of $3.8 million due to foreign currency exchange differences as compared to 2009;
an increase of $1.0 million from an increase in the number of cargo liftings due to increased oil production at the Heidrun field, a mature oil
field in the North Sea that is serviced by certain shuttle tankers on contracts of affreightment; and
an increase of $0.8 million due to a payment made to us by a joint venture partner as the number of dry dock days for the applicable
vessel exceeded the maximum allowed under our agreement with this joint venture partner;
partially offset by
a net decrease of $16.5 million from fewer shuttle tanker revenue days due to declining oil production at mature oil fields in the North Sea,
a decrease in revenue days in the conventional spot market from decreased demand for conventional crude transportation, partially offset
by an increase in revenues from certain projects; and
a decrease of $6.3 million due to the redelivery of one in-chartered vessel in June 2009 as it completed its time-charter contract.
Vessel Operating Expenses. Vessel operating expenses increased to $182.6 million for 2010, from $173.5 million for 2009, primarily due to:
an increase of $6.8 million due to the acquisition of a previously in-chartered shuttle tanker in February 2010;
an increase of $4.3 million due to the delivery of the two new shuttle tankers, the Amundsen Spirit and the Nansen Spirit, commencing in
July 2010 and October 2010, respectively;
an increase of $4.3 million relating to repairs and maintenance performed during 2010 on certain vessels, crew training costs and port
costs;
an increase of $3.3 million due to the inclusion of the Falcon Spirit FSO unit in December 2009; and
an increase of $3.2 million due to weakening of the U.S. Dollar against the Australian Dollar compared to 2009;
partially offset by
a decrease of $7.0 million relating to the net realized and unrealized changes in fair value of our foreign currency forward contracts that
are or have been designated as hedges for accounting purposes;
a decrease of $3.2 million in crew and manning costs resulting primarily from cost saving initiatives that commenced in 2009, as described
below under restructuring charges;
a decrease of $2.2 million due to decreases in the cost of services, spares and consumables during 2010; and
a decrease of $2.0 million due to the redelivery of one in-chartered vessel in June 2009 as it completed its time-charter agreement.
Time-Charter Hire Expense. Time-charter hire expense decreased to $89.8 million for 2010, from $113.8 million for 2009, primarily due to:
a decrease of $24.0 million primarily resulting from the redelivery of three in-chartered shuttles to their owners in June 2009, November
2009 and February 2010, upon expiration of their in-charter contracts; and
a decrease of $12.6 million due to the acquisition of a previously in-chartered shuttle tanker in February 2010;
partially offset by
an increase of $11.9 million due to less off hire in the in-chartered fleet and an increase in spot in-chartering of vessels; and
an increase of $0.7 million due to higher dry docking amortization relating to one of our in-chartered vessels.
Depreciation and Amortization. Depreciation and amortization expense increased to $127.4 million for 2010, from $122.6 million for 2009, primarily
due to capitalized dry dock and vessel upgrade costs incurred in the second half of 2009, depreciation on a shuttle tanker acquired in February
2010, and two shuttle tankers that delivered in July and October 2010, partially offset by lower amortization on our FSO units as certain conversion
costs were fully depreciated at the end of a fixed-term contract in April 2010.
Asset Impairments and Net Loss on Sale of Vessels and Equipment. Asset impairments and net loss on sale of vessels and equipment for 2010 of
$19.5 million was due to the write-down of certain shuttle equipment and a 1992-built shuttle tanker, as both the shuttle equipment and shuttle
tanker carrying values exceeded their estimated fair values. The shuttle tanker equipment was purchased for use in future shuttle tanker
conversions or new shuttle tankers.
Restructuring Charges. During 2010 and 2009, we incurred restructuring charges of $0.7 million and $7.0 million, respectively, primarily resulting
from the completion of the reflagging of certain vessels and a change in the nationality mix of our crews. We expect the restructuring will result in a
reduction in future crewing costs for these vessels.
50
FPSO Segment
The following table presents our FPSO segment’s operating results and also provides a summary of the changes in calendar-ship-days for our
FPSO segment:
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Revenues
Vessel operating expenses
Depreciation and amortization
General and administrative (1)
Income from vessel operations
Calendar-Ship-Days
Owned Vessels
Year Ended
December 31,
2010
2009
% Change
463,931
209,283
95,784
42,714
116,150
390,576
200,856
102,316
34,276
53,128
18.8
4.2
(6.4)
24.6
118.6
2,920
3,101
(5.8)
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the FPSO segment based on estimated use
of corporate resources). For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average fleet size of our FPSO segment, as measured by calendar-ship-days, decreased during 2010 compared to 2009. This was the result of
one shuttle tanker, which was previously being held for a possible conversion to an FPSO unit, being converted to an FSO unit and transferred to
the shuttle tanker and FSO segment in the fourth quarter of 2009.
Revenues. Revenues increased to $463.9 million for 2010, from $390.6 million for 2009, primarily due to:
an increase of $59.2 million from payments received under the amended operating contract for our Petrojarl Foinaven FPSO unit related to
operations in previous years;
an increase of $27.0 million due to supplemental efficiency and tariff payments received under the amended Petrojarl Foinaven FPSO
contract; and
a net increase of $6.2 million from the Petrojarl Varg FPSO unit commencing operations under a new four-year fixed-rate contract
extension beginning in the third quarter of 2009, partially offset by a decrease in revenues resulting from a planned maintenance shutdown
of the unit in the third quarter of 2010;
partially offset by
a decrease of $20.1 million from the decrease in amortization of contract value liabilities relating to FPSO service contracts (as discussed
below).
As part of our acquisition of Teekay Petrojarl, we assumed certain FPSO service contracts that had terms that were less favor able than prevailing
market terms at the time of acquisition. This contract value liability, which was initially recognized on the date of acquisition, is being amortized to
revenue over the remaining firm period of the current FPSO contracts on a weighted basis, based on the projected revenue to be earned under the
contracts. The amount of amortization relating to these contracts included in revenue for 2010 was $47.6 million (2009 - $67.7 million). The
decrease in 2010, compared to 2009, was due to increases in the amortization periods resulting from operating contract amendments and changes
to expected contract durations for two of our FPSO units. Please read Item 18 – Financial Statements: Note 6 – Goodwill, Intangible Assets and In-
Process Revenue Contracts.
Vessel Operating Expenses. Vessel operating expenses increased to $209.3 million for 2010, from $200.9 million for 2009, primarily due to
increases in crewing costs related to changes in crew classifications and wage increases and an increase in services and repairs due to the timing
of certain projects, which were incurred during scheduled maintenance shutdowns during 2010.
Depreciation and Amortization. Depreciation and amortization expense decreased to $95.8 million for 2010, from $102.3 million for 2009, primarily
due to a reassessment of the estimated residual value of the FPSO units in 2010.
Liquefied Gas Segment
The following table presents our liquefied gas segment’s operating results and compares its net revenues (which is a non-GAAP financial measure)
to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in calendar-ship-
days by owned vessels for our liquefied gas segment:
51
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Depreciation and amortization
General and administrative (1)
Gain on sale of vessels and equipment
Restructuring charges
Income from vessel operations
Year Ended
December 31,
2010
2009
% Change
248,378
29
248,349
46,497
62,904
20,147
(4,340)
394
122,747
246,472
1,018
245,454
50,704
59,868
20,007
-
4,177
110,698
0.8
(97.2)
1.2
(8.3)
5.1
0.7
-
(90.6)
10.9
Calendar-Ship-Days
Owned Vessels and Vessels under Direct Financing Lease
5,051
4,637
8.9
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the liquefied gas segment based on estimated
use of corporate resources). For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The increase in the average fleet size of our liquefied gas segment, as measured by calendar-ship-days, was primarily due to the deliveries of one
LNG carrier in March 2009 (the Tangguh LNG Delivery) and two new LPG carriers in April 2009 and November 2009 (the LPG Deliveries), partially
offset by the sale of one LPG carrier in November 2010.
During 2010, two of our vessels, the Arctic Spirit and the Dania Spirit, were off hire for a total of 288 days, of which approximately 44 days were
related to scheduled dry dockings of the two vessels, with the remainder due to the Arctic Spirit being off hire with no charter contract. The Arctic
Spirit commenced a new time-charter contract during the fourth quarter of 2010.
Net Revenues. Net revenues increased to $248.4 million for 2010, from $245.5 million for 2009, primarily due to:
an increase of $11.0 million due to the commencement of the time-charter related to the Tangguh LNG Delivery and an increase in the
time-charter rate for the Tangguh Hiri relating to the operating element of the time-charter;
an increase of $4.1 million due to the commencement of the time-charters related to the LPG Deliveries, respectively; and
an increase of $4.0 million due to the absence of off-hire days in 2010 for the Galicia Spirit and Madrid Spirit compared to 53 off-hire days
for these vessels in 2009 for scheduled dry docks;
partially offset by
a decrease of $11.6 million due to the Arctic Spirit being off hire during the majority of 2010 primarily due to the completion of its time-
charter contract in December 2009 and in part due to a scheduled dry docking;
a decrease of $2.9 million due to the effect on our Euro-denominated revenues from the weakening of the Euro against the U.S. Dollar
compared to 2009;
a decrease of $0.9 million due to a decrease in the hire rate for the Polar Spirit as compared to 2009 as a result of crewing rate
adjustments; and
a decrease of $0.7 million due to the sale of an LPG carrier in November 2010.
Vessel Operating Expenses. Vessel operating expenses decreased to $46.5 million for 2010, from $50.7 million for 2009, primarily due to:
a decrease of $3.2 million due to the Arctic Spirit being laid up for most of 2010 and as a result, operating with a reduced number of crew
on board and with reduced repair and maintenance activities, as well as decreased crew and manning costs upon the change of manning
agency services of the Arctic Spirit and Polar Spirit LNG carriers in October 2009;
a decrease of $1.7 million as a result of our decision to cancel our loss-of-hire insurance coverage in 2009 and a reduction in manning
levels for certain of our LNG carriers; and
a decrease of $1.1 million due to the effect on our Euro-denominated expenses from the weakening of the Euro against the U.S. Dollar
compared to 2009;
partially offset by
an increase of $1.5 million due to additional crew training expenses and crew manning relating to the delivery of the Tangguh Sago and
the Tangguh Hiri during 2009.
52
Depreciation and Amortization. Depreciation and amortization increased to $62.9 million for 2010, from $59.9 million for 2009, primarily due to:
an increase of $3.0 million relating to depreciation of dry dock expenditures incurred during the third and fourth quarters of 2009 and the
first quarter of 2010; and
an increase of $1.1 million from the LPG Deliveries;
partially offset by
a decrease of $0.9 million from the delivery of the Tangguh Sago in March 2009, prior to the commencement of the external time-charter
contract in May 2009, which is accounted for as a direct financing lease.
Gain on Sale of Vessels and Equipment. The $4.3 million gain on sale of vessels in 2010 relates to the sale of the Dania Spirit, a 2000-built LPG
carrier, in November 2010 for proceeds of $21.5 million.
Conventional Tanker Segment
Effective January 1, 2010, the operating results of vessels that were employed on fixed rate time-charters and contracts of affreightment that had an
original duration of more than one year but less than three years were included in the fixed-rate tanker sub-segment of the conventional tankers
segment. Previously, these operating results were included in our spot tanker sub-segment.
a) Fixed-Rate Tanker Sub-Segment
The following table presents our fixed-rate tanker sub-segment’s operating results and compares its net revenues (which is a non-GAAP financial
measure) to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in
calendar-ship-days by owned and chartered-in vessels for our fixed-rate tanker sub-segment:
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Year Ended
December 31,
2010
2009
% Change
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments and net loss on sale of vessels and equipment
Restructuring charges
Income from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
382,577
4,446
378,131
109,483
60,466
82,746
43,147
154
330
81,805
11,919
2,626
14,545
385,283
5,505
379,778
96,160
75,470
67,044
40,631
14,044
1,044
85,385
10,944
3,225
14,169
(0.7)
(19.2)
(0.4)
13.9
(19.9)
23.4
6.2
(98.9)
(68.4)
(4.2)
8.9
(18.6)
2.7
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the fixed-rate tanker sub-segment based on
estimated use of corporate resources). For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average fleet size of our fixed-rate tanker sub-segment (including vessels chartered-in), as measured by calendar-ship-days, increased in 2010
compared to 2009. This increase was primarily the result of:
the delivery of two new Suezmax tankers in June 2009 (the Suezmax Deliveries);
the purchase of a 2007-built product tanker which commenced a 10-year fixed-rate time-charter contract to Caltex Australia Petroleum Pty
Ltd. in September 2009;
the transfer of five Suezmax tankers from the spot tanker sub-segment between September 2009 and April 2010 (the Suezmax Transfers);
and
the transfer of one Aframax tanker, on a net basis, from the spot tanker sub-segment in each of 2009 and 2010 upon commencement of
long-term time-charters, which have an original term of one year or more (the Aframax Transfers);
partially offset by
the transfer of two product tankers to the spot tanker sub-segment in July 2009 and January 2010 (the Product Tanker Transfers);
53
the sale of two product tankers in October 2009 and August 2010 and the sale of two Aframax tankers in November 2009 and January
2010 (collectively, the Vessel Sales); and
an overall decrease in the number of in-chartered vessels.
The Aframax Transfers, discussed above, consist of the transfer of five owned vessels and three in-chartered vessels from the spot tanker sub-
segment, and the transfer of four owned vessels and three in-chartered vessels to the spot tanker sub-segment. The effect of the transactions are to
increase the fixed tanker sub-segment’s net revenues, time-charter hire expense, vessel operating expenses, and depreciation and amortization.
Net Revenues. Net revenues decreased to $378.1 million for 2010, from $379.8 million for 2009, primarily due to:
a decrease of $29.5 million from the Vessel Sales;
a decrease of $24.9 million from the redelivery of in-chartered vessels to their owners upon the expiration of the related in-charter
contracts;
a decrease of $4.7 million from the Product Tanker Transfers; and
a decrease of $3.8 million due to the Tenerife Spirit, the Algeciras Spirit and the Toledo Spirit being off hire for 73, 63 and 15 days in 2010
for scheduled dry dockings;
partially offset by
an increase of $35.9 million from the Aframax Transfers and the Suezmax Transfers;
an increase of $10.2 million from the Suezmax Deliveries;
an increase of $9.2 million from the purchase of a product tanker in September 2009; and
an increase of $5.3 million resulting from interest income from an investment in term loans, as discussed below.
We earned interest income from an investment in term loans of $115 million. This investment earns a total yield of approximately 10%. Our
subsidiary Teekay Tankers entered into this transaction in July 2010. Please read "Item 18. Financial Statements: Note 4 – Investment in Term
Loans."
Vessel Operating Expenses. Vessel operating expenses increased to $109.5 million for 2010, from $96.2 million for 2009, primarily due to:
an increase of $19.8 million from the Aframax Transfers, Product Tanker Transfers, and Suezmax Transfers;
an increase of $5.1 million from the purchase of a product tanker and the increased costs associated with certain vessels being changed
to Australian crewing as part of new time-charter contracts with a customer in Australia; and
an increase of $1.5 million from the Suezmax Deliveries;
partially offset by
a decrease of $9.4 million from the Vessel Sales; and
a decrease of $2.0 million relating to lower crewing costs and the timing of repairs and maintenance costs.
Time-Charter Hire Expense. Time-charter hire expense decreased to $60.5 million for 2010, from $75.5 million for 2009, primarily due to a decrease
in the number of in-chartered vessel days as vessels were redelivered to their owners upon expiration of in-charter contracts.
Depreciation and Amortization. Depreciation and amortization expense increased to $82.7 million for 2010, from $67.0 million for 2009, primarily due
to:
an increase of $20.7 million from the Aframax and Suezmax Transfers;
an increase of $2.8 million from the Suezmax Deliveries;
an increase of $0.9 million from the purchase of a product tanker in September 2009; and
a net increase of $0.8 million from an increase in amortization of capitalized vessels and equipment costs, partially offset by a decrease in
amortization of capitalized dry docking expenditures;
partially offset by
a decrease of $5.6 million from the Vessel Sales and Product Tanker Transfers; and
a decrease of $3.9 million due to certain intangible assets related to time-charter contracts being fully amortized in 2009.
54
b) Spot Tanker Sub-Segment
The following table presents our spot tanker sub-segment’s operating results and compares its net revenues (which is a non-GAAP financial
measure) to revenues, the most directly comparable GAAP financial measure. The following table also provides a summary of the changes in
calendar-ship-days by owned and chartered-in vessels for our spot tanker sub-segment:
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Revenues
Voyage expenses
Net revenues
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments and net loss (gain) on sale of vessels and equipment
Restructuring charge
Loss from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
Year Ended
December 31,
2010
2009
% Change
378,672
129,619
249,053
82,670
135,758
71,833
36,454
33,856
14,968
(126,486)
8,185
5,167
13,352
575,954
201,069
374,885
94,581
249,621
85,318
52,999
(3,317)
2,191
(106,508)
10,001
9,177
19,178
(34.3)
(35.5)
(33.6)
(12.6)
(45.6)
(15.8)
(31.2)
(1,120.7)
583.2
18.8
(18.2)
(43.7)
(30.4)
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to the spot tanker sub-segment based on
estimated use of corporate resources). For further discussion, please read ―Other Operating Results – General and Administrative Expenses.‖
The average size of our spot tanker sub-segment (including vessels chartered-in), as measured by calendar-ship-days, decreased in 2010
compared to 2009, primarily due to:
an overall decrease in the number of in-chartered vessels;
the sale of two product tankers in May 2009 and two Aframax tankers in April 2010 and August 2010 (the Spot Vessel Sales);
the transfer of five Suezmax tankers to the fixed-rate tanker sub-segment between September 2009 and April 2010 (the Spot Suezmax
Transfers); and
the transfer of one Aframax tanker, on a net basis, to the fixed-rate tanker sub-segment in each of 2009 and 2010 (the Spot Aframax
Transfers);
partially offset by
the delivery of five new Suezmax tankers between January 2009 to December 2009 (the Spot Suezmax Deliveries); and
the transfer of two product tankers from the fixed-rate tanker sub-segment in July 2009 and January 2010 (the Product Tanker Transfers).
Net Revenues. Net revenues decreased to $249.1 million for 2010, from $374.9 million for 2009, primarily due to:
a decrease of $88.7 million from a decrease in the number of in-chartered vessels, as we continued to reduce our exposure to the spot
tanker market by redelivering in-chartered vessels to their owners upon the expiration of in-charter contracts;
a decrease of $29.2 million from the Spot Aframax Transfers and Spot Suezmax Transfers;
a decrease of $12.3 million primarily from decreases in our average spot tanker TCE rates due to the relative weakening of the spot tanker
market, a decrease in the amortization of contract value liabilities relating to certain spot tanker contracts and an increas e in the cost of
fuel for off-hire vessels;
a decrease of $11.9 million from an increase in the number of days our vessels were off hire due to regularly scheduled maintenance; and
a decrease of $11.8 million from the Spot Vessel Sales;
partially offset by
an increase of $21.7 million from the Spot Suezmax Deliveries; and
an increase of $6.4 million from the Product Tanker Transfers.
55
Vessel Operating Expenses. Vessel operating expenses decreased to $82.7 million for 2010, from $94.6 million for 2009, primarily due to:
a decrease of $12.5 million from the Spot Aframax Transfers and Spot Suezmax Transfers;
a decrease of $5.7 million from the Spot Vessel Sales; and
a decrease of $4.4 million from lower crewing costs due to the positive impact of foreign currency exchange rate fluctuations, a reduction
in the number of crew on some vessels, as well as lower repairs and maintenance and consumable costs resulting from the review and
renegotiation of several key supplier contracts during 2009;
partially offset by
an increase of $4.4 million from the Product Tanker Transfers; and
an increase of $6.3 million from the Spot Suezmax Deliveries.
Time-Charter Hire Expense. Time-charter hire expense decreased to $135.8 million for 2010, from $249.6 million for 2009, primarily due to primarily
due to the decrease in the number of in-chartered vessels due to redelivery of these vessels to their owners upon expiration of in-charter contracts.
Depreciation and Amortization. Depreciation and amortization expense decreased to $71.8 million for 2010, from $85.3 million for 2009, primarily
due to:
a decrease of $17.4 million from the Spot Aframax Transfers and Spot Suezmax Transfers; and
a decrease of $2.8 million from the Spot Vessel Sales;
partially offset by
an increase of $5.8 million from the Spot Suezmax Deliveries; and
an increase of $1.8 million from capitalized dry docking expenditures incurred during 2010, partially offset by a decrease in amortization of
capitalized vessels and equipment costs.
Asset Impairments and Net Loss on Sale of Vessels and Equipment. The $33.9 million loss in 2010 is primarily due to write-downs of $31.7 million
for certain customer contracts and three vessel purchase options which either expired unexercised or were unlikely to be exercised by us and a $1.9
million loss on the sale of a 1995-built Aframax tanker in August 2010.
Restructuring Charges. During 2010, we incurred restructuring charges of $15.0 million primarily relating to costs incurred for certain vessel crew
changes relating to three of our vessels. We changed the crew operations being managed by an external management company to our own
international seafarers in order to reduce future crewing costs.
Other Operating Results
The following table compares our other operating results for 2010 and 2009.
(in thousands of U.S. dollars, except percentages)
General and administrative
Interest expense
Interest income
Realized and unrealized (losses) gains on non-designated
derivative instruments
Equity (loss) income from joint ventures
Foreign exchange gain (loss)
Loss on notes repurchase
Other income
Income tax recovery (expense)
Year Ended
December 31,
2010
2009
% Change
(193,743)
(136,107)
12,999
(299,598)
(11,257)
31,983
(12,645)
7,527
6,340
(198,836)
(141,448)
19,999
140,046
52,242
(20,922)
(566)
13,527
(22,889)
(2.6)
(3.8)
(35.0)
(313.9)
(121.5)
(252.9)
2,134.1
(44.4)
(127.7)
General and Administrative Expenses. General and administrative expenses decreased to $193.7 million for 2010, from $198.8 million for 2009,
primarily due to:
a decrease of $5.0 million in salaries and benefits due to a decrease in average head-count relating to completion of the 2009 cost
savings initiatives discussed below;
a decrease of $3.4 million due to a favorable increase in unrealized and realized losses on foreign currency forward contracts; and
56
a decrease of $1.1 million in equity-based compensation for management;
partially offset by
an increase of $1.9 million from increased travel activity compared to 2009 levels due to the 2009 cost saving initiatives as
discussed below;
an increase of $1.6 million from our short-term incentive program for employees and management; and
an increase of $1.3 million from higher personnel expenses associated with relocation and hiring costs in Norway.
General and administrative expenses of $13.6 million relating to certain crew training expenses for 2009 were reclassified from general
administrative expenses to vessel operating expenses to conform to the presentation adopted in the current period.
During 2009, we initiated a company-wide review of our general and administrative expenses. We implemented various cost reduction initiatives,
including the relocation of shore-based positions to lower cost jurisdictions. These initiatives, as well as a reduction in business development
activities, also contributed to the decreases in corporate-related expenses in 2009 compared to the prior periods.
Interest Expense. Interest expense decreased to $136.1 million for 2010, from $141.4 million for 2009, primarily due to:
a decrease of $22.4 million primarily due to repayments of debt drawn under long-term revolving credit facilities and term loans and
a decrease in interest rates relating to long-term debt, which is explained in further detail below;
a decrease of $7.8 million from the scheduled loan payments on the LNG carrier Catalunya Spirit, and scheduled capital lease
repayments on the LNG carrier Madrid Spirit (the Madrid Spirit is financed pursuant to a Spanish tax lease arrangement, under
which we borrowed under a term loan and deposited the proceeds into a restricted cash account and entered into a capital lease for
the vessel; as a result, this decrease in interest expense from the capital lease is offset by a corresponding decrease in the interest
income from restricted cash);
a decrease of $1.2 million due to the effect on our Euro-denominated debt from the weakening of the Euro against the U.S. Dollar
compared to 2009; and
a decrease of $0.2 million from declining interest rates on our five Suezmax tanker capital lease obligations;
partially offset by
an increase of $25.6 million due to the effect of the January 2010 public offering of our 8.5% senior unsecured notes due Jan uary 2020,
with a principal amount of $450 million, partially offset by the January 2010 repurchase of a majority of our then-outstanding 8.875% senior
notes due July 2011; and
an increase of $0.7 million due to the effect of the November 2010 issuance of the 600 million Norwegian Kroner-denominated senior
unsecured bonds due November 2013. Please read "Item 18. Financial Statements: Note 8 – Long-Term Debt."
The debt repayments under long-term revolving credit facilities that contributed to our decreased interest expense for the year ended December 31,
2010 were primarily funded with net proceeds from the issuance of equity securities by our publicly listed subsidiaries and from the sale of assets to
our public company subsidiaries and to third parties. When one of our publicly listed subsidiaries acquires an asset from us, a significant portion of
the acquisition typically has been financed through the issuance to the public of equity securities by the subsidiary. To the extent that there are no
immediate investment opportunities, we have generally applied the proceeds from the issuance of these equity offerings and from the sale of assets
to these subsidiaries and third parties towards debt reduction or increasing our cash balances. Please read "Item 4. Information on the Company—
Recent Equity Offerings and Transactions by Subsidiaries.‖
Interest Income. Interest income decreased to $13.0 million for 2010, compared to $20.0 million for 2009, primarily due to:
a decrease of $4.8 million due to scheduled capital lease repayments on one of our LNG carriers which was funded from restricted cash;
a decrease of $1.5 million due to decreases in LIBOR rates relating to the restricted cash used to fund capital lease payment s for the
RasGas II LNG Carriers (please read ―Item 18. Financial Statements: Note 10—Capital Leases and Restricted Cash‖);
a decrease of $0.3 million primarily relating to changes in interest rates and our bank account balances compared to the same periods
last year; and
a decrease of $0.3 million due to the weakening of the Euro against the U.S. Dollar compared to the same period last year.
Realized and Unrealized (Losses) Gains on Non-designated Derivative Instruments. Realized and unrealized (losses) gains related to
derivative instruments that are not designated as hedges for accounting purposes are included as a separate line item in the consolidated
statements of income (loss). The realized (losses) gains relate to the amounts we actually received or paid to settle such derivative instruments and
the unrealized (losses) gains relate to the change in fair value of such derivative instruments.
Net realized and unrealized (losses) gains on non-designated derivatives was a loss of $299.6 million for 2010, compared to net realized and
unrealized gains on non-designated derivatives of $140.0 million for 2009, as detailed in the table below:
57
(in thousands of U.S. Dollars)
Realized losses relating to:
Interest rate swap agreements
Foreign currency forward contracts
Forward freight agreements, bunker fuel swaps and other
Unrealized gains (losses) relating to:
Interest rate swaps
Foreign currency forward contracts
Forward freight agreements, bunker fuel swaps and other
Total realized and unrealized (losses) gains on non-designated derivative instruments
Year Ended
December 31,
2010
2009
(154,098)
(2,274)
(7,914)
(164,286)
(146,780)
6,307
5,161
(135,312)
(299,598)
(127,936)
(8,984)
(1,293)
(138,213)
258,710
14,797
4,752
278,259
140,046
Equity (Loss) Income from Joint Ventures. Equity (loss) income from joint ventures was a loss of $11.3 million for 2010, compared to income of
$52.2 million in 2009. The income or loss was primarily comprised of our share of the earnings (loss) from the Angola LNG Project and from the
RasGas 3 Joint Venture. Please read ―Item 18. Financial Statements: Note 23—Joint Ventures.‖ Of the equity loss for 2010, $26.3 million relates to
our share of unrealized income (loss) on interest rate swaps for 2010. This compares to unrealized gains on interest rate swaps of $32.4 million
included in equity income (loss) for 2009.
Foreign Exchange Gain (Loss). Foreign exchange gain (loss) was a gain of $32.0 million for 2010, compared to a loss of $20.9 million for 2009. The
changes in our foreign exchange gains (losses) are primarily attributable to the revaluation of our Euro-denominated term loans at the end of each
period for financial reporting purposes, and substantially all of the gains or losses are unrealized. Gains reflect a stronger U.S. Dollar against the
Euro on the date of revaluation. Losses reflect a weaker U.S. Dollar against the Euro on the date of revaluation. As of the date of this Annual
Report, our Euro-denominated revenues generally approximate our Euro-denominated operating expenses and our Euro-denominated interest and
principal repayments.
Other Income. Other income of $7.5 million for 2010 was primarily comprised of leasing income of $4.7 million from our volatile organic compound
emissions equipment and a $1.8 million gain on sale of marketable securities.
Income Tax Recovery (Expense). Income tax recovery was $6.3 million for 2010, compared to an expense of $22.9 million for 2009. The decrease
to income tax expense of $29.2 million for 2010 was primarily due to an increase in deferred income tax recovery relat ing to unrealized foreign
exchange translation losses.
Net (Loss) Income. As a result of the foregoing factors, net loss amounted to $166.6 million for 2010, compared to net income of $209.8 million for
2009.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Cash Needs
Our primary sources of liquidity are cash and cash equivalents, cash flows provided by our operations, our undrawn credit fac ilities, proceeds from
the sale of vessels, and capital raised through equity offerings by our publicly listed subsidiaries. Our short-term liquidity requirements are for the
payment of operating expenses, debt servicing costs, dividends, scheduled repayments of long-term debt, as well as funding our working capital
requirements. As at December 31, 2011, our total cash and cash equivalents were $692.1 million, compared to $779.7 million as at December 31,
2010. Our total liquidity, including cash and undrawn credit facilities, was $1.5 billion as at December 31, 2011 and $2.4 bi llion at December 31,
2010.
Our spot tanker market operations contribute to the volatility of our net operating cash flow. Historically, the tanker industry has been cyclical,
experiencing volatility in profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, spot
tanker markets historically have exhibited seasonal variations in charter rates. Spot tanker markets are typically stronger i n the winter months as a
result of increased oil consumption in the Northern Hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling.
As at December 31, 2011, we had $401.4 million of scheduled debt repayments and $47.2 million of capital lease obligations coming due within the
next 12 months. The capital lease obligations coming due within the next 12 months include a $39.0 million lease obligation for one Suezmax tanker
that we are obligated to purchase upon the termination of the lease agreement, which may occur in 2012. While this is unlikely to occur in 2012, as
we do not expect the lessor to exercise its right to terminate the leases, such exercise would require us to satisfy the purchase price either by
assuming the existing vessel financing, if the lender consents, or by financing the purchase using existing liquidity or by obtaining new debt or equity
financing. We believe that our existing cash and cash equivalents and undrawn long-term borrowings, in addition to other sources of cash such as
cash from operations and other debt and equity financings, will be sufficient to meet our existing liquidity needs for at least the next 12 months.
Our operations are capital intensive. We finance the purchase of our vessels primarily through a combination of borrowings from commercial banks
or our joint venture partners, the issuance of equity securities and publicly traded debt instruments and cash generated from operations. In addition,
we may use sale and lease-back arrangements as a source of long-term liquidity. Occasionally, we use our revolving credit facilities to temporarily
finance capital expenditures until longer-term financing is obtained, at which time we typically use all or a portion of the proceeds from the longer-
term financings to prepay outstanding amounts under revolving credit facilities. We are currently in the process of obtaining debt financing for our
remaining capital commitments relating to our portion of newbuildings on order as at December 31, 2011.
58
In October 2011, Teekay LNG entered into an agreement with Marubeni to acquire, through the Teekay LNG-Marubeni Joint Venture, six LNG
carriers from Maersk for an aggregate purchase price of approximately $1.3 billion. On February 28, 2012, Teekay LNG-Marubeni Joint Venture
acquired a 100% interest in six LNG carriers. The Teekay LNG-Marubeni Joint Venture financed approximately $1.06 billion of its acquisition from
secured loan facilities, and the remaining $266 million from equity contributions from Teekay LNG and Marubeni Corporation. Teekay LNG has a
52% economic interest in the Teekay-Marubeni Joint Venture and consequently its share of the equity contribution was approximately $138 million.
Teekay LNG financed its equity contribution from its November 2011 equity offering. Please read ―Item 18. Financial Statements: Note 25(d)—
Subsequent Events.‖
As part of the November 2011 transaction with Sevan, Teekay Offshore acquired the Piranema FPSO unit for a total purchase price of $165 million.
This FPSO unit was financed using the net proceeds from the November 2011 private placement of Teekay Offshore units. The other two Sevan
FPSO units, the Hummingbird, which was purchased by us with our existing revolving credit facility, and the Voyageur, which we have agreed to
acquire and expect to occur in the fourth quarter of 2012, have an aggregate purchase price of approximately $503 million plus the cost to upgrade
the Voyageur (which conversion we anticipate will cost between $110 million and $130 million), which we anticipate will be financed through a
combination of the assumption of an existing $230 million debt facility relating to the Voyageur, a new $200 million debt facility and our existing
liquidity.
Our pre-arranged newbuilding debt facilities are in addition to our undrawn credit facilities. We continue to consider strategic opportunities, including
the acquisition of additional vessels and expansion into new markets. We may choose to pursue such opportunities through internal growth, joint
ventures or business acquisitions. We intend to finance any future acquisitions through various sources of capital, including internally generated
cash flow, existing credit facilities, additional debt borrowings, or the issuance of additional debt or equity securities or any combination thereof.
As at December 31, 2011, our revolving credit facilities provided for borrowings of up to $3.0 billion, of which $0.8 billion was undrawn. The amount
available under these revolving credit facilities reduces by $349.6 million (2012), $749.6 million (2013), $791.8 million (2014), $226.4 million (2015),
$146.4 million (2016) and $784.0 million (thereafter).The revolving credit facilities are collateralized by first-priority mortgages granted on 63 of our
vessels, together with other related security, and are guaranteed by Teekay or our subsidiaries.
Our outstanding term loans reduce in monthly, quarterly or semi-annual payments with varying maturities through 2023. Some of the term loans also
have bullet or balloon repayments at maturity and are collateralized by first-priority mortgages granted on 34 of our vessels, together with other
related security, and are generally guaranteed by Teekay or our subsidiaries. We repaid our unsecured 8.875% Senior Notes on July 15, 2011.
Among other matters, our long-term debt agreements generally provide for maintenance of minimum consolidated financial covenants and certain
loan agreements with outstanding amounts totalling $671.8 million as at December 31, 2011, require the maintenance of market value to loan
ratios. Certain loan agreements require that we maintain a minimum level of free cash and as at December 31, 2011, this amount was $100.0
million. Certain of the loan agreements also require that we maintain an aggregate level of free liquidity and undrawn revolving credit lines (with at
least six months to maturity) of at least 7.5% of total debt and as at December 31, 2011, this amount was $318.3 million. We were in compliance
with all our loan covenants at December 31, 2011. For additional information about our credit facilities, please read ―Item 18. Financial
Statements: Note 8—Long-Term Debt.‖
We conduct our funding and treasury activities within corporate policies designed to minimize borrowing costs and maximize investment returns
while maintaining the safety of the funds and appropriate levels of liquidity for our purposes. We hold cash and cash equivalents primarily in U.S.
Dollars, with some balances held in Australian Dollars, British Pounds, Canadian Dollars, Euros, Japanese Yen, Norwegian Kroner and Singapore
Dollars.
We are exposed to market risk from foreign currency fluctuations and changes in interest rates, spot tanker market rates for vessels and bunker fuel
prices. We use forward foreign currency contracts, cross currency and interest rate swaps, forward freight agreements and bunker fuel swap
contracts to manage currency, interest rate, spot tanker rates and bunker fuel price risks. With the exception of some of our forward freight
agreements, we do not use these financial instruments for trading or speculative purposes. Please read "Item 11.Quantitative and Qualitative
Disclosures About Market Risk. "
Cash Flows
The following table summarizes our cash and cash equivalents provided by (used for) operating, financing and investing activi ties for the years
presented:
Net operating cash flows
Net financing cash flows
Net investing cash flows
Operating Cash Flows
Year ended December 31,
2011
($000’s)
107,193
976,645
(1,171,459)
2010
($000’s)
411,750
358,702
(413,214)
2009
($000’s)
368,251
(452,782)
(307,124)
Our net cash flow from operating activities fluctuates primarily as a result of changes in tanker utilization and TCE rates, changes in interest rates,
fluctuations in working capital balances, the timing and amount of dry docking expenditures, repairs and maintenance activities, vessel additions and
dispositions, and foreign currency rates. Our exposure to the spot tanker market historically has contributed significantly to fluctuations in operating
cash flows historically as a result of highly cyclical spot tanker rates and more recently as a result of the reduction in global oil demand that was
caused by a slow-down in global economic activity that began in the latter part of 2008.
59
Net cash flow from operating activities in 2011 decreased to $107.2 million from $411.8 million for 2010. This decrease was primarily due to a
$102.5 million net decrease in operating earnings before depreciation, amortization, gains/losses from asset disposals and write-downs of our four
reportable segments. In addition, there was a $129.8 million decrease in the change in operating assets and liabilities in 2011 compared to 2010,
and a $132.9 million increase in interest expense (including interest income and realized losses on interest rate swaps). The $129.8 million
decrease in the change in operating assets and liabilities in 2011 compared to 2010 was primarily the result of an increase in accounts receivable
due to increased activity in our conventional tanker pools, a decrease in accrued interest and a decrease in deferred revenues. Of the $132.9 million
increase in interest expense, $92.7 million was paid to the counterparties of five interest rate swap agreements with notional amounts totaling
$665.1 million in consideration for amending the terms of such agreements to reduce the weighted average fixed interest rate from 5.1% to 2.5%.
The amount paid has been reflected as a reduction in the outstanding liability of the interest rate swaps, which are accounted for at fair value. These
factors resulting in decreases to cash flows from operating activities were partially offset by a $15.5 million increase in dividends received from our
joint ventures and a $20.2 million increase from realized gains on foreign currency forward contracts, bunker fuel swap contracts and forward freight
agreements in 2011 compared to 2010.
Net cash flow from operating activities in 2010 increased to $411.8 million from $368.3 million for 2009. This increase was primarily due to a $127.6
million net increase in operating earnings before depreciation, amortization, gains/losses from asset disposals and write-downs of our four
reportable segments and a $20.5 million decrease in dry-dock expenditures, due to the timing of scheduled vessel dry docks. These increases were
partially offset by a $103.3 million decrease in the change in operating assets and liabilities in 2010 compared to 2009 and a $27.8 million increase
in interest expense (including interest income and realized losses on interest rate swaps). The $103.3 million decrease in the change in operating
assets and liabilities in 2010 compared to 2009 was primarily the result of an increase in accounts receivable due to increased activity in our
conventional tanker pools and certain lump sum charter-hire payments received in 2009.
The results of our four reportable segments and the reduction in interest costs are explained in further detail in ―—Results of Operations‖.
Financing Cash Flows
We have three publicly traded subsidiaries, Teekay LNG, Teekay Offshore and Teekay Tankers, in which we have less than 100% ownership
interests (collectively the Daughter Companies). It is our intention that the Daughter Companies hold most of our liquefied gas transportation assets
(Teekay LNG), our offshore assets, including shuttle tankers, FPSO units and FSO units, (Teekay Offshore) and our conventional tanker assets
(Teekay Tankers). From and including the respective initial public offerings of these subsidiaries, Teekay has been selling assets that are a part of
these lines of businesses to the Daughter Companies. The Daughter Companies distribute operating cash flows to their owners in the form of
distributions or dividends. Consequently, in order to finance new acquisitions, the Daughter Companies typically finance acquisitions, including
acquisitions of assets from Teekay Corporation, with a combination of debt and new equity from the public or private investors. The Daughter
Companies raised net proceeds from issuances of new equity to the public and to third-party investors of $631.1 million in 2011, $645.6 million in
2010 and $326.6 million in 2009. As the size of the Daughter Companies have grown through acquisitions, whether from Teekay Corporation or
otherwise, the amount of the operating cash flows generally have increased, which has resulted in larger aggregate distributions. Consequently,
distributions from our publicly listed subsidiaries to non-controlling interests have increased to $201.9 million in 2011, from $159.8 million in 2010
and from $109.9 million in 2009.
We use our revolving credit facilities to finance capital expenditures. Occasionally we will do this until longer-term financing is obtained, at which
time we typically use all or a portion of the proceeds from the longer-term financings to prepay outstanding amounts under the revolving credit
facilities. Our proceeds from the issuance of long-term debt, net of debt issuance costs and prepayments of long-term debt were $1,223.0 million in
2011, $218.7 million in 2010, and ($401.6) million in 2009. During September 2008, we temporarily borrowed $310.0 million under our revolving
credit facilities as a proactive measure in response to the credit crisis. This was repaid in 2009. The net proceeds from the issuance of long-term
debt increased in 2011 as a result of capital expenditures incurred on our newbuilding projects and our acquisition of FPSO units from Sevan. Net
proceeds from the issuance of long-term debt declined in 2010 and 2009 as result of less cash required for investing activities.
We actively manage the maturity profile of our outstanding financing arrangements. Our scheduled repayments of long-term debt were $449.6
million in 2011, $210.0 million in 2010, and $156.3 million in 2009. The increase in scheduled repayments in 2011 from 2010 and 2009 was the
result of the retirement of debt on the Madrid Spirit and the Stena Spirit of $215.0 million and $30.0 million, respectively, which was subsequently re-
drawn from different facilities.
In October 2010, Teekay announced a $200 million share repurchase program. During 2011, we repurchased 3.9 million shares of our common
stock for $122.2 million at an average price of $31.15, pursuant to share repurchase programs. During 2010, we repurchased 1.2 million shares of
our common stock for $40.1 million, at an average cost of $32.40 per share, pursuant to the share repurchase programs. We repurchased no
shares of common stock during 2009. As at December 31, 2011, $37.7 million remained for share repurchases under the program. Please read
―Item 18. Financial Statements: Note 12—Capital Stock.‖
Dividends paid during 2011, 2010 and 2009 were $93.5 million, $92.7 million and $91.7 million, respectively, or $1.265 per share. These amounts
include approximately $5.0 million, $0.4 million and $nil, respectively, of dividends paid on our common shares repurchased under our share
repurchase programs during 2011, 2010 and 2009. Subject to financial results and declaration by the Board of Directors, we currently intend to
continue to declare and pay a regular quarterly dividend on our common stock. We have paid a quarterly dividend since 1995.
In January 2012, Teekay Offshore issued NOK 600 million in senior unsecured bonds that mature in January 2017 in the Norwegian bond market.
The aggregate principal amount of the bonds is equivalent to approximately $100 million. The interest payments on the bonds are based on NIBOR
plus a margin of 5.75%. In connection with the bond issuance, Teekay Offshore entered into a cross currency rate swap, to swap all interest and
principal payments into USD, with the interest payments fixed at a rate of 7.49%. The proceeds of the bonds were used for general purposes.
Please read ―Item 18. Financial Statements: Note 25(a) —Subsequent Events.‖
In February 2012, Teekay Tankers completed a follow-on public offering of 17.3 million shares of Class A common stock at $4.00 per share. Please
read ―Item 18. Financial Statements: Note 25(c) —Subsequent Events.‖
60
In April 2012, Teekay LNG issued NOK 700 million in senior unsecured bonds that mature in May 2017 in the Norwegian bond market. The
aggregate principal amount of the bonds is equivalent to approximately $120 million. The proceeds of the bonds are expected to be used for general
corporate purposes. Please read ―Item 18. Financial Statements: Note 25(g) —Subsequent Events.‖
Investing Cash Flows
During 2011, we incurred capital expenditures for vessels and equipment of $755.0 million, primarily for capitalized vessel modifications and
shipyard construction installment payments on our newbuilding shuttle tankers and the installment payments and conversion costs of our FPSO
units under construction/conversion. In addition, we: invested $70.0 million in a term loan that bears interest at an interest rate of 9% per annum and
has a fixed term of three years, repayable in full on maturity and is collateralized by a first priority mortgage on a 2011-built VLCC; received net
proceeds of $33.4 million from the sale of a 1988-built FSO unit, the sale of a 1993-built Aframax tanker and the sale of equipment related to the
Tiro and Sidon FPSO project; and invested $322.5 million to acquire FPSO units from Sevan and make a 40% equity investment in a recapitalized
Sevan. Please read ―Item 18. Financial Statements: Note 3—Acquisition of FPSO Units and Investment in Sevan Marine ASA.‖
During 2010, we incurred capital expenditures for vessels and equipment of $343.1 million, primarily for capitalized vessel modifications and
shipyard construction installment payments on our newbuilding shuttle tankers. In addition, we invested $115.6 million in two term loans, received
net proceeds of $71.0 million from the sale of three Aframax tankers, one product tanker and one LPG carrier, and invested $45.5 million in joint
ventures.
