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, 2013
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)
Not Applicable
(Translation of Registrant’s name into English)
4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
Telephone: (441) 298-2530
(Address and telephone number of principal executive offices)
Mark Cave
4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
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 issuer’s classes of capital or common stock as of the close of the period covered by
the annual report.
70,729,399 shares of Common Stock, par value of $0.001 per share.
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Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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 if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes
[X]
No
[ ]
Indicate by check mark if the registrant (1) 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
[ ]
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]
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TEEKAY CORPORATION
INDEX TO REPORT ON FORM 20-F
INDEX
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, Insurance and Risk Management .........................................................................
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 2013 and 2014 ..................................................................................
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 .........................................................................................................
Item 6.
Directors, Senior Management and Employees ...................................................................................
Directors and Senior Management. ................................................................................................
Compensation of Directors and Senior Management .....................................................................
Options to Purchase Securities from Registrant or Subsidiaries ....................................................
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Board Practices ..............................................................................................................................
Crewing and Staff ...........................................................................................................................
Share Ownership ............................................................................................................................
Item 7.
Major Shareholders and Certain Relationships and Related Party Transactions ................................
Major Shareholders ........................................................................................................................
Our Major Shareholder ................................................................................................................
Our Directors and Executive Officers .............................................................................................
Relationships with Our Public Entity 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 Considerations ..........................................................................................
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 LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL..
PART III.
Item 17.
Financial Statements ............................................................................................................................
Item 18.
Financial Statements ............................................................................................................................
Item 19.
Exhibits .................................................................................................................................................
Signature
...............................................................................................................................................................
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PART I
This annual report of Teekay Corporation on Form 20-F for the year ended December 31, 2013 (or 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:
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our future financial condition or results of operations and future revenues and expenses;
our future growth prospects;
the growth of global oil and natural gas demand;
future capital expenditure commitments and the financing requirements for such commitments;
expected costs and delivery dates of and financing for newbuildings, and the commencement of service of newbuildings under long-
term time-charter contracts;
expected technical and operational capabilities of newbuildings, including the capabilities of the modern SX-157 Ulstein Design long-
haul distance towing and anchor handling vessel newbuildings ordered by Teekay Offshore and ALP Maritime Services B.V., the
benefits of the M-type, Electronically Controlled, Gas Injection twin engines in certain liquefied natural gas (or LNG) carrier
newbuildings ordered by Teekay LNG and the fuel efficiency of the Long Range 2 (or LR2) product tanker newbuildings ordered by
Teekay Tankers;
our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term
contracts;
the expected timing and costs of upgrades to any vessels;
our expectations as to any impairment of our vessels;
the expected lifespan of our vessels;
our expectation regarding our vessels’ ability to perform to specifications and maintain their hire rates;
our business strategy and other plans and objectives for future operations;
our ability to pay dividends on our common stock;
our ability to competitively pursue new projects;
our competitive positions in our markets;
our ability to avoid labor disruptions and attract and retain highly skilled personnel;
tanker market conditions and fundamentals, including the balance of supply and demand in these markets, expected recovery in the
current cyclically-low tanker market, and spot tanker charter rates and oil production;
our ability to balance our exposure to the volatile spot tanker market with the cash flow stability from the fixed segment;
the relative size of the newbuilding orderbook and the pace of future newbuilding orders in the tanker industry generally;
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;
the timing of the 2010-built HiLoad Dynamic Positioning (or DP) unit commencing its 10-year charter contract with Petroleo Brasileiro
SA and the expected charter rate;
the ability of Teekay Offshore to benefit from Remora AS’s research into the next generation of HiLoad DP units, even though Teekay
Offshore has a right of first refusal to acquire any future HiLoad projects developed by Remora;