During 2009, we incurred capital expenditures for vessels and equipment of $495.2 million, primarily for the acquisition of one product tanker and
shipyard construction installment payments on our newbuilding Suezmax tankers, shuttle tankers and LNG and LPG carriers. In addition, we
received proceeds of $170.8 million from the sale of four product tankers, received proceeds of $32.7 million from the sale of a 1993-built Aframax
tanker through a sale-leaseback agreement, and received proceeds of $16.3 million from the sale of a 1992-built Aframax tanker.
Commitments and Contingencies
The following table summarizes our long-term contractual obligations as at December 31, 2011:
In millions of U.S. Dollars
U.S. Dollar-Denominated Obligations:
Long-term debt (1)
Chartered-in vessels (operating leases)
Commitments under capital leases (2)
Commitments under capital leases (3)
Commitments under operating leases (4)
Newbuilding installments (5) (6)
Purchase obligation (7)
Asset retirement obligation
Total U.S. Dollar-denominated
obligations
Euro-Denominated Obligations: (8)
Long-term debt (9)
Total Euro-denominated obligations
Total
2012
2013 and
2014
2015 and
2016
Beyond
2016
5,095.5
250.8
201.1
1,001.1
431.4
1,308.4
185.8
21.1
387.9
125.1
58.9
24.0
25.0
570.5
185.8
-
2,045.3
91.2
108.2
48.0
50.0
737.9
-
-
597.1
25.1
7.1
48.0
50.0
-
-
-
2,065.2
9.4
26.9
881.1
306.4
-
-
21.1
8,495.2
1,377.2
3,080.6
727.3
3,310.1
348.9
348.9
13.5
13.5
30.1
30.1
34.6
34.6
270.7
270.7
Total
8,844.1
1,390.7
3,110.7
761.9
3,580.8
(1)
(2)
Excludes expected interest payments of $124.9 million (2012), $178.0 million (2013 and 2014), $118.0 million (2015 and 2016) and $158.1 million (beyond
2016). Expected interest payments are based on the existing interest rates (fixed-rate loans) and LIBOR plus margins that ranged up to 3.25% at December
31, 2011 (variable-rate loans). The expected interest payments do not reflect the effect of related interest rate swaps that we have used as an economic hedge
of certain of our floating-rate debt. In November 2011, we agreed to acquire the Voyageur FPSO unit upon completion of its upgrade. The Voyageur has been
determined to be a VIE and we have been determined to be the primary beneficiary. As a result, we have consolidated the Voyageur including its existing U.S.
Dollar-denominated term loan outstanding, which totalled $220.5 million as at December 31, 2011. Subsequent to December 31, 2011, we amended this debt
facility, which resulted in payments due beyond 2012 and has been reflected in the table above.
Includes, in addition to lease payments, amounts we are required to pay to purchase certain leased vessels at the end of the lease terms. The lessor has the
option to sell these vessels to us at any time during the remaining lease term however, they have agreed to delay their option to sell these vessels to us until at
least 2013. During 2011, the lessors extended four of the five leases and have delayed their option to sell these vessels to us until 2013. The purchase price
will be based on the unamortized portion of the vessel construction financing costs for the vessels, which we expect to range from $31.7 million to $39.2 million
per vessel. We expect to satisfy the purchase price by assuming the existing vessel financing, although we may be required to obtain separate debt or equity
financing to complete the purchases if the lenders do not consent to our assuming the financing obligations. Please read ―Item 18. Financial Statements: Note
10—Capital Lease Obligations and Restricted Cash.‖
61
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Existing restricted cash deposits of $476.1 million, together with the interest earned on the deposits, are expected to be sufficient to repay the remaining
amounts we currently owe under the lease arrangements.
We have corresponding leases whereby we are the lessor and expect to receive approximately $390.3 million for these leases from 2012 to 2029. Please read
―Item 18. Financial Statements: Note 10—Capital Lease Obligations and Restricted Cash.‖
Represents remaining construction costs (excluding capitalized interest and miscellaneous construction costs) for one FPSO unit, the conversion of an existing
Aframax tanker to an FPSO unit and four shuttle tankers as of December 31, 2011. Please read ―Item 18. Financial Statements: Note 16(a) —Commitments
and Contingencies—Vessels Under Construction.‖
We have a 33% interest in a joint venture that has entered into agreements for the construction of one LNG carrier (which delivered in January 2012) and a
50% interest in a joint venture that has entered into an agreement for the construction of one VLCC. As at December 31, 2011, the remaining commitments on
these vessels, excluding capitalized interest and other miscellaneous construction costs, totalled $214.3 million of which our share is $84.0 million. Please read
―Item 18. Financial Statements: Note 16(b) —Commitments and Contingencies—Joint Ventures.‖
Represents remaining cost to acquire and upgrade the Voyageur FPSO unit as of December 31, 2011, net of debt assumed. Please read ―Item 18. Financial
Statements: Note 16(c) —Commitments and Contingencies—Purchase Obligation.‖
Euro-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing exchange rate as at December 31, 2011.
Excludes expected interest payments of $9.4 million (2012), $17.7 million (2013 and 2014), $15.9 million (2015 and 2016) and $18.3 million (beyond 2016).
Expected interest payments are based on EURIBOR at December 31, 2011, plus margins that ranged up to 2.25%, as well as the prevailing U.S. Dollar/Euro
exchange rate as of December 31, 2011. The expected interest payments do not reflect the effect of related interest rate swaps that we have used as an
economic hedge of certain of our floating-rate debt.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources. Our equity accounted investments are described in ―Item 18. Financial
Statements: Note 23—Equity Accounted Investments.‖
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP, which requires us to make estimates in the applicat ion of our
accounting policies based on our best assumptions, judgments and opinions. On a regular basis, management reviews our accounting policies,
assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP.
However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and
estimates, and such differences could be material. Accounting estimates and assumptions discussed in this section are those that we consider to be
the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For a
further description of our material accounting policies, please read ―Item 18. Financial Statements: Note 1.Summary of Significant Accounting
Policies.‖
Revenue Recognition
Description. We recognize voyage revenue using the percentage of completion method. Under such method, voyages may be calculated on either a
load-to-load or discharge-to-discharge basis. In other words, voyage revenues are recognized ratably either from the beginning of when product is
loaded for one voyage to when it is loaded for the next voyage, or from when product is discharged (unloaded) at the end of one voyage to when it
is discharged after the next voyage.
Judgments and Uncertainties. In applying the percentage of completion method, we believe that in most cases the discharge-to-discharge basis of
calculating voyages more accurately reflects voyage results than the load-to-load basis. At the time of cargo discharge, we generally have
information about the next load port and expected discharge port, whereas at the time of loading we are normally less certain what the next load
port will be. We use this method of revenue recognition for all spot voyages and voyages servicing contracts of affreightment, with an exception for
our shuttle tankers servicing contracts of affreightment with offshore oil fields. In this case a voyage commences with tendering of notice of
readiness at a field, within the agreed lifting range, and ends with tendering of notice of readiness at a field for the next lifting. However we do not
begin recognizing revenue for any of our vessels until a charter has been agreed to by the customer and us, even if the vessel has discharged its
cargo and is sailing to the anticipated load port on its next voyage.
Effect if Actual Results Differ from Assumptions. Our revenues could be overstated or understated for any given period to the extent actual
results are not consistent with our estimates in applying the percentage of completion m ethod.
Vessel Lives and Impairment
Description. The carrying value of each of our vessels represents its original cost at the time of delivery or purchase less depreciation and
impairment charges. We depreciate the original cost, less an estimated residual value, of our vessels on a straight-line basis over each vessel’s
estimated useful life. The carrying values of our vessels may not represent their market value at any point in time because t he market prices of
second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Both charter rates and newbuilding costs tend to
be cyclical in nature.
We review vessels and equipment for impairment whenever events or circumstances indicate the carrying value of an asset, inc luding the carrying
value of the charter contract, if any, under which the vessel is employed, may not be recoverable, which occurs when the asset’s carrying value is
greater than the future undiscounted cash flows the asset is expected to generate over its remaining useful life. For a vessel under charter, the
discounted cash flows from that vessel may exceed its market value, as market values may assume the vessel is not employed on an existing
charter. If the estimated future undiscounted cash flows of an asset exceed the asset’s carrying value, no impairment is recognized even though the
62
fair value of the asset may be lower than its carrying value. If the estimated future undiscounted cash flows of an asset are less than the asset’s
carrying value and the fair value of the asset is less than its carrying value, the asset is written down to its fair value. Fair value is calculated as the
net present value of estimated future cash flows, which, in certain circumstances, will approximate the estimated market value of the vessel.
The following table presents by segment the aggregate market values and carrying values of certain of our vessels that we have determined have a
market value that is less than their carrying value as of December 31, 2011. Specifically, the following table reflects all such vessels, except those
operating on contracts where the remaining term is significant and the estimated future undiscounted cash flows relating to such contracts are
sufficiently greater than the carrying value of the vessels such that we consider it unlikely an impairment would be recognized in the following year.
Consequently, the vessels included in the following table generally include those vessels employed on single-voyage, or "spot" charters, as well as
those vessels near the end of existing charters or other operational contracts. While the market values of these vessels are below their carrying
values, no impairment has been recognized on any of these vessels as the estimated future undiscounted cash flows relating to such vessels are
greater than their carrying values.
We would consider the vessels reflected in the following table to be at a higher risk of future impairment. The estimated fut ure undiscounted cash
flows of certain vessels reflected in the following table may be significantly greater than their respective carrying values. Consequently, in these
cases the following table would not necessarily represent vessels that would likely be impaired in the next twelve months, and the recognition of an
impairment in the future for those vessels may primarily depend upon our deciding to dispose of the vessel instead of continuing to operate it. The
estimated future undiscounted cash flows of certain other vessels in the following table may only be marginally greater than their respective carrying
values. Consequently, in these cases the recognition of an impairment in the future may be more likely given the number of potential events that
could result in our reducing our estimate of future undiscounted cash flows.
(in thousands of U.S. dollars, except number of vessels)
Reportable Segment
Shuttle Tanker and FSO Segment
FPSO Segment
Liquefied Gas Segment
Conventional Tanker Segment
Number of
Vessels
13
-
-
30
Market
Values (1)
$
281,100
-
-
947,000
Carrying
Values
$
397,023
-
-
1,408,899
(1)
Market values are based on second-hand market comparables or using a depreciated replacement cost approach. Since vessel values can be highly volatile,
our estimates of market value may not be indicative of either the current or future prices we could obtain if we sold any of the vessels. In addition, the
determination of estimated market values for our shuttle tankers, FSO and FPSO units involve considerable judgment, given the illiquidity of the second-hand
market for these types of vessels.
Judgments and Uncertainties. Depreciation is calculated using an estimated useful life of 25 years for conventional tankers and shuttle tankers, 20
to 25 years for FPSO units, 20 to 35 years for FSO units, and 30 years for LPG carriers and 35 years for LNG carriers, commencing at the date the
vessel was originally delivered from the shipyard. However, the actual life of a vessel may be different than the estimated useful life, with a shorter
actual useful life resulting in an increase in quarterly depreciation and potentially resulting in an impairment loss. The estimated useful life of our
vessels takes into account design life, commercial considerations and regulatory restrictions. Our estimates of future cash flows involve
assumptions about future charter rates, vessel utilization, operating expenses, dry-docking expenditures, vessel residual values and the remaining
estimated life of our vessels. Our estimated charter rates are based on rates under existing vessel contracts and market rates at which we expect
we can re-charter our vessels. Our estimates of vessel utilization, including estimated off-hire time and the estimated amount of time our shuttle
tankers may spend operating in the spot tanker market when not being used in their capacity as shuttle tankers, are based on historical experience
and our projections of the number of future shuttle tanker voyages. Our estimates of operating expenses and dry-docking expenditures are based
on historical operating and dry-docking costs and our expectations of future inflation and operating requirements. Vessel residual values are a
product of a vessel’s lightweight tonnage and an estimated scrap rate. The remaining estimated lives of our vessels used in our estimates of future
cash flows are consistent with those used in our depreciation calculations.
In our experience, certain assumptions relating to our estimates of future cash flows are more predictable by their nature, including estimated
revenue under existing contract terms, on-going operating costs and remaining vessel life. Certain assumptions relating to our estimates of future
cash flows require more discretion and are inherently less predictable, such as future charter rates beyond the firm period of existing contracts and
vessel residual values, due to factors such as the volatility in vessel charter rates and vessel values. We believe that the assumptions used to
estimate future cash flows of our vessels are reasonable at the time they are made. We can make no assurances, however, as to whether our
estimates of future cash flows, particularly future vessel charter rates or vessel values, will be accurate.
Effect if Actual Results Differ from Assumptions. If we conclude that a vessel or equipment is impaired, we recognize a loss in an amount equal to
the excess of the carrying value of the asset over its fair value at the date of impairment. The written-down amount becomes the new lower cost
basis and will result in a lower annual depreciation expense than for periods before the vessel impairment.
Dry docking
Description. We capitalize a substantial portion of the costs we incur during dry docking and amortize those costs on a straight-line basis over the
useful life of the dry dock. We expense costs related to routine repairs and maintenance incurred during dry docking that do not improve operating
efficiency or extend the useful lives of the assets and for annual class survey costs on our FPSO units. When significant dry-docking expenditures
occur prior to the expiration of the original amortization period, the remaining unamortized balance of the original dry-docking cost and any
unamortized intermediate survey costs are expensed in the period of the subsequent dry dockings.
Judgments and Uncertainties. Amortization of capitalized dry dock expenditures requires us to estimate the period of the next dry docking and
useful life of dry dock expenditures. While we typically dry dock each vessel every two and a half to five years and have a shipping society
63
classification intermediate survey performed on our LNG and LPG carriers between the second and third year of the five-year dry docking period,
we may dry dock the vessels at an earlier date, with a shorter life resulting in an increase in the depreciation
Effect if Actual Results Differ from Assumptions. If we change our estimate of the next dry dock date for a vessel, we will adjust our annual
amortization of dry docking expenditures.
Goodwill and Intangible Assets
Description. We allocate the cost of acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining
amount being classified as goodwill. Certain intangible assets, such as time-charter contracts, are being amortized over time. Our future operating
performance will be affected by the amortization of intangible assets and potential impairment charges related to goodwill or intangible assets.
Accordingly, the allocation of the purchase price to intangible assets and goodwill may significantly affect our future operating results. Goodwill and
indefinite-lived assets are not amortized, but reviewed for impairment annually, or more frequently if impairment indicators arise. The process of
evaluating the potential impairment of goodwill and intangible assets is highly subjective and requires significant judgment at many points during the
analysis.
Judgments and Uncertainties. The allocation of the purchase price of acquired companies requires management to make significant estimates and
assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate to value
these cash flows. In addition, the process of evaluating the potential impairment of goodwill and intangible assets is highly subjective and requires
significant judgment at many points during the analysis. The fair value of our reporting units was estimated based on discounted expected future
cash flows using a weighted-average cost of capital rate. The estimates and assumptions regarding expected cash flows and the appropriate
discount rates require considerable judgment and are based upon existing contracts, historical experience, financial forecasts and industry trends
and conditions.
During 2011, we determined there were indicators of impairment present within our conventional tanker reporting unit. Consequently, we recorded
an impairment charge of $36.7 million in our consolidated statement of loss for 2011 and as of December 31, 2011, the carrying value of goodwill for
this reporting unit was nil. Key assumptions that impact the fair value of the reporting unit include our ability to utilize the vessels in the fleet and the
charter rates the vessels earn when employed. Other key assumptions include the operating life of our vessels and our cost of capital.
As of December 31, 2011, we had two reporting units with goodwill attributable to them. As of the date of this Annual Report, we do not believe that
there is a reasonable possibility that the goodwill attributable to our two remaining reporting units with goodwill attributable to them might be
impaired within the next year as described below.
Effect if Actual Results Differ from Assumptions. As of the date of this Annual Report, we do not believe that there is a reasonable possibility that the
goodwill attributable to our two reporting units with goodwill attributable to them might be impaired within the next year. H owever, certain factors that
impact our goodwill impairment tests are inherently difficult to forecast and as such we cannot provide any assurances that an impairment will or will
not occur in the future. An assessment for impairment involves a number of assumptions and estimates that are based on factors that are beyond
our control. Please read "Part I—Forward-Looking Statements."
Valuation of Derivative Financial Instruments
Description. Our risk management policies permit the use of derivative financial instruments to manage foreign currency fluctuation, interest rate,
bunker fuel price and spot tanker market rate risk. Changes in fair value of derivative financial instruments that are not designated as cash flow
hedges for accounting purposes are recognized in earnings in the consolidated statement of income (loss). Changes in fair value of derivative
financial instruments that are designated as cash flow hedges for accounting purposes are recorded in other comprehensive income (loss) and are
reclassified to earnings in the consolidated statement of income (loss) when the hedged transaction is reflected in earnings. Ineffective portions of
the hedges are recognized in earnings as they occur. During the life of the hedge, we formally assess whether each derivative designated as a
hedging instrument continues to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If we determine that a
hedge has ceased to be highly effective, we will discontinue hedge accounting prospectively.
Judgments and Uncertainties. A substantial majority of the fair value of our derivative instruments and the change in fair value of our derivative
instruments from period to period result from our use of interest rate swap agreements. The fair value of our derivative instruments is the estimated
amount that we would receive or pay to terminate the agreements in an arm’s length transaction under normal business conditions at the reporting
date, taking into account current interest rates, foreign exchange rates and the current credit worthiness of ourselves and the swap counterparties.
The estimated amount is the present value of estimated future cash flows, being equal to the difference between the benchmark interest rate and
the fixed rate in the interest rate swap agreement, multiplied by the notional principal amount of the interest rate swap agr eement at each interest
reset date.
The fair value of our interest rate swap agreements at the end of each period is most significantly impacted by the interest rate implied by the
benchmark interest rate yield curve, including its relative steepness. Interest rates have experienced significant volatility in recent years in both the
short and long term. While the fair value of our interest rate swap agreements is typically more sensitive to changes in shor t-term rates, significant
changes in the long-term benchmark interest rate also materially impact our interest rate swap agreements.
The fair value of our interest rate swap agreements is also impacted by changes in our specific credit risk included in the discount factor. We
discount our interest rate swap agreements with reference to the credit default swap spreads of similarly rated global industrial companies and by
considering any underlying collateral. The process of determining credit worthiness requires significant judgment in determining which source of
credit risk information most closely matches our risk profile.
The benchmark interest rate yield curve and our specific credit risk are expected to vary over the life of the interest rate swap agreements. The
larger the notional amount of the interest rate swap agreements outstanding and the longer the remaining duration of the interest rate swap
agreements, the larger the impact of any variability in these factors will be on the fair value of our interest rate swaps. W e economically hedge the
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interest rate exposure on a significant amount of our long-term debt and for long durations. As such, we have historically experienced, and we
expect to continue to experience, material variations in the period-to-period fair value of our derivative instruments.
Effect if Actual Results Differ from Assumptions. Although we measure the fair value of our derivative instruments utilizing the inputs and
assumptions described above, if we were to terminate the agreements at the reporting date, the amount we would pay or receive to terminate the
derivative instruments may differ from our estimate of fair value. If the estimated fair value differs from the actual termination amount, an adjustment
to the carrying amount of the applicable derivative asset or liability would be recognized in earnings for the current period. Such adjustments could
be material. See "Item 18. Financial Statements: Note 15—Derivative Instruments and Hedging Activities" for the effects on the change in fair value
of our derivative instruments on our consolidated statements of income (loss).
Recent Accounting Pronouncements Not Yet Adopted
In May 2011, the FASB issued amendments to FASB ASC 820, Fair Value Measurement, which clarify or change the application of existing fair
value measurements, including; that the highest and best use and valuation premise in a fair value measurement are relevant only when measuring
the fair value of nonfinancial assets; that a reporting entity should measure the fair value of its own equity instrument fro m the perspective of a
market participant that holds that instrument as an asset; to permit an entity to measure the fair value of certain financial instruments on a net basis
rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of such net exposure; that in the
absence of a Level 1 input, a reporting entity should apply premiums and discounts when market participants would do so when pricing the asset or
liability consistent with the unit of account; and that premiums and discounts related to size as a characteristic of the reporting entity’s holding are
not permitted in a fair value measurement. These amendments are effective for us on January 1, 2012. We are currently assessing the potential
impacts, if any, of these amendments on its consolidated financial statements.
Item 6. Directors, Senior Management and Employees
Directors and Senior Management
Our directors and executive officers as of the date of this Annual Report and their ages as of March 1, 2012 are listed below:
Name
Age Position
C. Sean Day
Peter Evensen
Axel Karlshoej
Dr. Ian D. Blackburne
Bill Berry
Peter S. Janson
Thomas Kuo-Yuen Hsu
Eileen A. Mercier
Bjorn Moller
Tore I. Sandvold
Arthur Bensler
Bruce Chan
David Glendinning
Kenneth Hvid
Vincent Lok
Peter Lytzen
Ingvild Saether
Lois Nahirney
Geir Sekkesaeter
Graham Westgarth
62
53
71
66
59
64
65
64
54
64
57
39
58
43
43
54
43
49
50
57
Director and Chair of the Board
Director, President and Chief Executive Officer (1)
Director and Chair Emeritus
Director
Director
Director
Director
Director
Director (1)
Director
Executive Vice President, Secretary and General Counsel
President, Teekay Tanker Services, a division of Teekay
President, Teekay Gas Services, a division of Teekay
Executive Vice President and Chief Strategy Officer (1)
Executive Vice President and Chief Financial Officer
President, Teekay Petrojarl AS, a subsidiary of Teekay
President, Teekay Shuttle and Offshore, a division of Teekay
Executive Vice President, Corporate Resources
Senior Vice President, Teekay Marine Management
Executive Vice President, Innovation, Technology and Projects
(1) Until March 31, 2011, Bjorn Moller served as President and Chief Executive Officer, Peter Evensen served as Executive Vice President and Chief Strategy Officer
and Kenneth Hvid served as President of Teekay Shuttle and Offshore, a division of Teekay.
Certain biographical information about each of these individuals is set forth below:
C. Sean Day has served as a Teekay director since 1998 and as our Chairman of the Board since 1999. Mr. Day also serves as Chairman of
Teekay GP L.L.C., the general partner of Teekay LNG, Chairman of Teekay Offshore GP L.L.C., the general partner of Teekay Offshore, and
Chairman of Teekay Tankers. From 1989 to 1999, he was President and Chief Executive Officer of Navios Corporation, a large bulk shipping
company based in Stamford, Connecticut. Prior to Navios, Mr. Day held a number of senior management positions in the shipping and finance
industries. He is currently serving as a director of Kirby Corporation and is Chairman of Compass Diversified Holdings. Mr. D ay is engaged as a
consultant to Kattegat Limited, the parent company of Resolute Investments, Ltd., our largest shareholder, to oversee its investments, including that
in the Teekay group of companies.
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Peter Evensen joined Teekay in 2003 as Senior Vice President, Treasurer and Chief Financial Officer. He was appointed Executive Vice President
and Chief Financial Officer in 2004 and was appointed Executive Vice President and Chief Strategy Officer in 2006. Effective April 1, 2011, he
became a Teekay director and Teekay's President and Chief Executive Officer. Mr. Evensen also serves as Chief Executive Officer and Chief
Financial Officer and a director of each of Teekay GP L.L.C. and Teekay Offshore GP L.L.C., and as a director of Teekay Tankers. Mr. Evensen has
over 20 years of experience in banking and shipping finance. Prior to joining Teekay, Mr. Evensen was Managing Director and Head of Global
Shipping at J.P. Morgan Securities Inc. and worked in other senior positions for its predecessor firms. His international ind ustry experience includes
positions in New York, London and Oslo.
Axel Karlshoej has served as a Teekay director since 1989, was Chairman of the Teekay Board from 1994 to 1999, and has been Chairman
Emeritus since stepping down as Chairman. Mr. Karlshoej is President and serves on the compensation committee of Nordic Industries, a California
general construction firm with which he has served for the past 30 years. He is the older brother of the late J. Torben Karlshoej, Teekay’s founder.
Please read "Item 7.Major Shareholders and Certain Relationships and Related Party Transactions."
Dr. Ian D. Blackburne has served as a Teekay director since 2000. Dr. Blackburne has over 25 years of experience in petroleum refining and
marketing, and in 2000 he retired as Managing Director and Chief Executive Officer of Caltex Australia Limited, a large petroleum refining and
marketing conglomerate based in Australia. He is currently serving as Chairman of Aristocrat Leisure Limited, and is a former Chairman of CSR
Limited and director of both Suncorp-Metway Ltd. and Symbion Health Limited (formerly Mayne Group Limited), Australian public companies in the
diversified industrial and financial sectors. Dr. Blackburne was also previously the Chairman of the Australian Nuclear Science and Technology
Organization.
Bill Berry joined the Teekay Board in June of 2011. From 1976 until his retirement in 2008, Mr. Berry held various positions with ConocoPhillips and
its predecessors, including the position of Executive Vice President of Exploration and Production, Worldwide from 2002 to 2005 and Executive Vice
President, Exploration and Production, Europe, Asia, Africa and Middle East from 2005 to 2008. Mr. Berry also serves on the boards of directors of
Nexen Inc. and Willbros Group, Inc., and serves as an Honorary Consul to the Embassy of the Republic of Kazakhstan.
Peter S. Janson has served as a Teekay director since 2005. From 1999 to 2002, Mr. Janson was the Chief Executive Officer of Amec Inc.
(formerly Agra Inc.), a publicly traded engineering and construction company. From 1986 to 1994 he served as the President and Chief Executive
Officer of Canadian operations for Asea Brown Boveri Inc., a company for which he also served as Chief Executive Officer for U.S. operations from
1996 to 1999. Mr. Janson has also served as a member of the Business Round Table in the United States, and as a member of the National
Advisory Board on Sciences and Technology in Canada. He is a director of IEC Holden Inc.
Thomas Kuo-Yuen Hsu has served as a Teekay director since 1993. He is presently a director of CNC Industries, an affiliate of the Expedo Group
of Companies that manages a fleet of six vessels of 70,000 dwt. He has been a Committee Director of the Britannia Steam Ship Insurance
Association Limited since 1988. Please read ―Item 7 – Major Shareholders and Certain Relationships and Related Party Transactions.‖
Eileen A. Mercier has served as a Teekay director since 2000. She has over 39 years of experience in a wide variety of financial and strategic
planning positions, including Senior Vice President and Chief Financial Officer for Abitibi-Price Inc. from 1990 to 1995. She formed her own
management consulting company, Finvoy Management Inc. and acted as president from 1995 to 2003. She currently serves as Chair man of the
Ontario Teachers’ Pension Plan, lead director for ING Bank of Canada, trustee of The University Health Network and as a director and Chair of
Governance for CGI Group Inc. and Intact Financial Corporation.
Bjorn Moller became a Teekay director in 1998. Mr. Moller also served as our President and Chief Executive Officer from 1998 until March 31,
2011. Also until March 31, 2011, Mr. Moller served as Vice Chairman of each of Teekay GP L.L.C. and Teekay Offshore GP L.L.C., and as Chief
Executive Officer of Teekay Tankers. Mr. Moller remains a director of Teekay Tankers. Mr. Moller has over 25 years' experience in the shipping
industry, and has served as Chairman of the International Tanker Owners Pollution Federation since December 2006. He served in senior
management positions with Teekay for more than 15 years and headed our overall operations from 1997, following his promotion to the position of
Chief Operating Officer. Prior to that, Mr. Moller headed our global chartering operations and business development activities.
Tore I. Sandvold has served as a Teekay director since 2003. He has over 30 years of experience in the oil and energy industry. From 1973 to
1987 he served in the Norwegian Ministry of Industry, Oil & Energy in a variety of positions in the areas of domestic and int ernational energy policy.
From 1987 to 1990 he served as the Counselor for Energy in the Norwegian Embassy in Washington, D.C. From 1990 to 2001 Mr. Sandvold served
as Director General of the Norwegian Ministry of Oil & Energy, with overall responsibility for Norway’s national and international oil and gas policy.
From 2001 to 2002 he served as Chairman of the Board of Petoro, the Norwegian state-owned oil company that is the largest oil asset manager on
the Norwegian continental shelf. From 2002 to the present, Mr. Sandvold, through his company, Sandvold Energy AS, has acted as advisor to
companies and advisory bodies in the energy industry. Mr. Sandvold serves on other boards, including those of Schlumberger Li mited., Lambert
Energy Advisory Ltd., Energy Policy Foundation of Norway, and Njord Gas Infrastructure.
Arthur Bensler joined Teekay in 1998 as General Counsel. He was promoted to the position of Vice President in 2002 and became our Corporate
Secretary in 2003. He was appointed Senior Vice President in 2004 and Executive Vice President in 2006. Prior to joining Teekay, Mr. Bensler was
a partner in a large Vancouver, Canada, law firm, where he practiced corporate, commercial and maritime law from 1987 until joining Teekay.
Bruce Chan joined Teekay in 1995. Since then, Mr. Chan has held a number of finance and accounting positions with Teekay, including Vice
President, Strategic Development from 2004 until his promotion to the position of Senior Vice President, Corporate Resources in 2005. In 2008, Mr.
Chan was appointed President of the Company’s Teekay Tanker Services division, which is responsible for the commercial management of
Teekay’s conventional crude oil and product tanker transportation services. Effective April 1, 2011, Mr. Chan also assumed the position of Chief
Executive Officer of Teekay Tankers. Prior to joining Teekay, Mr. Chan worked as a Chartered Accountant in the Vancouver, Canada office of Ernst
& Young LLP.
David Glendinning joined Teekay in 1987. Since then, he has held a number of senior positions, including Vice President, Marine and Commercial
Operations from 1995 until his promotion to Senior Vice President, Customer Relations and Marine Project Development in 1999. In 2003, Mr.
Glendinning was appointed President of our Teekay Gas Services division, which is responsible for our initiatives in the LNG business and other
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areas of gas activity. Prior to joining Teekay, Mr. Glendinning, who is a Master Mariner, had 18 years of sea service on oil tankers of various types
and sizes.
Kenneth Hvid joined Teekay in 2000 and was responsible for leading our global procurement activities until he was promoted in 2004 to Senior
Vice President, Teekay Gas Services. During this time, Mr. Hvid was involved in leading Teekay through its entry and growth in the LNG business.
He held this position until the beginning of 2006, when he was appointed President of our Teekay Shuttle and Offshore division. In that role he was
responsible for our global shuttle tanker business as well as initiatives in the floating storage and off-take business and related offshore activities.
Effective April 1, 2011, Mr. Hvid became Chief Strategy Officer and an Executive Vice President of Teekay and a director of each of Teekay GP
L.L.C. and Teekay Offshore GP L.L.C. Mr. Hvid has 22 years of global shipping experience, 12 of which were spent with A.P. Moller in Copenhagen,
San Francisco and Hong Kong.
Vincent Lok has served as Teekay’s Executive Vice President and Chief Financial Officer since 2007. He has held a number of finance and
accounting positions with Teekay Corporation, including Controller from 1997 until his promotions to the positions of Vice President, Finance in 2002
and Senior Vice President and Treasurer in 2004, and Senior Vice President and Chief Financial Officer in 2006. Mr. Lok has served as the Chief
Financial Officer of Teekay Tankers since 2007. Prior to joining Teekay Corporation, Mr. Lok worked as a Chartered Accountant with Deloitte &
Touche LLP. Mr. Lok is also a Chartered Financial Analyst.
Peter Lytzen joined Teekay Petrojarl as President and Chief Executive Officer in 2007. Mr. Lytzen’s experience includes over 20 years in the oil
and gas industry and he joined Teekay Petrojarl from Maersk Contractors, where he most recently served as Vice President of Production. In that
role, he held overall responsibility for Maersk Contractors’ technical tendering, construction and operation of FPSO and other offshore production
solutions. He first joined Maersk in 1987 and held progressively responsible positions throughout the organization.
Lois Nahirney joined Teekay in 2008 and is responsible for shore-based Human Resources, Corporate Communications, Corporate Services, and
IT. Ms. Nahirney brings to the role more than 25 years of global experience as a senior executive and consultant in human res ources, strategy,
organization change and information systems. Prior to joining Teekay, she held the position of Acting Chief Human Resources Officer with B.C.
Hydro in Vancouver, Canada, and Partner with Western Management Consultants.
Ingvild Sæther joined Teekay in 2002 as a result of Teekay's acquisition of Navion AS from Statoil ASA. Ms. Sæther held various management
positions in Teekay's conventional tanker business until 2007, when she assumed the commercial responsibility for Teekay's shuttle tanker activities
in the North Sea. In her role as Vice President, Teekay Navion Shuttle Tankers she managed the growth of Teekay's shuttle fleet. Effective April 1,
2011, Ms. Saether assumed the position of President, Teekay Shuttle and Offshore. Ms. Saether holds an Executive MBA in Shipping Management
and has over 20 years of industry experience.
Geir Sekkesaeter joined Teekay in 2008 as a leader in Teekay’s fleet operations. In 2011, he was appointed Senior Vice President of the Teekay
Marine Management unit, which oversees Teekay’s global ship management operations. Prior to joining Teekay, Mr. Sekkesaeter held the position
of President at Wilhelmsen Ship Management in Oslo. Mr. Sekkesaeter brings more than 20 years of global experience from ship classification as
well as ship management activities. His international experience includes positions in Japan, China, South Korea, UK and Norway.
Graham Westgarth joined Teekay in 1999 as Vice President, Marine Operations. Later the same year, he was promoted to the position of Senior
Vice President, Marine Operations. In 2003, Mr. Westgarth was appointed President of the Teekay Marine Services division, with responsibility for
the marine and technical operations of Teekay’s fleet, and also newbuild construction. In 2011, he assumed his new role as Executive Vice
President for Innovation, Technology and Projects, which is responsible for innovation and technology as well as the supervision of newbuild
construction and vessel conversion. Mr. Westgarth has 40 years of industry experience, which includes 18 years of sea service, with five years in a
command position. Prior to joining Teekay, he was General Manager of Maersk Company (UK). In November 2009, Mr. Westgarth was elected
Chairman of the International Association of Independent Tanker Owners (INTERTANKO). He is a member of the North of England P&I Association
Board of Directors, and the ABS Council. In June 2011, Mr. Westgarth was one of three recipients of the Dr. Winterbottom Fellowship Award from
South Tyneside College in the United Kingdom.
Compensation of Directors and Senior Management
Director Compensation
During 2011, the nine non-employee directors received, in the aggregate, approximately $1.2 million in cash fees for their service as directors, plus
reimbursement of their out-of-pocket expenses. Each non-employee director, other than the Chair of the Board, receives an annual cash retainer of
$90,000. The Chairman of the Board receives an annual cash retainer of $375,000. Members of the Audit Committee, Compensation and Human
Resources Committee, and Nominating and Governance Committee each receive an annual cash fee of $10,000. The Chairs of the Audit
Committee, Compensation and Human Resources Committee, and Nominating and Governance Committee each receive an annual cash fee of
$20,000, $17,500 and $15,000, respectively.
Each non-employee director, other than the Chair of the Board, also received a $90,000 annual retainer to be paid by way of a grant of, at the
director’s election, restricted stock or stock options under our 2003 Equity Incentive Plan. Pursuant to this annual retainer, during 2011 we granted
stock options to purchase an aggregate of 7,759 shares of our common stock at an exercise price of $34.93 per share and 15,462 shares of
restricted stock. During 2011 the Chairman of the Board received a $495,000 retainer in the form of 14,171 shares of restricted stock under our
2003 Equity Incentive Plan. The stock options described above expire March 14, 2021, ten years after the date of their grant. The stock options and
restricted stock vest as to one third of the shares on each of the first three anniversaries of their respective grant date.
Annual Executive Compensation
The aggregate compensation earned by Teekay’s 11 executive officers listed above (or the Executive Officers) for 2011 was $8.2 million. This is
comprised of base salary ($4.8 million), annual bonus ($2.8 million) and pension and other benefits ($0.6 million). These amounts were paid
primarily in Canadian Dollars, but are reported here in U.S. Dollars using an exchange rate of 1.0213 Canadian Dollars for each U.S. Dollar, the
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exchange rate on December 31, 2011. Teekay’s annual bonus plan considers both company performance, through comparison to established
targets and individual performance.
Long-Term Incentive Program
Teekay's long-term incentive program focuses on the returns realized by our shareholders and is intended to acknowledge and retain those
executives who can influence our long-term performance. The long-term incentive plan provides a balance against short-term decisions and
encourages a longer time horizon for decisions. This program consists of stock option grants, restricted stock units and performance share units. All
grants in 2011 were made under our 2003 Equity Incentive Plan.
During March 2011, we granted stock options to purchase an aggregate of 11,484 shares of our common stock at an exercise price of $34.93,
216,635 shares of restricted stock, and 73,349 performance shares to the Executive Officers under our 2003 Equity Incentive Plan. The stock
options expire March 14, 2021, ten years after the date of the grant. The stock options and restricted stock vest as to one third of the shares on
each of the first three anniversaries of their grant dates. Performance shares have a bullet vesting at the end of the three year performance cycle.
During March 2012, we granted stock options to purchase an aggregate of 264,127 shares of our common stock at an exercise price of $27.69,
127,577 shares of restricted stock, and 67,870 performance shares to the Executive Officers under our 2003 Equity Incentive Plan. The stock
options expire March 6, 2022, ten years after the date of the grant. The stock options and restricted stock vest as to one third of the shares on each
of the first three anniversaries of their grant dates. Performance shares have a bullet vesting at the end of the three year performance cycle.
Options to Purchase Securities from Registrant or Subsidiaries
As at December 31, 2011, we had reserved pursuant to our 1995 Stock Option Plan, which was terminated with respect to new grants effective
September 10, 2003, and our 2003 Equity Incentive Plan, which was adopted effective on the same date (together, the Plans), 4,895,787 shares of
common stock for issuance upon exercise of options granted or to be granted. During 2011, 2010, and 2009 we granted options under the Plans to
acquire up to 95,604, 733,167, and 1,517,900 shares of common stock, respectively, to eligible officers, employees and directors. Each option
under the Plans has a 10-year term and vests equally over three years from the grant date. The outstanding options under the Plans are exercisable
at prices ranging from $11.84 to $60.96 per share, with a weighted-average exercise price of $32.47 per share, and expire between March 11, 2012
and March 14, 2021.
Board Practices
As at December 31, 2011, the Board of Directors consisted of ten members. The Board of Directors is divided into three classes, with members of
each class elected to hold office for a term of three years in accordance with the classification indicated below or until his or her successor is elected
and qualified.
Directors Thomas Kuo-Yuen Hsu, Axel Karlshoej, Bjorn Moller, and Peter Evensen have terms expiring in 2014. Directors Dr. Ian D. Blackburne, Bill
Berry, and C. Sean Day have terms expiring in 2015. Directors Peter S. Janson, Eileen A. Mercier and Tore I. Sandvold have terms expiring in
2013.
There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
The Board of Directors has determined that each of the current members of the Board, other than Bjorn Moller, our President and Chief Executive
Officer until April 1, 2011, and Peter Evensen, our current President and Chief Executive Officer, has no material relationship with Teekay (either
directly or as a partner, shareholder or officer of an organization that has a relationship with Teekay), and is independent within the meaning of our
director independence standards, which reflect the New York Stock Exchange (or NYSE) director independence standards as currently in effect and
as they may be changed from time to time. In making this determination the Board considered the relationships of Thomas Kuo-Yuen Hsu, Axel
Karlshoej and C. Sean Day with our largest shareholder and concluded these relationships do not materially affect their independence as current
directors. Please read ―Item 7.Major Shareholders and Certain Relationships and Related Party Transactions.‖
The Board of Directors has three committees: Audit Committee, Compensation and Human Resources Committee, and Nominating and
Governance Committee. The membership of these committees during 2011 and the function of each of the committees are described below. Each
of the committees is currently comprised of independent members and operates under a written charter adopted by the Board. All of the committee
charters are available under ―Corporate Governance‖ in the Investor Centre of our website at www.teekay.com. During 2011, the Board held seven
meetings. Each director attended all Board meetings. Each committee member attended all applicable committee meetings.
Our Audit Committee is composed entirely of directors who satisfy applicable NYSE and SEC audit committee independence standards. Our Audit
Committee includes Eileen A. Mercier (Chairman), Peter S. Janson, and Bill Berry (effective June 2011 upon J. Rod Clark's retirement from the
Board). All members of the committee are financially literate and the Board has determined that Ms. Mercier qualifies as an audit committee
financial expert.
The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of:
the integrity of our financial statements;
our compliance with legal and regulatory requirements;
the independent auditors’ qualifications and independence; and
the performance of our internal audit function and independent auditors.
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During 2011, our Compensation and Human Resources Committee included Peter S. Janson (Chairman), C. Sean Day, Axel Karlshoej and Ian D.
Blackburne.
The Compensation and Human Resources Committee:
reviews and approves corporate goals and objectives relevant to the Chief Executive Officer’s compensation, evaluates the Chief
Executive Officer’s performance in light of these goals and objectives and determines the Chief Executive Officer’s compensation;
reviews and approves the evaluation process and compensation structure for executive officers, other than the Chief Executive Officer,
evaluates their performance and sets their compensation based on this evaluation;
reviews and makes recommendations to the Board regarding compensation for directors;
establishes and administers long-term incentive compensation and equity-based plans; and
oversees our other compensation plans, policies and programs.
During 2011, our Nominating and Governance Committee included Ian D. Blackburne (Chairman), Tore I. Sandvold, Eileen A. Mercier and Thomas
Kuo-Yuen Hsu.
The Nominating and Governance Committee:
identifies individuals qualified to become Board members;
selects and recommends to the Board director and committee member candidates;
develops and recommends to the Board corporate governance principles and policies applicable to us, monitors compliance with these
principles and policies and recommends to the Board appropriate changes; and
oversees the evaluation of the Board and management.
Crewing and Staff
As at December 31, 2011, we employed approximately 5,500 seagoing and 1,000 shore-based personnel, compared to approximately 5,500
seagoing and 900 shore-based personnel as at December 31, 2010, and 5,400 seagoing and 900 shore-based personnel as at December 31, 2009.
We regard attracting and retaining motivated seagoing personnel as a top priority. Through our global manning organization comprised of offices in
Glasgow, Scotland, Manila, Philippines, Mumbai, India, Sydney, Australia, and Madrid, Spain, we offer seafarers what we believe are competitive
employment packages and comprehensive benefits. We also intend to provide opportunities for personal and career development, which relate to
our philosophy of promoting internally.
During fiscal 1996, we entered into a collective bargaining agreement with the Philippine Seafarers’ Union, an affiliate of the International Transport
Workers’ Federation (or ITF), and an agreement with ITF London that cover substantially all of our junior officers and seamen. We are also party to
collective bargaining agreements with various Australian maritime unions that cover officers and seamen employed through our Australian
operations. Our officers and seamen for our Spanish-flagged vessels are covered by a collective bargaining agreement with Spain’s Union General
de Trabajadores and Comisiones Obreras. We believe our relationships with these labor unions are good.
We see our commitment to training as fundamental to the development of the highest caliber seafarers for our marine operation s. Our cadet training
program is designed to balance academic learning with hands-on training at sea. We have relationships with training institutions in Canada, Croatia,
India, Norway, Philippines, Turkey and the United Kingdom. After receiving formal instruction at one of these institutions, the cadets’ training
continues on board a Teekay vessel. We also have an accredited Teekay-specific competence management system that is designed to ensure a
continuous flow of qualified officers who are trained on our vessels and are familiar with our operational standards, systems and policies. We believe
that high-quality manning and training policies will play an increasingly important role in distinguishing larger independent tanker companies that
have in-house, or affiliate, capabilities from smaller companies that must rely on outside ship managers and crewing agents.
Share Ownership
The following table sets forth certain information regarding beneficial ownership, as of March 1, 2012, of our common stock by the directors and
Executive Officers as a group. The information is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person
or entity beneficially owns any shares that the person or entity (a) has or shares voting or investment power or (b) has the right to acquire as of April
30, 2012 (60 days after March 1, 2012) through the exercise of any stock option or other right. Unless otherwise indicated, each person or entity has
sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares set forth in the following table.
Information for certain holders is based on information delivered to us.
Identity of Person or Group
All directors and Executive Officers (20 persons)(1)
Shares Owned
3,925,138 (3)
Percent of Class
5.5% (2)
(1)
Includes 3,137,948 shares of common stock subject to stock options exercisable by April 30, 2012 under the Plans with a weighted-average exercise price of
$32.98 that expire between March 10, 2013 and March 14, 2021. Excludes (a) 528,814 shares of common stock subject to stock options exercisable after April
69
30, 2012 under the Plans with a weighted average exercise price of $26.75, that expire between March 8, 2020 and March 6, 2022 and (b) 379,565 shares of
restricted stock which vest after April 30, 2012, and (c) 232,144 performance shares which vest after April 30, 2012.
(2) Based on a total of approximately 68.7 million outstanding shares of our common stock as of March 1, 2012. Each director and Executive Officer beneficially
owns less than 1% of the outstanding shares of common stock.
(3) Each director is expected to have acquired shares having a value of at least four times the value of the annual cash retainer paid to them for their Board service
(excluding fees for Chair or Committee service) no later than April 30, 2012 or the fifth anniversary of the date on which the director joined the Board, whichever is
later. In addition, each Executive Officer is expected to acquire shares of Teekay’s common stock equivalent in value to one to three times their annual base
salary by 2013 or, for executive officers subsequently joining Teekay or achieving a position covered by the guidelines, within five years after the guidelines
become applicable to them.
Item 7. Major Shareholders and Certain Relationships and Related Party Transactions
Major Shareholders
The following table sets forth information regarding beneficial ownership, as of March 1, 2012, of Teekay’s common stock by each person we know
to beneficially own more than 5% of the common stock. Information for certain holders is based on their latest filings with the SEC or information
delivered to us. The number of shares beneficially owned by each person or entity is determined under SEC rules and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person or entity beneficially owns any shares as to which
the person or entity has or shares voting or investment power. In addition, a person or entity beneficially owns any shares that the person or entity
has the right to acquire as of April 30, 2012 (60 days after March 1, 2012) through the exercise of any stock option or other right. Unless otherwise
indicated, each person or entity has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares set
forth in the following table.
Identity of Person or Group
Resolute Investments, Ltd. (1)
Neuberger Berman Group LLC (2)
___________________________
Shares Owned
Percent of Class (3)
31,260,780
5,152,318
45.5%
7.5%
(1)
Includes shared voting and shared dispositive power. The ultimate controlling person of Resolute Investments, Ltd. (or Resolute) is Path Spirit Limited (or Path),
which is the trust protector for the trust that indirectly owns all of Resolute’s outstanding equity. This information is based on the Schedule 13D/A (Amendment
No. 5) filed by Resolute and Path with the SEC on November 14, 2011. Resolute's beneficial ownership was 42.3% on March 15, 2011, and 41.9% on March 15,
2010. One of our directors, Thomas Kuo-Yuen Hsu, is the President and a director of Resolute. Another of our directors, Axel Karlshoej, is among the directors of
Path. Our Chairman, C. Sean Day, is engaged as a consultant to Kattegat Limited, the parent company of Resolute, to oversee its investments, including that in
the Teekay group of companies.
(2)
Includes shared voting power and shared dispositive power. This information is based on the Schedule 13G/A filed by this investor with the SEC on February 7,
2012.
(3) Based on a total of 68.7 million outstanding shares of our common stock as of March 1, 2012.
Our major shareholders have the same voting rights as our other shareholders. No corporation or foreign government or other natural or legal
person owns more than 50% of our outstanding common stock. We are not aware of any arrangements, the operation of which may at a
subsequent date result in a change in control of Teekay.
Teekay and certain of its subsidiaries have relationships or are parties to transactions with other Teekay subsidiaries, including Teekay's publicly
traded subsidiaries Teekay LNG, Teekay Offshore and Teekay Tankers. Certain of these relationships and transactions are described below.
Our Major Shareholder
As of March 1, 2012, Resolute owned approximately 45.5% of our outstanding common stock. The ultimate controlling person of Resolute is Path,
which is the trust protector for the trust that indirectly owns all of Resolute's outstanding equity. One of our directors, Thomas Kuo-Yuen Hsu, is the
President and a director of Resolute. Another of our directors, Axel Karlshoej, is among the directors of Path. Our Chairman, C. Sean Day, is
engaged as a consultant to Kattegat Limited, the parent company of Resolute, to oversee its investments, including that in the Teekay group of
companies. Please read "Item 18. Financial Statements: Note 13—Related Party Transactions.‖
Our Directors and Executive Officers
C. Sean Day, the Chairman of Teekay's board of directors, is also the Chairman of Teekay Tankers, Teekay Offshore GP L.L.C. (the general partner
of Teekay Offshore) and Teekay GP L.L.C. (the general partner of Teekay LNG). Bjorn Moller, Teekay's Chief Executive Officer until April 1, 2011
and one of Teekay’s current directors, was also the Chief Executive Officer until April 1, 2011 and is a director of Teekay Tankers. Mr. Moller also
served as a Vice Chairman and director of each of Teekay Offshore GP L.L.C. and Teekay GP L.L.C., until April 1, 2011 when he resigned. Peter
Evensen, a Teekay director and President and Chief Executive Officer of Teekay as of April 1, 2011, is a director of Teekay Tankers and the Chief
Executive Officer and Chief Financial Officer and a director of each of Teekay Offshore GP L.L.C. and Teekay GP L.L.C.
Vincent Lok, Teekay's Executive Vice President and Chief Financial Officer, is also the Chief Financial Officer of Teekay Tank ers. Kenneth Hvid is
Teekay’s Executive Vice President and Chief Strategy Officer and is a director of each of Teekay GP L.L.C. and Teekay Offshore GP L.L.C. Bruce
Chan is the Chief Executive Officer of Teekay Tankers Ltd. and President of Teekay Tanker Services, a division of Teekay. Because the executive
officers of Teekay Tankers and of the general partners of Teekay Offshore and Teekay LNG are employees of Teekay or other of its subsidiaries,
their compensation (other than any awards under the respective long-term incentive plans of Teekay Tankers, Teekay Offshore and Teekay LNG) is
set and paid by Teekay or such other applicable subsidiaries.
70
Pursuant to agreements with Teekay, each of Teekay Tankers, Teekay Offshore and Teekay LNG have agreed to reimburse Teekay or its
applicable subsidiaries for time spent by the executive officers on management matters of such public company subsidiaries. For 2011, these
reimbursement obligations totalled approximately $1.7 million, $3.0 million, and $2.4 million, respectively, for Teekay Tankers, Teekay Offshore and
Teekay LNG, and are included in amounts paid as strategic fees under the management agreement for Teekay Tankers and the services
agreements for Teekay Offshore and Teekay LNG described below. For 2009 and 2010, these reimbursement obligations for Teekay Tankers,
Teekay Offshore and Teekay LNG totalled $1.3 million and $1.5 million, $1.3 million and $1.0 million, and $1.7 million and $1.4 million, respectively.
Relationships with Our Public Company Subsidiaries
Teekay Tankers
Teekay Tankers is a NYSE-listed, Marshall Islands corporation, which we formed to acquire from us a fleet of double-hull oil tankers in connection
with Teekay Tanker's initial public offering in December 2007. Teekay Tanker's business is to own oil tankers and employ a chartering strategy that
seeks to capture upside opportunities in the spot market while using fixed-rate time charters to reduce downside risks. Its operations are managed
by our subsidiary Teekay Tankers Management Services Ltd.
As of March 1, 2012, we owned shares of Teekay Tankers' Class A and Class B common stock that represented an ownership interest of 20.4%
and voting power of 51.2% of Teekay Tankers' outstanding common stock.
Teekay Tankers distributes to its stockholders on a quarterly basis all of its Cash Available for Distribution, subject to an y reserves the board of
directors may from time to time determine are required for the prudent conduct of the business. Cash Available for Distribution represents Teekay
Tankers' net income (loss) plus depreciation and amortization, unrealized losses from derivatives, non-cash items and any write-offs or other non-
recurring items less unrealized gains from derivatives and net income attributable to the historical results of vessels acqui red by Teekay Tankers
from us, prior to their acquisition by Teekay Tankers, for the period when these vessels were owned and operated by us. We received distributions
from Teekay Tankers of $23.4 million, $19.9 million and $13.4 million, respectively, with respect to 2009, 2010, and 2011.
Teekay Offshore and Teekay LNG
Teekay Offshore is a NYSE-listed, Marshall Islands limited partnership, which we formed to further develop our operations in the offshore market.
Teekay Offshore is an international provider of marine transportation and storage services to the offshore oil industry. We own and control Teekay
Offshore's general partner, and as of March 1, 2012, we owned a 31.0% limited partner and a 2% general partner interest in Teekay Offshore.
Teekay Offshore owns a majority of its fleet through OPCO, which was owned 51.0% by Teekay Offshore and 49.0% by us until we sold such 49%
interest to Teekay Offshore in March 2011. Please read ―Item 5. Operating and Financial Review and Prospects—Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Significant Developments in 2011 and Early 2012.‖
Teekay LNG is a NYSE-listed, Marshall Islands limited partnership, which we formed to expand our operations in the LNG shipping sector. Teekay
LNG is an international provider of marine transportation services for LNG, LPG and crude oil. We own and control Teekay LNG's general partner,
and as of March 1, 2012, we owned a 38.1% limited partner and a 2% general partner interest in Teekay LNG.
Quarterly Cash Distributions
We are entitled to distributions on our general and limited partner interests in Teekay Offshore and Teekay LNG, respectively. The general partner
of each of Teekay Offshore and Teekay LNG is also entitled to distributions payable with respect to incentive distribution rights. Incentive distribution
rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum
quarterly distribution and the target distribution levels have been achieved. In general, each of Teekay Offshore and Teekay LNG pays quarterly
cash distributions in the following manner:
first, 98% to all unitholders, pro rata, and 2% to the general partner, until each unitholder has received a total of $0.4025 (Teekay Offshore)
or $0.4625 (Teekay LNG) per unit for that quarter;
second, 85% to all unitholders, and 15% to the general partner, until each unitholder has received a total of $0.4375 (Teekay Offshore) or
$0.5375 (Teekay LNG) per unit for that quarter;
third, 75% to all unitholders, and 25% to the general partner, until each unitholder has received a total of $0.525 (Teekay Offshore) or
$0.65 (Teekay LNG) per unit for that quarter; and
thereafter, 50% to all unitholders and 50% to the general partner.
Teekay received total distributions, including incentive distributions, from Teekay Offshore of $29.2 million, $32.2 million, and $48.7 million,
respectively, with respect to 2009, 2010, and 2011.
Teekay received total distributions, including incentive distributions, from Teekay LNG of $64.0 million, $71.2 million, and $76.0 million, respectively,
with respect to 2009, 2010, and 2011.
Competition with Teekay Tankers, Teekay Offshore and Teekay LNG
Teekay has entered into an omnibus agreement with Teekay LNG, Teekay Offshore and related parties governing, among other things, when
Teekay, Teekay LNG, and Teekay Offshore may compete with each other and providing for rights of first offer on the transfer or rechartering of
certain LNG carriers, oil tankers, shuttle tankers, FSO units and FPSO units. Subject to applicable exceptions, the omnibus agreement generally
provides that (a) neither Teekay nor Teekay LNG will own or operate offshore vessels (i.e. dynamically positioned shuttle tan kers, FSO units and
FPSO units) that are subject to contracts with a duration of three years or more, excluding extension options, (b) neither Teekay nor Teekay
Offshore will own or operate LNG carriers and (c) neither Teekay LNG nor Teekay Offshore will own or operate crude oil tankers.
71
In addition, Teekay Tankers has agreed that Teekay may pursue business opportunities attractive to both parties and of which either party becomes
aware. These business opportunities may include, among other things, opportunities to charter out, charter in or acquire oil tankers or to acquire
tanker businesses.
Sales of Vessels and Project Interests by Teekay to Teekay Tankers, Teekay Offshore and Teekay LNG
From time to time Teekay has sold to Teekay Tankers, Teekay Offshore and Teekay LNG vessels or interests in vessel owning subsidiaries or joint
ventures. These transactions include those described under "Item 5. Operating and Financial Review and Prospects—Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Teekay currently has committed to the following vessel transactions with its public company subsidiaries:
Teekay has agreed to offer the Petrojarl Foinaven FPSO unit to Teekay Offshore prior to July 9, 2012. The purchase price for the
Foinaven FPSO would be its fair market value plus any additional tax or other similar costs to Teekay Petrojarl that would be required to
transfer the FPSO unit to Teekay Offshore.
In October 2010, we announced that we had signed a contract with Petroleo Brasileiro SA (or Petrobras) to provide a FPSO unit for the
Tiro and Sidon fields located in the Santos Basin offshore Brazil. The contract with Petrobras will be serviced by a newly converted FPSO
unit, to be named the Petrojarl Cidade de Itajai, which is currently under conversion from an existing Aframax tanker, for a total estimated
cost of approximately $378 million, of which our 50% share is approximately $189 million. The new FPSO unit is scheduled to deliver mid-
2012, when it will commence operations under a nine-year, fixed-rate time-charter-out contract to Petrobras with six additional one-year
extension options exercisable by Petrobras. Pursuant to the omnibus agreement, Teekay Corporation is obligated to offer to Teekay
Offshore its interest in this FPSO unit at Teekay Corporation’s fully built-up cost within 365 days after the commencement of the charter to
Petrobras.
Time Chartering and Bareboat Chartering Arrangements
Teekay charters in from or out to its public company subsidiaries certain vessels, including the following charter arrangements:
During 2011, nine of Teekay Offshore's conventional tankers were chartered out to Teekay subsidiaries under long-term time charters.
Two of Teekay Offshore's shuttle tankers are chartered out to Teekay subsidiaries under long-term bareboat charters. Pursuant to these
charter contracts, Teekay Offshore earned voyage revenues of $127.1 million, $119.8 million, and $140.9 million, respectively, for 2009,
2010, and 2011.
Two of Teekay Offshore's FSO units are chartered out to Teekay subsidiaries under long-term bareboat charters. Pursuant to these
charter contracts, Teekay offshore earned voyage revenues of $11.2 million, $11.2 million, and $11.0 million, respectively, for 2009, 2010,
and 2011.
From December 2008 to June 2009, Teekay Offshore entered into a bareboat charter contract to in-charter one shuttle tanker from a
subsidiary of Teekay. Pursuant to the charter contract, Teekay Offshore incurred time-charter hire expenses of $0.2 million, $nil and $nil,
respectively, for 2009, 2010 and 2011.
Starting in August 2008, Teekay had been chartering in from Teekay Tankers the tanker Nassau Spirit under a fixed-rate time charter that
expired in July 2010 and was replaced by a 12-month time-charter contract with a third party, which started immediately after the
expiration of the time-charter contract with Teekay. During 2009, 2010 and 2011, Teekay Tankers earned revenues of $13.4 million, $6.9
million, and nil respectively, under this time-charter contract.
Starting in April 2008, Teekay has been chartering in from Teekay LNG the LNG carriers Arctic Spirit and Polar Spirit under a fixed-rate
time charter for a period of ten years, plus options exercisable by Teekay to extend up to an additional 15 years. During 2009, 2010 and
2011, Teekay LNG earned revenues of $38.9 million, $36.5 million, and $35.1 million respectively, under these time-charter contracts.
Services, Management and Pooling Arrangements
Services Agreements. In connection with their initial public offerings in May 2005 and December 2006, respectively, and subsequent thereto,
Teekay LNG and Teekay Offshore and certain of their subsidiaries have entered into services agreements with certain other subsidiaries of Teekay,
pursuant to which the other Teekay subsidiaries provide to Teekay LNG, Teekay Offshore and their subsidiaries administrative, advisory and
technical and ship management services. These services are provided in a commercially reasonable manner and upon the reasonable request of
the general partner or subsidiaries of Teekay LNG or Teekay Offshore, as applicable. The other Teekay subsidiaries that are parties to the services
agreements provide these services directly or subcontract for certain of these services with other entities, including other Teekay subsidiaries.
Teekay LNG and Teekay Offshore pay arm's-length fees for the services that include reimbursement of the reasonable cost of any direct and
indirect expenses the other Teekay subsidiaries incur in providing these services. During 2009, 2010 and 2011, Teekay LNG and Teekay Offshore
incurred expenses of $38.8 million, $45.4 million, and $48.6 million, and $40.4 million, $43.0 million, and $54.6 million, respectively, for these
services.
Management Agreement. In connection with its initial public offering, Teekay Tankers entered into the long-term management agreement with
Teekay Tankers Management Services Ltd., a subsidiary of Teekay (the Manager). Subject to certain limited termination rights, the initial term of the
management agreement will expire on December 31, 2022. If not terminated, the agreement will automatically renew for five-year periods.
Termination fees are required for early termination by Teekay Tankers under certain circumstances. Pursuant to the management agreement, the
Manager provides to Teekay Tankers the following types of services: commercial (primarily vessel chartering), technical (primarily vessel
maintenance and crewing), administrative (primarily accounting, legal and financial) and strategic (primarily advising on acquisitions, strategic
72
planning and general management of the business). The Manager has agreed to use its best efforts to provide these services upon Teekay Tankers'
request in a commercially reasonable manner and may provide these services directly to Teekay Tankers or subcontract for certain of these
services with other entities, primarily other Teekay subsidiaries.
In return for services under the management agreement, Teekay Tankers pays the Manager an agreed-upon fee for commercial services (other
than for Teekay Tankers vessels participating in pooling arrangements), a technical services fee equal to the average rate Teekay charges third
parties to technically manage their vessels of a similar size, and fees for administrative and strategic services that reimburse the Manager for its
related direct and indirect expenses in providing such services and which includes a profit margin. During 2009, 2010, and 2011, Teekay Tankers
incurred $5.7 million, $5.6 million, and $7.5 million, respectively, for these services.
The management agreement also provides for the payment of a performance fee in order to provide the Manager an incentive to increase cash
available for distribution to Teekay Tankers' stockholders. Teekay Tankers did not incur any performance fees for2011, 2010 or 2009.
Pooling Arrangements. Certain Aframax and Suezmax tankers of Teekay Tankers participate in vessel pooling arrangements managed by other
Teekay subsidiaries. The pool managers provide commercial services to the pool participants and administer the pools in exchange for a fee
currently equal to 1.25% of the gross revenues attributable to each pool participant's vessels and a fixed amount per vessel per day which ranges
from $275 (for the Suezmax tanker pool) to $350 (for the Aframax tanker pool). Voyage revenues and voyage expenses of Teekay Tankers' vessels
operating in these pool arrangements are pooled with the voyage revenues and voyage expenses of other pool participants. The resulting net pool
revenues, calculated on a time charter equivalent basis, are allocated to the pool participants according to an agreed formula. Teekay Tankers
incurred pool management fees during 2009, 2010 and 2011 of $2.6 million, $1.9 million and $1.8 million, respectively.
Item 8. Financial Information
Consolidated Financial Statements and Notes
Please read Item 18 below.
Legal Proceedings
From time to time we have been, and we expect to continue to be, subject to legal proceedings and claims in the ordinary cour se of our business,
principally personal injury and property casualty claims. Such claims, even if lacking merit, could result in the expenditure of significant financial and
managerial resources. We are not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material
adverse effect on our financial condition or results of operations. For information about a recent legal proceeding, please read "Item 18. Financial
Statements: Note16(d)—Legal Proceedings and Claims."
Dividend Policy
Commencing with the quarter ended September 30, 1995, we declared and paid quarterly cash dividends in the amount of $0.1075 per share on our
common stock. We increased our quarterly dividend from $0.1375 to $0.2075 per share in the fourth quarter of 2005, from $0.2075 to $0.2375 in the
fourth quarter of 2006, from $0.2375 to $0.275 in the fourth quarter of 2007, and from $0.275 to $0.31625 in the fourth quarter of 2008. Subject to
financial results and declaration by the Board of Directors, we currently intend to continue to declare and pay a regular quarterly dividend in such
amount per share on our common stock. Pursuant to our dividend reinvestment program, holders of common stock are permitted to choose, in lieu
of receiving cash dividends, to reinvest any dividends in additional shares of common stock at then-prevailing market prices, but without brokerage
commissions or service charges.
The timing and amount of dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements,
restrictions in financing agreements and other factors deemed relevant by our Board of Directors. Because we are a holding company with no
material assets other than the stock of our subsidiaries, our ability to pay dividends on the common stock depends on the earnings and cash flow of
our subsidiaries.
Significant Changes
Please read "Item 18. Financial Statements: Note 25—Subsequent Events.
Item 9. The Offer and Listing
Our common stock is traded on the NYSE under the symbol ―TK". The following table sets forth the high and low sales prices for our common stock
on the NYSE for each of the periods indicated.
73
Years
Ended
High
Low
Quarters
Ended
High
Low
Months
Ended
High
Low
Dec. 31,
2011
$37.93
20.67
Mar. 31,
2012
$35.52
24.89
Mar. 31,
2012
$35.52
27.50
Dec. 31,
2010
$33.96
20.42
Dec. 31,
2011
$28.50
20.67
Feb. 29,
2012
$28.98
26.28
Dec. 31,
2009
$24.94
11.10
Dec. 31,
2008
$53.30
11.51
Sept. 30,
2011
June 30,
2011
$31.78
21.37
Jan. 31,
2012
$27.52
24.89
$37.93
29.81
Dec. 31,
2011
$28.09
25.45
Dec. 31,
2007
$62.66
42.52
Mar. 31,
2011
$37.19
31.55
Nov. 30,
2011
$28.50
24.62
Item 10. Additional Information
Memorandum and Articles of Association
Dec. 31,
2010
Sept. 30,
2010
June 30,
2010
$29.03
23.60
$29.76
22.39
$33.96
26.09
Oct. 31,
2011
$26.94
20.67
Our Amended and Restated Articles of Incorporation, as amended, have been filed as exhibits 1.1 and 1.2 to our Annual Report on Form 20-F (File
No. 1-12874), filed with the SEC on April 7, 2009, and are hereby incorporated by reference into this Annual Report. Our Bylaws have previously
been filed as exhibit 1.3 to our Report on Form 6-K (File No. 1-12874), filed with the SEC on August 31, 2011, and are hereby incorporated by
reference into this Annual Report.
The rights, preferences and restrictions attaching to each class of our capital stock are described in the section entitled "Description of Capital
Stock" of our Rule 424(b) prospectus (Registration No. 333-52513), filed with the SEC on June 10, 1998, and hereby incorporated by reference into
this Annual Report, provided that since the date of such prospectus (1) the par value of our capital stock has been changed to $0.001 per share, (2)
our authorized capital stock has been increased to 725,000,000 shares of common stock and 25,000,000 shares of Preferred Stock, (3) we have
been domesticated in the Republic of The Marshall Islands and (4) we have adopted a staggered Board of Directors, with directors serving three-
year terms.
The necessary actions required to change the rights of holders of our capital stock and the conditions governing the manner in which annual and
special meetings of shareholders are convened are described in our Bylaws filed as exhibit 1.3 to our Report on Form 6-K (File No. 1-12874), filed
with the SEC on August 31, 2011, and hereby incorporated by reference into this Annual Report.
We have in place a rights agreement that would have the effect of delaying, deferring or preventing a change in control of Teekay. The amended
and restated rights agreement has been filed as part of our Form 8-A/A (File No. 1-12874), filed with the SEC on July 2, 2010, and hereby
incorporated by reference into this Annual Report.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights
on the securities imposed by the laws of the Republic of The Marshall Islands or by our Articles of Incorporation or Bylaws.
Material Contracts
The following is a summary of each material contract, other than material contracts entered into in the ordinary course of business, to which we or
any of our subsidiaries, other than our publicly listed subsidiaries, is a party, for the two years immediately preceding the date of this Annual Report:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Indenture dated June 22, 2001 among Teekay Corporation and The Bank of New York Trust Company of Florida (formerly U.S. Trust
Company of Texas, N.A.) for U.S. $250,000,000 8.875% Senior Notes due 2011.
First Supplemental Indenture dated as of December 6, 2001, among Teekay Corporation and The Bank of New York Trust Company of
Florida, N.A. for U.S. $100,000,000 8.875% Senior Notes due 2011.
Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan Facility among Norsk Teekay Holdings Ltd.,
Den Norske Bank ASA and various other banks.
Agreement, dated September 1, 2004 for a U.S. $500,000,000 Credit Facility Agreement to be made available to Teekay Nordic Holdings
Incorporated by Nordea Bank Finland PLC, New York Branch.
Supplemental Agreement dated September 30, 2004 to Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing
Revolving Loan Facility among Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks.
Agreement, dated May 26, 2005 for a U.S. $550,000,000 Credit Facility Agreement to be made available to Avalon Spirit LLC et al by
Nordea Bank Finland PLC and others.
Agreement, dated October 2, 2006 for a U.S. $940,000,000 Secured Reducing Revolving Loan Facility among Teekay Offshore Operating
L.P., Den Norske Bank ASA and various other banks. Please read Note 8 to the Consolidated Financial Statements of Teekay Corporation
included herein for a summary of certain contract terms relating to our revolving loan facilities.
74
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
Agreement, dated August 23, 2006 for a U.S. $330,000,000 Secured Reducing Revolving Loan Facility among Teekay LNG Partners L.P.,
ING Bank N.V. and various other banks. Please read Note 8 to the Consolidated Financial Statements of Teekay Corporation included
herein for a summary of certain contract terms relating to our revolving loan facilities.
Agreement, dated November 28, 2007 for a U.S. $845,000,000 Secured Reducing Revolving Loan Facility among Teekay Corporation,
Teekay Tankers Ltd., Nordea Bank Finland PLC and various other banks. Please read Note 8 to the Consolidated Financial Statements of
Teekay Corporation included herein for a summary of certain contract terms relating to our revolving loan facilities.
Agreement dated May 16, 2007 for a U.S. $700,000,000 Credit Facility Agreement to be made available to Teekay Acquisition Hol dings
LLC et al by HSH NordBank AG and others.
Annual Executive Bonus Plan.
Vision Incentive Plan.
2003 Equity Incentive Plan.
Amended 1995 Stock Option Plan.
Amended and Restated Rights Agreement, dated as of July 2, 2010, between Teekay Corporation and The Bank of New York, as Rights
Agent.
Amended and Restated Omnibus Agreement dated as of December 19, 2006, among Teekay Corporation, Teekay GP L.L.C., Teekay
LNG Partners L.P., Teekay LNG Operating L.L.C., Teekay Offshore GP L.L.C., Teekay Offshore Partners L.P., Teekay Offshore Operating
GP. L.L.C. and Teekay Offshore Operating L.P. govern, among other things, when Teekay Corporation, Teekay LNG L.P. and Teekay
Offshore L.P. may compete with each other and to provide the applicable parties certain rights of first offer on LNG carriers , oil tankers,
shuttle tankers, FSO units and FPSO units.
(q)
Indenture dated January 27, 2010 among Teekay Corporation and The Bank of New York Mellon Trust Company, N.A. for U.S.
$450,000,000 8.5% Senior Unsecured Notes due 2020.
Exchange Controls and Other Limitations Affecting Security Holders
We are not aware of any governmental laws, decrees or regulations, including foreign exchange controls, in the Republic of The Marshall Islands
that restrict the export or import of capital or that affect the remittance of dividends, interest or other payments to non-resident holders of our
securities.
We are not aware of any limitations on the right of non-resident or foreign owners to hold or vote our securities imposed by the laws of the Republic
of The Marshall Islands or our Articles of Incorporation and Bylaws.
Taxation
Teekay Corporation was incorporated in the Republic of Liberia on February 9, 1979 and was domesticated in the Republic of The Marshall Islands
on December 20, 1999. Its principal executive headquarters are located in Bermuda. The following provides information regarding taxes to which a
U.S. Holder of our common stock may be subject.
Material U.S. Federal Income Tax Considerations
The following is a discussion of the material U.S. federal income tax considerations that may be relevant to stockholders. This discussion is based
upon the provisions of the Internal Revenue Code of 1986, as amended (or the Code), legislative history, applicable U.S. Treasury Regulations
promulgated thereunder (or Treasury Regulations), judicial authority and administrative interpretations, all as in effect on the date of this Annual
Report and which are subject to change, possibly with retroactive effect, or are subject to different interpretations. Changes in these authorities may
cause the tax consequences to vary substantially from the consequences described below. Unless the context otherwise requires, references in this
section to ―we,‖ ―our‖ or ―us‖ are references to Teekay Corporation.
This discussion is limited to stockholders who hold their common stock as a capital asset for tax purposes. This discussion does not address all tax
considerations that may be important to a particular stockholder in light of the stockholder’s circumstances, or to certain c ategories of stockholders
that may be subject to special tax rules, such as:
dealers in securities or currencies,
traders in securities that have elected the mark-to-market method of accounting for their securities,
persons whose functional currency is not the U.S. dollar,
persons holding our common stock as part of a hedge, straddle, conversion or other ―synthetic security‖ or integrated transaction,
certain U.S. expatriates,
financial institutions,
insurance companies,
persons subject to the alternative minimum tax,
persons that actually or under applicable constructive ownership rules own 10% or more of our common stock; and
75
entities that are tax-exempt for U.S. federal income tax purposes.
If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our common stock, the tax
treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership
holding our common stock, you should consult your own tax advisor about the U.S. federal income tax consequences of owning and disposing of
the common stock.
This discussion does not address any U.S. estate tax considerations or tax considerations arising under the laws of any state, local or non-U.S.
jurisdiction. Each stockholder is urged to consult its own tax advisor regarding the U.S. federal, state, local and other tax consequences of the
ownership or disposition of our common stock.
United States Federal Income Taxation of U.S. Holders
As used herein, the term U.S. Holder means a beneficial owner of our common stock that is a U.S. citizen or U.S. resident alien, a corporation or
other entity taxable as a corporation for U.S. federal income tax purposes, that was created or organized in or under the laws of the United States,
any state thereof or the District of Columbia, an estate whose income is subject to U.S. federal income taxation regardless of its source, or a trust
that either is subject to the supervision of a court within the United States and has one or more U.S. persons with authority to control all of its
substantial decisions or has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person.
Distributions
Subject to the discussion of passive foreign investment companies (or PFICs) below, any distributions made by us with respect to our common
stock to a U.S. Holder generally will constitute dividends, which may be taxable as ordinary income or ―qualified dividend income‖ as described in
more detail below, to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles.
Distributions in excess of our earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in
its common stock and thereafter as capital gain. U.S. Holders that are corporations for U.S. federal income tax purposes generally 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
stock generally will be treated as ―passive category income‖ or, in the case of certain types of U.S. Holders, ―general category income‖ for purposes
of computing allowable foreign tax credits for U.S. federal income tax purposes.
Dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate (or a U.S. Individual Holder) will be treated as ―qualified
dividend income‖ that currently is taxable to such U.S. Individual Holder at preferential capital gain tax rates provided that: (i) our common stock is
readily tradable on an established securities market in the United States (such as the New York Stock Exchange on which our c ommon stock is
traded); (ii) we are not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (we intend to take the
position that we are not now and have never been a PFIC, as discussed below); (iii) the U.S. Individual Holder has owned the common stock for
more than 60 days in the 121-day period beginning 60 days before the date on which the common stock become ex-dividend; (iv) the U.S. Individual
Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property; and (v) certain other
conditions are met. There is no assurance that any dividends paid on our common stock will be eligible for these preferential rates in the hands of a
U.S. Individual Holder. Any dividends paid on our common stock not eligible for these preferential rates will be taxed as ordinary income to a
U.S. Individual Holder. In the absence of legislation extending the term of the preferential tax rates for qualified dividend income, all dividends
received by a taxpayer in taxable years beginning after December 31, 2012 will be taxed at ordinary graduated tax rates.
Special rules may apply to any ―extraordinary dividend‖ paid by us. An extraordinary dividend is, generally, a dividend with respect to a share of
stock if the amount of the dividend is equal to or in excess of 10% of a stockholder’s adjusted basis (or fair market value in certain circumstances) in
such stock. If we pay an ―extraordinary dividend‖ on our common stock that is treated as ―qualified dividend income,‖ then any loss derived by a
U.S. Individual Holder from the sale or exchange of such common stock will be treated as long-term capital loss to the extent of such dividend.
Certain U.S. Individual Holders will be subject to pay a 3.8% tax on, among other things, dividends for taxable years beginning after December 31,
2012. U.S. Holders should consult their tax advisors regarding the effect, if any, of this tax on their ownership of our common stock.
Sale, Exchange or Other Disposition of Common Stock
Assuming we do not constitute a PFIC for any taxable year, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or
other disposition of our common stock in an amount equal to the difference between the amount realized by the U.S. Holder from such sale,
exchange or other disposition and the U.S. Holder’s tax basis in such stock. Subject to the discussion of extraordinary dividends above, such gain or
loss will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or
other disposition, and subject to preferential capital gain tax rates. Such capital gain or loss generally will be treated as U.S.-source gain or loss, as
applicable, for U.S. foreign tax credit purposes. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
Certain U.S. Individual Holders will be subject to a 3.8% tax on, among other things, capital gains from the sale or other disposition of stock for
taxable years beginning after December 31, 2012. U.S. Holders should consult their tax advisors regarding the effect, if any, of this tax on their
disposition of our common stock.
Consequences of Possible PFIC Classification
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be a PFIC in any taxable year in which, after taking into account
the income and assets of the corporation and certain subsidiaries pursuant to a ―look through‖ rule, either: (i) at least 75% of its gross income is
―passive‖ income; or (ii) at least 50% of the average value of its assets is attributable to assets that produce passive income or are held for the
production of passive income. For purposes of these tests, ―passive income‖ includes dividends, interest, and gains from the sale or exchange of
76
investment property and rents and royalties, other than rents and royalties that are received from unrelated parties in connection with the active
conduct of a trade or business. By contrast, income derived from the performance of services does not constitute ―passive income.‖
There are legal uncertainties involved in determining whether the income derived from our time-chartering activities constitutes rental income or
income derived from the performance of services, including the decision in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), which held
that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign
sales corporation provision of the Code. However, the Internal Revenue Service (or IRS) stated in an Action on Decision (AOD 2010-001) that
it disagrees with, and will not acquiesce to, the way that the rental versus services framework was appl ied to the facts in the Tidewater
decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC
purposes. The IRS's statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers.
Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing PFICs , there can be no
assurance that the IRS or a court would not follow the Tidewater decision in interpreting the PFIC provisions of the Code. Nevertheless,
based on our and our subsidiaries’ current assets and operations, we intend to take the position that we are not now and have never been a PFIC.
No assurance can be given, however, that the IRS, or a court of law, will accept our position or that we would not constitute a PFIC for any future
taxable year if there were to be changes in our or our subsidiaries assets, income or operations.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder would be subject to different taxation rules
depending on whether the U.S. Holder makes a timely and effective election to treat us as a ―Qualified Electing Fund‖ (a QEF election). As an
alternative to making a QEF election, a U.S. Holder should be able to make a ―mark-to-market‖ election with respect to our common stock, as
discussed below.
Taxation of U.S. Holders Making a Timely QEF Election. If a U.S. Holder makes a timely QEF election (an Electing Holder), the Electing Holder
must report each taxable year for U.S. federal income tax purposes the Electing Holder’s pro rata share of our ordinary earnings and net capital
gain, if any, for our taxable years that end with or within the Electing Holder’s taxable year, regardless of whether or not the Electing Holder received
distributions from us in that year. Such pro rata share would not exceed the income allocable to dividends on our shares, although ordinary earnings
could be allocated to a shareholder in a taxable year before the dividend is paid. Such income inclusions would not be eligible for the preferential tax
rates applicable to qualified dividend income. The Electing Holder’s adjusted tax basis in the common stock will be increased to reflect taxed but
undistributed earnings and profits. Distributions of earnings and profits that were previously taxed will result in a corresp onding reduction in the
Electing Holder’s adjusted tax basis in common stock and will not be taxed again once distributed. An Electing Holder generally will recognize
capital gain or loss on the sale, exchange or other disposition of our common stock. A U.S. Holder makes a QEF election with respect to any year
that we are a PFIC by filing IRS Form 8621 with the holder’s timely filed U.S. federal income tax return (including extensions).
If a U.S. Holder has not made a timely QEF election with respect to the first year in the holder’s holding period of our common stock during which we
qualified as a PFIC, the holder may be treated as having made a timely QEF election by filing a QEF election with the holder’s timely filed
U.S. federal income tax return (including extensions) and, under the rules of Section 1291 of the Code, a ―deemed sale election‖ to include in
income as an ―excess distribution‖ (described below) the amount of any gain that the holder would otherwise recognize if the holder sold the holder’s
common stock on the ―qualification date.‖ The qualification date is the first day of our taxable year in which we qualified as a ―qualified electing fund‖
with respect to such U.S. Holder. In addition to the above rules, under very limited circumstances, a U.S. Holder may make a retroactive QEF
election if the holder failed to file the QEF election documents in a timely manner. If a U.S. Holder makes a timely QEF election for one of our
taxable years, but did not make such election with respect to the first year in the holder’s holding period of our common sto ck during which we
qualified as a PFIC and the holder did not make the deemed sale election described above, the holder also will be subject to the more adverse rules
described below.
A U.S. Holder’s QEF election will not be effective unless we annually provide the holder with certain information concerning our inc ome and gain,
calculated in accordance with the Code, to be included with the holder’s U.S. federal income tax return. We have not provided our U.S. Holders with
such information in prior taxable years and do not intend to provide such information in the current taxable year. Accordingly, U.S. Holders will not
be able to make an effective QEF election at this time. If, contrary to our expectations, we determine that we are or will be a PFIC for any taxable
year, we will provide U.S. Holders with the information necessary to make an effective QEF election with respect to our common stock.
Taxation of U.S. Holders Making a ―Mark-to-Market‖ Election. If we were to be treated as a PFIC for any taxable year and, as we anticipate, our
stock were treated as ―marketable stock,‖ then, as an alternative to making a QEF election, a U.S. Holder would be allowed to make a ―mark-to-
market‖ election with respect to our common stock, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant
instructions and related Treasury Regulations. If that election is made for the first year a U.S. Holder holds or is deemed to hold our common stock
and for which we are a PFIC, the U.S. Holder generally would include as ordinary income in each taxable year that we are a PFIC the excess, if any,
of the fair market value of the U.S. Holder’s common stock at the end of the taxable year over the holder’s adjusted tax basis in the common stock.
The U.S. Holder also would be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the common
stock over the fair market value thereof at the end of the taxable year that we are a PFIC, but only to the extent of the net amount previously
included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in the holder’s common stock would be adjusted to reflect
any such income or loss recognized. Gain recognized on the sale, exchange or other disposition of our common stock in taxable years that we are a
PFIC would be treated as ordinary income, and any loss recognized on the sale, exchange or other disposition of the common stock i n taxable
years that we are a PFIC would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously
included in income by the U.S. Holder. Because the mark-to-market election only applies to marketable stock, however, it would not apply to a
U.S. Holder’s indirect interest in any of our subsidiaries that were also determined to be PFICs.
If a U.S. Holder makes a mark-to-market election for one of our taxable years and we were a PFIC for a prior taxable year during which such holder
held our common stock and for which (i) we were not a QEF with respect to such holder and (ii) such holder did not make a timely mark-to-market
election, such holder would also be subject to the more adverse rules described below in the first taxable year for which the mark-to-market election
is in effect and also to the extent the fair market value of the U.S. Holder’s common stock exceeds the holder’s adjusted tax basis in the common
stock at the end of the first taxable year for which the mark-to-market election is in effect.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election. If we were to be treated as a PFIC for any taxable year, a
U.S. Holder who does not make either a QEF election or a ―mark-to-market‖ election for that year (a Non-Electing Holder) would be subject to
77
special rules resulting in increased tax liability with respect to (i) any ―excess distribution‖ (i.e., the portion of any distributions received by the Non-
Electing Holder on our common stock 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 stock), and (ii) any gain realized on the
sale, exchange or other disposition of the stock. 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 stock;
the amount allocated to the current taxable year and any taxable year prior to the taxable year we were first treated as a PFIC with respect
to the Non-Electing Holder would be taxed as ordinary income in the current taxable year;
the amount allocated to each of the other taxable years would be subject to U.S. federal income tax at the highest rate of tax in effect for
the applicable class of taxpayers for that year; and
an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other
taxable year.
If we were treated as a PFIC for any taxable year and a Non-Electing Holder who is an individual dies while owning our common stock, such
holder’s successor generally would not receive a step-up in tax basis with respect to such stock. In addition, a U.S. Holder is required to file an
annual report with the IRS for each taxable year after 2010 in which we are treated as a PFIC with respect to the U.S. Holder’s common stock.
U.S. Holders are urged to consult their own tax advisors regarding the applicability, availability and advisability of, and procedure for,
making QEF, Mark-to-Market Elections and other available elections with respect to us and our subsidiaries, and the U.S. federal income
tax consequences of making such elections.
Consequences of Possible Controlled Foreign Corporation Classification
If CFC Shareholders (generally, U.S. Holders who each own, directly, indirectly or constructively, 10% or more of the total combined voting power of
our outstanding shares entitled to vote) own directly, indirectly or constructively more than 50% of either the total combined voting power of our
outstanding shares entitled to vote or the total value of all of our outstanding shares, we generally would be treated as a controlled foreign
corporation (or a CFC).
CFC Shareholders are treated as receiving current distributions of their shares of certain income of the CFC without regard to any actual
distributions and are subject to other burdensome U.S. federal income tax and administrative requirements but generally are not also subject to the
requirements generally applicable to shareholders of a PFIC. In addition, a person who is or has been a CFC Shareholder may recognize ordinary
income on the disposition of shares of the CFC. Although we do not believe we are or will become a CFC, U.S. persons owning a substantial
interest in us should consider the potential implications of being treated as a CFC Shareholder in the event we become a CFC in the future.
The U.S. federal income tax consequences to U.S. Holders who are not CFC Shareholders would not change in the event we become a CFC in the
future.
U.S. Return Disclosure Requirements for U.S. Individual Holders
U.S. Individual Holders who hold certain specified foreign assets with values in excess of certain dollar thresholds are required to report such assets
on IRS Form 8938 with their U.S. federal income tax return subject to certain exceptions, including an exception for foreign assets held in accounts
maintained by U.S. financial institutions. Stock in a foreign corporation, including our stock, is a specified foreign asset for this purpose. Penalties
apply for failure to properly complete and file Form 8938. You are encouraged to consult with your tax advisor regarding the filing of this form.
United States Federal Income Taxation of Non-U.S. Holders
A beneficial owner of our common stock (other than a partnership, including any entity or arrangement treated as a partnership for U.S. federal
income tax purposes) that is not a U.S. Holder is a Non-U.S. Holder.
Distributions
Distributions we make to a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax if the Non-U.S. Holder is not engaged in
a U.S. trade or business. If the Non-U.S. Holder is engaged in a U.S. trade or business, distributions we make will be subject to U.S. federal income
tax to the extent those distributions constitute income effectively connected with that Non-U.S. Holder’s U.S. trade or business. However,
distributions made to a Non-U.S. Holder that is engaged in a trade or business may be exempt from taxation under an income tax treaty if the
income represented thereby is not attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder.