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the timing and cost of converting the Navion Clipper into a floating storage and off-take (or FSO) unit and the timing of commencing its
10-year charter contract with Salamander Energy plc;
the cost of converting the Randgrid shuttle tanker into an FSO unit, the timing of commencing its three-year charter contract with
Statoil Petroleum AS and the cost and certainty of Teekay Offshore’s acquisition of the remaining 33% ownership interest in the
Randgrid;
the ability to repair the Foinaven floating production, storage and offloading (or FPSO) gas compressor and other subsea production
issues by May 2014;
the ability of Tanker Investments Ltd. (or TIL) to benefit from the cyclical tanker market, and its expected use of proceeds from recent
equity issuances;
Teekay LNG’s expected timing, amount and method of financing for the purchase of vessels, including its three Suezmax tankers
operated pursuant to capital leases, the five LNG carrier newbuildings ordered from DSME, the LNG carrier newbuilding from Awilco
and eight of the 12 LPG carrier newbuildings ordered within Exmar LPG BVBA;
the expected timing and financial result of the sale of the Suezmax tankers under capital leases;
the rents we expect to receive as lessor under operating leases;
the adequacy of restricted cash deposits to fund capital lease obligations;
the exercise of any counterparty's rights to terminate a lease, or to obligate us to purchase a leased vessel, or failure to exercise such
rights, including the rights under the leases and charters for three of Teekay LNG’s Suezmax tankers;
insurance coverage and indemnification for costs related to the collision between the Navion Hispania and the Njord Bravo;
the impact on operating income, the expected repair and insurance coverage, the completion, cost and recovery of certain capital
upgrade costs, and the timing of the expected return to operations of the Petrojarl Banff FPSO unit and the Apollo Spirit storage
tanker, following storm damage to the unit which was incurred in December 2011;
the outcome of ongoing tax proceedings, including the UK taxing authority’s legal challenge of tax benefits similar to the ones
provided under the RasGas II Leases;
taxation of our company and of distributions to our stockholders;
our exemption from tax on our U.S. source international transportation income;
the future valuation or impairment of goodwill;
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;
the effectiveness of our risk management policies and procedures and the ability of the counterparties to our derivative contracts to
fulfill their contractual obligations;
the cost of, and our ability to comply with, governmental regulations and maritime self-regulatory organization standards applicable to
our business;
our expectation regarding the results and impact of any adverse outcome of existing legal proceedings and claims;
changes in or additions to applicable industry laws and regulations, including Regulation (EU) No 1257/2013, which imposes rules
regarding ship recycling and management of hazardous materials on vessels;
the impact of future regulatory changes or environmental liabilities;
the expected impact of heightened environmental and quality concerns of insurance underwriters, regulators and charterers;
the adequacy of our insurance coverage for accident-related risks, environmental damage and pollution;
anticipated funds for liquidity needs, including for future acquisitions, 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;
6
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future restructuring charges relating to the reorganization of the Company’s marine operations and certain of its commercial and
administrative functions;
the impact of the LC Bank’s downgraded credit rating on the related lease payments and required cash deposits by Teekay Nakilat
and the ability of Teekay Nakilat to mitigate any impact of the LC Bank’s downgraded credit rating; and
our involvement in any EU anti-trust investigation of container line operators.
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 2009 through 2013, 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 the Independent Registered Public Accounting Firm therein with respect to fiscal years 2013, 2012, and 2011 (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).
7
Income Statement Data:
Revenues
Total operating expenses (1)
Income (loss) from vessel operations
Interest expense
Interest income
Realized and unrealized gain (loss) on non-designated
derivative instruments
Equity income (loss) from joint ventures
Foreign exchange (loss) gain
Other income
Income tax (expense) recovery
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)
2009
Years Ended December 31,
2011
(in thousands of U.S. Dollars, except share, per share, and fleet data)
2010
2012
2013
$2,196,985
(2,027,197)
169,788
(141,448)
19,999
140,046
52,242
(20,922)
12,961
(22,889)
209,777
$2,113,604
(1,879,481)
234,123
(136,107)
12,999
$1,976,022
(1,867,610)
108,412
(137,604)
10,078
$1,980,771
(2,131,164)
(150,393)
(167,615)
6,159
$1,830,085
(1,767,339)
62,746
(181,396)
9,708
(299,598)
(11,257)
31,983
(5,118)
6,340
(166,635)
(342,722)
(35,309)
12,654
12,360
(4,290)
(376,421)
(80,352)
79,211
(12,898)
366
14,406
(311,116)
18,414
136,538
(13,304)
5,646
(2,872)
35,480
(81,365)
(100,652)
17,805
150,936
(150,218)
128,412
(267,287)
(358,616)
(160,180)
(114,738)
1.77
1.76
1.2650
$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
$1,902,894
791,291
583,133
62.7%
57.4%
$495,214
(3.67)
(5.11)
(2.31)
(1.63)
(3.67)
1.2650
(5.11)
1.2650
(2.31)
1.2650
(1.63)
1.2650
$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
7,890,761
459,908
11,137,677
6,091,420
660,917
1,863,798
3,303,794
68,732,341
$639,491
533,819
7,321,058
436,601
11,002,025
6,197,288
681,933
1,876,085
3,191,474
69,704,188
$614,660
502,732
7,351,144
727,262
11,555,701
6,707,799
713,760
2,071,262
3,203,050
70,729,399
$1,868,507
390,838
729,695
60.8%
53.4%
$1,799,408
184,003
686,795
64.9%
59.8%
$1,842,488
291,832
830,676
66.0%
61.2%
$1,717,867
641,126
817,382
67.7%
63.6%
$343,091
$755,045
$523,597
$753,755
(1) Total operating expenses include, among other things, the following:
Asset impairments, loan loss provisions and net gain (loss)
on sale of vessels and equipment
Unrealized gains (losses) on derivative instruments
Restructuring charges
Goodwill impairment charge
Bargain purchase gain
2009
2010
Years Ended December 31,
2011
(in thousands)
2012
2013
($12,629)
14,915
(14,444)
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$ (12,158)
($49,150)
(4,875)
(16,396)
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$ (70,421)
($151,059)
(791)
(5,490)
(36,652)
68,535
$ (125,457)
($441,057)
(660)
(7,565)
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$ (449,282)
($166,358)
(130)
(6,921)
-
-
$ (173,409)
(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).