Sale, Exchange or Other Disposition of Common Stock
The U.S. federal income taxation of Non-U.S. Holders on any gain resulting from the disposition of our common stock generally is the same as
described above regarding distributions. However, an individual Non-U.S. Holder may be subject to tax on gain resulting from the disposition of our
common stock if the holder is present in the United States for 183 days or more during the taxable year in which such disposition occurs and meet
certain other requirements.
78
Backup Withholding and Information Reporting
In general, payments of distributions or the proceeds of a disposition of common stock to a non-corporate U.S. Holder will be subject to information
reporting requirements. These payments to a non-corporate U.S. Holder also may be subject to backup withholding if the non-corporate U.S.
Holder:
fails to timely provide an accurate taxpayer identification number;
is notified by the IRS that it has failed to report all interest or distributions required to be shown on its U.S. federal income tax returns; or
in certain circumstances, fails to comply with applicable certification requirements.
Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding on payments withi n the United
States, or through a U.S. payor by certifying their status on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable.
Backup withholding is not an additional tax. Rather, a stockholder generally may obtain a credit for any amount withheld against its liability for U.S.
federal income tax (and a refund of any amounts withheld in excess of such liability) by accurately completing and timely filing a return with the IRS.
Non-United States Tax Consequences
Marshall Islands Tax Consequences. Because Teekay and our subsidiaries do not, and do not expect that we or they will, conduct business or
operations in the Republic of The Marshall Islands, and because all documentation related to issuances of shares of our common stock was
executed outside of the Republic of The Marshall Islands, under current Marshall Islands law, no taxes or withholdings will b e imposed by the
Republic of The Marshall Islands on distributions made to holders of shares of our common stock, so long as such persons do not reside in,
maintain offices in, or engage in business in the Republic of The Marshall Islands. Furthermore, no stamp, capital gains or other taxes will be
imposed by the Republic of The Marshall Islands on the purchase, ownership or disposition by such persons of shares of our common stock.
Documents on Display
Documents concerning us that are referred to herein may be inspected at our principal executive headquarters at 4th Floor, Belvedere Building, 69
Pitts Bay Road, Hamilton, HM 08, Bermuda. Those documents electronically filed via the Electronic Data Gathering, Analysis, and Retrieval (or
EDGAR) system may also be obtained from the SEC’s website at www.sec.gov, free of charge, or from the Public Reference Section of the SEC at
100F Street, NE, Washington, D.C. 20549, at prescribed rates. Further information on the operation of the SEC public reference rooms may be
obtained by calling the SEC at 1-800-SEC-0330.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from foreign currency fluctuations and changes in interest rates, bunker fuel prices and spot tanker market rates for
vessels. We use foreign currency forward contracts, cross currency and interest rate swaps, bunker fuel swap contracts and forward freight
agreements to manage currency, interest rate, bunker fuel price and spot tanker market rate risks but we do not use these financial instruments for
trading or speculative purposes, except as noted below under Spot Tanker Market Rate Risk. Please read "Item 18. Financial Statements: Note
15—Derivative Instruments and Hedging Activities."
Foreign Currency Fluctuation Risk
Our primary economic environment is the international shipping market. Transactions in this market generally utilize the U.S. Dollar. Consequently,
a substantial majority of our revenues and most of our operating costs are in U.S. Dollars. We incur certain voyage expenses, vessel operating
expenses, dry docking and overhead costs in foreign currencies, the most significant of which are the Australian Dollar, British Pound, Canadia n
Dollar, Euro, Norwegian Kroner and Singapore Dollar. There is a risk that currency fluctuations will have a negative effect on the value of cash
flows.
We reduce our exposure by entering into foreign currency forward contracts. In most cases, we hedge a substantial majority of our net foreign
currency exposure for the following 12 months. We generally do not hedge our net foreign currency exposure beyond three years forward.
As at December 31, 2011, we had the following foreign currency forward contracts:
Norwegian Kroner:
Average contractual exchange rate(2)
Euro:
Average contractual exchange rate(2)
Canadian Dollar:
Average contractual exchange rate(2)
British Pounds:
Average contractual exchange rate(2)
2012
Contract
Amount (1)
$141.3
6.09
$40.9
0.75
$31.8
1.01
$46.5
0.65
Expected Maturity Date
2013
Contract
Amount (1)
$32.8
5.94
$5.8
0.75
$4.6
1.03
$7.8
0.64
Total
Contract
Amount (1)
$174.1
6.07
$46.7
0.75
$36.4
1.02
$54.3
0.64
Total
Fair value (1)
Asset (Liability)
$(1.0)
$(1.7)
$(0.5)
$(1.2)
(1) Contract amounts and fair value amounts in millions of U.S. Dollars.
(2) Average contractual exchange rate represents the contractual amount of foreign currency one U.S. Dollar will buy.
79
Although the majority of our transactions, assets and liabilities are denominated in U.S. Dollars, certain of our subsidiaries have foreign currency-
denominated liabilities. There is a risk that currency fluctuations will have a negative effect on the value of our cash flows. We have not entered into
any forward contracts to protect against the translation risk of our foreign currency-denominated liabilities. As at December 31, 2011, we had Euro-
denominated term loans of 269.2 million Euros ($348.9 million). We receive Euro-denominated revenue from certain of our time-charters. These
Euro cash receipts generally are sufficient to pay the principal and interest payments on our Euro-denominated term loans. Consequently, we have
not entered into any foreign currency forward contracts with respect to our Euro-denominated term loans, although there is no assurance that our
exposure to fluctuations in the Euro will not increase in the future.
Interest Rate Risk
We are exposed to the impact of interest rate changes primarily through our borrowings that require us to make interest payments based on LIBOR
or EURIBOR. Significant increases in interest rates could adversely affect our operating margins, results of operations and our ability to repay our
debt. We use interest rate swaps to reduce our exposure to market risk from changes in interest rates. Generally our approach is to hedge a
substantial majority of floating-rate debt associated with our vessels that are operating on long-term fixed-rate contracts. We manage the rest of our
debt based on our outlook for interest rates and other factors.
In order to minimize counterparty risk, we only enter into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s
or A3 by Moody’s at the time of the transaction. In addition, to the extent possible and practical, interest rate swaps are entered into with different
counterparties to reduce concentration risk.
The table below provides information about our financial instruments at December 31, 2011, which are sensitive to changes in interest rates,
including our debt and capital lease obligations and interest rate swaps. For long-term debt and capital lease obligations, the table presents principal
cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and
weighted-average interest rates by expected contractual maturity dates.
Expected Maturity Date
2012
2013
2014
Total
2016
(in millions of U.S. dollars, except percentages)
Thereafter
2015
Fair
Value
Asset /
(Liability) Rate(1)
343.2
13.5
44.7
5.2%
1,005.2
14.5
950.8
15.6
44.7
5.2%
44.7
5.2%
282.3
16.7
44.7
5.2%
225.5
17.9
1,452.3
270.7
4,259.3
348.9
(3,837.5)
(312.7)
1.8%
2.7%
44.7
5.2%
612.7
7.5%
836.2
6.9%
(922.0)
6.9%
47.2
6.7%
68.3
9.1%
29.6
7.8%
2.3
4.4%
2.3
4.4%
26.0
4.4%
175.7
7.4%
(175.7)
7.4%
392.3
2.4%
13.5
3.1%
392.3
2.3%
14.5
3.1%
210.2
3.9%
15.6
3.1%
338.1
4.0%
16.7
3.1%
760.4
2.8%
17.9
3.1%
1,673.5
4.9%
270.7
3.1%
3,766.8
3.8%
348.9
3.1%
(561.7)
3.8%
(25.8)
3.1%
Long-Term Debt:
Variable Rate ($U.S.) (2)
Variable Rate (Euro) (3) (4)
Fixed-Rate ($U.S.)
Average Interest Rate
Capital Lease Obligations (5)
Variable-Rate ($U.S.) (6)
Average Interest Rate (7)
Interest Rate Swaps:
Contract Amount ($U.S.) (5) (8)
Average Fixed Pay Rate (2)
Contract Amount (Euro) (4)
Average Fixed Pay Rate (3)
________
(1) Rate refers to the weighted-average effective interest rate for our long-term debt and capital lease obligations, including the margin we pay on our floating-rate,
which as of December 31, 2011, ranged from 0.45% to 3.25%. The average interest rate for our capital lease obligations is the weighted-average interest rate
implicit in our lease obligations at the inception of the leases.
(2)
Interest payments on U.S. Dollar-denominated debt and interest rate swaps are based on LIBOR. The average fixed pay rate for our interest rate swaps excludes
the margin we pay on our floating-rate debt.
(3)
Interest payments on Euro-denominated debt and interest rate swaps are based on EURIBOR.
(4) Euro-denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of December 31, 2011.
(5) Under the terms of the capital leases for the RasGas II LNG Carriers (see Item 18 – Financial Statements: Note 10 – Capital Lease Obligations and Restricted
Cash), we are required to have on deposit, subject to a variable rate of interest, an amount of cash that, together with interest earned on the deposit, will equal the
remaining amounts owing under the variable-rate leases. The deposits, which as at December 31, 2011, totalled $476.1 million, and the lease obligations, which
as at December 31, 2011, totalled $471.4 million, have been swapped for fixed-rate deposits and fixed-rate obligations. Consequently, we are not subject to
interest rate risk from these obligations and deposits and, therefore, the lease obligations, cash deposits and related interest rate swaps have been excluded from
the table above. As at December 31, 2011, the contract amount, fair value and fixed interest rates of these interest rate swaps related to the RasGas II LNG
Carriers capital lease obligations and restricted cash deposits were $423.7 million and $470.2 million, ($119.9) million and $159.6 million, and 4.9% and 4.8%
respectively.
(6) The amount of capital lease obligations represents the present value of minimum lease payments together with our purchase obligation, as applicable (see Item
18 – Financial Statements: Note 10 – Capital Lease Obligations and Restricted Cash).
(7) The average interest rate is the weighted-average interest rate implicit in the capital lease obligations at the inception of the leases.
(8) The average variable receive rate for our interest rate swaps is set monthly at the 1-month LIBOR or EURIBOR, quarterly at the 3-month LIBOR or semi-annually
at the 6-month LIBOR.
80
Commodity Price Risk
From time to time we may use bunker fuel swap contracts relating to a portion of our bunker fuel expenditures. As at December 31, 2011 and 2010,
we had no bunker fuel swap contract commitments.
Spot Tanker Market Rate Risk
In order to reduce variability in revenues from fluctuations in certain spot tanker market rates, from time to time we have e ntered into forward freight
agreements (or FFAs). FFAs involve contracts to move a theoretical volume of freight at fixed-rates, thus attempting to reduce our exposure to spot
tanker market rates. As at December 31, 2011 and 2010, we had no FFAs commitments.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (or the Exchange Act)) that are designed to ensure that (i) information required to be disclosed in our reports that are filed or submitted
under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and (ii) information required to be disclosed by us in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, including the principal executive and principal financial officers, or person s performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
We conducted an evaluation of our disclosure controls and procedures under the supervision and with the participation of the Chief Executive
Officer and Chief Financial Officer. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective as of December 31, 2011.
During 2011, there were no changes in our internal controls that have materially affected, or are reasonably likely to materially affect , our internal
control over financial reporting.
The Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all
fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls
also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining for us adequate internal controls over financial reporting.
Our internal controls are designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and
presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the
United States. Our internal controls 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 our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made in accordance with authorizations of management and the dir ectors; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on
this evaluation.
On November 30, 2011, we acquired the Hummingbird and began consolidating its operations. Please read "Item 18. Financial Statements: Note
3—Acquisition of FPSO Units and Investment in Sevan Marine ASA." Our management has excluded from its evaluation of the effectiveness of our
81
internal control over financial reporting as of December 31, 2011, Hummingbird’s internal control over financial reporting associated with net assets
of $142.8 million and total revenues of $8.4 million included in our consolidated financial statements as of and for the year ended December 31,
2011. Effective November 30, 2011, we consolidated the accounts of the Voyageur pursuant to FASB ASC 810. Please read "Item 18. Financial
Statements: Note 3—Acquisition of FPSO Units and Investment in Sevan Marine ASA." Our management has excluded from its evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2011, Voyageur’s internal control over financial reporting associated
with its related net assets of $172.0 million and total revenues of $1.3 million included in our consolidated financial statements as of and for the year
ended December 31, 2011.
On November 30, 2011, Teekay Offshore acquired the Piranema and began consolidating its operations. Please read "Item 18. Financial
Statements: Note 3—Acquisition of FPSO Units and Investment in Sevan Marine ASA." Our management has excluded from its evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2011, Piranema’s internal control over financial reporting associated
with its related net assets of $166.5 million and total revenues of $4.8 million included in our consolidated financial statements as of and for the year
ended December 31, 2011.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements even w hen determined to be
effective and can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies and procedures may deteriorate. However, based on the evaluation, management believes that we
maintained effective internal control over financial reporting as of December 31, 2011.
Our independent auditors, KPMG LLP, a registered public accounting firm has audited the accompanying consolidated financial statements and our
internal control over financial reporting. Their attestation report on the effectiveness of our internal control over financi al reporting can be found on
page F-2 of this Annual Report.
Item 16A. Audit Committee Financial Expert
The Board has determined that director and Chair of the Audit Committee, Eileen A. Mercier, qualifies as an audit committee financial expert and is
independent under applicable NYSE and SEC standards.
Item 16B. Code of Ethics
We have adopted Standards for Business Conduct that apply to all employees and directors. This document is available under ―Business – About
Teekay – Corporate Governance‖ from the Home Page of our website (www.teekay.com). We also intend to disclose under ―Business – About
Teekay – Corporate Governance‖ in the About Teekay section of our web site any waivers to or amendments of our Standards of Business Conduct
for the benefit of our directors and executive officers.
Item 16C. Principal Accountant Fees and Services
Our principal accountant for 2011 was KPMG LLP, Chartered Accountants, and our principal accountant for 2010 was Ernst & Young LLP,
Chartered Accountants. The following table shows the fees Teekay and our subsidiaries paid or accrued for audit and other services provided by
KPMG LLP and Ernst & Young LLP for 2011 and 2010.
Fees (in thousands of U.S. Dollars)
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total (5)
2011
$3,806
293
73
6
$4,178
2010
$5,802
477
121
11
$6,411
(1)
(2)
(3)
(4)
(5)
Audit fees represent fees for professional services provided in connection with the audits of our consolidated financial statements, reviews of our quarterly
consolidated financial statements and audit services provided in connection with other statutory or regulatory filings for Teekay or our subsidiaries including
professional services in connection with the review of our regulatory filings for public offerings of our subsidiaries. Audit fees for 2011 and 2010 include
approximately $688 thousand and $996 thousand, respectively, of fees paid to KPMG LLP and Ernst & Young LLP by Teekay LNG that were approved by the
Audit Committee of the Board of Directors of the general partner of Teekay LNG. Audit fees for 2011 and 2010 include approximately $1,131 thousand and
$1,380 thousand, respectively, of fees paid to KPMG LLP and Ernst & Young LLP by our subsidiary Teekay Offshore that were approved by the Audit Committee
of the Board of Directors of the general partner of Teekay Offshore. Audit fees for 2011 and 2010 include approximately $477 thousand and $535 thousand,
respectively, of fees paid to KPMG LLP and Ernst & Young LLP by our subsidiary Teekay Tankers that were approved by the Audit Committee of the Board of
Directors of Teekay Tankers.
Audit-related fees consisted primarily of accounting consultations, employee benefit plan audits, services related to business acquisitions, divestitures and other
attestation services.
For 2011 and 2010, tax fees principally included international tax planning fees, corporate tax compliance fees and personal and expatriate tax services fees.
All other fees principally include subscription fees to an internet database of accounting information.
Total fees incurred with respect to KPMG LLP were approximately $2,938 thousand and nil for 2011 and 2010, respectively. Total fees incurred with respect to
Ernst & Young LLP were approximately $1,240 thousand and $6,411 thousand for 2011 and 2010, respectively.
The Audit Committee has the authority to pre-approve audit-related and non-audit services not prohibited by law to be performed by our
independent auditors and associated fees. Engagements for proposed services either may be separately pre-approved by the Audit Committee or
entered into pursuant to detailed pre-approval policies and procedures established by the Audit Committee, as long as the Audit Committee is
82
informed on a timely basis of any engagement entered into on that basis. The Audit Committee separately pre-approved all engagements and fees
paid to our principal accountants in 2011.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In October 2008, we announced that our Board of Directors had authorized the repurchase of up to $200 million of shares of our common stock. As
at December 31, 2011, Teekay had repurchased 5.2 million shares of Common Stock for $162.3 million pursuant to such authorizations. The total
remaining share repurchase authorization at December 31, 2011, was $37.7 million.
Item 16F. Change in Registrant's Certifying Accountant
Ernst & Young LLP was previously the principal accountants for Teekay. In 2011, Teekay decided to seek proposals from several independent
accounting firms, including Ernst & Young LLP, to provide audit and other principal accounting services. On June 1, 2011, we engaged KPMG LLP
as our principal accountants. The decision to change accountants was approved by the Audit Committee and our Board of Directors.
During the two fiscal years ended December 31, 2010, and the subsequent interim period through March 31, 2011, there were no: (1)
disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to
the subject matter of the disagreement, or (2) reportable events.
The audit reports of Ernst & Young LLP on the consolidated financial statements of Teekay as of and for the years ended December 31, 2009 and
2010 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting
principles.
Item 16G. Corporate Governance
The following are the significant ways in which our corporate governance practices differ from those followed by domestic companies:
In lieu of obtaining shareholder approval prior to the adoption of equity compensation plans, the board of directors approves such adoption, as
permitted by New York Stock Exchange rules for foreign private issuers.
There are no other significant ways in which our corporate governance practices differ from those followed by U.S. domestic companies under the
listing requirements of the New York Stock Exchange.
Item 16H. Mine Safety Disclosure
Not applicable.
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
PART III
The following consolidated financial statements and schedule, together with the related reports of KPMG LLP, Independent Registered Public
Accounting Firm thereon, and Ernst & Young LLP, Independent Registered Public Accounting Firm thereon, are filed as part of this Annual Report:
Page
Reports of Independent Registered Public Accounting Firms .................................................................................................................
F-1 to F-3
Consolidated Financial Statements
Consolidated Statements of Income (Loss) ............................................................................................................................................
F-4
Consolidated Statements of Comprehensive Income (Loss) ..................................................................................................................
F-5
Consolidated Balance Sheets ................................................................................................................................................................
F-6
Consolidated Statements of Cash Flows ...............................................................................................................................................
F-7
Consolidated Statements of Changes in Total Equity ............................................................................................................................
F-8
Notes to the Consolidated Financial Statements ...................................................................................................................................
F-9
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required, are inapplicable or have been
disclosed in the Notes to the Consolidated Financial Statements and therefore have been omitted.
83
Item 19. Exhibits
The following exhibits are filed as part of this Annual Report:
1.1
1.2
1.3
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
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
4.15
4.16
Amended and Restated Articles of Incorporation of Teekay Corporation. (15)
Articles of Amendment of Articles of Incorporation of Teekay Corporation. (15)
Amended and Restated Bylaws of Teekay Corporation. (1)
Registration Rights Agreement among Teekay Corporation, Tradewinds Trust Co. Ltd., as Trustee for the Cirrus Trust, and Worldwide
Trust Services Ltd., as Trustee for the JTK Trust. (2)
Specimen of Teekay Corporation Common Stock Certificate. (2)
Indenture dated June 22, 2001 among Teekay Corporation and The Bank of New York Trust Company of Florida (formerly U.S. Trust
Company of Texas, N.A.) for U.S. $250,000,000 8.875% Senior Notes due 2011. (3)
First Supplemental Indenture dated as of December 6, 2001 among Teekay Corporation and The Bank of New York Trust Company of
Florida, N.A. for U.S. $100,000,000 8.875% Senior Notes due 2011. (4)
Exchange and Registration Rights Agreement dated June 22, 2001 among Teekay Corporation and Goldman, Sachs & Co., Morgan
Stanley & Co. Incorporated, Salomon Smith Barney Inc., Deutsche Banc Alex. Brown Inc. and Scotia Capital (USA) Inc. (3)
Exchange and Registration Rights Agreement dated December 6, 2001 between Teekay Corporation and Goldman, Sachs & Co. (4)
Specimen of Teekay Corporation’s 8.875% Senior Notes due 2011. (3)
Indenture dated as of January 27, 2010 among Teekay Corporation and The Bank of New York Mellon Trust Company, N.A. for US
$450,000,000 8.5% Senior Notes due 2020. (16)
1995 Stock Option Plan. (2)
Amendment to 1995 Stock Option Plan. (5)
Amended 1995 Stock Option Plan. (6)
Amended 2003 Equity Incentive Plan.
Annual Executive Bonus Plan. (7)
Vision Incentive Plan. (8)
Form of Indemnification Agreement between Teekay and each of its officers and directors. (2)
Amended Rights Agreement, dated as of July 2, 2010 between Teekay Corporation and The Bank of New York, as Rights Agent. (9)
Agreement dated June 26, 2003 for a U.S. $550,000,000 Secured Reducing Revolving Loan Facility among Norsk Teekay Holdings Ltd.,
Den Norske Bank ASA and various other banks. (10)
Agreement dated September 1, 2004 for a U.S. $500,000,000 Credit Facility Agreement to be made available to Teekay Nordic Holdings
Incorporated by Nordea Bank Finland PLC. (7)
Supplemental Agreement dated September 30, 2004 to Agreement dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing
Revolving Loan Facility among Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks. (7)
Agreement dated May 26, 2005 for a U.S. $550,000,000 Credit Facility Agreement to be made available to Avalon Spirit LLC et al by
Nordea Bank Finland PLC and others. (8)
Agreement dated October 2, 2006, for a U.S. $940,000,000 Secured Reducing Revolving Loan Facility among Teekay Offshore
Operating L.P., Den Norske Bank ASA and various other banks. (11)
Agreement dated August 23, 2006, for a U.S. $330,000,000 Secured Reducing Revolving Loan Facility among Teekay LNG Partners
L.P., ING Bank N.V. and various other banks. (11)
Agreement, dated November 28, 2007 for a U.S. $845,000,000 Secured Reducing Revolving Loan Facility among Teekay Corporation,
Teekay Tankers Ltd., Nordea Bank Finland PLC and various other banks. (12)
Agreement dated May 16, 2007 for a U.S. $700,000,000 Credit Facility Agreement to be made available to Teekay Acquisition Holdings
LLC et al by HSH NordBank AG and others. (13)
Amended and Restated Omnibus Agreement (14)
List of Significant Subsidiaries.
4.17
8.1
12.1 Rule 13a-14(a)/15d-14(a) Certification of Teekay’s Chief Executive Officer.
12.2 Rule 13a-14(a)/15d-14(a) Certification of Teekay’s Chief Financial Officer.
13.1
13.2
Teekay Corporation Certification of Peter Evensen, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Teekay Corporation Certification of Vincent Lok, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
23.1 Consent of KPMG LLP, as independent registered public accounting firm.
23.2 Consent of Ernst & Young LLP, as former independent registered public accounting firm.
(1)
(2)
(3)
(4)
(5)
Previously filed as an exhibit to the Company’s Report on Form 6-K (File No.1-12874), filed with the SEC on August 31, 2011, and hereby
incorporated by reference to such Report.
Previously filed as an exhibit to the Company’s Registration Statement on Form F-1 (Registration No. 33-7573-4), filed with the SEC on July
14, 1995, and hereby incorporated by reference to such Registration Statement.
Previously filed as an exhibit to the Company’s Registration Statement on Form F-4 (Registration No. 333-64928), filed with the SEC on July
11, 2001, and hereby incorporated by reference to such Registration Statement.
Previously filed as an exhibit to the Company’s Registration Statement on Form F-4 (Registration No. 333-76922), filed with the SEC on
January 17, 2002, and hereby incorporated by reference to such Registration Statement.
Previously filed as an exhibit to the Company’s Form 6-K (File No.1-12874), filed with the SEC on May 2, 2000, and hereby incorporated by
reference to such Report.
84
(6)
(7)
(8)
(9)
Previously filed as an exhibit to the Company’s Annual Report on Form 20-F (File No.1-12874), filed with the SEC on April 2, 2001, and
hereby incorporated by reference to such Annual Report.
Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 8, 2005, and hereby
incorporated by reference to such Report.
Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 10, 2006, and hereby
incorporated by reference to such Report.
Previously filed as an exhibit to the Company’s Form 8-A/A (File No.1-12874), filed with the SEC on July 2, 2010, and hereby incorporated by
reference to such Annual Report.
(10) Previously filed as an exhibit to the Company’s Report on Form 6-K (File No. 1-12874), filed with the SEC on August 14, 2003, and hereby
incorporated by reference to such Report.
(11) Previously filed as an exhibit to the Company’s Report on Form 6-K (File No. 1-12874), filed with the SEC on December 21, 2006, and
hereby incorporated by reference to such Report.
(12) Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 11, 2008, and hereby
incorporated by reference to such Report.
(13) Previously filed as an exhibit to the Company’s Schedule TO – T/A, filed with the SEC on May 18, 2007, and hereby incorporated by
reference to such schedule.
(14) Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 19, 2007, and hereby
incorporated by reference to such Report.
(15) Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 7, 2009, and hereby
incorporated by reference to such Report.
(16) Previously filed as an exhibit to the Company’s Report on Form 6-K (File No. 1-12874), filed with the SEC on January 27, 2010, and hereby
incorporated by reference to such Report.
85
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.
SIGNATURE
TEEKAY CORPORATION
By: /s/ Vincent Lok
Vincent Lok
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: April 25, 2012
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
TEEKAY CORPORATION
We have audited the accompanying consolidated balance sheet of Teekay Corporation and subsidiaries (the ―Company‖) as of December 31, 2011,
and the related consolidated statements of income (loss), comprehensive income (loss), cash flows and changes in total equity for the year then
ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The accompanying consolidated financial statements of Teekay Corporation as of
December 31, 2010 and for the years ended December 31, 2010 and 2009, were audited by other auditors whose report thereon dated April 13,
2011, expressed an unqualified opinion on those statements.
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 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 audit provides a reasonable basis for our opinion.
In our opinion, the 2011 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally
accepted accounting principles.
We also have 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, 2011, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 25, 2012, expressed an unqualified opinion on
the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
April 25, 2012
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
TEEKAY CORPORATION
We have audited Teekay Corporation and subsidiaries ("the Company")’s internal control over financial reporting as of December 31, 2011, based
on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). 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 Management’s Report on Internal Control over Financial
Reporting in the accompanying Form 20-F. 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, and testing and evaluating the design and operating effectiveness of internal control based on th e assessed risk. Our
audit also included 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 to provide reasonable assurance regarding the rel iability 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 U.S. generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of manage ment 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that 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, 2011 based
on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
The Company acquired the FPSO Units and the Investment in Sevan Marine ASA (note 3) during 2011, and management excluded from its
assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011, these acquired businesses
internal control over financial reporting associated with net assets of $481.3 million and total revenues of $14.5 million included in the consolidated
financial statements of the Company as of and for the year ended December 31, 2011. Our audit of internal control over financial reporting of the
Company also excluded an evaluation of the internal control over financial reporting of these acquired businesses.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of the Company as at December 31, 2011, and the related consolidated statements of income (loss), comprehensive income (loss),
cash flows and changes in total equity for the year then ended, and our report dated April 25, 2012 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
April 25, 2012
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TEEKAY CORPORATION
We have audited the accompanying consolidated balance sheet of Teekay Corporation and subsidiaries (the ―Company‖) as of December 31,
2010, and the related consolidated statements of income (loss), changes in total equity, cash flows and comprehensive income (loss) for each of the
two years in the period ended December 31, 2010. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financi al position of Teekay
Corporation and subsidiaries as at December 31, 2010, and the consolidated results of their operations and their cash flows for each of the two
years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
Vancouver, Canada,
April 13, 2011
/s/ ERNST & YOUNG LLP
Chartered Accountants
F - 3
TEEKAY CORPORATION AND SUBSIDIARIES (NOTE 1)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands of U.S. dollars, except share amounts)
Year ended
December 31,
Year ended
December 31,
Year ended
December 31,
2011
$
2010
$
2009
$
REVENUES
1,953,782
2,095,753
2,181,605
OPERATING EXPENSES
Voyage expenses
Vessel operating expenses (note 15)
Time-charter hire expense
Depreciation and amortization
General and administrative (notes 12 and 15)
Asset impairments and net loss on sale of vessels and equipment (notes 6 and 18)
Bargain purchase gain (note 3)
Goodwill impairment charge (note 6)
Restructuring charges (note 20)
Total operating expenses
176,614
677,687
214,179
428,608
223,616
151,059
(58,235)
36,652
5,490
245,097
630,547
285,992
440,705
193,743
49,150
-
-
16,396
294,091
615,764
438,877
437,176
198,836
12,629
-
-
14,444
1,855,670
1,861,630
2,011,817
Income from vessel operations
98,112
234,123
169,788
OTHER ITEMS
Interest expense
Interest income
Realized and unrealized (loss) gain on non-designated derivative instruments (note 15)
Equity (loss) income (notes 18b and 23)
Foreign exchange gain (loss) (notes 8 and 15)
Loss on notes repurchase (note 8)
Other income (note 14)
Net (loss) income before income taxes
Income tax (expense) recovery (note 21)
Net (loss) income
Less: Net loss (income) attributable to non-controlling interests
Net (loss) income attributable to stockholders of Teekay Corporation
Per common share of Teekay Corporation (note 19)
• Basic (loss) earnings attributable to stockholders of Teekay Corporation
• Diluted (loss) earnings attributable to stockholders of Teekay Corporation
• Cash dividends declared
Weighted average number of common shares outstanding (note 19)
• Basic
• Diluted
The accompanying notes are an integral part of the consolidated financial statements.
(137,604)
10,078
(342,722)
(35,309)
12,654
-
12,360
(382,431)
(4,290)
(386,721)
17,805
(368,916)
(136,107)
12,999
(299,598)
(11,257)
31,983
(12,645)
7,527
(172,975)
6,340
(166,635)
(100,652)
(267,287)
(141,448)
19,999
140,046
52,242
(20,922)
(566)
13,527
232,666
(22,889)
209,777
(81,365)
128,412
(5.25)
(5.25)
1.2650
(3.67)
(3.67)
1.2650
1.77
1.76
1.2650
70,234,817
72,862,617
72,549,361
70,234,817
72,862,617
73,058,831
F - 4
TEEKAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands of U.S. dollars)
Year Ended
December 31,
2011
$
Year Ended
December 31,
2010
$
Year Ended
December 31,
2009
$
Net (loss) income
(386,721)
(166,635)
209,777
Other comprehensive (loss) income:
Unrealized (loss) gain on marketable securities
Realized gain on marketable securities
Pension adjustments, net of taxes
Unrealized gain (loss) on qualifying cash flow hedging instruments
Realized (gain) loss on qualifying cash flow hedging instruments
Other comprehensive (loss) income
Comprehensive (loss) income
Less: Comprehensive loss (income) attributable to non-controlling interests
Comprehensive (loss) income attributable to stockholders of Teekay
Corporation
(4,357)
(3,372)
(5,402)
2,019
(5,566)
(16,678)
(403,399)
18,751
2,333
(1,097)
(7,245)
(3,559)
3,040
(6,528)
(173,163)
(100,761)
5,837
-
13,044
45,994
24,647
89,522
299,299
(90,360)
(384,648)
(273,924)
208,939
F - 5
TEEKAY CORPORATION AND SUBSIDIARIES (NOTE 1)
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
ASSETS
Current
Cash and cash equivalents (note 8)
Restricted cash (note 10)
Accounts receivable, including non-trade of $38,120 (2010 - $35,960) and related party balance
of $3,487 (2010 - $nil)
Vessels held for sale (notes 11 and 18)
Net investment in direct financing leases (note 9)
Prepaid expenses
Current portion of derivative assets (note 15)
Other assets
Total current assets
Restricted cash - non-current (note 10)
Vessels and equipment (note 8)
At cost, less accumulated depreciation of $2,375,604 (2010 - $1,997,411)
Vessels under capital leases, at cost, less accumulated amortization of $163,939 (2010 – $172,113 ) (note 10)
Advances on newbuilding contracts (note 16a)
Total vessels and equipment
Net investment in direct financing leases - non-current (note 9)
Marketable securities
Loans to equity accounted investees and joint venture partners, bearing interest between 4.4% to 8.0%
Derivative assets (note 15)
Deferred income tax asset (note 21)
Equity accounted investments (notes 16b, 18b and 23)
Investment in term loans (note 4)
Other non-current assets
Intangible assets – net (note 6)
Goodwill (note 6)
As at
As at
December 31, 2011 December 31, 2010
$
$
692,127
4,370
353,659
19,000
23,171
93,045
24,712
2,672
779,748
86,559
256,496
-
26,791
83,915
27,215
2,616
1,212,756
1,263,340
495,784
489,712
6,678,899
681,554
507,908
7,868,361
436,737
7,782
85,248
140,557
22,316
252,637
186,844
119,093
136,742
166,539
5,692,812
880,576
197,987
6,771,375
460,725
21,380
32,750
55,983
17,001
207,633
116,014
117,351
155,893
203,191
Total assets
11,131,396
9,912,348
LIABILITIES AND EQUITY
Current
Accounts payable
Accrued liabilities (note 7)
Current portion of derivative liabilities (note 15)
Current portion of long-term debt (note 8)
Current obligation under capital leases (note 10)
Current portion of in-process revenue contracts (note 6)
Loans from equity accounted investees
Total current liabilities
Long-term debt, including amounts due to joint venture partners of $13,282 (2010 - $13,282) (note 8)
Long-term obligation under capital leases (note 10)
Derivative liabilities (note 15)
Asset retirement obligation
In-process revenue contracts (note 6)
Other long-term liabilities (note 21)
97,084
394,586
117,337
401,376
47,203
73,344
-
1,130,930
5,042,997
599,844
569,542
21,150
235,296
199,836
46,240
377,119
144,111
276,508
267,382
43,469
59
1,154,888
4,155,556
470,752
387,124
23,018
152,637
194,640
Total liabilities
Commitments and contingencies (notes 9, 10, 15 and 16)
7,799,595
6,538,615
Redeemable non-controlling interest (note 16e)
38,307
41,725
Equity
Common stock and additional paid-in capital ($0.001 par value; 725,000,000 shares authorized; 68,732,341
shares outstanding (2010 - 72,012,843); 74,391,691 shares issued (2010 - 73,749,793)) (note 12)
Retained earnings
Non-controlling interest
Accumulated other comprehensive loss (note 1)
Total equity
Total liabilities and equity
Consolidation of variable interest entities (note 3)
The accompanying notes are an integral part of the consolidated financial statements
660,917
792,682
1,863,798
(23,903)
672,684
1,313,934
1,353,561
(8,171)
3,293,494
3,332,008
11,131,396
9,912,348
F - 6
TEEKAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net (loss) income
Non-cash items:
Depreciation and amortization
Amortization of in-process revenue contracts (note 6)
Gain on sale of marketable securities
Gain on sale of vessels and equipment
Write-down of intangibles and other
Write-down for impairment of goodwill
Write-down of equity accounted investments (note 18b)
Write-down of vessels and equipment
Bargain purchase gain (note 3)
Loss on repurchase of notes
Equity loss (income), net of dividends received
Income tax expense(recovery)
Employee stock option compensation
Unrealized foreign exchange (gain) loss
Unrealized loss (gain) on derivative instruments
Other
Change in operating assets and liabilities (note 17a)
Expenditures for dry docking
Net operating cash flow
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt (note 8)
Debt issuance costs
Scheduled repayments of long-term debt
Prepayments of long-term debt
Repayments of capital lease obligations
Proceeds from loans to equity accounted investees
Repayment of loans from equity accounted investees
Decrease in restricted cash (note 10)
Net proceeds from issuance of Teekay LNG Partners L.P. units (note 5)
Net proceeds from issuance of Teekay Offshore Partners L.P. units (note 5)
Net proceeds from issuance of Teekay Tankers Ltd. shares (note 5)
Issuance of Common Stock upon exercise of stock options
Repurchase of Common Stock
Distribution paid from subsidiaries to non-controlling interests
Cash dividends paid
Year Ended
December 31,
2011
$
Year Ended
December 31,
2010
$
Year Ended
December 31,
2009
$
(386,721)
(166,635)
209,777
428,608
(46,436)
(2,906)
(4,861)
-
36,652
19,411
155,920
(58,235)
-
31,376
4,290
16,262
(11,614)
70,822
(5,408)
(84,347)
(55,620)
107,193
2,114,879
(10,634)
(449,640)
(881,207)
(89,145)
-
(59)
73,105
334,101
189,722
107,234
5,906
(122,195)
(201,942)
(93,480)
440,705
(48,254)
(1,805)
(2,012)
31,730
-
-
19,432
-
12,645
11,257
(6,340)
15,264
(21,427)
140,187
(929)
45,415
(57,483)
411,750
1,769,742
(14,471)
(210,025)
(1,536,587)
(38,958)
1,182
(1,235)
30,291
50,000
392,944
202,698
5,735
(40,111)
(159,808)
(92,695)
437,176
(75,977)
-
(27,683)
16,105
-
-
24,221
-
566
(49,299)
22,889
11,255
16,605
(293,174)
5,140
148,655
(78,005)
368,251
1,194,037
(11,745)
(156,315)
(1,583,852)
(37,248)
649
(24,140)
38,953
158,996
102,009
65,556
2,007
-
(109,942)
(91,747)
Net financing cash flow
976,645
358,702
(452,782)
INVESTING ACTIVITIES
Expenditures for vessels and equipment
Proceeds from sale of vessels and equipment
Proceeds from sale of marketable securities
Acquisition, net of cash acquired of $50,230 (note 3)
Investment in term loans (note 4)
Investment in equity accounted investees (note 23)
Advances to equity accounted investees
Investment in direct financing lease assets
Direct financing lease payments received
Other investing activities
(755,045)
33,424
8,774
(322,500)
(70,000)
(38,496)
(55,156)
-
27,608
(68)
(343,091)
70,958
565
-
(115,575)
(45,480)
(5,447)
(886)
25,782
(40)
(495,214)
219,834
-
-
-
(7,426)
(1,369)
(25,526)
1,084
1,493
Net investing cash flow
(1,171,459)
(413,214)
(307,124)
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Supplemental cash flow information (note 17)
The accompanying notes are an integral part of the consolidated financial statements
F - 7
(87,621)
779,748
692,127
357,238
422,510
779,748
(391,655)
814,165
422,510
TEEKAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
(in thousands of U.S. dollars)
TOTAL EQUITY
Thousands
of Shares
of Common
Stock
Outstanding
#
Common
Stock and
Additional
Paid-in
Capital
$
Accumulated Other
Comprehensive
Income
(Loss)
$
Retained
Earnings
$
Non-controlling
Interest
$
Total
$
Balance as at December 31, 2008
72,512
642,911
1,507,617
(82,061)
583,938
2,652,405
Net income
Other comprehensive income (loss)
Dividends declared
Reinvested dividends
Exercise of stock options
Employee stock option compensation (note 12)
Dilution gains on public offerings of Teekay LNG, Teekay
Offshore and Teekay Tankers (note 5)
Addition of non-controlling interest from unit and share
issuances of subsidiaries and other
Balance as at December 31, 2009
Net (loss) income
Other comprehensive income (loss)
Dividends declared
Reinvested dividends
Exercise of stock options and other
Repurchase of Common Stock (note 12)
Employee stock option compensation and other (note 12)
Dilution gains on public offerings of Teekay Offshore and
Teekay Tankers and unit issuances of Teekay LNG (note 5)
Dilution loss on initiation of majority owned subsidiary (note 16e)
Addition of non-controlling interest from share and unit
issuances of subsidiaries and other
Balance as at December 31, 2010
Net loss
Other comprehensive income (loss)
Dividends declared
Reinvested dividends
Exercise of stock options and other
Repurchase of Common Stock (note 12)
Employee stock option compensation and other (note 12)
Dilution gains on public offerings of Teekay LNG and Teekay
Tankers and unit issuances of Teekay Offshore (note 5)
Sale of 49% interest of OPCO to Teekay Offshore (note 5)
Acquisition of Voyageur FPSO unit (note 3)
Addition of non-controlling interest from share and unit
issuances of subsidiaries and other
Balance as at December 31, 2011
128,412
(91,767)
80,527
81,365
8,995
(109,942)
2
180
20
2,007
11,255
41,169
209,777
89,522
(201,709)
20
2,007
11,255
41,169
72,694
656,193
1,585,431
(1,534)
291,224
855,580
291,224
3,095,670
2
555
(1,238)
41
5,735
(10,610)
21,325
(267,287)
(92,736)
(29,501)
123,203
(5,176)
(6,637)
99,854
109
(159,808)
(2,256)
(167,433)
(6,528)
(252,544)
41
5,735
(40,111)
21,325
123,203
(7,432)
72,013
672,684
1,313,934
(8,171)
560,082
1,353,561
560,082
3,332,008
1
641
(3,923)
9
5,906
(33,944)
16,262
(368,916)
(93,489)
(88,251)
124,247
(94,843)
(15,732)
(24,406)
(946)
(201,942)
94,843
144,600
(393,322)
(16,678)
(295,431)
9
5,906
(122,195)
16,262
124,247
-
144,600
68,732
660,917
792,682
(23,903)
498,088
1,863,798
498,088
3,293,494
The accompanying notes are an integral part of the consolidated financial statements
F - 8
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
1. Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (or GAAP). They
include the accounts of Teekay Corporation (or Teekay), which is incorporated under the laws of The Republic of the Marshall Islands, and its
wholly-owned or controlled subsidiaries (collectively, the Company). Significant intercompany balances and transactions have been eliminated
upon consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affe ct
the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Gi ven the
current credit markets, it is possible that the amounts recorded as derivative assets and liabilities could vary by material amounts.
Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period, relating to the
reclassification of revenues of $26.9 million and $9.6 million for the years ended December 31, 2010 2009, respectively, from time-charter hire
expense to revenues, and the reclassification of certain crew training expenses of $13.6 million for the year ended December 31, 2009 from
general and administrative expenses to vessel operating expenses in the consolidated statements of income (loss) and the reclassification of
accounts receivable of $11.6 million as at December 31, 2010 from prepaid expenses to accounts receivable and accounts payable in the
consolidated balance sheets.
Reporting currency
The consolidated financial statements are stated in U.S. Dollars. The functional currency of the Company is the U.S. Dollar because the
Company operates in the international shipping market, which typically utilizes the U.S. Dollar as the functional currency. Transactions involving
other currencies during the year are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. At the
balance sheet date, monetary assets and liabilities that are denominated in currencies other than the U.S. Dollar are translated to reflect the
year-end exchange rates. Resulting gains or losses are reflected separately in the accompanying consolidated statements of income (loss).
Operating revenues and expenses
The Company recognizes revenues from time-charters and bareboat charters daily over the term of the charter as the applicable vessel
operates under the charter. The Company does not recognize revenue during days that the vessel is off hire. When the time-charter contains a
profit-sharing agreement, the Company recognizes the profit-sharing or contingent revenue only after meeting the profit sharing or other
contingent threshold. All revenues from voyage charters are recognized on a percentage of completion method. The Company uses a
discharge-to-discharge basis in determining percentage of completion for all spot voyages and voyages servicing contracts of affreightment ,
whereby it recognizes revenue ratably from when product is discharged (unloaded) at the end of one voyage to when it is discharged after the
next voyage. The Company does not begin recognizing revenue until a charter has been agreed to by the customer and the Company, even if
the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. Shuttle tanker voyages servicing contracts of
affreightment with offshore oil fields commence with tendering of notice of readiness at a field, within the agreed lifting range, and ends with
tendering of notice of readiness at a field for the next lifting. Revenues from floating production, storage and off-take (or FPSO) service
contracts are recognized as service is performed. Certain of the Company’s FPSO units receive incentive-based revenue, which is recognized
when earned by fulfillment of the applicable performance criteria. The consolidated balance sheets reflect the deferred porti on of revenues and
expenses, which will be earned in subsequent periods.
Revenues and voyage expenses of the Company’s vessels operating in pool arrangements with unrelated parties are pooled with the revenues
and voyage expenses of other pool participants. The resulting net pool revenues, calculated on the time-charter-equivalent basis, are allocated
to the pool participants according to an agreed formula. The Company accounts for the net allocation from the pool as revenues and amounts
due from the pool are included in accounts receivable.
Voyage expenses are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading
expenses, canal tolls, agency fees and commissions. Vessel operating expenses include crewing, repairs and maintenance, insurance, stores,
lube oils and communication expenses. Voyage expenses and vessel operating expenses are recognized when incurred.
Cash and cash equivalents
The Company classifies all highly liquid investments with a maturity date of three months or less at inception as cash equivalents.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best
estimate of the amount of probable credit losses in existing accounts receivable. The Company determines the allowance based on historical
write-off experience and customer economic data. The Company reviews the allowance for doubtful accounts regularly and past due bal ances
are reviewed for collectability. Account balances are charged off against the allowance when the Company believes that the receivable will not
be recovered. There were no significant amounts recorded as allowance for doubtful accounts as at December 31, 2011, 2010, and 2009.
F - 9
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Marketable securities
The Company's investments in marketable securities are classified as available-for-sale securities and are carried at fair value. Net unrealized
gains and losses on available-for-sale securities are reported as a component of accumulated other comprehensive income (loss). Realized
gains and losses on available-for-sale securities are computed based upon the historical cost of these securities applied using the weighted-
average historical cost method.
The Company analyzes its available-for-sale securities for impairment during each reporting period to evaluate whether an event or change in
circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investment. The Company records
an impairment charge through current-period earnings and adjusts the cost basis for such other-than-temporary declines in fair value when the
fair value is not anticipated to recover above cost within a three-month period after the measurement date, unless there are mitigating factors
that indicate an impairment charge through earnings may not be required. If an impairment charge is recorded, subsequent recoveries in fair
value are not reflected in earnings until sale of the security.
Vessels and equipment
All pre-delivery costs incurred during the construction of newbuildings, including interest, supervision and technical costs, are capitalized. The
acquisition cost and all costs incurred to restore used vessels purchased by the Company to the standard required to properly service the
Company's customers are capitalized.
Depreciation is calculated on a straight-line basis over a vessel's estimated useful life, less an estimated residual value. Depreciation is
calculated using an estimated useful life of 25 years for crude oil tankers, 20 to 30 years for FPSO units and 35 years for liquefied natural gas
(or LNG) and liquefied petroleum gas (or LPG) carriers, commencing the date the vessel is delivered from the shipyard, or a shorter period if
regulations prevent the Company from operating the vessels for 25 years or 35 years, respectively. Depreciation includes depreciation on all
owned vessels and amortization of vessels accounted for as capital leases. Depreciation of vessels and equipment, excluding amortization of
dry docking expenditures, for the years ended December 31, 2011, 2010 and 2009 aggregated $356.0 million, $355.5 million and $362.3
million, respectively. Amortization of vessels accounted for as capital leases was $34.7 million, $33.5 million and $31.6 million for the years
ended December 31, 2011, 2010 and 2009, respectively.
Vessel capital modifications include the addition of new equipment or can encompass various modifications to the vessel that are aimed at
improving or increasing the operational efficiency and functionality of the asset. This type of expenditure is amortized over the estimated useful
life of the modification. Expenditures covering recurring routine repairs and maintenance are expensed as incurred.
Interest costs capitalized to vessels and equipment for the years ended December 31, 2011, 2010, and 2009, aggregated $8.1 million, $14.0
million and $14.0 million, respectively.
Generally, the Company dry docks each vessel every two and a half to five years. The Company capitalizes a substantial portion of the costs
incurred during dry docking and amortizes those costs on a straight-line basis over their estimated useful life, which typically is from the
completion of a dry docking or intermediate survey to the estimated completion of the next dry docking. The Company includes in capitalized
dry docking those costs incurred as part of the dry dock to meet classification and regulatory requirements. The Company expenses costs
related to routine repairs and maintenance performed during dry docking, and for annual class survey costs on the Company’s FPSO units.
Dry docking activity for the three years ended December 31, 2011, 2010, and 2009, is summarized as follows:
Balance at the beginning of the year
Costs incurred for dry docking
Dry dock amortization
Balance at the end of the year
2011
$
143,103
60,484
(74,600)
128,987
Year ended December 31,
2010
$
172,053
57,156
(86,106)
143,103
2009
$
154,613
79,482
(62,042)
172,053
Vessels and equipment that are ―held and used‖ are assessed for impairment when events or circumstances indicate the carrying amount of
the asset may not be recoverable. If the asset’s net carrying value exceeds the net undiscounted cash flows expected to be generated over its
remaining useful life, the carrying amount of the asset is reduced to its estimated fair value. Estimated fair value is determined based on
discounted cash flows or appraised values depending on the nature of the asset.
Gains on vessels sold and leased back under capital leases are deferred and amortized over the remaining term of the capital lease. Losses on
vessels sold and leased back under capital leases are recognized immediately when the fair value of the vessel at the time of sale and lease-
back is less than its book value. In such case, the Company would recognize a loss in the amount by which book value exceeds fair value.
Direct financing leases and other loan receivables
The Company employs (i) two vessels on long-term time charters, (ii) a floating storage and off-take (or FSO) unit, and (iii) assembles, installs,
operates and leases equipment that reduces volatile organic compound emissions (or VOC Equipment) during loading, transportation and
storage of oil and oil products, all of which are accounted for as direct financing leases. The lease payments received by the Company under
F - 10
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
these lease arrangements are allocated between the net investments in the leases and revenues or other income using the effective interest
method so as to produce a constant periodic rate of return over the lease terms.
The Company’s investments in loan receivables are recorded at cost. The premium paid over the outstanding principal amount, if any, is
amortized to interest income over the term of the loan using the effective interest rate method. The Company analyzes its loans for impairment
during each reporting period. A loan is impaired when, based on current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan agreement. Factors the Company considers in determining that a loan
is impaired include, among other things, an assessment of the financial condition of the debtor, payment history of the debtor, general
economic conditions, the credit rating of the debtor, and any information provided by the debtor regarding its ability to repay the loan. When a
loan is impaired, the Company measures the amount of the impairment based on the present value of expected future cash flows discounted at
the loan's effective interest rate and recognizes the resulting impairment in the consolidated statement of income (loss).
The following table contains a summary of the Company’s financing receivables by type of borrower and the method by which the Company
monitors the credit quality of its financing receivables on a quarterly basis.
Class of Financing Receivable
Credit Quality
Indicator
Grade
December 31,
2011
$
December 31,
2010
$
Direct financing leases
Other loan receivables
Investment in term loans and interest
receivable
Loans to joint ventures and joint venture
partners(1)
Payment activity
Performing
459,908
487,516
Collateral
Performing
188,616
Other internal metrics
Performing
36,002
786
685,312
117,825
33,932
410
639,683
Long-term receivable included in other
Payment activity
Performing
assets
(1) The Company’s subsidiary Teekay LNG Partners L.P. (or Teekay LNG) owns a 99% interest in Teekay Tangguh Borrower LLC (or Teekay Tangguh), which
owns a 70% interest in Teekay BLT Corporation (or Teekay Tangguh Subsidiary). Subsequent to December 31, 2011, one of Teekay LNG’s joint venture
partner’s parent company, PT Berlian Laju Tanker (or BLT), suspended trading on the Jakarta Stock Exchange, and filed for bankruptcy protection in order to
restructure its debts. The Company believes the loans to BLT and Teekay LNG’s joint venture partner, BLT LNG Tangguh Corporation, totaling $19.1 million
as at December 31, 2011 (2010 - $20.2 million) are still collectible given the expected cash flows anticipated to be generated by the Teekay Tangguh
Subsidiary that can be used to repay the loan and given the underlying collateral securing the loans to BLT.
Joint ventures
The Company’s investments in joint ventures are accounted for using the equity method of accounting. Under the equity method of accounting,
investments are stated at initial cost and are adjusted for subsequent additional investments and the Company’s proportionate share of
earnings or losses and distributions. The Company evaluates its investments in joint ventures for impairment when events or circumstances
indicate that the carrying value of such investments may have experienced an other than temporary decline in value below their carrying value.
If the estimated fair value is less than the carrying value and is considered an other than temporary decline, the carrying value is written down
to its estimated fair value and the resulting impairment is recorded in the consolidated statement of income (loss).
Debt issuance costs
Debt issuance costs, including fees, commissions and legal expenses, are deferred and presented as other non-current assets. Debt issuance
costs of revolving credit facilities are amortized on a straight-line basis over the term of the relevant facility. Debt issuance costs of term loans
are amortized using the effective interest rate method over the term of the relevant loan. Amortization of debt issuance costs is included in
interest expense.
Derivative instruments
All derivative instruments are initially recorded at fair value as either assets or liabilities in the accompanying consolidated balance sheet and
subsequently remeasured to fair value, regardless of the purpose or intent for holding the derivative. The method of recognizing the resulting
gain or loss is dependent on whether the derivative contract is designed to hedge a specific risk and whether the contract qu alifies for hedge
accounting. The Company generally does not apply hedge accounting to its derivative instruments, except for certain foreign exchange
currency contracts (See Note 15).
When a derivative is designated as a cash flow hedge, the Company formally documents the relationship between the derivative and the
hedged item. This documentation includes the strategy and risk management objective for undertaking the hedge and the method that will be
used to assess the effectiveness of the hedge. Any hedge ineffectiveness is recognized immediately in earnings, as are any gains and losses
on the derivative that are excluded from the assessment of hedge effectiveness. The Company does not apply hedge accounting if it is
determined that the hedge was not effective or will no longer be effective, the derivative was sold or exercised, or the hedged item was sold or
repaid.
F - 11
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
For derivative financial instruments designated and qualifying as cash flow hedges, changes in the fair value of the effective portion of the
derivative financial instruments are initially recorded as a component of accumulated other comprehensive income (loss) in total equity. In the
periods when the hedged items affect earnings, the associated fair value changes on the hedging derivatives are transferred from total equity to
the corresponding earnings line item in the consolidated statement of income (loss). The ineffective portion of the change in fair value of the
derivative financial instruments is immediately recognized in earnings in the consolidated statement of income (loss). If a cash flow hedge is
terminated and the originally hedged item is still considered possible of occurring, the gains and losses initially recognized in total equity remain
there until the hedged item impacts earnings, at which point they are transferred to the corresponding earnings line item (e.g. general and
administrative expense) item in the consolidated statement of income (loss). If the hedged items are no longer possible of occurring, amounts
recognized in total equity are immediately transferred to the earnings item in the consolidated statement of income (loss).
For derivative financial instruments that are not designated or that do not qualify as hedges under FASB ASC 815, Derivatives and Hedging,
the changes in the fair value of the derivative financial instruments are recognized in earnings. Gains and losses from the Company’s non-
designated interest rate swaps related to long-term debt, capital lease obligations, restricted cash deposits, non-designated bunker fuel swap
contracts and forward freight agreements, and non-designated foreign exchange currency forward contracts are recorded in realized and
unrealized gain (loss) on non-designated derivative instruments. Gains and losses from the Company’s hedge accounted foreign currency
forward contracts are recorded primarily in vessel operating expenses and general and administrative expense. Gains and losses from the
Company’s non-designated cross currency swap are recorded in foreign currency exchange (loss) gain in the consolidated statements of
income (loss).
Goodwill and intangible assets
Goodwill and indefinite-lived intangible assets are not amortized, but reviewed for impairment annually or more frequently if impairment
indicators arise. A fair value approach is used to identify potential goodwill impairment and, when necessary, measure the am ount of
impairment. The Company uses a discounted cash flow model to determine the fair value of reporting units, unless there is a r eadily
determinable fair market value. Reporting units may be operating segments as a whole or an operation one level below an operating segment,
referred to as a component. Intangible assets with finite lives are amortized over their useful lives. Intangible assets with finite lives are
assessed for impairment when and if impairment indicators exist. An impairment loss is recognized if the carrying amount of an intangible asset
is not recoverable and its carrying amount exceeds its fair value.
The Company’s intangible assets consist primarily of acquired time-charter contracts and contracts of affreightment. The value ascribed to the
time-charter contracts and contracts of affreightment are being amortized over the life of the associated contract, with the amount amortized
each year being weighted based on the projected revenue to be earned under the contracts.
Asset retirement obligation
The Company has an asset retirement obligation (or ARO) relating to the sub-sea production facility associated with the Petrojarl Banff FPSO
unit operating in the North Sea. This obligation generally involves restoration of the environment surrounding the facility and removal and
disposal of all production equipment. This obligation is expected to be settled at the end of the contract under which the FPSO unit currently
operates, which is anticipated no later than 2018. The ARO will be covered in part by contractual payments from FPSO contract counterparties.
The Company records the fair value of an ARO as a liability in the period when the obligation arises. The fair value of the ARO is measured
using expected future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate. When the liability is recorded, the
Company capitalizes the cost by increasing the carrying amount of the related equipment. Each period, the liability is increased for the change
in its present value, and the capitalized cost is depreciated over the useful life of the related asset. Changes in the amount or timing of the
estimated ARO are recorded as an adjustment to the related asset and liability. As at December 31, 2011, the ARO and associated receivable
which is recorded in other non-current assets from third parties were $21.2 million and $6.1 million, respectively (2010 - $23.0 million and $6.8
million, respectively).
Repurchase of common stock
The Company accounts for repurchases of common stock by decreasing common stock by the par value of the stock repurchased. In addition,
the excess of the repurchase price over the par value is allocated between additional paid in capital and retained earnings. The amount
allocated to additional paid in capital is the pro-rata share of the capital paid in and the balance is allocated to retained earnings.
Issuance of shares or units by subsidiaries
The Company accounts for dilution gains or losses from the issuance of shares or units by its publicly listed subsidiaries as an adjustment to
retained earnings.
Share-based compensation
The Company grants stock options, restricted stock units, performance share units and restricted stock awards as incentive-based
compensation to certain employees and directors. The Company measures the cost of such awards using the grant date fair value of the award
and recognizes that cost, net of estimated forfeitures, over the requisite service period, which generally equals the vesting period. For stock-
based compensation awards subject to graded vesting, the Company calculates the value for the award as if it was one single award with one
expected life and amortizes the calculated expense for the entire award on a straight-line basis over the vesting period of the award.
F - 12
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Compensation cost for awards with performance conditions is recognized when it is probable that the performance condition will be achieved.
The compensation cost of the Company’s stock-based compensation awards are substantially reflected in general and administrative expense.
In 2005, the Company adopted the Vision Incentive Plan (or the VIP) to reward exceptional corporate performance and shareholder returns.
This plan was designed to result in an award pool for senior management based on the following two measures: (a) economic profit from 2005
to 2010; and (b) market value added from 2001 to 2010. In March 2008, an interim distribution was made to certain participants with a value of
$13.3 million, paid in restricted stock units, with vesting of the interim distribution in three equal amounts on November 20 08, November 2009
and November 2010. In September 2009, 187,400 restricted stock units, with two-year bullet vesting, were granted as the June 2009 New
Participants Reserve Pool allocation under the VIP. The Plan terminated on December 31, 2010 and no final award was granted to participants.
During the year ended December 31, 2011, the Company recorded an expense from the VIP of $1.3 million ($2.4 million – 2010 and $0.6
million – 2009), which is included in general and administrative expense. As at December 31, 2011 and 2010, there was no VIP liability.
Income taxes
The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are recognized
for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of the Company’s assets
and liabilities using the applicable jurisdictional tax rates. A valuation allowance for deferred tax assets is recorded when it is more likely than
not that some or all of the benefit from the deferred tax asset will not be realized.
Recognition of uncertain tax positions is dependent upon whether it is more-likely-than-not that a tax position taken or expected to be taken in a
tax return will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits
of the position. If a tax position meets the more-likely-than-not recognition threshold, it is measured to determine the amount of benefit to
recognize in the financial statements based on GAAP guidance. The Company recognizes interest and penalties related to uncertain tax
positions in income tax expense.
The Company believes that it and its subsidiaries are not subject to taxation under the laws of the Republic of The Marshall Islands or
Bermuda, or that distributions by its subsidiaries to the Company will be subject to any taxes under the laws of such countries, and that it
qualifies for the Section 883 exemption under U.S. federal income tax purposes.
Accumulated other comprehensive (loss) income
The following table contains the changes in the balances of each component of accumulated other comprehensive income (loss) for the periods
presented.
Qualifying Cash
Flow Hedging
Instruments
$
Pension
Adjustments
$
Unrealized Gain on
Available for Sale
Marketable Securities
$
Balance as of December 31, 2008
Other comprehensive income
Balance as of December 31, 2009
Other comprehensive (loss) income
Balance as of December 31, 2010
Other comprehensive (loss) income
Balance as of December 31, 2011
Employee pension plans
(58,723)
61,646
2,923
(628)
2,295
(2,601)
(306)
(23,338)
13,044
(10,294)
(7,245)
(17,539)
(5,402)
(22,941)
-
5,837
5,837
1,236
7,073
(7,729)
(656)
Total
$
(82,061)
80,527
(1,534)
(6,637)
(8,171)
(15,732)
(23,903)
The Company has several defined contribution pension plans covering the majority of its employees. Pension costs associated with the
Company’s required contributions under its defined contribution pension plans are based on a percentage of employees’ salaries and are
charged to earnings in the year incurred. The Company also has a number of defined benefit pension plans covering certain of its employees.
The Company accrues the costs and related obligations associated with its defined benefit pension plans based on actuarial computations
using the projected benefits obligation method and management’s best estimates of expected plan investment performance, salar y escalation,
and other relevant factors. For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. The
overfunded or underfunded status of the defined benefit pension plans are recognized as assets or liabilities in the consolidated balance sheet.
The Company recognizes as a component of other comprehensive income (loss) the gains or losses that arise during a period but that are not
recognized as part of net periodic benefit costs.
F - 13
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Earnings (loss) per common share
The computation of basic earnings (loss) per share is based on the weighted average number of common shares outstanding during the period.
The computation of diluted earnings per share assumes the exercise of all dilutive stock options and restricted stock awards using the treasury
stock method. The computation of diluted loss per share does not assume such exercises.
Adoption of new accounting pronouncements
In January 2011, the Company adopted an amendment to Financial Accounting Standards Board (or FASB) Accounting Standards Codification
(or ASC) 605, Revenue Recognition, that provides for a new methodology for establishing the fair value for a deliverable in a multiple-element
arrangement. When vendor specific objective or third-party evidence for deliverables in a multiple-element arrangement cannot be determined,
the Company will be required to develop a best estimate of the selling price of separate deliverables and to allocate the arrangement
consideration using the relative selling price method. The adoption of this amendment did not have an impact on the Company’s consolidated
financial statements.
On September 30, 2011, the Company adopted an amendment to FASB ASC 350, Intangibles – Goodwill and Other, that provides entities with
the option of performing a qualitative assessment before performing the first step of the current two-step goodwill impairment test. If entities
determine, on the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is l ess than the carrying
amount, then performing the two-step impairment test is not required. However, if an entity concludes otherwise, the existing two-step goodwill
impairment test is performed. The adoption of this amendment did not have an impact on the Company’s consolidated financial statements.
2. Segment Reporting
The Company is a leading provider of international crude oil and gas marine transportation services and also offers offshore oil production
storage and offloading services, primarily under long-term fixed-rate contracts.
The Company has four reportable segments: its shuttle tanker and FSO segment (or Teekay Shuttle and Offshore), its floating production,
storage and offloading (or FPSO) segment (or Teekay Petrojarl), its liquefied gas segment (or Teekay Gas Services) and its conventional
tanker segment (or Teekay Tanker Services). The Company’s shuttle tanker and FSO segment consists of shuttle tankers and FSO units. The
Company’s FPSO segment consists of FPSO units and other vessels used to service its FPSO contracts. The Company’s liquefied gas
segment consists of LNG and LPG carriers. The Company’s conventional tanker segment consists of conventional crude oil and product
tankers that: (i) are subject to long-term, fixed-rate time-charter contracts, which have an original term of one year or more; (ii) operate in the
spot tanker market; or (iii) are subject to time-charters or contracts of affreightment that are priced on a spot-market basis or are short-term,
fixed-rate contracts, which have an original term of less than one year. Segment results are evaluated based on income from vessel operations.
The accounting policies applied to the reportable segments is the same as those used in the preparation of the Company’s consolidated
financial statements.
The following tables present results for these segments for the years ended December 31, 2011, 2010 and 2009.
Year ended December 31, 2011
Revenues
Voyage expenses
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (2)
Asset impairments and net loss (gain) on sale
of vessels and equipment
Bargain purchase gain
Goodwill impairment
Restructuring charges
Income (loss) from vessel operations
Shuttle
Tanker and
FSO
Segment
$
613,768
97,743
196,536
74,478
129,293
60,359
43,356
-
-
5,351
6,652
FPSO
Segment
$
464,810
-
242,332
-
96,915
52,854
(4,888)
(58,235)
-
-
135,832
Liquefied
Gas
Segment
$
Conventional
Tanker
Segment
$
272,041
4,862
48,158
-
63,641
20,586
-
-
-
-
134,794
603,163
74,009
190,661
139,701
138,759
89,817
112,591
-
36,652
139
(179,166)
Total
$
1,953,782
176,614
677,687
214,179
428,608
223,616
151,059
(58,235)
36,652
5,490
98,112
Segment assets
2,182,461
2,225,830
2,924,653
2,572,685
9,905,629
F - 14
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Year ended December 31, 2010
Revenues (1)
Voyage expenses
Vessel operating expenses
Time charter hire expense
Depreciation and amortization
General and administrative (2)
Asset impairments and net loss (gain) on sale
of vessels and equipment
Restructuring charges
Income (loss) from vessel operations
Shuttle
Tanker and
FSO
Segment
$
622,195
111,003
182,614
89,768
127,438
51,281
19,480
704
39,907
FPSO
Segment
$
463,931
-
209,283
-
95,784
42,714
-
-
116,150
Liquefied
Gas
Segment
$
248,378
29
46,497
-
62,904
20,147
(4,340)
394
122,747
Conventional
Tanker
Segment
$
761,249
134,065
192,153
196,224
154,579
79,601
34,010
15,298
(44,681)
Total
$
2,095,753
245,097
630,547
285,992
440,705
193,743
49,150
16,396
234,123
Segment assets
1,811,186
1,185,017
2,869,713
2,691,407
8,557,323
Year ended December 31, 2009
Revenues
Voyage expenses
Vessel operating expenses
Time charter hire expense
Depreciation and amortization
General and administrative (2)
Asset impairments and net loss on sale of
vessels and equipment
Restructuring charges
Income (loss) from vessel operations
Shuttle
Tanker and
FSO
Segment
$
583,320
86,499
173,463
113,786
122,630
50,923
1,902
7,032
27,085
FPSO
Segment
$
390,576
-
200,856
-
102,316
34,276
-
-
53,128
Liquefied
Gas
Segment
$
246,472
1,018
50,704
-
59,868
20,007
-
4,177
110,698
Conventional
Tanker
Segment
$
961,237
206,574
190,741
325,091
152,362
93,630
10,727
3,235
(21,123)
Total
$
2,181,605
294,091
615,764
438,877
437,176
198,836
12,629
14,444
169,788
(1)
(2)
FPSO segment includes $59.2 million in revenue for the year ended December 31, 2010, related to operations in previous years as a result of executing a
contract amendment in March 2010.
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of
corporate resources).
A reconciliation of total segment assets to amounts presented in the accompanying consolidated balance sheets is as follows:
Total assets of all segments
Cash
Accounts receivable and other assets
Consolidated total assets
December 31, 2011
$
9,905,629
692,127
533,640
11,131,396
December 31, 2010
$
8,557,323
779,748
575,277
9,912,348
The following table presents revenues and percentage of consolidated revenues for customers that accounted for more than 10% of the
Company’s consolidated revenues during the periods presented. All of these customers are international oil companies.
(U.S. dollars in millions)
Statoil ASA (1)
Petroleo Brasileiro SA (1)
BP PLC (2)
Year Ended
December 31,
2011
$283.7 or 15%
$224.9 or 12%
$190.3(3)
Year Ended
December 31,
2010
$330.4 or 16%
$226.0 or 11%
$222.2 or 11%
Year Ended
December 31,
2009
$346.6 or 16%
$217.9 or 10%
$152.0 (3)
(1) Shuttle tanker and FSO, FPSO and conventional tanker segments
(2) Shuttle tanker and FSO, FPSO, liquefied gas and conventional tanker segments
(3) Less than 10%
F - 15
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
3. Acquisition of FPSO Units and Investment in Sevan Marine ASA
On November 30, 2011, the Company acquired from Sevan Marine ASA (or Sevan) the FPSO unit Sevan Hummingbird (or Hummingbird) and
its existing customer contract for approximately $184 million (including an adjustment for working capital) and made an investment of
approximately $25 million to obtain a 40% ownership interest in a recapitalized Sevan. The Company also entered into a cooperation
agreement with Sevan relating to joint marketing of offshore projects, the development of future projects, and the financing of such projects.
Concurrently, the Company’s subsidiary, Teekay Offshore Partners L.P. (or Teekay Offshore), acquired from Sevan the FPSO unit Sevan
Piranema (or Piranema) and its existing customer contract for approximately $164 million (including an adjustment for working capital). The
purchase price for the acquisitions of the Hummingbird and the Piranema and the investment in Sevan Marine were paid in cash and financed
by a combination of new debt facilities, a private placement offering of Teekay Offshore common units and existing liquidity.
On November 30, 2011, the Company also entered into an agreement to acquire the FPSO unit Sevan Voyageur (or Voyageur) and its existing
customer contract from Sevan. The Company will acquire the Voyageur once the existing upgrade project is completed and the Voyageur
commences operations under its customer contract, currently expected to be in the fourth quarter of 2012. The Company will pay Sevan $94.0
million to acquire the Voyageur, will assume the Voyageur’s existing $230.0 million credit facility, which had an outstanding balance of $220.0
million on November 30, 2011, and are responsible for all upgrade costs after November 30, 2011, which are estimated to be between $110
and $130 million. The Company has control over the upgrade project and has guaranteed the repayment of the existing credit f acility. The
Voyageur has been consolidated by the Company effective November 30, 2011, as the Voyageur has been determined to be a variable interest
entity (or VIE) and the Company has been determined to be the primary beneficiary. The following table summarizes the balance sheet of the
Voyageur as at December 31, 2011:
ASSETS
Cash and cash equivalents
Other current assets
Vessels and equipment
Deferred tax assets
Total assets
LIABILITIES AND EQUITY
Accounts payable
Accrued liabilities
Long-term debt (note 8)
Derivative liabilities
Other long-term liabilities
Total liabilities
Total equity
Total liabilities and total equity
30,963
7,195
322,092
1,955
362,205
11,860
3,063
220,497
4,969
1,523
241,912
120,293
362,205
The 2007-built Piranema FPSO is currently operating under a long-term charter to Petrobras S.A. on the Piranema field located in the Brazil
offshore region. The charter includes a firm contract period through March 2018, with up to 11 one-year extension options that includes cost-
escalation clauses.
The 2008-built Hummingbird FPSO is currently operating under a charter to Centrica Energy Upstream on the Chestnut field in the UK sector of
the North Sea. The charter was recently extended to September 2012 and thereafter, includes one six-month extension option, one three-year
extension option and two one-year extension options.
The 2009-built Voyageur FPSO operated successfully on the Shelley field in the UK sector of the North Sea from August 2009 to August 2010.
The unit is currently undergoing an upgrade prior to commencement of its charter contract with E.ON Ruhrgas UK E&P on the Huntington field
in the UK sector of the North Sea. The charter is expected to commence in the fourth quarter of 2012 for a firm period of five years, with
extension options.
This transaction consolidates the industry in the harsh environment FPSO space, broadens the Company’s FPSO offering to include both ship
shape and cylindrical FPSO solutions and was concluded at an attractive price. A total bargain purchase gain of $58.2 million related to the
acquisition of the FPSO units and the 40% equity investment in Sevan has been recorded in the consolidated statements of income (loss) for
the year ended December 31, 2011.
During 2011, Sevan encountered severe financial difficulties following significant cost overruns on the upgrade of the Voyageur and was unable
to service its existing financial obligations. The acceptance of the Company’s offer and the recognition of the bargain purchase gain, was in part
F - 16
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
due to the Company’s ability to structure the transaction in a way that would satisfy all the various stakeholders, including Sevan’s
management, lenders, customers and shareholders, within a short time frame, the Company’s financial strength and limited competition in the
transaction. As a result, the Company was able to purchase the assets at a discount in this distressed acquisition situation.
The Company’s acquisition was accounted for using the purchase method of accounting, based upon estimates of fair value. The estimated fair
values of certain assets and liabilities have been determined with the assistance of third-party valuation specialists. Certain of these estimates
of fair value, most notably vessels and equipment, investment in Sevan Marine and in-process revenue contracts, are preliminary and are
subject to further adjustment. The operating results of the Hummingbird, Piranema and Voyageur are reflected in the Company’s consolidated
financial statements from November 30, 2011, the effective date of acquisition. During December 2011, the Company recognized $14.5 million
of revenue and $58.1 million of net income, including the bargain purchase gain, resulting from these acquisitions. In addition, the Company
incurred $1.1 million of acquisition-related expenses, which are reflected in general and administrative expenses.
The following table summarizes the preliminary fair values of the assets acquired and liabilities, including the Voyageur VIE, assumed by the
Company at November 30, 2011:
ASSETS
Cash and cash equivalents
Other current assets
Vessels and equipment
Deferred income taxes
Investment in Sevan Marine
Other assets - long-term
Total assets acquired
LIABILITIES
Current liabilities
In-process revenue contracts
Long-term debt (note 8)
Other long-term liabilities
Non-controlling interest
Total liabilities assumed
Net assets acquired
Bargain purchase gain
Cash consideration
As at November 30,
2011
$
50,230
29,209
869,952
3,307
49,200
659
1,002,557
41,376
158,968
220,497
6,036
144,600
571,477
431,080
(58,235)
372,845
The Company is obligated to fund the upgrade of the Voyageur. In addition to the upgrade, the Company is also obligated to make remaining
payments to acquire the Voyageur (see Note 16 c).
The following table shows comparative summarized consolidated pro forma financial information for the Company for the years ended
December 31, 2011 and 2010, giving effect to the Company’s acquisition of the Sevan FPSO units as if it had taken place on January 1, 2010:
Revenues
Net loss
Loss per common share
- Basic
- Diluted
4.
Investment in Term Loans
Pro Forma
Year Ended
December 31,
2011
(unaudited)
$
2,109,929
(382,432)
Pro Forma
Year Ended
December 31,
2010
(unaudited)
$
2,284,336
(176,456)
(5.18)
(5.18)
(3.79)
(3.79)
In February 2011, Teekay made a $70 million term loan (or the 2011 Loan) to an unrelated ship-owner of a 2011-built Very Large Crude Carrier
(or VLCC). The 2011 Loan bears interest at 9% per annum, which is payable quarterly. The 2011 Loan is repayable in full in February 2014.
F - 17
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
However, it may be repaid prior to maturity at the option of the borrower. The 2011 Loan is collateralized by a first priorit y mortgage on the
VLCC, together with other related collateral.
In July 2010, the Company’s subsidiary Teekay Tankers Ltd. (or Teekay Tankers) acquired two term loans with a total principal amount
outstanding of $115.0 million for a total cost of $115.6 million (the Loans). The Loans bear interest at an annual interest rate of 9% per annum,
and include a repayment premium feature which provides a total investment yield of approximately 10% per annum. The 9% interest income is
received in quarterly installments and the Loans and repayment premium are payable in full at maturity in July 2013 where the repayment
premium of 3% is calculated on the principal amount of the Loans outstanding at maturity. As at December 31, 2011 and 2010, the repayment
premium included in the principal balance was $1.5 million and $0.5 million, respectively. The Loans are collateralized by first-priority
mortgages on two 2010-built VLCC owned by a shipowner based in Asia, together with other related security. The Loans can be repaid prior to
maturity, at the option of the borrower.
Interest income earned from the investments in the term loans is included in revenues in the consolidated statements of income (loss). As at
December 31, 2011 and 2010, $2.8 million and $1.8 million, respectively, in interest receivable were recorded in the consolidated balance
sheet as accounts receivable.
The maximum potential loss relating to these loans is the Company’s original investment of $185.6 million plus any unpaid interest, which
exposes the Company to a concentration of credit risk.
5. Financing Transactions
Teekay Tankers is a Marshall Islands corporation formed by the Company to provide international marine transportation of crude oil. Teekay
Tankers completed its initial public offering on December 12, 2007. As of December 31, 2011, Teekay owned 26.0% of the capital stock of
Teekay Tankers, including Teekay Tankers' outstanding shares of Class B common stock, which entitle the holders to five votes per share,
subject to a 49% aggregate Class B Common Stock voting power maximum.
Teekay Offshore is a Marshall Islands limited partnership formed by the Company as part of its strategy to expand its operations in the offshore
oil marine transportation, production, processing and storage sectors. Teekay Offshore completed its initial public offering on December 14,
2006. As of December 31, 2011, Teekay owned a 33.0% interest in Teekay Offshore, including common units and its 2% general partner
interest.
Teekay LNG is a Marshall Islands limited partnership formed by the Company as part of its strategy to expand its operations in the LNG
shipping sector. Teekay LNG provides LNG, LPG and crude oil marine transportation services under long-term, fixed-rate contracts with major
energy and utility companies through its fleet of LNG and LPG carriers and Suezmax tankers. Teekay LNG completed its initial public offering
on May 5, 2005. As of December 31, 2011, Teekay owned a 40.1% interest in Teekay LNG, including common units and its 2% general partner
interest.
In connection with Teekay LNG’s initial public offering in May 2005, Teekay entered into an omnibus agreement with Teekay LNG, Teekay
LNG’s general partner and others governing, among other things, when the Company and Teekay LNG may compete with each other and to
provide the applicable parties certain rights of first offer on LNG carriers and Suezmax tankers. In December 2006, the omnibus agreement
was amended in connection with Teekay Offshore’s initial public offering to govern, among other things, when the Company, Teekay LNG and
Teekay Offshore may compete with each other and to provide the applicable parties certain rights of first offer on LNG carriers, oil tankers,
shuttle tankers, FSO units and FPSO units.
During the years ended December 31, 2011, 2010 and 2009, the Company’s publicly traded subsidiaries, Teekay Tankers, Teekay Offshore
and Teekay LNG completed the following financing transactions;
In February 2011, Teekay Tankers completed a public offering of 9.9 million common shares of its Class A Common Stock (including 1.3 million
commons shares issued upon the full exercise of the underwriter’s overallotment option) at a price of $11.33 per share, for gross proceeds of
$112.1 million. As a result of the offering, Teekay’s ownership of Teekay Tankers was reduced to 26.0% as of December 31, 2011. Teekay
maintains voting control of Teekay Tankers through its ownership of shares of Teekay Tankers’ Class A and Class B common stock and
continues to consolidate this subsidiary. See note 25(c) to the consolidated financial statements for information related to an equity offering by
Teekay Tankers in February 2012.
In March 2011, Teekay sold its remaining 49% interest in Teekay Offshore Operating L.P. (or OPCO) to Teekay Offshore for a total purchase
price of $386.3 million comprised of $175 million in cash (less $15 million in distributions made by OPCO to Teekay between December 31,
2010 and the date of acquisition) and 7.7 million newly issued Teekay Offshore common units (including the general partner’s 2% interest) of
gross proceeds of $226.3 million. Consequently, the Company recognized a decrease to retained earnings and an increase in non-controlling
interest of $94.8 million as the Company accounts for changes in its ownership interest in controlled subsidiaries as equity transactions. In July
2011, Teekay Offshore completed a private placement of 0.7 million common units to an institutional investor at a price of $28.04 per unit for
gross proceeds of $20.4 million (including the general partner's 2% proportionate capital contribution). In November 2011, Teekay Offshore
completed a private placement of 7.3 million common units to a group of institutional investors at a price of $23.90 per unit for gross proceeds
(including the general partner's 2% proportionate capital contribution) of $173.5 million. As a result of the private placements and the
acquisition of the 49% interest in OPCO by Teekay Offshore, Teekay’s ownership of Teekay Offshore was reduced to 33.0% (including the
Company’s 2% general partner interest) as of December 31, 2011. Teekay maintains control of Teekay Offshore by virtue of its control of the
general partner and continues to consolidate this subsidiary.
F - 18
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
In April 2011, Teekay LNG , completed a public offering of 4.3 million common units (including 0.6 million common units issued upon the partial
exercise of the underwriters’ overallotment option) at a price of $38.88 per unit, for gross proceeds (including the general partner’s 2%
proportionate capital contribution) of approximately $168.7 million. In November 2011, Teekay LNG completed a public offering of 5.6 million
common units at a price of $33.40 per unit, for gross proceeds of $187.4 million (including general partner’s 2% proportionate capital
contribution). As a result of the offerings, Teekay’s ownership of Teekay LNG was reduced to 40.1% (including the Company’s 2% general
partner interest) as of December 31, 2011. Teekay maintains control of Teekay LNG by virtue of its control of the general partner and continues
to consolidate this subsidiary.
As a result of the 2011 financing transactions, the Company recorded an increase to retained earnings $124.2 million, which represents
Teekay’s dilution gains from the issuance of units and shares in Teekay Tankers, Teekay Offshore and Teekay LNG, during the y ear ended
December 31, 2011.
In March 2010, Teekay Offshore completed a public offering of 5.1 million common units (including 660,000 units issued upon exercise of the
underwriters' overallotment option) at a price of $19.48 per unit. In August 2010, Teekay Offshore completed a public offering of 6.0 million
common units (including 787,500 units issued upon exercise of the underwriters' overallotment option) at a price of $22.15 per unit. In
December 2010, Teekay Offshore completed a public offering of 6.4 million common units (including 840,000 units issued upon exercise of the
underwriters' overallotment option) at a price of $27.84 per unit. In each case the general partner made a proportionate capital contribution to
maintain its 2% interest.
In April 2010, Teekay Tankers completed a public offering of 8.8 million shares of its Class A Common Stock (including 1.1 million common
shares issued upon the partial exercise of the underwriter’s overallotment option) at a price of $12.25 per share. Teekay Tankers concurrently
issued to Teekay 2.6 million unregistered shares of its Class A Common Stock at the April 2010 offering price. In October 2010, Teekay
Tankers completed a public offering of 8.6 million common shares of its Class A Common Stock (including 395,000 common shares issued
upon the partial exercise of the underwriter’s overallotment option) at a price of $12.15 per share.
In July 2010, Teekay LNG completed a direct equity placement of 1.7 million common units at a price of $29.18 per unit. In November 2010,
Teekay LNG issued to Exmar NV 1.1 million common units at a price of $35.44 per unit.
As a result of the 2010 offerings, direct equity placement, and unit issuance to Exmar NV, the Company recorded increases to retained
earnings of $84.9 million, $20.6 million, and $17.7 million, respectively, which represents Teekay’s dilution gains from the issuance of units and
shares in Teekay Offshore, Teekay LNG and Teekay Tankers, during the year ended December 31, 2010.
In August 2009, Teekay Offshore completed a public offering of 7.5 million common units (including 975,000 units issued upon the exercise in
full of the underwriter’s overallotment option) at a price of $14.32 per unit. In June 2009, Teekay Tankers completed a public offering of 7.0
million shares of its Class A Common Stock at a price of $9.80 per share. In March 2009, Teekay LNG completed a public offering of 4.0 million
common units at a price of $17.60 per unit. In November 2009, Teekay LNG completed a public offering of 4.0 million common units (including
450,650 units issued upon the exercise of the underwriter’s overallotment option) at a price of $24.40 per unit. In each case the general partner
made a proportionate capital contribution to maintain its 2% interest. As a result of the 2009 offerings, Teekay recorded increases to retained
earnings of $26.9, $12.6 million, and $1.7 million, respectively, which represents Teekay’s dilution gains from the issuance of units and shares
in Teekay Offshore, Teekay LNG and Teekay Tankers during the year ended December 31, 2009.
The proceeds received from the financing transactions are summarized as follows:
2011
Teekay Tankers Public Offering
Teekay Offshore Private Equity Placements
Teekay LNG Public Offerings
2010
Teekay Offshore Public Offerings
Teekay Tankers Public Offerings
Teekay LNG Direct Equity Placement
2009
Teekay Offshore Public Offerings
Teekay Tankers Public Offerings
Teekay LNG Public Offerings
Total Proceeds
Received
$
112,054
420,145
356,133
419,989
243,977
51,020
107,042
68,600
170,237
Less: Teekay
Corporation
Portion
$
-
(230,144)
(7,123)
(8,400)
(32,000)
(1,020)
(2,291)
-
(3,436)
Offering
Expenses
$
Net Proceeds
Received
$
(4,820)
(279)
(14,909)
(18,645)
(9,279)
-
(2,742)
(3,044)
(7,805)
107,234
189,722
334,101
392,944
202,698
50,000
102,009
65,556
158,996
F - 19
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
6. Goodwill, Intangible Assets and In-Process Revenue Contracts
Goodwill
The carrying amount of goodwill for the years ended December 31, 2010 and 2011, for the Company’s reportable segments are as follows:
Balance as of December 31, 2010 and 2009
Goodwill impairment
Balance as of December 31, 2011
Shuttle
Tanker and
FSO Segment
$
130,908
-
130,908
FPSO
Segment
$
-
-
Liquefied Gas
Segment
$
35,631
-
35,631
Conventional
Tanker
Segment
$
36,652
(36,652)
-
Total
$
203,191
(36,652)
166,539
A goodwill impairment charge of $36.7 million was recognized in the Company’s consolidated statements of income (loss) for the year ended
December 31, 2011 in respect of its Suezmax tanker reporting unit. The fair value of this reporting unit was determined using the present value
of expected future cash flows discounted at a rate equivalent to a market participant’s weighted-average cost of capital. The estimates and
assumptions regarding expected future cash flows and the appropriate discount rates are in part based upon existing contracts, future tanker
market rates, historical experience, financial forecasts and industry trends and conditions. The recognition of the goodwill impairment charge
was driven by the continuing weak tanker market, which has largely been caused by an oversupply of vessels relative to demand.
Intangible Assets
As at December 31, 2011, the Company’s intangible assets consisted of:
Customer contracts
Other intangible assets
Weighted-Average
Amortization Period
Amortization Period
(Years)
15.6
4.5
15.2
Gross Carrying
Amount
Amount
$
329,815
11,430
341,245
As at December 31, 2010, the Company’s intangible assets consisted of:
Customer contracts
Other intangible assets
Weighted-Average
Amortization Period
Amortization Period
(Years)
13.7
4.5
13.5
Gross Carrying
Amount
Amount
$
347,085
11,430
358,515
Accumulated
Amortization
Amortization
$
(194,266)
(10,237)
(204,503)
Accumulated
Amortization
Amortization
$
(195,358)
(7,264)
(202,622)
Net Carrying
Amount
Amount
$
135,549
1,193
136,742
Net Carrying
Amount
Amount
$
151,727
4,166
155,893
Aggregate amortization expense of intangible assets for the year ended December 31, 2011, was $19.1 million (2010 - $26.2 million, 2009 -
$34.1 million), which is included in depreciation and amortization. Amortization of intangible assets for the five years following 2011 is expected
to be $15.4 million (2012), $14.2 million (2013), $13.2 million (2014), $12.1 million (2015), $11.1 million (2016) and $70.8 million (thereafter).
During 2010, the Company recognized $31.7 million in write-downs of three vessel purchase options and certain in-charter customer contracts.
The vessel purchase options and in-charter contracts either expired unexercised or were unlikely to be exercised by the Company. During
2009, the Company recognized a $16.1 million impairment of other intangible assets due to lower fair value of certain bareboat contracts
compared to carrying values, expired time-charter hire contracts and write-down of vessel purchase options.