8
(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.
2009
2010
2012
2013
Year Ended December 31,
2011
(in thousands of U.S. Dollars)
Revenues
Voyage expenses
Net revenues
$2,196,985
($294,091)
$1,902,894
$2,113,604
($245,097)
$1,868,507
$1,976,022
($176,614)
$1,799,408
$1,980,771
($138,283)
$1,842,488
$1,830,085
($112,218)
$1,717,867
(4) EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA before restructuring
charges, unrealized foreign exchange (gain) loss, asset impairments, loan loss provisions, 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
the above items 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.
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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.
9
Year Ended December 31,
2011
2010
2012
(in thousands of U.S. Dollars)
$ (166,635)
(6,340)
440,705
123,108
390,838
$ (376,421)
4,290
428,608
127,526
184,003
$ (311,116)
(14,406)
455,898
161,456
291,832
2009
Income Statement Data:
Reconciliation of EBITDA and Adjusted EBITDA to Net income (Loss)
Net income (loss)
Income tax expense (recovery)
Depreciation and amortization
$ 209,777
22,889
437,176
Interest expense, net of interest income
EBITDA
Restructuring charges
Foreign exchange loss (gain)
Loss on notes repurchase
Asset impairments, loan loss provisions 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 on interest rate swaps
Realized losses on interest rate swap amendments and
terminations
Write-down of equity accounted investments
Items related to non-consolidated joint ventures
(a)
121,449
791,291
14,444
20,922
566
12,629
-
-
(75,977)
(293,174)
127,936
-
-
(15,504)
16,396
(31,983)
12,645
49,150
-
-
(48,254)
140,187
154,098
-
-
46,618
Items related to non-consolidated joint ventures
583,133
729,695
Reconciliation of Adjusted EBITDA to net operating cash flow
Net operating cash flow
Expenditures for drydocking
Interest expense, net of interest income
Change in non-cash working capital items related to operating
activities
Write-down and gain on sale of marketable securities
Equity income (loss), net of dividends received
Other (loss) income
Employee stock option compensation
Restructuring charges
Realized losses on interest rate swaps
Realized losses on interest rate swap resets and terminations
Items related to non-consolidated joint ventures
(a)
Adjusted EBITDA
368,251
78,005
121,449
(148,655)
-
49,299
(837)
(11,255)
14,444
127,936
-
(15,504)
583,133
411,750
57,483
123,108
(45,415)
1,805
(11,257)
(9,627)
(15,264)
16,396
154,098
-
46,618
729,695
5,490
(12,654)
-
151,059
36,652
(68,535)
(46,436)
70,822
132,931
149,666
19,411
64,386
686,795
107,193
55,620
127,526
84,347
3,372
(31,376)
3,902
(16,262)
5,490
132,931
149,666
64,386
686,795
2013
$ 35,480
2,872
431,086
171,688
641,126
6,921
13,304
-
166,358
-
-
(61,700)
(178,731)
122,439
35,985
-
71,680
7,565
12,898
-
441,057
-
-
(72,933)
(29,658)
123,277
-
1,767
54,871
830,676
817,382
288,936
35,023
161,456
115,209
(2,560)
65,639
(9,347)
(9,393)
7,565
123,277
-
54,871
830,676
292,584
72,205
171,688
(64,184)
-
121,144
(5,760)
(7,320)
6,921
122,439
35,985
71,680
817,382
(a) Equity income from non-consolidated joint ventures is adjusted for income tax expense (recovery), depreciation and amortization, interest expense, net of
interest income, foreign exchange loss (gain), amortization of in-process revenue contracts, and unrealized and realized (gains) losses on derivative
instruments.