The write-downs are included in asset impairments and net loss on sale of vessels and equipment, on the consolidated statements of income
(loss) and within the Company’s conventional tanker segment.
In-Process Revenue Contracts
As part of the Company’s acquisition of FPSO units from Sevan and its previous acquisitions of Petrojarl ASA (subsequently renamed Teekay
Petrojarl AS, or Teekay Petrojarl) and 50% of OMI Corporation (or OMI), the Company assumed certain FPSO service contracts and time
charter-out contracts with terms that were less favorable than the then prevailing market terms. The Company has recognized a liability based
on the estimated fair value of these contracts. The Company is amortizing this liability over the estimated remaining terms of the contracts on a
weighted basis based on the projected revenue to be earned under the contracts. During 2010, the Company increased the amortization term
due to operating contract amendments for two FPSO units which resulted in a decrease in amortization of in-process revenue contracts during
2010 of $10.5 million.
F - 20
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Amortization of in-process revenue contracts for the year ended December 31, 2011 was $46.4 million (2010 - $48.3 million), which is included
in revenues on the consolidated statements of income (loss). Amortization for the five years following 2011 is expected to be $73.3 million
(2012), $59.9 million (2013), $40.2 million (2014), $18.7 million (2015) and $116.5 million (thereafter).
7. Accrued Liabilities
Voyage and vessel expenses
Interest
Payroll and benefits and other
Deferred revenue
8. Long-Term Debt
December 31, 2011
$
December 31, 2010
$
209,058
63,310
83,528
38,690
394,586
179,553
70,760
84,912
41,894
377,119
December 31, 2011
$
December 31, 2010
$
Revolving Credit Facilities
Senior Notes (8.875%) due July 15, 2011
Senior Notes (8.5%) due January 15, 2020
Norwegian Kroner-denominated Bonds due November 2013
U.S. Dollar-denominated Term Loans due through 2021
U.S. Dollar-denominated Term Loan Variable Interest Entity due October 2016 (note 3)
Euro-denominated Term Loans due through 2023
U.S. Dollar-denominated Unsecured Demand Loan due to Joint Venture Partners
Total
Less current portion
Long-term portion
2,244,634
-
446,825
100,417
2,069,860
220,450
348,905
13,282
5,444,373
401,376
5,042,997
1,697,237
16,201
446,559
103,061
1,782,423
-
373,301
13,282
4,432,064
276,508
4,155,556
As of December 31, 2011, the Company had 14 long-term revolving credit facilities (or the Revolvers) available, which, as at such date,
provided for aggregate borrowings of up to $3.0 billion, of which $0.8 billion was undrawn. Interest payments are based on LIBOR plus
margins; at December 31, 2011, the margins ranged between 0.45% and 3.25% (2010 – 0.45% and 3.25%). At December 31, 2011 and
December 31, 2010, the three-month LIBOR was 0.58% and 0.30%, respectively. The total amount available under the Revolvers reduces by
$349.6 million (2012), $749.6 million (2013), $791.8 million (2014), $226.4 million (2015), $146.4 million (2016) and $784.0 million (thereafter).
The Revolvers are collateralized by first-priority mortgages granted on 63 of the Company’s vessels, together with other related security, and
include a guarantee from Teekay or its subsidiaries for all outstanding amounts.
In January 2010, the Company completed a public offering of senior unsecured notes due January 15, 2020 (or the 8.5% Notes) with a
principal amount of $450 million. The 8.5% Notes were sold at a price equal to 99.181% of par and the discount is accreted using the effective
interest rate of 8.625% per year. The Company capitalized issuance costs of $9.4 million, which is recorded in other non-current assets in the
consolidated balance sheet and is amortized to interest expense over the term of the 8.5% notes. The 8.5% Notes rank equally in right of
payment with all of Teekay’s existing and future senior unsecured debt and senior to any future subordinated debt of Teekay. The 8.5% Notes
are not guaranteed by any of Teekay’s subsidiaries and effectively rank behind all existing and future secured debt of Teekay and other
liabilities of its subsidiaries. In 2010, the Company repurchased a principal amount of $160.5 million of the Company’s 8.875% senior
unsecured notes due July 15, 2011 (or the 8.875% Notes) using a portion of the proceeds from the 8.5% Notes offering, and recognized a loss
on repurchase of $12.6 million. During the year ended December 31, 2011, the balance of the remaining 8.875% Notes was repaid upon
maturity.
The Company may redeem the 8.5% Notes in whole or in part at any time before their maturity date at a redemption price equal to the greater
of (i) 100% of the principal amount of the 8.5% Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled
payments of principal and interest on the 8.5% Notes to be redeemed (excluding accrued interest) discounted to the redemption date on a
semi-annual basis, at the treasury yield plus 50 basis points, plus accrued and unpaid interest to the redemption date. In addition, at any time
or from time to time prior to January 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the 8.5%
Notes issued under the indenture with the net cash proceeds of one or more qualified equity offerings at a redemption price equal to 108.5% of
the principal amount of the 8.5% Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date, provided certain
conditions are met. No such redemptions have been made as at December 31, 2011.
In November 2010, Teekay Offshore issued NOK 600 million in senior unsecured bonds that mature in November 2013 in the Norwegian bond
market. Teekay Offshore capitalized issuance costs of $1.3 million, which is recorded in other non-current assets in the consolidated balance
sheet and is amortized to interest expense over the term of the senior unsecured bonds. The bonds are listed on the Oslo Stock Exchange.
Interest payments on the senior unsecured bonds are based on NIBOR plus a margin of 4.75%. Teekay Offshore has entered into a cross
currency swap arrangement to swap the interest payments from NIBOR into LIBOR and the principal from Norwegian Kroner to U.S. dollars.
Teekay Offshore entered the interest rate swap to swap the interest payments from LIBOR to a fixed rate of 1.12%, and the LIBOR rate
receivable from the interest rate swap is capped at 3.5% (See note 15). See Note 25(a) to the consolidated financial statements for information
F - 21
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
related to a Norwegian bond offering by Teekay Offshore in January 2012.
As of December 31, 2011, the Company had 16 U.S. Dollar-denominated term loans outstanding, which totalled $2.1 billion (December 31,
2010 – $1.8 billion). Certain of the term loans with a total outstanding principal balance of $372.7 million, as at December 31, 2011 (December
31, 2010 - $417.4 million) bear interest at a weighted-average fixed rate of 5.3% (December 31, 2010 – 5.3%). Interest payments on the
remaining term loans are based on LIBOR plus a margin. At December 31, 2011 and 2010, the margins ranged between 0.3% and 3.25%. At
December 31, 2011 and 2010, the three-month LIBOR was 0.58% and 0.30%, respectively. The term loan payments are made in quarterly or
semi-annual payments commencing three or six months after delivery of each newbuilding vessel financed thereby, and 15 of the term loans
have balloon or bullet repayments due at maturity. The term loans are collateralized by first-priority mortgages on 33 (December 31, 2010 – 28)
of the Company’s vessels, together with certain other security. In addition, at December 31, 2011, all but $119.4 million (December 31, 2010 -
$122.5 million) of the outstanding term loans were guaranteed by Teekay or its subsidiaries.
The Voyageur FPSO unit has been consolidated by the Company effective November 30, 2011, as the Voyageur has been determined to be a
VIE and the Company has been determined to be the primary beneficiary. As a result, the Company has included the Voyageur’s existing U.S.
Dollar-denominated term loan (VIE term loan) outstanding, which as at December 31, 2011 totalled $220.5 million (December 31, 2010 – $nil).
Interest payments on the VIE term loan are based on LIBOR plus a margin of 2.95% and are paid quarterly. The VIE term loan is collateralized
by a first-priority mortgage on the Voyageur, together with certain other security.
The Company has two Euro-denominated term loans outstanding, which, as at December 31, 2011, totalled 269.2 million Euros ($348.9
million). The Company repays the loans with funds generated by two Euro-denominated long-term time-charter contracts. Interest payments on
the loans are based on EURIBOR plus a margin. At December 31, 2011 and 2010, the margins ranged between 0.60% and 2.25% and the
one-month EURIBOR at December 31, 2011, was 1.02% (December 31, 2010 – 0.78%). The Euro-denominated term loans reduce in monthly
payments with varying maturities through 2023 and are collateralized by first-priority mortgages on two of the Company’s vessels, together with
certain other security, and are guaranteed by a subsidiary of Teekay.
Both Euro-denominated term loans are revalued at the end of each period using the then prevailing Euro/U.S. Dollar exchange rate. Due in part
to this revaluation, the Company recognized an unrealized foreign exchange gain of $12.7 million during the year ended December 31, 2011
(2010 - $32.0 million gain, 2009 - $20.9 million loss).
The Company has one U.S. Dollar-denominated loan outstanding owing to a joint venture partner, which, as at December 31, 2011, totalled
$13.3 million (2010 – one loan totaling $13.8 million), including accrued interest. Interest payments on the loan, which are based on a fixed
interest rate of 4.84%, commenced in February 2008. This loan is repayable on demand no earlier than February 27, 2027.
The weighted-average effective interest rate on the Company’s long-term aggregate debt as at December 31, 2011, was 2.6% (December 31,
2010 – 2.3%). This rate does not include the effect of the Company’s interest rate swap agreements (see Note 15).
The aggregate annual long-term debt principal repayments required to be made by the Company subsequent to December 31, 2011, are
$401.4 million (2012), $1.1 billion (2013), $1.0 billion (2014), $343.6 million (2015), $288.1 million (2016) and $2.3 billion (thereafter).
Among other matters, the Company’s long-term debt agreements generally provide for maintenance of minimum consolidated financial
covenants and certain loan agreements with outstanding amounts totalling $671.8 million as at December 31, 2011 (December 31, 2010 –
$541.0 million), require the maintenance of market value to loan ratios. Certain loan agreements require that a minimum level of free cash be
maintained and as at December 31, 2011 and 2010, this amount was $100.0 million. Certain of the loan agreements also require that the
Company maintain an aggregate level of free liquidity and undrawn revolving credit lines with at least six months to maturity, of 5% to 7.5% of
total debt. As at December 31, 2011, this amount was $318.3 million (December 31, 2010 - $236.5 million).
As at December 31, 2011, the Company was in compliance with all covenants in the credit facilities and long-term debt.
9. Operating and Direct Financing Leases
Charters-in
As at December 31, 2011, minimum commitments to be incurred by the Company under vessel operating leases by which the Company
charters-in vessels were approximately $250.8 million, comprised of $125.1 million (2012), $68.2 million (2013), $23.0 million (2014), $16.0
million (2015), $9.1 million (2016) and $9.4 million (thereafter). The Company recognizes the expense from these charters, which is included in
time-charter hire expense, on a straight-line basis over the firm period of the charters.
Charters-out
Time-charters and bareboat charters of the Company’s vessels to third parties (except as noted below) are accounted for as operating leases.
Certain of these charters provide the charterer with the option to acquire the vessel or the option to extend the charter. As at December 31,
2011, minimum scheduled future revenues to be received by the Company on time-charters and bareboat charters then in place were
approximately $10.1 billion, comprised of $1.3 billion (2012), $1.1 billion (2013), $1.1 billion (2014), $1.1 billion (2015), $1.0 billion (2016) and
$4.5 billion (thereafter). The minimum scheduled future revenues should not be construed to reflect total charter hire revenues for any of the
years. Minimum scheduled future revenues do not include revenue generated from new contracts entered into after December 31, 2011,
revenue from unexercised option periods of contracts that existed on December 31, 2011 or variable or contingent revenues. In addition,
minimum scheduled future revenues presented in this paragraph have been reduced by estimated off-hire time for any of period maintenance.
F - 22
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
The amounts may vary given unscheduled future events such as vessel maintenance. The carrying amount of the vessels employed on
operating leases at December 31, 2011, was $5.3 billion (2010 - $5.5 billion). The cost and accumulated depreciation of the vessels on time
charter as at December 31, 2011 and 2010 were $7.2 billion, $1.9 billion, and $7.4 billion, $1.9 billion, respectively.
Operating Lease Obligations
Teekay Tangguh Subsidiary
The Company’s subsidiary Teekay LNG owns a 99% interest in Teekay Tangguh, which owns a 70% interest in Teekay Tangguh Subsidiary,
essentially giving it a 69% interest in the Teekay Tangguh Subsidiary. As at December 31, 2011, the Teekay Tangguh Subsidiary was a party
to operating leases whereby it is the lessor and is leasing its two LNG carriers (or the Tangguh LNG Carriers) to a third party company (or Head
Leases). The Teekay Tangguh Subsidiary is then leasing back the LNG carriers from the same third party company (or Subleases). Under the
terms of these leases, the third party company claims tax depreciation on the capital expenditures it incurred to lease the vessels. As is typical
in these leasing arrangements, tax and change of law risks are assumed by the Teekay Tangguh Subsidiary. Lease payments under the
Subleases are based on certain tax and financial assumptions at the commencement of the leases. If an assumption proves to be incorrect, the
third party company is entitled to increase the lease payments under the Sublease to maintain its agreed after-tax margin. The Teekay
Tangguh Subsidiary’s carrying amount of this tax indemnification is $9.9 million and is included as part of other long-term liabilities in the
accompanying consolidated balance sheets of the Company. The tax indemnification is for the duration of the lease contract with the third party
plus the years it would take for the lease payments to be statute barred, and ends in 2033. Although there is no maximum potential amount of
future payments, the Teekay Tangguh Subsidiary may terminate the lease arrangements on a voluntary basis at any time. If the lease
arrangements terminate, the Teekay Tangguh Subsidiary will be required to pay termination sums to the third party company sufficient to repay
the third party company's investment in the vessels and to compensate it for the tax effect of the terminations, including recapture of any tax
depreciation. The Head Leases and the Subleases have 20 year terms and are classified as operating leases. The Head Lease and the
Sublease for each of the two Tangguh LNG Carriers commenced in November 2008 and March 2009, respectively.
As at December 31, 2011, the total estimated future minimum rental payments to be received and paid under the lease contracts are as
follows:
Head Lease Sublease
Year
2012
2013
2014
2015
2016
Thereafter
Total
Receipts (1)
28,859
28,843
Payments (1)
24,999
24,999
28,828
22,188
21,242
260,306
$ 390,266
24,999
24,999
24,999
306,356
$ 431,351
(1) The Head Leases are fixed-rate operating leases while the Subleases have a small variable-rate component. As at December 31, 2011, the Teekay Tangguh
Subsidiary had received $120.1 million of aggregate Head Lease receipts and had paid $66.0 million of Sublease payments.
Net Investment in Direct Financing Leases
The time-charters for two of the Company’s LNG carriers, one FSO unit and equipment that reduce volatile organic compound emissions (or
VOC equipment) are accounted for as direct financing leases. The following table lists the components of the net investments in direct financing
leases:
Total minimum lease payments to be received
Estimated unguaranteed residual value of leased properties
Initial direct costs and other
Less unearned revenue
Total
Less current portion
Long-term portion
December 31,
2011
$
December 31,
2010
$
741,604
203,465
1,636
(486,797)
459,908
23,171
436,737
796,137
203,465
1,726
(513,812)
487,516
26,791
460,725
As at December 31, 2011, minimum lease payments to be received by the Company in each of the next five years following 2011 were $62.4
million (2012), $49.5 million (2013), $48.1 million (2014), $47.1 million (2015) and $47.3 million (2016). The VOC equipment lease is scheduled
to expire in 2014, the FSO contract is scheduled to expire in 2017, and the LNG time-charters are both scheduled to expire in 2029.
F - 23
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
10. Capital Lease Obligations and Restricted Cash
Capital Lease Obligations
RasGas II LNG Carriers
Spanish-Flagged LNG Carrier
Suezmax Tankers
Total
Less current portion
Long-term portion
December 31,
2011
$
December 31,
2010
$
471,397
-
175,650
647,047
47,203
599,844
470,752
81,881
185,501
738,134
267,382
470,752
RasGas II LNG Carriers. As at December 31, 2011, the Company was a party, as lessee, to 30-year capital lease arrangements relating to
three LNG carriers (or the RasGas II LNG Carriers) that operate under time-charter contracts with Ras Laffan Liquefied Natural Gas Co.
Limited (II) (or RasGas II), a joint venture between Qatar Petroleum and ExxonMobil RasGas Inc., a subsidiary of Exxon Mobil Corporation.
The Company has a 70% share in the leases for the RasGas II LNG Carriers.
Under the terms of the RasGas II LNG Carriers capital lease arrangements, the lessor claims tax depreciation on the capital expenditures it
incurred to acquire these vessels. As is typical in these leasing arrangements, tax and change of law risks are assumed by the lessee. Lease
payments under the lease arrangements are based on certain tax and financial assumptions at the commencement of the leases. If an
assumption proves to be incorrect, the lessor is entitled to increase the lease payments to maintain its agreed after-tax margin. The Company’s
carrying amount of the tax indemnification guarantee as at December 31, 2011 was $16.1 million and is included as part of other long-term
liabilities in the Company’s consolidated balance sheets.
The tax indemnification is for the duration of the lease contract with the third party plus the years it would take for the lease payments to be
statute barred, and ends in 2041. Although there is no maximum potential amount of future payments, the Company may terminate the lease
arrangements on a voluntary basis at any time. If the lease arrangements terminate, the Company will be required to pay termination sums to
the lessor sufficient to repay the lessor’s investment in the vessels and to compensate it for the tax-effect of the terminations, including
recapture of any tax depreciation.
At their inception, the weighted-average interest rate implicit in these leases was 5.2%. These capital leases are variable-rate capital leases. As
at December 31, 2011, the commitments under these capital leases approximated $1.0 billion, including imputed interest of ($529.7) million,
repayable as follows:
Year
2012
2013
2014
2015
2016
Thereafter
Commitment
$24.0 million
$24.0 million
$24.0 million
$24.0 million
$24.0 million
$881.1 million
As the payments in the next five years only cover a portion of the estimated interest expense, the lease obligation will continue to increase.
Starting in 2024, the lease payments will increase to cover both interest and principal to commence reduction of the principal portion of the
lease obligations.
Spanish-Flagged LNG Carrier. The Company’s capital lease on one LNG carrier, the Madrid Spirit, expired and the Company purchased the
vessel at the end of the lease term in December 2011. The purchase obligation was fully funded with restricted cash deposits.
Suezmax Tankers. As at December 31, 2011, the Company was a party, as lessee, to capital leases on five Suezmax tankers. Under the terms
of the lease arrangements, the Company is required to purchase these vessels after the end of their respective lease terms for a fixed price. At
the inception of these leases, the weighted-average interest rate implicit in these leases was 7.4%. These capital leases are variable-rate
capital leases; however, any change in the lease payments resulting from changes in interest rates is offset by a corresponding change in the
charter hire payments received by the Company. As at December 31, 2011, the remaining commitments under these capital leases, including
the purchase obligations, approximated $201.1 million, including imputed interest of $25.5 million, repayable during 2012 through 2017.
FPSO Units. As at December 31, 2011, the Company was a party, as lessee, to capital leases on one FPSO unit, the Petrojarl Foinaven, and
the topside production equipment for another FPSO unit, the Petrojarl Banff. However, prior to being acquired by Teekay, Teekay Petrojarl
legally defeased its future charter obligations for these assets by making up-front, lump-sum payments to unrelated banks, which have
assumed Teekay Petrojarl’s liability for making the remaining periodic payments due under the long-term charters (or Defeased Rental
Payments) and termination payments under the leases.
F - 24
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
The Defeased Rental Payments for the Petrojarl Foinaven were based on assumed Sterling LIBOR of 8% per annum. If actual interest rates
are greater than 8% per annum, the Company receives rental rebates; if actual interest rates are less than 8% per annum, the Company is
required to pay rentals in excess of the Defeased Rental Payments. For accounting purposes, this contract feature is an embed ded derivative,
and has been separated from the host contract and is separately accounted for as a derivative instrument.
As is typical for these types of leasing arrangements, the Company has indemnified the lessors of the Petrojarl Foinaven for the tax
consequence resulting from changes in tax laws or interpretation of such laws or adverse rulings by authorities and for fluctuations in actual
interest rates from those assumed in the leases. The Company’s capital leases do not contain financial or restrictive covenants other than
those relating to operation and maintenance of the vessels.
Restricted Cash
Under the terms of the capital leases for the RasGas II LNG Carriers, the Company is required to have on deposit with financial institutions an
amount of cash that, together with interest earned on the deposits, will equal the remaining amounts owing under the leases. These cash
deposits are restricted to being used for capital lease payments and have been fully funded primarily with term loans (see Note 8).
As at December 31, 2011 and 2010, the amount of restricted cash on deposit for the three RasGas II LNG Carriers was $479.1 million and
$477.2 million, respectively. As at December 31, 2011 and 2010, the weighted-average interest rates earned on the deposits were 0.3% and
0.4%, respectively. These rates do not reflect the effect of related interest rate swaps (see Note 15).
The restricted cash relating to the Madrid Spirit was used to fund the purchase obligation relating to the capital lease in 2011. As at December
31, 2011 and December 31, 2010, the amount of restricted cash on deposit for the Madrid Spirit was nil and 61.7 million Euros ($82.6 million),
respectively. As at December 31, 2011 and December 31, 2010, the weighted-average interest rates earned on these deposits were 5.0%.
The Company also maintains restricted cash deposits relating to certain term loans and other obligations, which totalled $21.1 million and $16.5
million as at December 31, 2011 and 2010, respectively.
11. Fair Value Measurements
The following methods and assumptions were used to estimate the fair value of each class of financial instruments and other non-financial
assets.
Cash and cash equivalents, restricted cash and marketable securities - The fair value of the Company’s cash and cash equivalents
restricted cash, and marketable securities approximates their carrying amounts reported in the accompanying consolidated balance sheets.
Vessels held for sale – The fair value of the Company’s vessels held for sale is based on selling prices of similar vessels and approximates
their carrying amounts reported in the accompanying consolidated balance sheets.
Investment in term loans –The fair value of the Company’s investment in term loans is estimated using a discounted cash flow analysis,
based on current rates currently available for debt with similar terms and remaining maturities. In addition, an assessment of the credit
worthiness of the borrower and the value of the collateral is taken into account when determining the fair value.
Loans to equity accounted investees and loans from equity accounted investees – The fair value of the Company’s loans to joint
ventures and loans from joint venture partners approximates their carrying amounts reported in the accompanying consolidated balance
sheets.
Long-term debt – The fair value of the Company’s fixed-rate and variable-rate long-term debt is either based on quoted market prices or
estimated using discounted cash flow analyses, based on current rates currently available for debt with similar terms and remaining maturities
and the current credit worthiness of the Company.
Derivative instruments – The fair value of the Company’s derivative instruments is the estimated amount that the Company would receive or
pay to terminate the agreements at the reporting date, taking into account, as applicable, fixed interest rates on interest rate swaps, current
interest rates, foreign exchange rates, and the current credit worthiness of both the Company and the derivative counterparties. The estimated
amount is the present value of future cash flows. The Company transacts all of its derivative instruments through investment-grade rated
financial institutions at the time of the transaction and requires no collateral from these institutions. For the Foinaven FPSO embedded
derivative (see Note 10), the calculation of the fair value takes into account the fixed rate in the contract, current interest rates and foreign
exchange rates. Given the current volatility in the credit markets, it is reasonably possible that the amounts recorded as derivative assets and
liabilities could vary by material amounts in the near term.
The Company categorizes its fair value estimates using a fair value hierarchy based on the inputs used to measure fair value. The fair value
hierarchy has three levels based on the reliability of the inputs used to determine fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
F - 25
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
The estimated fair value of the Company’s financial instruments and other non-financial assets and categorization using the fair value hierarchy
for those financial instruments that are measured at fair value on a recurring basis is as follows:
December 31, 2011
December 31, 2010
Fair Value
Hierarchy
Level (1)
Carrying
Amount
Asset (Liability)
$
Fair
Value
Asset (Liability)
$
Carrying
Amount
Asset (Liability)
$
Fair
Value
Asset (Liability)
$
Recurring
Cash and cash equivalents, restricted
cash, and marketable securities
Derivative instruments (note 15)
Interest rate swap agreements (2)
Interest rate swap agreements (2)
Cross currency interest swap
agreement
Foreign currency contracts
Foinaven embedded derivative
Non-recurring
Vessels and equipment(3)
Equity accounted investments(4)
Vessels held for sale
Other
Investment in term loans (note 4)
Loans to equity accounted investees
and joint venture partners
Loans from equity accounted
investees
Long-term debt
Level 1
1,200,063
1,200,063
1,377,399
1,377,399
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 3
Level 2
(707,437)
159,603
2,677
(4,362)
3,385
118,682
9,623
19,000
189,666
85,248
(707,437)
159,603
2,677
(4,362)
3,385
118,682
9,623
19,000
190,939
85,248
(557,991)
66,869
4,233
11,375
(3,500)
-
-
-
(557,991)
66,869
4,233
11,375
(3,500)
-
-
-
116,014
120,837
32,750
32,750
-
(5,444,373)
-
(5,072,214)
(59)
(4,432,064)
(59)
(4,192,646)
(1) The fair value hierarchy level is only applicable to each financial instrument on the consolidated balance sheets that are recorded at fair value on a recurring
basis.
(2) The fair value of the Company’s interest rate swap agreements at December 31, 2011 includes $24.5 million (December 31, 2010 - $31.0 million) of net
accrued interest which is recorded in accrued liabilities on the consolidated balance sheet.
(3) The fair value measurement used to determine the impairment of the vessels was calculated based upon the estimated sales price of the vessel or the
estimated scrap value of the respective vessels.
(4) The fair value measurement used to determine the impairment of the investment in Petrotrans Holdings Ltd. (or PTH) was based upon the estimated
liquidation values of the underlying net assets of the investment.
There are no other non-financial assets or non-financial liabilities carried at fair value as at December 31, 2011 and December 31, 2010.
12. Capital Stock
The authorized capital stock of Teekay at December 31, 2011 and 2010, was 25,000,000 shares of Preferred Stock, with a par value of $1 per
share, and 725,000,000 shares of Common Stock, with a par value of $0.001 per share. During 2011, the Company issued 0.6 million common
shares upon the exercise of stock options and restricted stock units and awards, and had share repurchases of 3.9 million common shares.
During 2010, the Company issued 0.6 million common shares upon the exercise of stock options and restricted stock units and awards, and
had share repurchases of 1.2 million common shares. As at December 31, 2011, Teekay had issued 74,391,691 shares of Common Stock
(2010 – 73,749,793) and no shares of Preferred Stock issued. As at December 31, 2011, Teekay had 68,732,341 shares of Common Stock
outstanding (2010 – 72,012,843).
Dividends may be declared and paid out of surplus only, but if there is no surplus, dividends may be declared or paid out of the net profits for
the fiscal year in which the dividend is declared and for the preceding fiscal year. Surplus is the excess of the net assets of the Company over
the aggregated par value of the issued shares of the Teekay. Subject to preferences that may apply to any shares of preferred stock
outstanding at the time, the holders of common stock are entitled to share equally in any dividends that the board of directors may declare from
time to time out of funds legally available for dividends.
During 2008, Teekay announced that its Board of Directors had authorized the repurchase of up to $200 million of shares of its Common Stock
in the open market, subject to cancellation upon approval by the Board of Directors. As at December 31, 2011, Teekay had repurchased
approximately 5.2 million shares of Common Stock for $162.3 million pursuant to such authorizations. The total remaining share repurchase
authorization at December 31, 2011, was $37.7 million.
F - 26
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
On July 2, 2010, the Company amended and restated its Stockholder Rights Agreement (the Rights Agreement), which was originally adopted
by the Board of Directors in September 2000. In September 2000, the Board of Directors declared a dividend of one common share purchase
right (a Right) for each outstanding share of the Company’s common stock. These Rights continue to remain outstanding and will not be
exercisable and will trade with the shares of the Company’s common stock until after such time, if any, as a person or group becomes an
―acquiring person‖ as set forth in the amended Rights Agreement. A person or group will be deemed to be an ―acquiring person,‖ and the
Rights generally will become exercisable, if a person or group acquires 20% or more of the Company’s common stock, or if a person or group
commences a tender offer that could result in that person or group owning more than 20% of the Company’s common stock, subject to certain
higher thresholds for existing stockholders that currently own in excess of 15% of the Company’s common stock. Once exercisable, each Right
held by a person other than the ―acquiring person‖ would entitle the holder to purchase, at the then-current exercise price, a number of shares
of common stock of the Company having a value of twice the exercise price of the Right. In addition, if the Company is acquired in a merger or
other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current
exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right. The a mended Rights
Agreement will expire on July 1, 2020, unless the expiry date is extended or the Rights are earlier redeemed or exchanged by the Company.
Stock-based compensation
As at December 31, 2011, the Company had reserved pursuant to its 1995 Stock Option Plan and 2003 Equity Incentive Plan (collectively
referred to as the Plans) 4,895,787 shares of Common Stock (2010 – 5,537,381) for issuance upon exercise of options or equity awards
granted or to be granted. During the years ended December 31, 2011, 2010 and 2009, the Company granted options under the Plans to
acquire up to 95,604, 733,167, and 1,517,900 shares of Common Stock, respectively, to certain eligible officers, employees and directors of the
Company. The options under the Plans have ten-year terms and vest equally over three years from the grant date. All options outstanding as of
December 31, 2011, expire between March 11, 2012 and March 14, 2021, ten years after the date of each respective grant.
A summary of the Company’s stock option activity and related information for the years ended December 31, 2011, 2010 and 2009, are as
follows:
December 31, 2011
December 31, 2010
December 31, 2009
Outstanding-beginning
of year
Granted
Exercised
Forfeited / expired
Outstanding-end of year
Options
(000’s)
#
6,123
96
(363)
(143)
5,713
Exercisable-end of year
4,656
Weighted-
Average
Exercise Price
$
Options
(000’s)
#
Weighted-
Average
Exercise Price
$
Options
(000’s)
#
Weighted-
Average
Exercise Price
$
31.54
34.93
16.14
33.11
32.47
35.40
5,983
733
(380)
(213)
6,123
3,963
31.46
24.42
15.12
29.00
31.54
36.80
4,813
1,518
(180)
(168)
5,983
3,299
37.22
11.84
12.21
35.16
31.46
36.50
A summary of the Company's non-vested stock option activity and related information for the years ended December 31, 2011, 2010 and 2009,
are as follows:
December 31, 2011
December 31, 2010
December 31, 2009
Options
(000’s)
#
2,160
96
(1,071)
(128)
Weighted-
Average
Grant Date Fair
Value
$
6.36
11.27
6.18
11.47
Options
(000’s)
#
2,684
733
(1,084)
(173)
Weighted-
Average
Grant Date Fair
Value
$
Options
(000’s)
#
Weighted-
Average
Grant Date Fair
Value
$
6.56
8.16
7.48
10.06
2,240
1,518
(974)
(100)
10.59
3.74
10.88
11.38
1,057
6.40
2,160
6.36
2,684
6.56
Outstanding non-vested
stock options-
beginning of year
Granted
Vested
Forfeited
Outstanding non-vested
stock options-end of
year
The weighted average grant date fair value for options forfeited in 2011 was $1.2 million (2010 - $1.7 million).
As of December 31, 2011, there was $2.0 million of total unrecognized compensation cost related to non-vested stock options granted under
the Plans. Recognition of this compensation is expected to be $1.5 million (2012), and $0.5 million (2013). During the years ended December
31, 2011, 2010 and 2009, the Company recognized $5.3 million, $8.1 million and $9.8 million, respectively, of compensation cost relating to
stock options granted under the Plans. The intrinsic value of options exercised during 2011 was $3.8 million (2010 - $6.8 million; 2009 - $2.0
million).
F - 27
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
As at December 31, 2011, the intrinsic value of the outstanding in–the-money stock options was $20.9 million (2010 - $41.6 million) and
exercisable stock options was $12.6 million (2010 - $14.3 million). As at December 31, 2011, the weighted-average remaining life of options
vested and expected to vest was 5.4 years (2010 – 6.2 years).
Further details regarding the Company’s outstanding and exercisable stock options at December 31, 2011 are as follows:
Range of Exercise
Prices
$10.00 – $14.99
$15.00 – $19.99
$20.00 – $29.99
$30.00 – $34.99
$35.00 – $39.99
$40.00 – $44.99
$45.00 – $49.99
$50.00 – $59.99
$60.00 – $64.99
Outstanding Options
Weighted-
Average
Remaining Life
(Years)
Weighted-
Average
Exercise Price
$
Options
(000’s)
#
1,085
439
685
444
753
1,276
352
676
3
5,713
7.2
0.8
8.2
3.8
4.3
6.2
3.2
5.2
5.3
5.5
11.84
19.57
24.39
33.86
38.98
40.41
46.80
51.40
60.96
32.47
Options
(000’s)
#
599
439
207
351
753
1,276
352
676
3
4,656
Exercisable Options
Weighted-
Average
Remaining Life
(Years)
Weighted-
Average
Exercise Price
$
7.2
0.8
8.1
2.3
4.3
6.2
3.2
5.2
5.3
4.9
11.84
19.57
24.33
33.58
38.98
40.41
46.80
51.40
60.96
35.40
The weighted-average grant-date fair value of options granted during 2011 was $11.27 per option (2010 - $8.16, 2009 - $3.74). The fair value
of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model. The following weighted-average
assumptions were used in computing the fair value of the options granted: expected volatility of 53.6% in 2011, 52.7% in 2010 and 45% in
2009; expected life of four years; dividend yield of 3.8% in 2011, 3.3% in 2010 and 2.3% in 2009; risk-free interest rate of 2.1% in 2011, 2.6% in
2010, and 2.0% in 2009; and estimated forfeiture rate of 11.2% in 2011, 9.8% in 2010 and 9.0% in 2009. The expected life of the options
granted was estimated using the historical exercise behavior of employees. The expected volatility was generally based on historical volatility
as calculated using historical data during the five years prior to the grant date.
The Company grants restricted stock units and performance share units to certain eligible officers, employees and directors of the Company.
Each restricted stock unit and performance share unit is equivalent in value to one share of the Company’s common stock plus reinvested
dividends from the grant date to the vesting date. The restricted stock units vest equally over two or three years from the grant date and the
performance share units vest three years from the grant date. Upon vesting, the value of the restricted stock units and performance share units
are paid to each grantee in the form of shares. The number of performance share units that vest will range from zero to three times the original
number granted, based on certain performance and market conditions.
In February 2010, the Company modified settlement terms for its then outstanding restricted stock units, such that all restricted stock units will
be paid in the form of shares. This modification decreased accrued liabilities by $4.0 million, decreased other long-term liabilities by $2.0
million, and increased additional paid-in capital by $6.0 million.
During 2011, the Company granted 358,180 restricted stock units with a fair value of $12.5 million and 73,349 performance sha re units with a
fair value of $3.7 million, based on the quoted market price and a Monte Carlo valuation model, to certain of the Company’s employees and
directors. During 2011, 214,863 restricted stock units with a market value of $4.9 million vested and that amount was paid to grantees by
issuing 131,682 shares of common stock, net of withholding taxes. During 2010, the Company granted 263,620 restricted stock units with a fair
value of $6.4 million and 87,054 performance share units with a fair value of $3.5 million, based on the quoted market price and a Monte Carlo
valuation model, to certain of the Company’s employees and directors. During 2010, 227,165 restricted stock units with a market value of $4.9
million vested and that amount was paid to grantees by issuing 148,518 shares of common stock, net of withholding taxes. During 2009, the
Company granted 568,342 restricted stock units with a fair value of $8.2 million based on the quoted market price, to certain of the Company’s
employees and directors, of which 187,400 were issued pursuant to the Company’s VIP plan. During 2009, 102,300 restricted stock units with a
market value of $2.5 million vested and that amount was paid to grantees by issuing 18,318 shares of common stock, net of withholding taxes
and $1.9 million in cash. For the year ended December 31, 2011, the Company recorded an expense of $12.5 million (2010 - $4.8 million, 2009
- $4.0 million) related to the restricted stock units.
During 2011, the Company also granted 29,663 (2010 – 27,028 and 2009 – 47,570) shares of restricted stock awards with a fair value of $1.0
million, based on the quoted market price, to certain of the Company’s directors. The shares of restricted stock are issued when granted.
In March 2011, the Company incurred a one-time $11.0 million increase to the pension plan benefits of Bjorn Moller, who retired from his
position as the Company’s President and Chief Executive Officer on April 1, 2011. The additional pension benefit was in recognition of Mr.
Moller’s service to the Company. In addition, the Company recognized a compensation expense of approximately $4.7 million which related to
the portion of Mr. Moller’s previously unvested outstanding stock-based compensation grants that vested on the date of his retirement. The total
compensation expense related to Mr. Moller’s retirement of $15.7 million was recorded in general and administrative expense in the
consolidated statements of income (loss) for the year ended December 31, 2011.
F - 28
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
13. Related Party Transactions
As at December 31, 2011, Resolute Investments, Ltd. (or Resolute) owned 45.5% (2010 – 42.3%, 2009 – 41.9%) of the Company's
outstanding Common Stock. One of the Company's directors, Thomas Kuo-Yuen Hsu, is the President and a director of Resolute. Another of
the Company's directors, Axel Karlshoej, is among the directors of Path Spirit Limited, which is the trust protector for the trust that indirectly
owns all of Resolute’s outstanding equity. The Company’s Chairman, C. Sean Day, is engaged as a consultant to Kattegat Limited, the parent
company of Resolute, to oversee its investments, including that in the Teekay group of companies.
14. Other Income
Volatile organic compound emission plant lease income
Gain on sale of marketable securities
Miscellaneous income
Other income
15. Derivative Instruments and Hedging Activities
Year Ended
December 31, 2011
$
2,900
3,372
6,088
12,360
Year Ended
December 31, 2010
$
4,714
1,805
1,008
7,527
Year Ended
December 31, 2009
$
6,892
-
6,635
13,527
The Company uses derivatives to manage certain risks in accordance with its overall risk management policies.
Foreign Exchange Risk
The Company economically hedges portions of its forecasted expenditures denominated in foreign currencies with foreign currency forward
contracts. Certain foreign currency forward contracts are designated, for accounting purposes, as cash flow hedges of forecasted foreign
currency expenditures.
As at December 31, 2011, the Company was committed to the following foreign currency forward contracts:
Contract Amount
In Foreign
Currency
(millions)
1,044.5
34.6
36.8
34.5
Average
Forward
Rate (1)
6.00
0.74
1.01
0.64
Norwegian Kroner
Euro
Canadian Dollar
British Pounds
Fair Value / Carrying Amount
of Asset / (Liability)
Expected Maturity
Hedge
$0.6
-
(0.2)
(0.3)
$0.1
2012
Non-Hedge
(in millions of U.S. Dollars)
$141.3
40.9
31.8
46.5
$260.5
($1.6)
(1.7)
(0.3)
(0.9)
($4.5)
2013
$32.8
5.8
4.6
7.8
$51.0
(1) Average contractual exchange rate represents the contracted amount of foreign currency one U.S. Dollar will buy.
The Company incurs interest expense on its Norwegian Kroner-denominated bonds. The Company has entered into a cross currency swap to
economically hedge the foreign exchange risk on the principal and interest. As at December 31, 2011, the Company was committed to one
cross currency swap with the notional amounts of NOK 600 million and $98.5 million, which exchanges a receipt of floating interest based on
NIBOR plus a margin of 4.75% with a payment of floating interest based on LIBOR plus a margin of 5.04%. In addition, the cross currency
swap locks in the transfer of principal to $98.5 million upon maturity in exchange for NOK 600 million. The fair value of the cross currency swap
agreement as at December 31, 2011 was $2.7 million.
Interest Rate Risk
The Company enters into interest rate swap agreements which exchange a receipt of floating interest for a payment of fixed interest to reduce
the Company’s exposure to interest rate variability on its outstanding floating-rate debt. In addition, the Company holds interest rate swaps
which exchange a payment of floating rate interest for a receipt of fixed interest in order to reduce the Company’s exposure to the variability of
interest income on its restricted cash deposits. The Company has not designated its interest rate swap agreements as cash flow hedges for
accounting purposes.
As at December 31, 2011, the Company was committed to the following interest rate swap agreements related to its LIBOR-based debt,
restricted cash deposits and EURIBOR-based debt, whereby certain of the Company's floating-rate debt and restricted cash deposits were
swapped with fixed-rate obligations or fixed-rate deposits:
F - 29
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
LIBOR-Based Debt:
U.S. Dollar-denominated interest rate swaps (2)
U.S. Dollar-denominated interest rate swaps
LIBOR-Based Restricted Cash Deposit:
U.S. Dollar-denominated interest rate swaps (2)
EURIBOR-Based Debt:
Euro-denominated interest rate swaps (3) (4)
Interest
Rate Index
Principal
Amount
$
Fair Value /
Carrying Amount
of Asset /
(Liability)
$
Weighted-
Average
Remaining
Term
(Years)
Fixed
Interest
Rate
(%) (1)
LIBOR
LIBOR
423,748
3,766,809
(119,895)
(561,747)
LIBOR
470,199
159,603
EURIBOR
348,905
5,009,661
(25,795)
(547,834)
25.1
8.4
25.1
12.5
4.9
3.8
4.8
3.1
________________________________________________
(1) Excludes the margins the Company pays on its variable-rate debt, which as of December 31, 2011 ranged from 0.30% to 3.25%.
(2) Principal amount reduces quarterly.
(3) Principal amount reduces monthly to 70.1 million Euros ($90.9 million) by the maturity dates of the swap agreements.
(4) Principal amount is the U.S. Dollar equivalent of 269.2 million Euros.
Spot Tanker Market Risk
In order to reduce variability in revenues from fluctuations in certain spot tanker market rates, from time to time the Company has entered into
forward freight agreements (or FFAs). FFAs involve contracts to move a theoretical volume of freight at fixed-rates, thus attempting to reduce
the Company’s exposure to spot tanker market rates. As at December 31, 2011 and 2010, the Company had no FFAs commitments. Net gains
and losses from FFAs are recorded within realized and unrealized gain (loss) on non-designated derivative instruments in the consolidated
statements of income (loss).
Commodity Price Risk
From time to time, the Company enters into bunker fuel swap contracts relating to a portion of its bunker fuel expenditures. As at December 31,
2011 and 2010, the Company had no bunker fuel swap contract commitments. Net gains and losses from the bunker fuel swap contracts are
recorded within realized and unrealized gain (loss) on non-designated derivative instruments in the consolidated statements of income (loss).
Tabular Disclosure
The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Company’s
consolidated balance sheets.
As at December 31, 2011:
Derivatives designated as a cash flow hedge:
Foreign currency contracts
Derivatives not designated as a cash flow hedge:
Foreign currency contracts
Interest rate swap agreements
Cross currency swap
Foinaven embedded derivative (note 10)
As at December 31, 2010:
Derivatives designated as a cash flow hedge:
Foreign currency contracts
Derivatives not designated as a cash flow hedge:
Foreign currency contracts
Interest rate swap agreements
Forward freight agreements
Foinaven embedded derivative
Current
Portion of
Derivative
Assets
Derivative
Assets
Accrued
Liabilities
Current
Portion of
Derivative
Liabilities
Derivative
Liabilities
1,551
2,592
15,608
1,576
3,385
24,712
28
3
139,651
875
-
140,557
-
(1,192)
(264)
-
(24,750)
225
-
(24,525)
(6,248)
(109,897)
-
-
(117,337)
(832)
(568,446)
-
-
(569,542)
3,437
1,546
-
(652)
22
4,988
16,759
2,031
-
27,215
3,172
45,524
2,003
3,738
55,983
-
(31,174)
199
-
(30,975)
(1,050)
(135,171)
-
(7,238)
(144,111)
(88)
(387,058)
-
-
(387,124)
F - 30
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
For the periods indicated, the following table presents the effective portion of gains (losses) on foreign currency contracts designated and
qualifying as cash flow hedges that was recognized in (1) accumulated other comprehensive income (or AOCI), (2) recorded in accumulated
other comprehensive income (loss) during the term of the hedging relationship and reclassified to earnings, and (3) the ineffective portion of
gains (losses) on derivative instruments designated and qualifying as cash flow hedges.