(5) Total capitalization represents total debt and total equity.
(6) Net debt represents total debt less cash, cash equivalents and restricted cash. Total net capitalization represents net debt and total equity.
(7) Excludes our acquisition of FPSO units and investment in Sevan Marine ASA (or Sevan) in 2011 and 2012, and our acquisition of LNG carriers
through our 52% interest in the joint venture between Teekay LNG and Marubeni Corporation. 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.”
10
Risk Factors
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, production and storage of 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.
The cyclical nature of the tanker industry may lead to volatile changes in charter rates and significant fluctuations in the utilization of our
vessels, which may adversely affect our earnings and profitability.
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. The cyclical nature of the tanker industry may cause significant increases
or decreases in the revenue we earn from our vessels and may also cause significant increases or decreases in the value of our vessels. 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 7% of our net revenues during both 2013 and 2012. The spot-charter market is highly volatile
and fluctuates based upon tanker and oil supply and demand, and declining spot rates in a given period generally will result in corresponding
declines in operating results for that period. 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, time 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. The factors affecting the supply of and demand for tankers are outside of our control, and the nature,
timing and degree of changes in industry conditions are unpredictable.
Factors that influence demand for tanker capacity include:
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•
•
•
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:
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•
•
•
•
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.
Reduction in oil produced from offshore oil fields could harm our shuttle tanker and FPSO businesses.
As at December 31, 2013, we had 35 vessels operating in our shuttle tanker fleet, nine FPSO units operating in our FPSO fleet (of which one is
operating in a joint venture) and one FPSO unit on order. Certain of our shuttle tankers and our FPSO units earn revenue that depends upon the
volume of oil we transport or the volume of oil produced 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 extended 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 could 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
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.
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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 FSO contracts under
which our vessels operate are subject to extensions beyond their initial term. The likelihood of these contracts 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 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 fair market value or the disposition of the vessel at a fair market value that is lower than its book 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 FPSO,
shuttle tanker, and FSO sectors.
Expansion of the LNG and LPG shipping sectors depends on continued growth in world and regional demand for LNG and LPG and marine
transportation of LNG and LPG, as well as the supply of LNG and LPG. Demand for LNG and LPG and for the marine transportation of LNG and
LPG could be negatively affected by a number 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 sources, 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 FPSO, shuttle tanker, and FSO 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:
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•
•
•
•
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;
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.
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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 reduced 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 charters for our LNG and LPG carriers, shuttle tankers, FPSO and FSO 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, FPSO, shuttle tanker
and FSO 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 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 37%, or $677.3 million, of our consolidated revenues during 2013 (2012 –
three customers for 38% or $760.3 million, 2011 – three customers for 35% or $698.9 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 hazardous 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 regulatory 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 requirements 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. Recently, Teekay Offshore entered the long-haul ocean towage and offshore installation services
business through its acquisition of ALP Maritime Services B.V. (or ALP) in March 2014. 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;
additional demands on members of our senior management while integrating acquired businesses, which would decrease the time they
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;
13
•
•
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 and TIL 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 effect 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 FPSO and FSO 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, 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 failing to
maintain certification with applicable maritime 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.
Past port calls by our vessels, or third-party vessels from which we derived pooling revenues, to countries that are subject to sanctions
imposed by the United States and the European Union may impact investors’ decisions to invest in our securities.
The United States government has imposed sanctions on Iran, Syria and Sudan. The European Union (or EU) has also imposed sanctions on
trade with Iran. In the past, conventional oil tankers owned or chartered-in by us, or third-party vessels participating in commercial pooling
arrangements from which we derive revenue, made limited port calls to those countries for the loading and discharging of oil products. Those port
calls did not violate U.S. or EU sanctions at the time and we intend to maintain our compliance with all U.S. and EU sanctions. In addition, we have
no future contracted loadings or discharges in any of those countries and intend not to enter into voyage charter contracts for the transport of oil or
gas to or from Iran, Syria or Sudan. We believe that our compliance with these sanctions and our lack of any future port calls to those countries
does not and will not adversely impact our revenues, because port calls to these countries have never accounted for any material amount of our
revenues. However, some investors might decide not to invest in us simply because we have previously called on, or through our participation in
pooling arrangements have previously received revenue from calls on, ports in these sanctioned countries. Any such investor reaction could
adversely affect the market for our common shares.