Year Ended December 31, 2011
Year Ended December 31, 2010
Balance
Sheet
(AOCI)
Statement of Income (Loss)
Balance
Sheet
(AOCI)
Statement of Income (Loss)
Effective
Portion
Effective
Portion
Ineffective
Portion
Effective
Portion
Effective
Portion
Ineffective
Portion
2,007
918
(568)
2,007
4,636
5,554
(223)
(791)
Vessel operating expenses
General and administrative
expenses
(3,559)
(680)
(3,473)
(3,559)
(2,360)
(3,040)
(1,402)
(4,875)
Vessel operating expenses
General and administrative
expenses
Realized and unrealized (losses) gains from derivative instruments that are not designated for accounting purposes as cash flow hedges, are
recognized in earnings and reported in realized and unrealized (losses) gains on non-designated derivatives in the consolidated statements of
income (loss). The effect of the (loss) gain on derivatives not designated as hedging instruments in the statements of income (loss) are as
follows:
Realized (losses) gains relating to:
Interest rate swap agreements
Interest rate swap amendments and terminations
Foreign currency forward contracts
Forward freight agreements, bunker fuel swap contracts and other
Unrealized (losses) gains relating to:
Interest rate swap agreements
Foreign currency forward contracts
Forward freight agreements and bunker fuel swap contracts
Foinaven embedded derivative
Year Ended
December 31,
2011
$
Year Ended
December 31,
2010
$
Year Ended
December 31,
2009
$
(132,931)
(149,666)
9,965
36
(272,596)
(58,405)
(11,399)
-
(322)
(70,126)
(154,098)
-
(2,274)
(7,914)
(164,286)
(146,780)
6,307
(108)
5,269
(135,312)
(127,936)
-
(8,984)
(1,293)
(138,213)
258,710
14,797
4,167
585
278,259
Total realized and unrealized (losses) gains on non-designated
derivative instruments
(342,722)
(299,598)
140,046
Realized and unrealized gains (losses) of the cross currency swap are recognized in earnings and reported in foreign exchange gain (loss) in
the consolidated statements of income (loss). For the year ended December 31, 2011, an unrealized loss of $(1.6) million (2010 gain - $4.0
million) and a realized gain of $2.9 million (2010 - $0.2 million) have been recognized in the consolidated statements of income (loss) relating to
the cross currency swap.
As at December 31, 2011, the Company’s accumulated other comprehensive loss included $0.3 million of unrealized losses on foreign
currency forward contracts designated as cash flow hedges. As at December 31, 2011, the Company estimated, based on then current foreign
exchange rates, that it would reclassify approximately $(0.4) million of net losses on foreign currency forward contracts from accumulated other
comprehensive loss to earnings during the next 12 months. During 2010, the Company de-designated certain foreign currency forward
contracts that were designated as cash flow hedges and reclassified $0.6 million of net losses from accumulated other comprehensive loss to
earnings in the consolidated statement of income (loss). There were no de-designations in 2011.
The Company is exposed to credit loss to the extent the fair value represents an asset (see above) in the event of non-performance by the
counterparties to the foreign currency forward contracts, and cross currency and interest rate swap agreements; however, the Company does
not anticipate non-performance by any of the counterparties. In order to minimize counterparty risk, the Company only enters into derivative
transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transaction. In
addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.
F - 31
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
16. Commitments and Contingencies
a) Vessels Under Construction
As at December 31, 2011, the Company was committed to the construction of four shuttle tankers, one FPSO unit and the conversion of an
existing Aframax tanker to an FPSO unit for a total cost of approximately $1.7 billion, excluding capitalized interest. The four shuttle tankers are
scheduled for delivery in 2013 and the two FPSO units are scheduled to be delivered between 2012 and 2013. As at December 31, 2011,
payments made towards these commitments totalled $499.1 million (excluding $8.8 million of capitalized interest and other miscellaneous
construction costs). As at December 31, 2011, the remaining payments required to be made under these newbuilding contracts were $503.6
million in 2012, $707.4 million in 2013 and $13.5 million in 2014. See Note 25(b) to the consolidated financial statements for information
related to the conversion of the existing Aframax tanker to an FPSO unit.
b) Joint Ventures
Teekay has a 33% interest in a joint venture that charters four newbuilding 160,400-cubic meter LNG carriers for a period of 20 years to the
Angola LNG Project, which is being developed by subsidiaries of Chevron Corporation, Sociedade Nacional de Combustiveis de An gola EP,
BP Plc, Total S.A. and ENI SpA. The vessels are chartered at fixed rates, with inflation adjustments. The other members of the joint venture are
Mitsui & Co., Ltd. and NYK Bulkship (Europe) Ltd., which hold 34% and 33% interests in the joint venture, respectively. In connection with this
award, the joint venture entered into agreements with Samsung Heavy Industries Co. Ltd. to construct the four LNG carriers at a total cost of
approximately $906.0 million (of which Teekay’s 33% portion was $299.0 million), excluding capitalized interest and other miscellaneous
construction costs. During the year ended December 31, 2011, Teekay sold to Teekay LNG its 33% ownership interest in these vessels and
related charter contracts, in accordance with existing agreements. During the year ended December 31, 2011, three of the Angola LNG carriers
delivered and commenced their 20-year, fixed-rate charter contracts. The final Angola LNG carrier delivered in January 2012. As at December
31, 2011, payments made towards these commitments by the joint venture company totalled $770.1 million (of which Teekay’s 33%
contribution was $254.1 million), excluding capitalized interest and other miscellaneous construction costs. As at December 31, 2011, the
remaining payments required to be made under these contracts were $135.9 million (2012), of which Teekay’s share was 33% of this amount.
Teekay has also provided certain guarantees in relation to the performance of the joint venture company. The fair value of the guarantees was
a liability of $2.5 million and $1.8 million, respectively, as at December 31, 2011 and December 31, 2010 and is included as part of other long-
term liabilities in the Company’s consolidated balance sheets.
In September 2010, Teekay Tankers entered into a joint venture arrangement (the Joint Venture) with Wah Kwong Maritime Transport Holdings
Limited (or Wah Kwong) to have a VLCC newbuilding constructed, managed and chartered to third parties. Teekay Tankers has a 50%
economic interest in the Joint Venture, which is jointly controlled by Teekay Tankers and Wah Kwong. The VLCC has an estimated purchase
price of approximately $98 million (of which Teekay Tankers’ 50% portion is $49 million), excluding capitalized interest and other miscellaneous
construction costs. The vessel is expected to deliver during the second quarter of 2013. As at December 31, 2011, the remaining payments
required to be made under this newbuilding contract, including the Wah Kwong’s 50% share, was $44.1 million (2012) and $34.3 million (2013).
As of December 31, 2011, the Joint Venture had received a firm commitment from a financial institution for a loan of approximately $68.6
million, which is subject to satisfactory completion of loan documentation. Teekay Tankers and Wah Kwong have each agreed to finance 50%
of the costs to acquire the VLCC that are not financed with commercial bank financing. Teekay Tankers made its initial $9.8 million advance to
the Joint Venture in October 2010. The advance is non-interest bearing, unsecured and the amount is recorded in loans to joint ventures and
joint venture partners in the consolidated balance sheets. A third party has agreed to time-charter the vessel following its delivery for a term of
five years at a fixed daily rate and an additional amount if the daily rate of any sub-charter earned by the third party exceeds a certain
threshold.
c) Purchase Obligation
As at December 31, 2011, the Company was committed to fund the remaining upgrade costs of the Voyageur FPSO unit in connection with the
Sevan acquisition, for a total cost estimated to be between $110 and $130 million, excluding capitalized interest. The upgrades on the FPSO
unit are expected to be completed by the fourth quarter of 2012. As at December 31, 2011, payments made towards these remaining upgrade
costs totalled $22.7 million and the remaining payments required to be made are estimated to be between $90 and $105 million in 2012. In
addition, the Company’s purchase of the FPSO unit is expected to be completed in the fourth quarter of 2012. In addition to the upgrade costs,
the remaining payments required to be made to acquire the Voyageur total approximately $92.4 million (net of assumed debt of $230 million) in
2012.
d) Legal Proceedings and Claims
The Company may, from time to time, be involved in legal proceedings and claims that arise in the ordinary course of business. The Company
believes that any adverse outcome of existing claims, individually or in the aggregate, would not have a material effect on its financial position,
results of operations or cash flows, when taking into account its insurance coverage and indemnifications from charterers.
On November 13, 2006, the Company’s shuttle tanker, the Navion Hispania, collided with the Njord Bravo, an FSO unit, while preparing to load
an oil cargo from the Njord Bravo. The Njord Bravo services the Njord field, which is operated by Statoil Petroleum AS (or Statoil) and is located
off the Norwegian coast. At the time of the incident, Statoil was chartering the Navion Hispania from the Company. The Navion Hispania and
the Njord Bravo both incurred damages as a result of the collision. In November 2007, Navion Offshore Loading AS (or NOL), our subsidiary,
and two other subsidiaries of ours, were named as co-defendants in a legal action filed by Norwegian Hull Club (the hull and machinery
insurers of the Njord Bravo) and various licensees in the Njord field (or the Plaintiffs). The claim sought damages for vessel repairs, expenses
for a replacement vessel and other amounts related to production stoppage on the field, totaling NOK 213,000,000 (approximately USD $36
F - 32
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
million). The matter was heard before the Stavanger District Court in December 2011. The court found that NOL is liable for damages to the
Plaintiffs, but excluded a large part of the indirect or consequential losses from the liability. The court also found that Statoil is liable for the
same amount of damages to NOL. The parties may appeal against the decision of the court. As a result of the recent judgment, as at
December 31, 2011, the Company has recognized a liability of NOK 76,000,000 (approximately $12.7 million, which is a reduced amount in
accordance with the court’s decision to exclude a large part of the indirect or consequential losses) and a corresponding receivable from Statoil
ASA recorded in other liabilities and other assets, respectively.
The Company believes the likelihood of any losses relating to the claim is remote. The Company believes that the charter contract relating to
the Navion Hispania requires that Statoil be responsible and indemnify the Company for all losses relating to the damage to the Njord Bravo.
The Company also maintains P&I insurance for damages to the Navion Hispania and insurance for collision-related costs and claims. The
Company believes that these insurance policies will cover the costs related to this incident, including any costs not indemnified by Statoil,
subject to standard deductibles. In addition, Teekay has agreed to indemnify Teekay Offshore for any losses it may incur in connection with this
incident.
Teekay Nakilat Corporation (or Teekay Nakilat), is the lessee under 30-year capital lease arrangements with a third party for the RasGas II
LNG Carriers (or RasGas II Leases). The UK taxing authority, (or HMRC), has been urging our lessor as well as other lessors under capital
lease arrangements that have tax benefits similar to the ones provided by the RasGas II Leases, to terminate such finance lease arrangements
and has in other circumstances challenged the use of similar structures. As a result, the lessor has requested that Teekay Na kilat enter into
negotiations to terminate the RasGas II Leases. Teekay Nakilat has declined this request as it does not believe that HRMC would be able to
successfully challenge the availability of the tax benefits of these leases to the lessor. This assessment is partially based on a January 2012
court decision regarding a similar financial lease of an LNG carrier that ruled in favor of the taxpayer. However, it is possible that the HMRC
may appeal that decision. If the HMRC were able to successfully challenge the RasGas II Leases, Teekay Nakilat, could be subject to
significant costs associated with the termination of the lease or increased lease payments to compensate the lessor for the lost tax benefits.
The Company estimates its 70% share of the potential exposure to range from $54 million to $77 million.
e) Redeemable Non-Controlling Interest
In the year ended December 31, 2010, an unrelated party contributed a shuttle tanker with a value of $35.0 million to a subsidiary of Teekay
Offshore in exchange for a 33% equity interest in the subsidiary. The equity issuance resulted in a dilution loss of $7.4 million. The non-
controlling interest owner of Teekay Offshore’s 67% owned subsidiary holds a put option which, if exercised, would obligate T eekay Offshore to
purchase the non-controlling interest owner’s 33% share in the entity for cash in accordance with a defined formula. The redeemable non-
controlling interest is subject to remeasurement if the formulaic redemption amount exceeds the carrying value. No remeasurement was
required as at December 31, 2011.
f) Other
The Company enters into indemnification agreements with certain officers and directors. In addition, the Company enters into other
indemnification agreements in the ordinary course of business. The maximum potential amount of future payments required under these
indemnification agreements is unlimited. However, the Company maintains what it believes is appropriate liability insurance that reduces its
exposure and enables the Company to recover future amounts paid up to the maximum amount of the insurance coverage, less any deductible
amounts pursuant to the terms of the respective policies, the amounts of which are not considered material.
17. Supplemental Cash Flow Information
a) The changes in operating assets and liabilities for the years ended December 31, 2011, 2010 and 2009, are as follows:
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued and other liabilities
Other long-term liabilities
Year Ended
December 31, 2011
$
Year Ended
December 31, 2010
$
Year Ended
December 31, 2009
$
(68,914)
(8,225)
12,216
(19,424)
-
(84,347)
(21,820)
12,719
(11,002)
65,518
-
45,415
64,886
35,006
(2,731)
26,240
25,254
148,655
b) Cash interest paid, including realized interest rate swap settlements, during the years ended December 31, 2011, 2010, and 2009, totalled
$279.1 million, $271.3 million and $263.1 million, respectively. In addition, during the years ended December 31, 2011, 2010 and 2009,
cash interest paid relating to interest rate swap amendments and terminations totalled $149.7 million, $nil and $nil, respectively.
c) During the year ended December 31, 2010, an unrelated party contributed a shuttle tanker with a value of $35.0 million to a subsidiary of
the Company in exchange for a 33% equity interest in the subsidiary as described in Note 16(e) to these consolidated financial statements.
This contribution has been treated as a non-cash transaction in the Company’s consolidated statement of cash flows.
F - 33
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
18. Vessel Sales and Write-downs
a) Vessel Sales
In March 2011, the Company sold a 1988-built FSO unit. The FSO unit was part of the Company’s shuttle tanker and FSO segment. The
Company realized a loss of $0.2 million from the sale of the FSO unit. In August 2011, the Company sold a 1993-built Aframax tanker which
was part of the Company’s conventional tanker segment. The Company did not realize a gain or a loss from the sale of the vessel.
In February 2010, the Company sold a 1992-built Aframax tanker and realized a loss of $0.2 million as a result of this sale. In April 2010, the
Company sold a 1995-built Aframax tanker for $17.3 million, which approximated the vessel net book value. In August 2010, the Company sold
a 1995-built Aframax tanker and a 1990-built product tanker for $17.2 million and $4.0 million, respectively. The Company realized a loss of
$1.9 million as a result of the sale of the Aframax tanker and the proceeds from the sale of the product tanker approximated the vessel net book
value. These vessels were part of the Company’s conventional tanker segment. In November 2010, the Company sold a 2000-built LPG tanker
for $21.6 million and realized a gain of $4.3 million as a result of the sale. The vessel was part of the Company’s liquefied gas segment.
In January and February 2009, the Company sold a 2009-built product tanker and a 1993-built Aframax tanker, respectively, through a sale-
leaseback agreement. The Company realized a gain of $17.7 million as a result of these transactions, of which $17.6 million was deferred and
will be amortized over the four-year term of the bareboat charter leaseback. In May 2009, the Company sold a 2007-built product tanker and a
2005-built product tanker and realized a gain of $29.8 million as a result of these transactions. In July and September 2009, the Company sold
a 1992-built Aframax tanker and a 1989-built product tanker, respectively. These two vessels were written-down by $7.1 million and $4.0
million, respectively, to their fair market value less costs to sell. The vessels sold in 2009 were part of the Company’s con ventional tanker
segment.
b) Write-downs of Vessels, Equipment and Equity Accounted Investments
The Company’s consolidated statements of income (loss) for the year ended December 31, 2011 includes a $112.1 million write-down on
certain of the Company’s conventional tankers. The vessels are part of the Company’s conventional tanker segment and were written down to
their estimated fair values, which is either the estimated sales price of the vessel or the estimated scrap value. The recognition of these write-
downs was driven by the continuing weak tanker market, which has largely been caused by an oversupply of vessels relative to demand. Two
of these vessels were presented on the consolidated balance sheet as at December 31, 2011 as vessels held for sale.
The Company’s consolidated statements of income (loss) for the year ended December 31, 2011 includes a $36.9 million write-down on certain
of the Company’s shuttle tankers and a FSO unit. These vessels are part of the Company’s shuttle tanker and FSO segment and were written
down to their estimated fair value, which is the estimated sales price. The recognition of these write-downs was driven by the older age of the
vessels, the requirements of operating in the North Sea, and recent economic developments.
During the year ended December 31, 2011, the Company incurred a $19.4 million write-down of its investment in PTH, a 50% joint venture
which provides ship-to-ship lightering services. The Company’s investment in PTH is part of the Company’s conventional tanker segment and
was written down to its estimated fair value, which is based upon the estimated liquidation values of the underlying net assets of the
investment. The recognition of this write-down was driven by the continuing weak tanker market.
The Company’s consolidated statements of income (loss) for the year ended December 31, 2010 includes a total write-down of $19.4 million for
impairment of certain shuttle tanker equipment and one 1992-built shuttle tanker, as their carrying values exceeded their estimated fair values
using Level 2 of the fair value hierarchy. The shuttle tanker equipment and the shuttle tanker were written-down to their estimated fair values at
December 31, 2010. The two write-downs were included in the Company’s shuttle tanker and FSO segment.
The Company’s consolidated statements of income (loss) for the year ended December 31, 2009 includes a $24.2 million write-down for
impairment of three older vessels due to lower fair values compared to carrying values, of which two vessels were sold at the end of 2009. The
Company used then recent sale prices of similar age and size of vessels to determine the fair value.
19. Earnings (Loss) Per Share
Year ended
Year ended
Year ended
December 31, 2011 December 31, 2010 December 31, 2009
$
$
$
Net (loss) income attributable to stockholders’ of Teekay Corporation
(368,916)
(267,287)
128,412
Weighted average number of common shares
Dilutive effect of stock-based compensation
Common stock and common stock equivalents
70,234,817
-
70,234,817
72,862,617
-
72,862,617
72,549,361
509,470
73,058,831
(Loss) earnings per common share:
- Basic
- Diluted
(5.25)
(5.25)
(3.67)
(3.67)
1.77
1.76
F - 34
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
The anti-dilutive effect attributable to outstanding stock-based compensation excluded from the calculation of diluted (loss) earnings per
common share, for the years ended December 31, 2011, 2010 and 2009 was 5.7 million, 6.1 million and 4.3 million shares, respectively.
20. Restructuring Charges
During 2011, the Company incurred $5.5 million of restructuring costs. The restructuring costs were primarily related to the sale of an FSO unit,
the Karratha Spirit, and the termination of the time-charter for the Basker Spirit. The Company committed to plans for termination of the
employment of certain seafarers of the two vessels. At December 31, 2011, no restructuring liability was recorded in accrued liabilities on the
consolidated balance sheets.
During 2010, the Company incurred $16.4 million of restructuring costs. The restructuring costs were primarily related to the reflagging of
certain vessels, crew changes, and global staffing changes. At December 31, 2010, $0.1 million of restructuring liability was recorded in
accrued liabilities on the consolidated balance sheets.
During 2009, the Company incurred $14.4 million of restructuring costs. The restructuring costs were primarily comprised of the reflagging of
certain vessels, transfer of certain ship management functions from the Company’s office in Spain to a subsidiary of Teekay, global staffing
changes and closure of one of the Company’s three offices in Norway. At December 31, 2009, $2.0 million of restructuring liability was
recorded in accrued liabilities on the consolidated balance sheets.
21. Income Taxes
Teekay and a majority of its subsidiaries are not subject to income tax in the jurisdictions in which they are incorporated because they do not
conduct business or operate in those jurisdictions. However, among others, the Company’s Australian ship-owing subsidiaries and its
Norwegian subsidiaries are subject to income taxes.
The significant components of the Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets:
Vessels and equipment
Tax losses carried forward (1)
Other
Total deferred tax assets
Deferred tax liabilities:
Vessels and equipment
Long-term debt
Other
Total deferred tax liabilities
Net deferred tax assets
Valuation allowance
Net deferred tax assets (liabilities)
December 31,
2011
$
December 31,
2010
$
76,582
380,299
95,312
552,193
60,776
24,918
45,624
131,318
420,875
(398,559)
22,316
2,182
286,499
97,945
386,626
122,263
31,077
2,900
156,240
230,386
(213,385)
17,001
(1) Substantially all of the Company’s net operating loss carryforwards of $1.27 billion relate to its Australian ship-owning subsidiaries and its Norwegian
subsidiaries. These net operating loss carryforwards are available to offset future taxable income in the respective jurisdictions, and can be carried forward
indefinitely.
The components of the provision for income taxes are as follows:
Current
Deferred
Income tax (expense) recovery
Year Ended
December 31, 2011
$
(6,768)
2,478
(4,290)
Year Ended
December 31, 2010
$
(13,129)
19,469
6,340
Year Ended
December 31, 2009
$
(28,312)
5,423
(22,889)
The Company operates in countries that have differing tax laws and rates. Consequently, a consolidated weighted average tax rate will vary
from year to year according to the source of earnings or losses by country and the change in applicable tax rates. Reconciliations of the tax
charge related to the relevant year at the applicable statutory income tax rates and the actual tax charge related to the relevant year are as
follows:
F - 35
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Net (loss) income before taxes
Net (loss) income not subject to taxes
Net (loss) income subject to taxes
Year Ended
December 31, 2011
$
(382,431)
(351,773)
(30,658)
Year Ended
December 31, 2010
$
(172,975)
(416,684)
243,709
Year Ended
December 31, 2009
$
232,666
550,299
(317,633)
At applicable statutory tax rates
Permanent and currency differences
Adjustments to valuation allowances and uncertain tax
positions
Other
Tax expense (recovery) related to the current year
(8,987)
(172,368)
179,675
5,970
4,290
57,737
(104,514)
40,863
(425)
(6,340)
(89,395)
109,857
1,623
804
22,889
The following is a roll-forward of the Company’s unrecognized tax benefits, recorded in other long-term liabilities, from January 1, 2009 to
December 31, 2011:
Balance of unrecognized tax benefits as at January 1
Increase for positions taken in prior years
Increase for positions related to the current year
Decreases for positions taken in prior years
Decreases related to statute of limitations
Balance of unrecognized tax benefits as at December 31
2011
$
45,302
83
3,308
-
(8,889)
39,804
2010
$
40,943
4,037
8,979
(4,557)
(4,100)
45,302
2009
$
17,296
-
27,552
(3,905)
-
40,943
The majority of the net decrease for positions for the year ended December 31, 2011 relates to potential tax on freight income.
The Company does not presently anticipate such uncertain tax positions will significantly increase or decrease in the next 12 months; however,
actual developments could differ from those currently expected. The tax years 2007 through 2010 remain open to examination by some of the
major taxing jurisdictions in which the Company is subject to tax.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The interest and penalties on
unrecognized tax benefits are included in the roll-forward schedule above and are approximately $1.8 million in 2011, $1.2 million in 2010 and
$8.5 million in 2009.
22. Pension Benefits
a) Defined Contribution Pension Plans
With the exception of the Company’s employees in Norway and certain of its employees in Australia, the Company’s employees are generally
eligible to participate in defined contribution plans. These plans allow for the employees to contribute a certain percentag e of their base salaries
into the plans. The Company matches all or a portion of the employees’ contributions, depending on how much each employee contributes.
During the years ended December 31, 2011, 2010 and 2009, the amount of cost recognized for the Company's defined contribution pension
plans was $18.3 million, $17.1 million and $15.0 million, respectively.
b) Defined Benefit Pension Plans
The Company has a number of defined benefit pension plans (or the Benefit Plans) which primarily cover its employees in Norway and certain
employees in Australia. As at December 31, 2011, approximately 75% of the defined benefit pension assets were held by the Norwegian plans
and approximately 25% are held by the Australia plan. The pension assets in the Norwegian plans have been guaranteed a minimum rate of
return by the provider, thus reducing potential exposure to the Company to the extent the counterparty honors its obligations . Potential
exposure to the Company has also been reduced, particularly for the Australian plans, as a result of certain of its time-charter and management
contracts that allow the Company, under certain conditions, to recover pension plan costs from its customers.
In 2010, the Norwegian Parliament enacted a new early retirement plan for the private sector in Norway, which was effective January 1, 2011.
As a result of the legislation, the Company was substantially released from its obligation under the Company's prior early retirement plan (a
single-employer defined benefit pension plan) and the Company recorded income of $3.7 million in the consolidated statement of income (loss).
The following table provides information about changes in the benefit obligation and the fair value of the Benefit Plans assets, a statement of
the funded status, and amounts recognized on the Company’s balance sheets:
F - 36
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Year Ended
December 31, 2011
$
Year Ended
December 31, 2010
$
Change in benefit obligation:
Beginning balance
Service cost
Interest cost
Contributions by plan participants
Actuarial loss
Benefits paid
Settlements and curtailments
Foreign currency exchange rate changes
Other
Ending balance
Change in fair value of plan assets:
Beginning balance
Actual return on plan assets
Contributions by the employer
Contributions by plan participants
Benefits paid
Settlements and curtailments
Foreign currency exchange rate changes
Other
Ending balance
Funded status deficiency
Amounts recognized in the balance sheets:
Other long-term liabilities
Accumulated other comprehensive (loss) income:
Net actuarial losses (1)
120,723
8,829
5,167
739
9,408
(4,395)
-
(3,299)
-
137,172
102,085
2,931
12,061
739
(4,339)
-
(2,357)
(422)
110,698
(26,474)
26,474
(19,929)
114,256
8,345
5,148
579
730
(7,333)
(4,937)
3,635
300
120,723
95,495
125
11,649
579
(7,259)
(1,314)
3,110
(300)
102,085
(18,638)
18,638
(18,279)
(1) As at December 31, 2011, the estimated amount that will be amortized from accumulated other comprehensive (loss) income into net periodic benefit cost in
2012 is $(0.2) million.
As of December 31, 2011 and 2010, the accumulated benefit obligation for the Benefit Plans was $100.4 million and $114.3 million,
respectively. The following table provides information for those pension plans with a benefit obligation in excess of plan assets and those
pension plans with an accumulated benefit obligation in excess of plan assets:
Benefit obligation
Fair value of plan assets
Accumulated benefit obligation
Fair value of plan assets
December 31, 2011
$
December 31, 2010
$
113,460
85,432
35,358
31,815
72,180
53,421
62,405
39,134
The components of net periodic pension cost relating to the Benefit Plans for the years ended December 31, 2011, 2010 and 2009 consisted of
the following:
Net periodic pension cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Other
Net cost
Year Ended
December 31,
2011
$
Year Ended
December 31,
2010
$
Year Ended
December 31,
2009
$
8,978
5,250
(5,805)
371
421
9,215
8,616
5,091
(5,431)
281
(3,390)
5,167
9,753
4,548
(4,624)
1,394
184
11,255
F - 37
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
The components of other comprehensive (income) loss relating to the Plans for the years ended December 31, 2011, 2010 and 2009 consisted
of the following:
Other comprehensive (income) loss:
Net loss (gain) arising during the period
Amortization of net actuarial (gain) loss
Other loss (gain)
Total loss (income)
Year Ended
December 31,
2011
$
Year Ended
December 31,
2010
$
Year Ended
December 31,
2009
$
12,052
(319)
-
11,733
5,711
1,026
390
7,127
(13,524)
(1,394)
(785)
(15,703)
The Company estimates that it will make contributions into the Benefit Plans of $10.7 million during 2012. The following table provides the
estimated future benefit payments, which reflect expected future service, to be paid by the Benefit Plans:
Year
2012
2013
2014
2015
2016
2017 – 2021
Total
The fair value of the plan assets, by category, as of December 31, 2011 and 2010 were as follows:
Pension Benefit
Payments
$
8,000
4,969
6,361
6,251
5,704
29,263
60,548
Pooled Funds (1)
Mutual Funds (2)
Equity investments
Debt securities
Real estate
Cash and money market
Other
Total
December 31,
2011
$
December 31,
2010
$
82,501
13,852
3,445
2,092
291
8,517
110,698
74,826
13,073
3,197
2,327
1,034
7,628
102,085
(1) The Company has no control over the investment mix or strategy of the pooled funds. The pooled funds guarantee a minimum rate of return. If actual
investment returns are less than the guarantee minimum rate, then the provider’s statutory reserves are used to top up the shortfall. The pooled funds
primarily invest in hold to maturity bonds, real estate and other fixed income investments, which are expected to provide a stable rate of return.
(2) The mutual funds primary aim is to provide investors with an exposure to a diversified mix of predominantly growth oriented assets (70%) with moderate to
high volatility and some defensive assets (30%).
The investment strategy for all plan assets is generally to actively manage a portfolio that is diversified among asset class es, markets and
regions. Certain of the investment funds do not invest in companies that do not meet certain socially responsible investment criteria. In addition
to diversification, other risk management strategies employed by the investment funds include gradual implementation of portfolio adjustments
and hedging currency risks.
The Company’s plan assets are primarily invested in commingled funds holding equity and debt securities, which are valued using the net asset
value (or NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its
liabilities, and then divided by the number of shares or units outstanding. Commingled funds are classified within Level 2 of the fair value
hierarchy as the NAVs are not publicly available.
The Company has a pension committee that is comprised of various members of senior management. Among other things, the Compan y’s
pension committee oversees the investment and management of the plan assets, with a view to ensuring the prudent and effective
management of such plans. In addition, the pension committee reviews investment manager performance results annually and approves
changes to the investment managers.
F - 38
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
The weighted average assumptions used to determine benefit obligations at December 31, 2011 and 2010 were as follows:
Discount rates
Rate of compensation increase
December 31, 2011
December 31, 2010
3.2%
4.4%
4.4%
4.6%
The weighted average assumptions used to determine net pension expense for the years ended December 31, 2011, 2010 and 2009 were as
follows:
Discount rates
Rate of compensation increase
Expected long-term rates of return (1)
Year Ended
December 31,
2011
Year Ended
December 31,
2010
Year Ended
December 31,
2009
3.2%
4.4%
5.0%
4.4%
4.6%
5.7%
5.0%
4.7%
6.0%
(1) To the extent the expected return on plan assets varies from the actual return, an actuarial gain or loss results. The expected long-term rates of return on
plan assets are based on the estimated weighted-average long-term returns of major asset classes. In determining asset class returns, the Company takes
into account long-term returns of major asset classes, historical performance of plan assets, as well as the current interest rate environment. The asset class
returns are weighted based on the target asset allocations.
23. Equity Accounted Investments
The Company has joint venture interests of 33%, 40%, and 50%, respectively, in the Angola LNG Project (see Note 16b), Ikdam Production,
and SkaugenPetroTrans. The Wah Kwong Joint Venture is a joint venture arrangement between Teekay Tankers and Wah Kwong whereby
Teekay Tankers holds a 50% interest (see Note 16b). The RasGas 3 Joint Venture is a joint venture arrangement between Teekay LNG and
QGTC 3 whereby Teekay LNG holds a 40% interest. The RasGas 3 Joint Venture owns four LNG carriers and related long-term fixed-rate
time-charters to service the expansion of a LNG project in Qatar.
In November 2011, Teekay acquired a 40% interest in a recapitalized Sevan for approximately $25 million (see Note 3). Sevan owns (i) two
partially-completed hulls (#4 and #5) available for upgrade to FPSOs or other offshore projects; (ii) a licensing agreement with ENI SpA; (iii) an
engineering and offshore project development business; and (iv) intellectual property rights, including offshore unit design patents. As at
November 30, 2011, the fair value of the Company’s interest in Sevan was determined to be $49.2 million. The difference between the fair
value of the Company’s 40% interest in Sevan and the price paid has been recognized as a bargain purchase gain in the Company’s
consolidated statements of income (loss). As of February 28, 2012, the aggregate value of the Company’s 40% interest in Sevan, based on the
quoted market price of Sevan’s common stock on the Oslo Stock Exchange was $46.5 million.
In November 2010, Teekay LNG acquired a 50% interest in companies that own two LNG carriers (collectively, the Exmar Joint Venture) from
Exmar NV for a total equity purchase price of approximately $72.5 million (net of assumed debt). Teekay LNG financed $37.3 million of the
purchase price by issuing to Exmar NV 1.1 million new common units with the balance financed by drawing on one of Teekay LNG’s revolving
credit facilities. As part of the transaction, Teekay LNG agreed to guarantee 50% of the $206 million of debt secured by the Exmar Joint
Venture. Exmar NV retains a 50% ownership interest in the Exmar Joint Venture. The two vessels acquired are the 2002-built Excalibur, a
conventional LNG carrier, and the 2005-built Excelsior, a specialized gas carrier which can both transport and regasify LNG onboard. Both
vessels are on long-term, fixed-rate charter contracts to Excelerate Energy LP for firm periods until 2022 and 2025, respectively.
A condensed summary of the Company's investments in and advances to equity accounted investments are as follows (in thousands of dollars,
except percentages):
Investments in Equity Accounted Investments
RasGas 3 Joint Venture
Exmar Joint Venture
Angola Joint Venture
SkaugenPetroTrans Joint Venture
Sevan Marine Equity Investment
Other
Total
Loans to Equity Accounted Investees
Wah Kwong Joint Venture
Ikdam Production Joint Venture
SkaugenPetroTrans Joint Venture
Sevan Marine Equity Investment
Total
Ownership
Percentage
40%
50%
33%
50%
40%
40% to 50%
Ownership
Percentage
50%
40%
50%
40%
December 31,
2011
97,423
81,242
16,063
9,623
46,998
1,288
252,637
December 31,
2011
9,830
538
5,000
50,000
65,368
December 31,
2010
98,207
74,504
-
32,721
-
2,201
207,633
December 31,
2010
9,830
3,116
-
-
12,946
F - 39
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
A condensed summary of the Company’s financial information for equity accounted investments (33% to 50% owned) shown on a 100% basis
are as follows:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Revenues
Income from vessel operations
Net (loss) income
December 31,
2011
281,933
2,545,518
252,439
2,118,550
Year Ended
December 31,
2010
232,516
91,290
(44,794)
December 31,
2010
135,087
1,867,161
106,858
1,507,800
Year Ended
December 31,
2009
238,838
97,708
136,444
Year Ended
December 31,
2011
333,020
134,617
(48,732)
For the year ended December 31, 2011, the Company recorded equity (loss) income of $(35.3) million (2010 – $(11.3) million and 2009 - $52.5
million). The income or loss was primarily comprised of the Company’s share of net (loss) income from the Angola LNG Project, the RasGas 3
Joint Venture, and from the Exmar Joint Venture. For the year ended December 31, 2011, $(35.2) million of the equity (loss) gain related to the
Company’s share of unrealized (loss) gain on interest rate swaps associated with these projects (2010 – $(26.3) million and 2009 - $32.4
million).
24. Accounting Pronouncements Not Yet Adopted
In May 2011, the FASB issued amendments to FASB ASC 820, Fair Value Measurement, which clarify or change the application of existing
fair value measurements, including that the highest and best use and valuation premise in a fair value measurement are relevant only when
measuring the fair value of nonfinancial assets; that a reporting entity should measure the fair value of its own equity inst rument from the
perspective of a market participant that holds that instrument as an asset; to permit an entity to measure the fair value of c ertain financial
instruments on a net basis rather than based on its gross exposure when the reporting entity manages its financial instruments on the basis of
such net exposure; that in the absence of a Level 1 input, a reporting entity should apply premiums and discounts when market participants
would do so when pricing the asset or liability consistent with the unit of account; and that premiums and discounts related to size as a
characteristic of the reporting entity’s holding are not permitted in a fair value measurement. These amendments are effective for the Company
on January 1, 2012. The Company is currently assessing the potential impacts, if any, of these amendments on its consolidated financial
statements.
25. Subsequent Events
a)
b)
c)
d)
In January 2012, Teekay Offshore issued NOK 600 million in senior unsecured bonds that mature in January 2017 in the Norwegian bond
market. The aggregate principal amount of the bonds is equivalent to approximately $100 million. The interest payments on the bonds are
based on NIBOR plus a margin of 5.75%. The Partnership entered into a cross currency rate swap, to swap all interest and principal
payments into U.S. Dollars, with the interest payments fixed at a rate of 7.49%. The proceeds of the bonds are to be used for general
corporate purposes.
In January 2012, OOG-TKP FPSO GmbH & Co KG, a 50/50 joint venture between Teekay and Odebrecht Oil & Gas S.A., purchased the
assets related to the Tiro and Sidon FPSO project, including the partially constructed FPSO unit and the customer contracts, from Teekay
for approximately $179 million. The purchase price was financed 80% with borrowings under a $300 million debt facility secured by the
Tiro and Sidon FPSO unit and the balance of the purchase price was financed with equity contributions by each of the joint venture
partners. The facility is interest bearing at LIBOR plus a margin of 2.25% and requires quarterly principal repayments with a final bullet
payment on maturity in October 2021.
In February 2012, Teekay Tankers completed a follow-on public offering of 17.25 million shares of Class A common stock at $4.00 per
share. Teekay Tankers used the net offering proceeds to repay a portion of its outstanding debt under its revolving credit facility and the
balance for general corporate purposes. As a result of the public offering, Teekay’s ownership of Teekay Tankers was reduced to 20.4%.
Teekay maintains voting control of Teekay Tankers through its ownership of shares of Class A and Class B Common Stock and will
continue to consolidate this subsidiary.
In February 2012, a joint venture (or Teekay-Marubeni Joint Venture) between Teekay LNG and Marubeni Corporation acquired a 100%
interest in six LNG carriers from Denmark-based A.P. Moller-Maersk A/S for approximately $1.3 billion. The Teekay LNG-Marubeni Joint
Venture financed this acquisition with $1.06 billion from secured loan facilities and $266 million from equity contributions from Teekay LNG
and Marubeni Corporation. Teekay LNG has a 52% economic interest in the Teekay-Marubeni Joint Venture and consequently its share of
the equity contribution was approximately $138 million. Teekay LNG financed this equity contribution from borrowing under its existing
credit facilities.
F - 40
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
e)
f)
In February 2012, Teekay Offshore entered into a $130 million debt facility secured by the Piranema Spirit FPSO unit that matures in
February 2017. The interest payments on the facility are based on LIBOR plus a margin of 3%. The principal repayments are ide ntical
quarterly payments with a final balloon payment in February 2017. The proceeds from the debt facility were used for general corporate
purposes including repayment of existing revolving credit facility debt.
In April 2012, Teekay reached an agreement to sell to Teekay Tankers 13 of its 17 directly-owned conventional tankers and related time-
charter contracts, debt facilities and other assets and rights, for an aggregate purchase price of approximately $455 million. As partial
consideration for the sale, Teekay will receive $25 million of newly issued shares of Teekay Tankers Class A common stock, and the
remaining amount will be settled through a combination of cash payments to Teekay and the assumption by Teekay Tankers of existing
debt secured by the acquired vessels. As a result of this share issuance, Teekay’s economic interest in Teekay Tankers will increase from
approximately 20% to approximately 25% and its voting interest as a result of its combined ownership of Class A and Class B shares will
increase from approximately 51% to approximately 53%. As part of this transaction, Teekay and Teekay Tankers will enter into a non-
competition agreement, which will provide Teekay Tankers with a right of first refusal to participate in any future conventio nal crude oil
tanker and product tanker opportunities developed by Teekay for a period of three years from the closing date of this transac tion. The
transaction is subject to final documentation, receiving relevant third party consents, and other customary closing conditions and is
expected to be completed in the second quarter of 2012.
g)
In April 2012, Teekay LNG issued NOK 700 million in senior unsecured bonds that mature in May 2017 in the Norwegian bond market.
The aggregate principal amount of the bonds is equivalent to approximately $120 million and all interest and principal payments will be
swapped into U.S. Dollars. The proceeds of the bonds, which will be available to Teekay LNG upon settlement in early May 2012 , are
expected to be used for general corporate purposes. Teekay LNG will apply for listing of the bonds on the Oslo Stock Exchange.
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SECTION 1. PURPOSE
TEEKAY CORPORATION
2003 EQUITY INCENTIVE PLAN
The purpose of the Teekay Corporation 2003 Equity Incentive Plan is to attract, retain and motivate employees, officers, directors, consultants,
agents, advisors and independent contractors of Teekay Corporation and its Related Companies by providing them the opportunity to acquire a
proprietary interest in the Company and to link their interests and efforts to the long-term interests of the Company's shareholders.
EXHIBIT 4.4
SECTION 2. DEFINITIONS
As used in the Plan,
"Acquired Entity" means any entity acquired by the Company or a Related Company or with which the Company or a Related Company merges or
combines.
"Acquisition Price" means the higher of (a) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported
on the New York Stock Exchange Composite Tape or other national exchange on which the Common Stock is listed or on Nasdaq during the 60-
day period prior to and including the date of a Company Transaction or Change in Control or (b) if the Company Transaction or Change in Control is
the result of a tender or exchange offer or a negotiated acquisition of the Company's Common Stock, the highest price per share of Common Stock
paid in such tender or exchange offer or acquisition. To the extent that the consideration paid in any such transaction desc ribed above consists all
or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined by the Board
in its sole discretion.
"Award" means any Option, Stock Appreciation Right, Restricted Stock, Stock Unit, Performance Stock, Performance Unit, dividend equivalent,
cash-based award or other incentive payable in cash or in shares of Common Stock as may be designated by the Committee from time to time.
"Board" means the Board of Directors of the Company.
"Cause," unless otherwise defined in the instrument evidencing the Award or in a written employment, services or other agreement between the
Participant and the Company or a Related Company, means dishonesty, fraud, serious misconduct, unauthorized use or disclosure of confidential
information or trade secrets, or conduct prohibited by criminal law (except minor violations), in each case as determined by the Company's chief
human resources officer or other person performing that function or, in the case of directors and executive officers, the Committee, whose
determination shall be conclusive and binding.
"Change in Control," unless the Committee determines otherwise with respect to an Award at the time the Award is granted, means the happening
of any of the following events:
(a)
an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) of the Exchange Act (an "Entity") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (1) the then outstanding shares of
common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"), excluding, however,
the following (i) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a convers ion privilege where the
security being so converted was not acquired directly from the Company by the party exercising the conversion privilege, (ii) any acquisition by the
Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Related Company, or
(iv) a Related Party Transaction; or
(b)
a change in the composition of the Board during any two-year period such that the individuals who, as of the beginning of such two-year
period, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that for
purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two-year period, whose election,
or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of those individuals who are members of
the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such
individual were a member of the Incumbent Board; and provided further, however, that any such individual whose initial assumption of office occurs
as a result of or in connection with an actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall
not be considered a member of the Incumbent Board.
"Committee" has the meaning set forth in Section 3.1.
"Common Stock" means the common stock, par value $0.001 per share, of the Company.
"Company" means Teekay Corporation, a Republic of the Marshall Islands corporation.
"Company Transaction," unless otherwise defined in the instrument evidencing the Award or in a written employment, services or other agreement
between the Participant and the Company or a Related Company, means consummation of:
(a)
a merger or consolidation of the Company with or into any other company or other entity;
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(b)
voting securities, or
a sale in one transaction or a series of transactions undertaken with a common purpose of at least 50% of the Company's outstanding
a sale, lease, exchange or other transfer in one transaction or a series of related transactions undertaken with a common purpose of all or
(c)
substantially all of the Company's assets.
Where a series of transactions undertaken with a common purpose is deemed to be a Company Transaction, the date of such Company
Transaction shall be the date on which the last of such transactions is consummated.
"Disability," unless otherwise defined by the Committee or in the instrument evidencing the Award or in a written employment, services or other
agreement between the Participant and the Company or a Related Company, means a mental or physical impairment of the Participant that is
expected to result in death or that has lasted or is expected to last for a continuous period of 12 months or more and that causes the Participant to
be unable to perform his or her material duties for the Company or a Related Company and to be engaged in any substantial gai nful activity, in each
case as determined by the Company's chief human resources officer or other person performing that function or, in the case of directors and
executive officers, the Committee, whose determination shall be conclusive and binding.