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.
14
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;
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 results 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, 2013, we had on order five LNG carriers, 12 LPG carriers, one FSO conversion, one planned FSO conversion and one FPSO unit. Two LNG
carriers are scheduled for delivery in 2016 and three LNG carriers are scheduled for delivery in 2017. Three LPG carriers are scheduled for delivery
in each of the years 2014, 2015, 2016, and 2017, respectively. One FSO conversion is scheduled for completion in the third quarter of 2014, and
the FPSO unit is scheduled for delivery in mid-2014 and to be on-hire in late-2014. As of December 31, 2013, progress payments made towards
these newbuildings, excluding payments made by our joint venture partners, totaled $731.1 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 conversions 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 recently
submitted bids to provide transportation solutions for LNG and LPG, FPSO and FSO projects. We may submit additional bids from time to time. The
award process relating to LNG and LPG transportation, FPSO and FSO 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, FPSO and FSO projects, we will need to incur significant capital
expenditures to build the related LNG and LPG carriers, FPSO and FSO 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 financial 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.
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Exposure to currency exchange rate and interest rate fluctuations results in fluctuations in our cash flows and operating results.
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 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 and our
Norwegian Kroner-denominated bonds. We have entered into foreign currency forward contracts to economically hedge portions of our forecasted
expenditures denominated in Norwegian Kroner. We also incur interest expense on our Norwegian Kroner-denominated bonds. We have entered
into cross-currency swaps to economically hedge the foreign exchange risk on the principal and interest payments of our Norwegian Kroner bonds.
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 represent 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, increased
vessel operational costs, including insurance costs, and the inability to transport oil to or from certain locations. Terrorist 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 charters, 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 Indian Ocean off
the coast of Somalia. While there continue to be significant numbers of piracy incidents in the Gulf of Aden and Indian Ocean, recently there have
been increases in the frequency and severity of piracy incidents off the coast of West Africa. 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, 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. Any disruption caused by these factors 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 and gas from
politically and economically unstable regions. Conflicts in these regions have included attacks on ships and other efforts to disrupt shipping.
Hostilities, strikes, or other political or economic instability in regions where we operate or where we may operate could have a material adverse
effect 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 in which we operate or to which we trade 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 generally 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, 2013, the total outstanding debt under credit facilities
with this type of covenant tied to conventional tanker values was $146.7 million and to LNG carrier values was $400.1 million. We have five
financing arrangements that require us to maintain vessel value to outstanding loan principal balance ratios ranging from 105% to 120%. At
December 31, 2013, 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, regulatory frameworks to
reduce greenhouse gas emissions. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased
efficiency standards, and incentives or mandates for renewable energy. 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 cannot predict
with certainty at this time.
We have substantial debt levels and may incur additional debt.
As of December 31, 2013, our consolidated debt and capital lease obligations totaled $6.7 billion and we had the capacity to borrow an additional
$0.6 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 limitations 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, and our
ability to refinance our credit facilities 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 dividends/cash distributions;
reducing or delaying our business activities, acquisitions, investments or capital expenditures; or
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•
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 future 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.
As described in “Item 18 – Financial Statements: Note 10 – Capital Lease Obligations and Restricted Cash,” the Teekay Nakilat Corporation (or
Teekay Nakilat) and a joint venture partner (or Teekay Nakilat Joint Venture) is the lessee under 30-year capital lease arrangements with a third
party for the three RasGas II LNG Carriers (or the RasGas II Leases). The UK taxing authority (or HMRC) has been urging the 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 the
Teekay Nakilat Joint Venture enter into negotiations to terminate the RasGas II Leases. The Teekay Nakilat Joint Venture has declined this request
as it does not believe that HRMC will 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 from the First Tribunal regarding a similar financial lease of an LNG carrier that
ruled in favor of the taxpayer as well as a 2013 decision from the Upper Tribunal that upheld the 2012 verdict. HMRC has been granted leave to
further appeal the 2013 decision to the Court of Appeal. If the HMRC is able to successfully challenge the RasGas II Leases, the Teekay Nakilat
Joint Venture 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. Teekay LNG estimates its 70% share of the potential exposure to be approximately $34 million, exclusive of potential
financing and interest rate swap termination costs.