"Effective Date" has the meaning set forth in Section 16.
"Eligible Person" means any person eligible to receive an Award as set forth in Section 5.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended from time to time.
"Fair Market Value" means the average of the high and low trading prices for the Common Stock on any given date during regular trading, or if not
trading on that date, such price on the last preceding date on which the Common Stock was traded, unless determined otherwise by the Committee
using such methods or procedures as it may establish, including an average of trading days not to exceed 30 days from the Grant Date.
"Good Reason," unless otherwise defined by the Committee or in the instrument evidencing the Award or in a written employment, services or
other agreement between the Participant and the Company or a Related Company, means the Participant's voluntary resignation following any of
the following events or conditions and the failure of the Successor Company to cure such event or condition within 30 days after receipt of written
notice from the Participant: (a) a change in the Participant's position which materially reduces the Participant's level of responsibility; (b) a reduction
in the Participant's level of compensation (including base salary, fringe benefits or participation in any corporate performance based bonus or
incentive programs) by more than 15%; or (c) a relocation of the Participant's place of employment by more than 50 miles; provided and only if such
change, reduction or relocation is effected without the Participant's consent.
"Grant Date" means the later of (a) the date on which the Committee completes the corporate action authorizing the grant of an Award or such later
date specified by the Committee or (b) the date on which all conditions precedent to the Award have been satisfied, provided that conditions to the
exercisability or vesting of Awards shall not defer the Grant Date.
"Option" means a right to purchase shares of Common Stock granted under Section 7.
"Participant" means any Eligible Person to whom an Award is granted.
"Performance Stock" means an Award granted under Section 10.1.
"Performance Unit" means an Award granted under Section 10.2.
"Plan" means the Teekay Corporation 2003 Equity Incentive Plan.
''Related Company" means any entity that is directly or indirectly controlled by the Company.
"Related Party Transaction" means a Company Transaction pursuant to which:
(a)
all or substantially all of the individuals and entities who are the beneficial owners of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such Company Transaction will beneficially own, directly or indirectly, more than 50%
of the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the
election of directors of the company resulting from such Company Transaction (including a company or other entity which as a result of such
transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries (a "Parent
Company")) in substantially the same proportions as their ownership, immediately prior to such Company Transaction, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities;
no Entity (other than the Company, any employee benefit plan (or related trust) of the Company or a Related Company, the company
(b)
resulting from such Company Transaction or, if reference was made to equity ownership of any Parent Company for purposes of determining
whether clause (a) above is satisfied in connection with the applicable Company Transaction, such Parent Company) will beneficially own, directly
or indirectly, 40% or more of, respectively, the outstanding shares of common stock of the company resulting from such Company Transaction or
the combined voting power of the outstanding voting securities of such company entitled to vote generally in the election of directors unless such
ownership resulted solely from ownership of securities of the Company prior to the Company Transaction; and
(c)
individuals who were members of the Incumbent Board will immediately after the consummation of the Company Transaction constitute at
least a majority of the members of the board of directors of the company resulting from such Company Transaction (or, if reference was made to
equity ownership of any Parent Company for purposes of determining whether clause (a) above is satisfied in connection with the applicable
Company Transaction, of the Parent Company).
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"Restricted Stock" means an Award of shares of Common Stock granted under Section 9, the rights of ownership of which may be subject to
restrictions prescribed by the Committee.
"Retirement," unless otherwise defined in the instrument evidencing the Award or in a written employment, services or other agreement between
the Participant and the Company or a Related Company, means either (a) attaining the age of 65, or (b) attaining the age of 5 5 with a combination
of age and years of service that equates to at least 65.
"Securities Act" means the U.S. Securities Act of 1933, as amended from time to time.
"Stock Appreciation Right" has the meaning set forth in Section 8.1.
"Stock Unit" means an Award granted under Section 9 denominated in units of Common Stock.
"Substitute Awards" means Awards granted or shares of Common Stock issued by the Company in assumption of, or in substitution or exchange
for, awards previously granted by a company acquired by the Company or with which the Company combines.
"Successor Company" means the surviving company, the successor company or the Parent Company, as applicable, in connection with a
Company Transaction.
"Termination of Service" means a termination of employment or service relationship with the Company or a Related Company for any reason,
whether voluntary or involuntary, including by reason of death, Disability or Retirement. Any question as to whether and when there has been a
Termination of Service for the purposes of an Award and the cause of such Termination of Service shall be determined by the Company's chief
human resources officer or other person performing that function or by the Committee with respect to directors and executive officers, whose
determination shall be conclusive and binding. Transfer of a Participant's employment or service relationship between the Company and any
Related Company shall not be considered a Termination of Service for purposes of an Award. Unless the Committee determines otherwise, a
Termination of Service shall be deemed to occur if the Participant's employment or service relationship is with an entity that has ceased to be a
Related Company.
"Vesting Commencement Date" means the Grant Date or such other date selected by the Committee as the date from which the Option begins to
vest for purposes of Section 7.4.
SECTION 3. ADMINISTRATION
3.1
Administration of the Plan
The Plan shall be administered by a committee or committees (which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board, or if no such committee has been appointed, by the Board. All references in the Plan to the "Committee" shall be, as
applicable, to the Committee appointed by the Board pursuant to this Section 3.1, to the Board, if no committee has been appointed, or to any other
committee or any officer to whom the Board or the Committee has delegated authority to administer the Plan. Members of the Committee shall
serve for such term as the Board may determine, subject to removal by the Board at any time. To the extent consistent with applicable law, the
Board or the Committee may authorize one or more officers of the Company to grant Awards to designated classes of Eligible Persons, within limits
specifically prescribed by the Board or the Committee; provided, however, that no such officer shall have or obtain authority to grant Awards to
himself or herself.
3.2
Administration and Interpretation by Committee
Except for the terms and conditions explicitly set forth in the Plan, the Committee shall have full power and exclusive authority, subject to such
orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to: (a) select the Eligible
Persons to whom Awards may from time to time be granted under the Plan; (b) determine the type or types of Awards to be granted to each
Participant under the Plan; (c) determine the number of shares of Common Stock to be covered by each Award granted under the Plan; (d)
determine the terms and conditions of any Award granted under the Plan; (e) approve the forms of agreements for use under the Plan; (f) determine
whether, to what extent and under what circumstances Awards may be settled in cash, shares of Common Stock or other property, or canceled or
suspended; (g) determine whether, to what extent and under what circumstances cash, shares of Common Stock, other property and other amounts
payable with respect to an Award shall be deferred either automatically or at the election of the Participant; (h) interpret and administer the Plan and
any instrument evidencing an Award or agreement entered into under the Plan; (i) establish such rules and regulations as it s hall deem appropriate
for the proper administration of the Plan; (j) delegate ministerial duties to such of the Company's officers as it so determines; and (k) make any other
determination and take any other action that the Committee deems necessary or desirable for administration of the Plan.
Decisions of the Committee shall be final, conclusive and binding on all persons, including the Company, any Participant, any shareholder and any
Eligible Person. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings.
SECTION 4. SHARES SUBJECT TO THE PLAN
4.1
Authorized Number of Shares
Subject to adjustment from time to time as provided in Section 13.1, the number of shares of Common Stock available for issuance under the Plan
shall be:
(a) 3,000,000 shares; plus
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(b)(i) the total number of authorized shares reserved for issuance under the Company's 1995 Stock Option Plan (the "Prior Plan"), but not issued or
subject to outstanding awards on the Effective Date, and (ii) any shares subject to outstanding awards under the Prior Plan on such date that cease
to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised f or or settled in shares),
up to an aggregate maximum of 15,684,138 shares, which shares shall cease, as of such date, to be available for grant and issuance under the
Prior Plan, but shall be available for issuance under the Plan.
Shares issued under the Plan shall be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company.
4.2
Share Usage
(a)
Shares of Common Stock covered by an Award shall not be counted as used unless and until they are actually issued and delivered to a
Participant. If any Award lapses, expires, terminates or is canceled prior to the issuance of shares thereunder or if shares of Common Stock are
issued under the Plan to a Participant and thereafter are forfeited to or otherwise reacquired by the Company, the shares subject to such Awards
and the forfeited or reacquired shares shall again be available for issuance under the Plan. Any shares of Common Stock (i) tendered by a
Participant or retained by the Company as full or partial payment to the Company for the purchase price of an Award or to sat isfy tax withholding
obligations in connection with an Award or (ii) covered by an Award that is settled in cash shall be available for Awards under the Plan. The number
of shares available for issuance under the Plan shall not be reduced to reflect any dividends or dividend equivalents that are reinvested into
additional shares or credited as additional Restricted Stock, Stock Units, Performance Stock or Performance Units.
(b)
under other compensation plans or arrangements of the Company.
The Committee shall have the authority to grant Awards as an alternative to or as the form of payment for grants or rights earned or due
(c)
Substitute Awards shall not reduce the number of shares authorized for issuance under the Plan. In the event that an Acquired Entity has
shares available for awards or grants under one or more preexisting plans not adopted in contemplation of such acquisition or combination, then, to
the extent determined by the Board or the Committee, the shares available for grant pursuant to the terms of such preexisting plans (as adjusted, to
the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to
determine the consideration payable to holders of common stock of the entities who are parties to such acquisition or combination) may be used for
Awards under the Plan and shall not reduce the number of shares of Common Stock authorized for issuance under the Plan; provi ded, however,
that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of such
preexisting plans, absent the acquisition or combination, and shall only be made to individuals who were not employees or nonemployee directors of
the Company or a Related Company prior to such acquisition or combination. Notwithstanding anything in the Plan to the contrary, the Committee
may grant Substitute Awards under the Plan. In the event that a written agreement between the Company and an Acquired Entity pursuant to which
a merger or consolidation is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and conditions shall be deemed to be the action of the Committee without any
further action by the Committee and the persons holding such awards shall be deemed to be Participants.
SECTION 5. ELIGIBILITY
An Award may be granted to any employee, officer or director of the Company or a Related Company whom the Committee from time to time
selects. An Award may also be granted to any consultant, agent, advisor or independent contractor for bona fide services rendered to the Company
or any Related Company that (a) are not in connection with the offer and sale of the Company's securities in a capital-raising transaction and (b) do
not directly or indirectly promote or maintain a market for the Company's securities.
SECTION 6. AWARDS
6.1
Form, Grant and Settlement of Awards
The Committee shall have the authority, in its sole discretion, to determine the type or types of Awards to be granted under the Plan. Such Awards
may be granted either alone, in addition to, or in tandem with, any other type of Award. Any Award settlement may be subject to such conditions,
restrictions and contingencies as the Committee shall determine.
Evidence of Awards
6.2
Awards granted under the Plan shall be evidenced by a written (including electronic) instrument that shall contain such terms , conditions, limitations
and restrictions as the Committee shall deem advisable and that are not inconsistent with the Plan.
Vesting of Awards
6.3
The effect on the vesting of an Award of a Company-approved leave of absence or a Participant's working less than full-time shall be determined by
the Company's chief human resources officer or other person performing that function or, with respect to directors or executive officers, by the
Committee or the Board, whose determination shall be final.
6.4
Deferrals
The Committee may permit or require a Participant to defer receipt of the payment of any Award. If any such deferral election is permitted or
required, the Committee, in its sole discretion, shall establish rules and procedures for such payment deferrals, which may i nclude the grant of
additional Awards or provisions for the payment or crediting of interest or dividend equivalents, including converting such cr edits to deferred share
unit equivalents.
SECTION 7. OPTIONS
7.1
Grant of Options
The Committee may grant Options.
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7.2
Option Exercise Price
The exercise price for shares purchased under an Option shall be the closing price of the Company’s stock trading on the New York Stock
Exchange on the Grant Date, or if the New York Stock Exchange is not open on the Grant Date, then the exercise price for shares purchased under
an Option shall be the closing price of the Company’s stock trading on the New York Stock Exchange on the last trading day immediately before the
Grant Date,
7.3
Term of Options
Subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the Option, the maximum term of an Option
shall be as established for that Option by the Committee or, if not so established, shall be ten years from the Grant Date.
7.4
Exercise of Options
The Committee shall establish and set forth in each instrument that evidences an Option the time at which, or the installments in which, the Option
shall vest and become exercisable, any of which provisions may be waived or modified by the Committee at any time. If not so established in the
instrument evidencing the Option, the Option shall vest and become exercisable according to the following schedule, which may be waived or
modified by the Committee at any time:
Period of Participant's Continuous
Employment or Service With the Company
or Its Related Companies From the Vesting
Commencement Date
After 1 year
After each additional year of continuous
service completed thereafter
After 3 years
Portion of Total Option
That Is Vested and Exercisable
1/3
An additional 1/3
100%
To the extent an Option has vested and become exercisable, the Option may be exercised in whole or from time to time in part by delivery to the
Company of a properly executed option exercise agreement or notice, in a form and in accordance with procedures established by the Committee,
setting forth the number of shares with respect to which the Option is being exercised, the restrictions imposed on the shares purchased under such
exercise agreement, if any, and such representations and agreements as may be required by the Committee, accompanied by payment in full as
described in Section 7.5. An Option may be exercised only for whole shares and may not be exercised for less than a reasonable number of shares
at any one time, as determined by the Committee.
7.5
Payment of Exercise Price
The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration must be paid before the Company will issue the shares being
purchased and must be in a form or a combination of forms acceptable to the Committee for that purchase, which forms may include:
(a)
(b)
cash;
check or wire transfer;
(c)
tendering (either actually or, if the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) shares of
Common Stock already owned by the Participant for at least six months (or any shorter period necessary to avoid a charge to the Company's
earnings for financial reporting purposes) that on the day prior to the exercise date have a Fair Market Value equal to the aggregate exercise price
of the shares being purchased under the Option;
(d)
if the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act and to the extent permitted by law, delivery of a
properly executed exercise notice, together with irrevocable instructions to a brokerage firm designated by the Company to deliver promptly to the
Company the aggregate amount of sale or loan proceeds to pay the Option exercise price and any withholding tax obligations th at may arise in
connection with the exercise, all in accordance with the regulations of the Federal Reserve Board; or
(e)
7.6
such other consideration as the Committee may permit.
Post-Termination Exercise
The Committee may establish and set forth in each instrument that evidences an Option whether the Option shall continue to be exercisable, and
the terms and conditions of such exercise, after a Termination of Service, any of which provisions may be waived or modified by the Committee at
any time. If not so established in the instrument evidencing the Option, the Option shall be exercisable according to the following terms and
conditions, which may be waived or modified by the Committee at any time:
Any portion of an Option that is not vested and exercisable on the date of a Participant's Termination of Service shall expire on such date
(a)
unless the Participant’s Termination of Service arises as a result of the Participant’s Retirment, in which case the provisions of paragraph (b) below
shall apply.
(b)
If the Participant’s Termination of Service is due to Retirement, all Options granted to that Participant shall continue to vest in accordance
with the vesting schedule applicable to such Options and otherwise in accordance with the terms and conditions imposed by the Committee in
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connection with such Options. The Options shall expire on the earliest to occur of (y) the last day of the maximum term of the Option (the ―Option
Expiration Date‖) and (z) the five-year anniversary of the date of Retirement, unless the Committee determines otherwise.
(c)
occur of
Any portion of an Option that is vested and exercisable on the date of a Participant's Termination of Service shall expire on the earliest to
that is three months after such Termination of Service;
(i)
if the Participant's Termination of Service occurs for reasons other than Cause, Retirement, Disability or death, the date
(ii)
if the Participant's Termination of Service occurs by reason of Disability, the five-year anniversary of such Termination
of Service;
Service; and
(iii)
if the Participant's Termination of Service occurs by reason of death, the two-year anniversary of such Termination of
(iv)
the Option Expiration Date.
Notwithstanding the foregoing, if a Participant dies after his or her Termination of Service but while an Option is otherwise exercisable, the portion of
the Option that is vested and exercisable on the date of such Termination of Service shall expire upon the earlier to occur of (y) the Option
Expiration Date and (z) the two-year anniversary of the date of death, unless the Committee determines otherwise.
Also notwithstanding the foregoing, in case a Participant's Termination of Service occurs for Cause, all Options granted to the Participant shall
automatically expire upon first notification to the Participant of such termination, unless the Committee determines otherwise. If a Participant's
employment or service relationship with the Company is suspended pending an investigation of whether the Participant shall be terminated for
Cause, all the Participant's rights under any Option shall likewise be suspended during the period of investigation. If any facts that would constitute
termination for Cause are discovered after a Participant's Termination of Service, any Option then held by the Participant may be immediately
terminated by the Committee, in its sole discretion.
(d)
consultant, advisor or independent contractor to an employee shall not be considered a Termination of Service for purposes of this Section 7.6.
A Participant's change in status from an employee to a consultant, advisor or independent contractor or a change in status from a
SECTION 8. STOCK APPRECIATION RIGHTS
8.1
Grant of Stock Appreciation Rights
The Committee may grant share appreciation rights ("Stock Appreciation Rights" or "SARs") to Participants at any time. A SAR may be granted in
tandem with an Option or alone ("freestanding"). The grant price of a tandem SAR shall be equal to the exercise price of the related Option, and the
grant price of a freestanding SAR shall be equal to the Fair Market Value of the Common Stock on the Grant Date. A SAR may be exercised upon
such terms and conditions and for such term as the Committee determines in its sole discretion; provided, however, that, subject to earlier
termination in accordance with the terms of the Plan and the instrument evidencing the SAR, the term of a freestanding SAR shall be as established
for that SAR by the Committee or, if not so established, shall be ten years, and in the case of a tandem SAR, (a) the term shall not exceed the term
of the related Option and (b) the tandem SAR may be exercised for all or part of the shares subject to the related Option upon the surrender of the
right to exercise the equivalent portion of the related Option, except that the tandem SAR may be exercised only with respect to the shares for which
its related Option is then exercisable.
8.2
Payment of SAR Amount
Upon the exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying (a) the
difference between the Fair Market Value of the Common Stock on the date of exercise over the grant price by (b) the number of shares with
respect to which the SAR is exercised. At the discretion of the Committee as set forth in the instrument evidencing the Awar d, the payment upon
exercise of a SAR may be in cash, in shares of equivalent value, in some combination thereof or in any other manner approved by the Committee in
its sole discretion.
Post Termination Exercise
8.3
The provisions of paragraph 7.6 above shall apply, mutatis mutandis, to the right of a Participant to exercise a SAR after the Participant’s
Termination of Service.
SECTION 9. RESTRICTED STOCK AND STOCK UNITS
Grant of Restricted Stock and Stock Units
9.1
The Committee may grant Restricted Stock and Stock Units on such terms and conditions and subject to such repurchase or forfeiture restrictions, if
any (which may be based on continuous service with the Company or a Related Company or the achievement of any performance cri teria, as the
Committee shall determine in its sole discretion), which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award.
9.2
Issuance of Shares; Settlement of Awards
Upon the satisfaction of any terms, conditions and restrictions prescribed with respect to Restricted Stock or Stock Units, or upon a Participant's
release from any terms, conditions and restrictions of Restricted Stock or Stock Units, as determined by the Committee, and subject to the
provisions of Section 11, (a) the shares of Restricted Stock covered by each Award of Restricted Stock shall become freely transferable by the
Participant and (b) Stock Units shall be paid in shares of Common Stock or, if set forth in the instrument evidencing the Awards, in a combination of
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cash and shares of Common Stock as the Committee shall determine in its sole discretion. Any fractional shares subject to such Awards shall be
paid to the Participant in cash.
9.3
Dividends and Distributions
Participants holding shares of Restricted Stock or Stock Units may, if the Committee so determines, be credited with dividends paid with respect to
the underlying shares or dividend equivalents while they are so held in a manner determined by the Committee in its sole disc retion. The
Committee may apply any restrictions to the dividends or dividend equivalents that the Committee deems appropriate. The Committee, in its sole
discretion, may determine the form of payment of dividends or dividend equivalents, including cash, shares of Common Stock, Restricted Stock or
Stock Units.
9.4
Waiver of Restrictions
Notwithstanding any other provisions of the Plan, the Committee, in its sole discretion, may waive the repurchase or forfeiture period and any other
terms, conditions or restrictions on any Restricted Stock or Stock Unit under such circumstances and subject to such terms and conditions as the
Committee shall deem appropriate.
9.5
Post-Termination Vesting
The Committee may establish and set forth in each instrument that evidences a RSU whether the RSU shall vest after a Termination of Service, any
of which provisions may be waived or modified by the Committee at any time. If not so established in the instrument evidencing the RSU, the RSU
shall vest according to the following terms and conditions, which may be waived or modified by the Committee at any time:
(a)
Any portion of a RSU that is not vested on the date of a Participant's Termination of Service shall be cancelled on such date unless the
Participant’s Termination of Service arises as a result of the Participant’s Retirment, in which case the provisions of paragraph (b) below shall apply.
(b)
Subject to the provisions of paragraph (c) below, if the Participant’s Termination of Service is due to Retirement, all RSUs granted to that
Participant shall continue to vest in accordance with the vesting schedule applicable to such RSUs and otherwise in accordance with the terms and
conditions imposed by the Committee in connection with such RSUs.
The provisions of this paragraph 9.5 shall not apply to RSU’s which only vest upon the achievement of certain performance criteria
(c)
established by the Committee, such performance-based RSU’s to be governed by the provisions of paragraph 10.3 below.
Notwithstanding the foregoing, in case a Participant's Termination of Service occurs for Cause, all RSUs granted to the Participant shall
automatically expire upon first notification to the Participant of such termination, unless the Committee determines otherwise. If a Participant's
employment or service relationship with the Company is suspended pending an investigation of whether the Participant shall be terminated for
Cause, all the Participant's rights under any RSU shall likewise be suspended during the period of investigation. If any fac ts that would constitute
termination for Cause are discovered after a Participant's Termination of Service, any RSU then held by the Participant may be immediately
terminated by the Committee, in its sole discretion.
(d)
consultant, advisor or independent contractor to an employee shall not be considered a Termination of Service for purposes of this Section 9.5.
A Participant's change in status from an employee to a consultant, advisor or independent contractor or a change in status from a
SECTION 10. PERFORMANCE STOCK AND PERFORMANCE UNITS
10.1
Grant of Performance Stock
The Committee may grant Awards of Performance Stock and designate the Participants to whom Performance Stock is to be awarded and
determine the number of shares of Performance Stock, the length of the performance period and the other terms and conditions of each such
Award. Each Award of Performance Stock shall entitle the Participant to a payment in the form of Common Stock, cash or a combination, as the
Committee may determine, upon the attainment of performance goals and other terms and conditions specified by the Committee. Notwithstanding
the satisfaction of any performance goals, the number of shares to be issued or the amount of cash to be paid under an Award of Performance
Stock may be adjusted on the basis of such further consideration as the Committee shall determine in its sole discretion.
10.2
Grant of Performance Units
The Committee may grant Awards of Performance Units and designate the Participants to whom Performance Units are to be awarded and
determine the number of Performance Units, the length of the performance period and the terms and conditions of each such Award. Each Award
of Performance Units shall entitle the Participant to a payment in the form of Common Stock, cash or a combination, as the Committee may
determine, upon the attainment of performance goals and other terms and conditions specified by the Committee. Notwithstanding the satisfaction
of any performance goals, the number of shares to be issued or the amount of cash to be paid under an Award of Performance Units may be
adjusted on the basis of such further consideration as the Committee shall determine in its sole discretion.
10.3
Post-Termination Vesting
The Committee may establish and set forth in each instrument that evidences a Performance Unit whether the Performance Unit shall continue to
vest, and the terms and conditions of such vesting, after a Termination of Service, any of which provisions may be waived or modified by the
Committee at any time. If not so established in the instrument evidencing the Performance Unit, the Performance Unit shall be vest according to the
following terms and conditions, which may be waived or modified by the Committee at any time:
F - 7
(a)
Any portion of a Performance Unit that is not vested on the date of a Participant's Termination of Service shall be cancelled on such date
unless the Participant’s Termination of Service arises as a result of the Participant’s Retirement, in which case the provisions of paragraph (b) below
shall apply.
(b)
If the Participant’s Termination of Service is due to Retirement, a pro rata portion of the Performance Units granted to that Participant,
calculated in each case to reflect the proportion of the performance period served by the Participant prior to his/her Retirement, shall vest and be
paid to the Retired Participant in accordance with the performance vesting schedule applicable to such Performance Units and otherwise in
accordance with the terms and conditions imposed by the Committee in connection with such Performance Units.
Notwithstanding the foregoing, in case a Participant's Termination of Service occurs for Cause, all Performance Units granted to the Participant shall
automatically expire upon first notification to the Participant of such termination, unless the Committee determines otherwise. If a Participant's
employment or service relationship with the Company is suspended pending an investigation of whether the Participant shall be terminated for
Cause, all the Participant's rights under any Performance Unit shall likewise be suspended during the period of investigation. If any facts that would
constitute termination for Cause are discovered after a Participant's Termination of Service, any Performance Unit then held by the Participant may
be immediately terminated by the Committee, in its sole discretion.
(c)
Service for purposes of this Section 10.3.
A Participant's change in status from an employee to a consultant, advisor or independent contractor shall be considered a Termination of
SECTION 11. WITHHOLDING
The Company may require a Participant to pay to the Company the amount of (a) any taxes that the Company is required by applicable law to
withhold with respect to the grant, vesting or exercise of an Award ("tax withholding obligations") and (b) any amounts due from the Participant to
the Company or to any Related Company ("other obligations"). The Company shall not be required to issue any shares of Common Stock or
otherwise settle an Award under the Plan until such tax withholding obligations and other obligations are satisfied.
The Committee may permit or require a Participant to satisfy all or part of the Participant's tax withholding obligations and other obligations by
(a) paying cash to the Company, (b) having the Company withhold an amount from any cash amounts otherwise due or to become due from the
Company to the Participant, (c) having the Company withhold a number of shares of Common Stock that would otherwise be issued to the
Participant (or become vested in the case of Restricted Stock) having a Fair Market Value equal to the tax withholding obligations and other
obligations, or (d) surrendering a number of shares of Common Stock the Participant already owns having a value equal to the tax withholding
obligations and other obligations. The value of the shares so withheld may not exceed the employer's minimum required tax withholding rate, and
the value of the shares so tendered may not exceed such rate to the extent the Participant has owned the tendered shares for less than six months,
if such limitation is necessary to avoid a charge to the Company for financial reporting purposes.
SECTION 12. ASSIGNABILITY
No Award or interest in an Award may be sold, assigned, pledged (as collateral for a loan or as security for the performance of an obligation or for
any other purpose) or transferred by a Participant or made subject to attachment or similar proceedings otherwise than by wil l or by the applicable
laws of descent and distribution, except to the extent the Participant designates one or more beneficiaries on a Company-approved form who may
exercise the Award or receive payment under the Award after the Participant's death. During a Participant's lifetime, an Award may be exercised
only by the Participant. Notwithstanding the foregoing, the Committee, in its sole discretion, may permit a Participant to assign or transfer an Award;
provided, however, that any Award so assigned or transferred shall be subject to all the terms and conditions of the Plan and the instrument
evidencing the Award.
SECTION 13. ADJUSTMENTS
13.1
Adjustment of Shares
In the event, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger,
consolidation, distribution to shareholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results
in (a) the outstanding shares of Common Stock, or any securities exchanged therefor or received in their place, being exchanged for a different
number or kind of securities of the Company or any other company or (b) new, different or additional securities of the Company or any other
company being received by the holders of shares of Common Stock, then the Committee shall make proportional adjustments in (i) the maximum
number and kind of securities available for issuance under the Plan; and (ii) the number and kind of securities that are subject to any outstanding
Award and the per share price of such securities, without any change in the aggregate price to be paid therefor.
The determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, the issuance by the Company of shares of any class, or securities convertible into shares of any class, for cash or
property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, outstanding Awards. Also notwithstanding the foregoing, a dissolution or liquidation of the Company or a
Company Transaction or Change in Control shall not be governed by this Section 13.1 but shall be governed by Sections 13.2 and 13.3,
respectively.
13.2 Dissolution or Liquidation
To the extent not previously exercised or settled, and unless otherwise determined by the Committee in its sole discretion, Options, Stock
Appreciation Rights and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company. To t he extent a forfeiture
F - 8
provision or repurchase right applicable to an Award has not been waived by the Committee, the Award shall be forfeited immediately prior to the
consummation of the dissolution or liquidation.
13.3 Company Transaction; Change in Control
13.3.1 Effect of a Company Transaction That Is Not a Change in Control or a Related Party Transaction
Notwithstanding any other provision of the Plan to the contrary, unless the Committee shall determine otherwise at the time of grant with respect to
a particular Award, in the event of a Company Transaction that is not a Change in Control or a Related Party Transaction:
(a)
All outstanding Awards, other than Performance Stock and Performance Units, shall become fully and immediately exercisable, and all
applicable deferral and restriction limitations shall lapse immediately prior to the Company Transaction, unless s uch Awards are converted,
assumed, or replaced by the Successor Company. Notwithstanding the foregoing, with respect to Options or Stock Appreciation Rights, the
Committee, in its sole discretion, may instead provide that a Participant's outstanding Options shall terminate upon consummation of such Company
Transaction and that each such Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (a) the
Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options or SARs (whether or not then
exercisable) exceeds (b) the aggregate exercise price for such Options or SARs.
For the purposes of this Section 13.3.1, an Award shall be considered assumed or substituted for if following the Company Transaction the option or
right confers the right to purchase or receive, for each Common Share subject to the Award immediately prior to the Company Transaction, the
consideration (whether stock, cash, or other securities or property) received in the Company Transaction by holders of Common Stock for each
share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consi deration chosen by the
holders of a majority of the outstanding shares); provided, however, that if such consideration received in the Company Transaction is not solely
common stock of the Successor Company, the Committee may, with the consent of the Successor Company, provide for the consideration to be
received upon the exercise of the Option, for each share of Common Stock subject thereto, to be solely common stock of the Successor Company
substantially equal in fair market value to the per share consideration received by holders of Common Stock in the Company Transaction. The
determination of such substantial equality of value of consideration shall be made by the Committee and its determination shall be conclusive and
binding.
All Performance Stock or Performance Units earned and outstanding as of the date the Company Transaction is determined to have
(b)
occurred shall be payable in full in accordance with the payout schedule pursuant to the Award agreement. Any remaining Perf ormance Stock or
Performance Units (including any applicable performance period) for which the payout level has not been determined shall be prorated at the target
payout level up to and including the date of such Company Transaction and shall be payable in full in accordance with the payout schedule pursuant
to the Award agreement.
Any existing deferrals or other restrictions shall remain in effect. If the Participant's employment is terminated without Cause following the Company
Transaction, any Awards remaining to be paid will be paid in accordance with the employment termination provision of the Award agreement. If the
Participant's employment is terminated for Good Reason following the Company Transaction, any Awards remaining to be paid will be paid in
accordance with the payout schedule pursuant to the Award agreement.
13.3.2 Effect of a Change in Control
Notwithstanding any other provision of the Plan to the contrary, unless the Committee shall determine otherwise at the time of grant with respect to
a particular Award, in the event of a Change in Control:
(a)
are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant;
any Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred, and which
(b)
Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant;
any restrictions and deferral limitations applicable to any Restricted Stock or Stock Units shall lapse, and such Restricted Stock or Stock
(c)
shall lapse and such Performance Stock and Performance Units shall be immediately settled or distributed; and
all Performance Stock and Performance Units shall be considered to be earned and payable in full, and any deferral or other r estriction
(d)
become free of all restrictions, limitations or conditions and become fully vested and transferable to the full extent of the original grant.
any restrictions and deferral limitations and other conditions applicable to any other Awards shall lapse, and such other Awards shall
13.3.3 Change in Control Cash-Out
Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), if the
Committee shall so determine at, or at any time after, the time of grant, a Participant holding an Option or SAR shall have the right, whether or not
the Option or SAR is fully exercisable and in lieu of the payment of the purchase price for the shares of Common Stock being purchased under the
Option, and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Option or SAR to the Company and
to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Acquisition Price per share of Common Stock on the
date of such election shall exceed the exercise price per share of Common Stock under the Option or SAR multiplied by the number of shares of
Common Stock granted under the Option or SAR as to which the right granted under this Section 13.3.3 shall have been exercised.
13.3.4 Acceleration and Exercise Following a Company Transaction
If following a Change in Control or a Company Transaction that is not a Related Party Transaction, a Participant's employment is subsequently
terminated without Cause or for Good Reason within 24 months of the Change in Control or Company Transaction, any such Awards (other than
F - 9
Performance Awards) that remain unvested shall become fully and immediately exercisable upon the date of the Participant's termination, all
applicable deferral and restriction limitations shall lapse, and an Award that is an Option or a Stock Appreciation Right shall remain exercisable until
the later of the date five years after the date of such termination and the date the Award would have expired by its terms if the Participant's
employment had not been terminated.
13.4
Further Adjustment of Awards
Subject to Sections 13.2 and 13.3, the Committee shall have the discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation, dissolution or change of control of the Company, as defined by the Committee, to take such further action as it
determines to be necessary or advisable with respect to Awards. Such authorized action may include (but shall not be limited to) establishing,
amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional
time for exercise, lifting restrictions and other modifications, and the Committee may take such actions with respect to all Participants, to certain
categories of Participants or only to individual Participants. The Committee may take such action before or after granting Awards to which the action
relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation, dissolution or
change of control that is the reason for such action.
13.5
No Limitations
The grant of Awards shall in no way affect the Company's right to adjust, reclassify, reorganize or otherwise change its capital or business structure
or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
13.6
Fractional Shares
In the event of any adjustment in the number of shares covered by any Award, each such Award shall cover only the number of full shares resulting
from such adjustment.
SECTION 14. AMENDMENT AND TERMINATION
14.1
Amendment, Suspension or Termination
The Board may amend, suspend or terminate the Plan or any portion of the Plan at any time and in such respects as it shall deem advisable;
provided, however, that, to the extent required by applicable law, regulation or stock exchange rule, shareholder approval shall be required for any
amendment to the Plan. Subject to Section 14.3, the Board may amend the terms of any outstanding Award, prospectively or retroactively.
14.2
Term of the Plan
Unless sooner terminated as provided herein, the Plan shall terminate ten years from the Effective Date. After the Plan is terminated, no future
Awards may be granted, but Awards previously granted shall remain outstanding in accordance with their applicable terms and c onditions and the
Plan's terms and conditions.
Consent of Participant
14.3
The amendment, suspension or termination of the Plan or a portion thereof or the amendment of an outstanding Award shall not, without the
Participant's consent, materially adversely affect any rights under any Award theretofore granted to the Participant under the Plan. Notwithstanding
the foregoing, any adjustments made pursuant to Section 13 shall not be subject to these restrictions.
SECTION 15. GENERAL
15.1
No Individual Rights
No individual or Participant shall have any claim to be granted any Award under the Plan, and the Company has no obligation for uniformity of
treatment of Participants under the Plan.
Furthermore, nothing in the Plan or any Award granted under the Plan shall be deemed to constitute an employment contract or confer or be
deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Related
Company or limit in any way the right of the Company or any Related Company to terminate a Participant's employment or other relationship at any
time, with or without cause.
15.2
Issuance of Shares
Notwithstanding any other provision of the Plan, the Company shall have no obligation to issue or deliver any shares of Common Stock under the
Plan or make any other distribution of benefits under the Plan unless, in the opinion of the Company's counsel, such issuance, delivery or
distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act or the laws of any state or
foreign jurisdiction) and the applicable requirements of any securities exchange or similar entity.
The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or
to register or qualify under the laws of any state or foreign jurisdiction, any shares of Common Stock, security or interest in a security paid or issued
under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made.
As a condition to the exercise of an Option or any other receipt of Common Stock pursuant to an Award under the Plan, the Company may require
(a) the Participant to represent and warrant at the time of any such exercise or receipt that such shares are being purchased or received only for the
Participant's own account and without any present intention to sell or distribute such shares and (b) such other action or agreement by the
Participant as may from time to time be necessary to comply with the federal, state and foreign securities laws. At the option of the Company, a
F - 10
stop-transfer order against any such shares may be placed on the official stock books and records of the Company, and a legend indicating that
such shares may not be pledged, sold or otherwise transferred, unless an opinion of counsel is provided (concurred in by counsel for the Company)
stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates to ensure exemption from
registration. The Committee may also require the Participant to execute and deliver to the Company a purchase agreement or such other
agreement as may be in use by the Company at such time that describes certain terms and conditions applicable to the shares.
To the extent the Plan or any instrument evidencing an Award provides for issuance of stock certificates to reflect the issuance of shares of
Common Stock, the issuance may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the applicable rules of any
stock exchange.
15.3
Indemnification
Each person who is or shall have been a member of the Board, or a committee appointed by the Board, or an officer of the Company to whom
authority was delegated in accordance with Section 3 shall be indemnified and held harmless by the Company against and from any loss, cost,
liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or
proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the
Plan and against and from any and all amounts paid by such person in settlement thereof, with the Company's approval, or paid by such person in
satisfaction of any judgment in any such claim, action, suit or proceeding against such person; provided, however, that such person shall give the
Company an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such
person's own behalf, unless such loss, cost, liability or expense is a result of such person's own willful misconduct or except as expressly provided
by statute.
The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the
Company's certificate of incorporation or bylaws, as a matter of law, or otherwise, or of any power that the Company may have to indemnify or hold
harmless.
15.4
No Rights as a Shareholder
Unless otherwise provided by the Committee or in the instrument evidencing the Award or in a written employment, services or other agreement, no
Option, Stock Appreciation Right, or Award denominated in units shall entitle the Participant to any cash dividend, voting or other right of a
shareholder unless and until the date of issuance under the Plan of the shares that are the subject of such Award.
15.5
Global Participants
The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with
provisions of the laws of any countries in which the Company or any Related Company may operate, to ensure the viability of t he benefits from
Awards granted to Participants employed in such countries, to comply with applicable laws and to meet the objectives of the Plan.
15.6
No Trust or Fund
The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other
property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to
any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.
15.7
Successors
All obligations of the Company under the Plan with respect to Awards shall be binding on any successor to the Company, whether the existence of
such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all the business and/or assets
of the Company.
15.8
Severability
If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deeme d amended to
conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Committee's determination, materially altering the
intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such
Award shall remain in full force and effect.
15.9
Choice of Law
The Plan, all Awards granted thereunder and all determinations made and actions taken pursuant hereto shall be governed by the laws of the
Commonwealth of the Bahamas.
SECTION 16. EFFECTIVE DATE
The effective date (the "Effective Date") is the date on which the Plan is adopted by the Board.
F - 11
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
SUMMARY PAGE
Date of Board
Action
Action
Section/Effect
of Amendment
Date of Shareholder
Approval
September 10, 2003
Initial Plan Adoption
March 12, 2007
March 8, 2009
Amend Plan to increase
shares reserved by
3,000,000
Amend Plan to increase
shares reserved by
5,000,000
Section 4.1/increase shares
reserved by 3,000,000
Section 4.1/increase shares
reserved by 5,000,000
N/A
N/A
N/A
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List of Significant Subsidiaries
The following is a list of the Company’s significant subsidiaries as at March 1, 2012.
Name of Significant Subsidiary
TEEKAY CHARTERING LIMITED
TEEKAY HOLDINGS LIMITED
SINGLE SHIP LIMITED LIABILITY COMPANIES
TEEKAY LNG PARTNERS LP
TEEKAY OFFSHORE PARTNERS LP
TEEKAY OFFSHORE OPERATING LP
TEEKAY NAVION OFFSHORE LOADING PTE LTD.
TEEKAY PETROJARL AS
TEEKAY TANKERS LTD.
EXHIBIT 8.1
State or
Jurisdiction of
Incorporation
Proportion of
Ownership
Interest
MARSHALL ISLANDS
BERMUDA
MARSHALL ISLANDS
MARSHALL ISLANDS
MARSHALL ISLANDS
MARSHALL ISLANDS
SINGAPORE
NORWAY
MARSHALL ISLANDS
100.0%
100.0%
100.0%
40.1%(1)
33.0%(1)
33.0%(1)
33.0%(1)
100.0%
20.4%(2)
(1) The partnership is controlled by its general partner. Teekay Corporation has a 100% beneficial ownership in the general partner. In limited cases, approval of a
majority or supermajority of the common unit holders (in some cases excluding units held by the general partner and its affiliates) is required to approve certain
actions.
(2) Proportion of voting power held is 51.2%.
F - 13
I, Peter Evensen, President and Chief Executive Officer of the company, certify that:
1.
I have reviewed this report on Form 20-F of Teekay Corporation;
CERTIFICATION
EXHIBIT 12.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a -15(f) and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of fina ncial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered
by the Annual Report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting;
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting.
Dated: April 25, 2012
By: /s/ Peter Evensen
Peter Evensen
President and Chief Executive Officer
F - 14
I, Vincent Lok, Executive Vice President and Chief Financial Officer of the company, certify that:
1.
I have reviewed this report on Form 20-F of Teekay Corporation;
CERTIFICATION
EXHIBIT 12.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a -15(f) and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of fina ncial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered
by the Annual Report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting;
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting.
Dated: April 25, 2012
By: /s/ Vincent Lok
Vincent Lok
Executive Vice President and Chief Financial Officer
F - 15
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.1
In connection with the Annual Report of Teekay Corporation (the "Company") on Form 20-F for the year ended December 31, 2011, as filed with
the Securities and Exchange Commission on the date hereof (the "Form 20-F"), I Peter Evensen, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2) The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: April 25, 2012
By: /s/ Peter Evensen
Peter Evensen
President and Chief Executive Officer
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.2
In connection with the Annual Report of Teekay Corporation (the "Company") on Form 20-F for the year ended December 31, 2011, as filed with
the Securities and Exchange Commission on the date hereof (the "Form 20-F"), I Vincent Lok, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
(2) The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Dated: April 25, 2012
By: /s/ Vincent Lok
Vincent Lok
Executive Vice President and Chief Financial Officer
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in the following Registration Statements of Teekay Corporation:
(1) No. 333-42434 on Form S-8 pertaining to the Amended 1995 Stock Option Plan,
(2) No. 333-119564 on Form S-8 pertaining to the Amended 1995 Stock Option Plan and the 2003 Equity Incentive Plan,
(3) No. 33-97746 on Form F-3 and related Prospectus for the registration of 2,000,000 shares of common stock under its Dividend Reinvestment
Plan,
(4) No. 333-147683 on Form S-8 pertaining to the 2003 Equity Incentive Plan of Teekay, and
(5) No. 333-166523 on Form S-8 pertaining to the 2003 Equity Incentive Plan of Teekay;
of our reports dated April 25, 2012, with respect to the consolidated financial statements as at December 31, 2011 and for the year then ended and
the effectiveness of internal control over financial reporting as of December 31, 2011, which reports appear in the December 31, 2011 Annual
Report on Form 20-F of Teekay Corporation.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
April 25, 2012
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.2
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-42434) pertaining to the Amended 1995 Stock Option Plan of Teekay Corporation (―Teekay‖),
(2) Registration Statement (Form S-8 No. 333-119564) pertaining to the Amended 1995 Stock Option Plan and the 2003 Equity Incentive Plan of
Teekay,
(3) Registration Statement (Form F-3 No. 33-97746) and related Prospectus of Teekay for the registration of 2,000,000 shares of Teekay common
stock under its Dividend Reinvestment Plan,
(4) Registration Statement (Form S-8 No. 333-147683) pertaining to the 2003 Equity Incentive Plan of Teekay, and
(5) Registration Statement (Form S-8 No. 333-166523) pertaining to the 2003 Equity Incentive Plan of Teekay;
of our report dated April 13, 2011, with respect to the consolidated financial statements of Teekay for the year ended December 31, 2010, included
in this Annual Report (Form 20-F) of Teekay for the year ended December 31, 2011.
Vancouver, Canada,
April 25, 2012
/s/ Ernst & Young LLP
Chartered Accountants
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