The Teekay Nakilat Joint Venture has received notice from the lessor of the three vessels of a credit rating downgrade to the bank that was
providing the letter of credit (or LC Bank) to Teekay Nakilat Joint Venture’s lease. As a result, in January 2014, the lessor notified Teekay Nakilat
Joint Venture of an increase in the lease payments over the remaining term of the RasGas II Leases of approximately $12.3 million on a net present
value basis effective April 2014. Teekay LNG's 70% share of the present value of the lease payment increase is approximately $8.6 million. Teekay
Nakilat Joint Venture is looking at alternatives to mitigate the impact of the downgrade to the LC Bank’s credit rating to avoid a prolonged increase
to lease payments.
In addition, the subsidiaries of another joint venture formed to service the Tangguh LNG project in Indonesia has 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 RasGas II 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.
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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
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 Consequences” 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. shareholders.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (or PFIC)
for such purposes in any taxable year for which either (a) at least 75% of its gross income consists of “passive income” or (b) at least 50% of the
average value of the entity’s assets is attributable to assets that produce or are held for the production of “passive income.” For purposes of these
tests, “passive income” includes dividends, interest, 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 2010-01) 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 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 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.”
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 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 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
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 the continuation of our conventional tanker business through our publicly-listed
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subsidiary, Teekay Tankers Ltd. (NYSE: TNK) (or Teekay Tankers). We are responsible for managing and operating consolidated assets of over
$11.5 billion, comprised of approximately 164 liquefied gas, offshore, and conventional tanker assets. With offices in 15 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, one
HiLoad DP unit, and our floating production, storage and offloading (or FPSO) units, which primarily operate under long-term fixed-rate contracts. As
of December 31, 2013, our shuttle tanker fleet had a total cargo capacity of approximately 4.4 million deadweight tonnes (or dwt), which represented
approximately 40% of the total tonnage of the world shuttle tanker fleet. Please read “—B. Operations—Our Fleet.”
Our liquefied gas segment includes our LNG and LPG carriers. LNG carriers are usually chartered to carry LNG pursuant to time-charter contracts,
where a vessel is hired for a fixed period of time. LPG carriers are mainly chartered to carry LPG on time-charters, on contracts of affreightment or
spot voyage charters. As of December 31, 2013, this fleet, including newbuildings on order, had a total cargo carrying capacity of approximately
6.6 million cubic meters. Please read “—B. Operations—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 “—B. Operations—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 Acquisitions
ALP Acquisition and Newbuilding Order
In March 2014, Teekay Offshore acquired 100% of the shares of ALP Maritime Services B.V. (or ALP), a Netherlands-based provider of long-haul
ocean towage and offshore installation services to the global offshore oil and gas industry. Concurrent with this transaction, Teekay Offshore and
ALP entered into an agreement with Niigata Shipbuilding & Repair of Japan for the construction of four state-of-the-art SX-157 Ulstein Design ultra-
long distance towing and anchor handling vessel newbuildings. These vessels will be equipped with dynamic positioning capability and are
scheduled for delivery in 2015 and 2016. Teekay Offshore is committed to acquire these newbuildings for a total cost of approximately $258 million.
Teekay Offshore acquired ALP for a purchase price of $6.1 million, of which $2.6 million was paid in cash on closing and a further $3.5 million
representing the fair value of contingent consideration. The contingent consideration consists of $2.4 million which is contingently payable upon the
delivery and employment of ALP’s four newbuildings. In addition, the contingent consideration includes a further amount of up to $2.6 million, based
on ALP’s annual operating results from 2017 to 2021. Teekay Offshore has the option to pay up to one half of the contingent consideration through
the issuance of common units of Teekay Offshore. Teekay Offshore also incurred $1.0 million of acquisition-related costs which have been
recognized in general and administrative expenses in March 2014. Teekay Offshore financed the ALP acquisition and initial newbuilding payments
through its existing liquidity and expects to secure long-term debt financing for the newbuildings prior to their deliveries. This acquisition represents
Teekay Offshore’s entrance into the long-haul ocean towage and offshore installation services business. This acquisition allows Teekay Offshore to
combine its infrastructure and access to capital with ALP’s experienced management team to further grow this niche business that is in an adjacent
sector to Teekay Offshore’s FPSO and shuttle tanker businesses.
Exmar LPG Joint Venture
In February 2013, Teekay LNG entered into a joint venture agreement with Belgium-based Exmar NV (or Exmar) to own and charter-in LPG carriers
with a primary focus on the mid-size gas carrier segment. The joint venture entity, called Exmar LPG BVBA, took economic effect as of November 1,
2012 and included 19 owned LPG carriers (including eight newbuilding carriers scheduled for delivery between 2014 and 2016, and taking into
effect the sale of the Donau LPG carrier in April 2013) and five chartered-in LPG carriers. For its 50% ownership interest in the joint venture,
including newbuilding payments made prior to the November 1, 2012 economic effective date of the joint venture, Teekay LNG invested $133.1
million in exchange for equity and a shareholder loan and assumed approximately $108 million as its pro rata share of existing debt and lease
obligations as of the economic effective date. These debt and lease obligations are secured by certain vessels in the Exmar LPG BVBA fleet. The
excess of the book value of net assets acquired over Teekay LNG’s investment in Exmar LPG BVBA, which amounted to approximately $6.0 million,
has been accounted for as an adjustment to the value of the vessels, charter agreements and lease obligations of Exmar LPG BVBA and as
recognition of goodwill, in accordance with the finalized purchase price allocation. Control of Exmar LPG BVBA is shared jointly between Exmar and
Teekay LNG. Consequently, Teekay LNG accounts for its investment in Exmar LPG BVBA using the equity method. In July 2013 and October 2013,
Exmar LPG BVBA exercised its options with Hanjin Heavy Industries and Construction Co., Ltd. to construct four additional LPG carrier
newbuildings, scheduled for delivery in 2017 and 2018.
HiLoad Dynamic Positioning Unit
In September 2013, Teekay Offshore acquired a 2010-built HiLoad dynamic positioning (or DP) unit from Remora AS (or Remora), a Norway-based
offshore marine technology company, for a total purchase price of approximately $55 million, including modification costs. The HiLoad DP unit
arrived in Brazil in November 2013 and is expected to commence operations under its full time-charter rate under a ten-year time-charter contract
with Petrobras in Brazil in the second quarter of 2014, once operational testing has been completed. Under the terms of an agreement between
Remora and Teekay Offshore, Teekay Offshore has a right of first refusal to acquire any future HiLoad projects developed by Remora. In July 2013,
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Remora was awarded a contract by BG E&P Brasil Ltda. to perform a front-end engineering and design study to develop the next generation of
HiLoad DP units. The design of the next generation of HiLoad DP units, which is based on the main parameters of the first generation design, is
expected to include new features, such as increased engine power and the capability to maneuver vessels larger than Suezmax conventional
tankers.
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 2013 and Early 2014 " for more information.
Recent Equity Offerings and Transactions by Subsidiaries
Equity Offerings and Transactions by Teekay Tankers
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. Teekay Tankers used the net proceeds from the offering to repay a portion of its outstanding debt under a revolving credit facility.
During June 2012, Teekay Tankers acquired 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 $454.2 million. As partial consideration for
the sale, Teekay received $25 million of newly issued shares of Teekay Tankers’ Class A common stock, issued at a price of $5.60 per share, and
the remaining amount was settled through a combination of a cash payment to Teekay and the assumption by Teekay Tankers of existing debt
secured by the acquired vessels.
Our ownership of Teekay Tankers was 25.1% as of March 1, 2014. 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—Financing
Transactions."
Equity Offerings, Unit Issuances and Transactions by Teekay Offshore and the Sale of Remaining Interest in OPCO to Teekay Offshore
During March 2011, we sold our 49% interest in Teekay Offshore Operating L.P. (or 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 that are 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 7.1 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 of the Piranema Spirit FPSO from Sevan in November 2011 and of
four BG newbuilding shuttle tankers that delivered in 2013.
During November 2011, Teekay Offshore acquired a 100% interest in the Piranema from Sevan. The total purchase price of approximately $164.3
million (including an adjustment for working capital) was paid in cash and was financed through the concurrent issuance of 7.1 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.
During July 2012, Teekay Offshore issued approximately 1.7 million common units to a group of institutional investors for gross proceeds, including
Teekay Offshore’s general partner’s 2% proportionate capital contribution, of $45.9 million. Teekay Offshore used the net proceeds from the
issuance of common units to partially finance the shipyard instalments for the four Suezmax newbuilding shuttle tankers.
During September 2012, Teekay Offshore completed a public offering of 7.8 million common units for gross proceeds, including Teekay Offshore’s
general partner’s 2% proportionate capital contribution, of $219.5 million. Teekay Offshore used the net proceeds from the issuance of common
units to repay a portion of its outstanding debt under its revolving credit facilities.
During April 2013, Teekay Offshore issued approximately 2.1 million common units in a private placement to an institutional investor for net
proceeds of approximately $61.2 million (including Teekay Offshore’s general partner’s proportionate capital contribution). Teekay Offshore used the
net proceeds from the sale of the common units to partially fund the acquisition of four Suezmax newbuilding shuttle tankers and for general
partnership purposes.
During April 2013, Teekay Offshore issued 6.0 million 7.25% Series A Cumulative Redeemable Preferred Units in a public offering, for net proceeds
of approximately $144.8 million. Teekay Offshore used a portion of the net proceeds from the public offering to prepay a portion of its outstanding
debt under three of its revolving credit facilities and to partially finance the purchase from us of the Voyageur Spirit FPSO unit and its interest in the
Cidade de Itajai FPSO unit, and used the remainder for general partnership purposes.
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During May 2013, Teekay Offshore implemented a continuous offering program (or COP), under which Teekay Offshore may issue new common
units, representing limited partner interests, at market prices up to a maximum aggregate amount of $100 million. Through December 31, 2013,
Teekay Offshore sold an aggregate of 85,508 common units under the COP, generating net proceeds of approximately $2.4 million (including
Teekay Offshore’s general partner’s 2% proportionate capital contribution and net of approximately $0.4 million of offering costs). The net proceeds
from the issuance of these common units were used for general partnership purposes.
During December 2013, Teekay Offshore issued approximately 1.75 million common units in a private placement to an institutional investor for net
proceeds of $54.4 million (including our general partner’s proportionate capital contribution). Teekay Offshore used the net proceeds from the
issuance of these common units for general partnership purposes.
Our ownership of Teekay Offshore was 29.3% (including our 2% general partner interest) as of March 1, 2014. We maintain control of Teekay
Offshore by virtue of our control of the general partner and will continue to consolidate this subsidiary. Please read "Item 18. Financial Statements:
Note 5—Financing Transactions."
Equity Offerings, Unit Issuances and Transactions by Teekay LNG
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 financed this acquisition with secured loan facilities and equity contributions from Teekay LNG
and Marubeni. Teekay LNG's share of the equity contribution was approximately $138 million.
During September 2012, Teekay LNG completed a public offering of 4.8 million common units at a price of $38.43 per unit for gross proceeds,
including Teekay LNG’s general partner’s 2% proportionate capital contribution, of approximately $189.2 million. Teekay LNG used the net proceeds
from the offering to repay a portion of its outstanding debt under two of its revolving credit facilities.
During May 2013, Teekay LNG implemented a COP under which Teekay LNG may issue new common units, representing limited partner interests,
at market prices up to a maximum aggregate amount of $100 million. Through December 31, 2013, Teekay LNG sold an aggregate of 124,071
common units under the COP, generating proceeds of approximately $4.9 million (including Teekay LNG’s general partner’s 2% proportionate
capital contribution of $0.1 million and net of approximately $0.1 million of commissions and $0.4 million of other offering costs). Teekay LNG used
the net proceeds from the issuance of these common units for general partnership purposes.
During July 2013, Teekay LNG issued approximately 0.9 million common units in a private placement to an institutional investor for net proceeds,
including Teekay LNG’s general partner’s 2% proportionate capital contribution, of $40.8 million. Teekay LNG used the proceeds from the private
placement to fund the first installment payments on two newbuilding LNG carriers ordered in July 2013 and for general corporate purposes.
During October 2013, Teekay LNG completed a public offering of 3.5 million common units (including 0.45 million common units issued upon
exercise of the underwriters’ over-allotment option) at a price of $42.62 per unit, for gross proceeds of approximately $150.0 million (including
Teekay LNG’s general partner’s 2% proportionate capital contribution). Teekay LNG used the net proceeds from the offering of approximately
$144.8 million to prepay a portion of its outstanding debt under two of its revolving credit facilities and to fund the acquisition of the second LNG
carrier newbuilding from Awilco LNG ASA.
Our ownership of Teekay LNG was 35.3% (including our 2% general partner interest) as of March 1, 2014. 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—
Financing Transactions.”
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 2013 and Early 2014" 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.
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•
•
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.
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 vessels 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 depend 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, 2013, there were approximately 93 vessels in the world shuttle tanker fleet (including eight newbuildings), the majority of which
operate in the North Sea. Shuttle tankers also operate in Africa, Brazil, Canada, Russia and the United States Gulf of Mexico. As of December 31,
2013, we had ownership interests in 32 shuttle tankers and chartered-in an additional three shuttle tankers. Other shuttle tanker owners include
Knutsen NYK Offshore Tankers AS, Transpetro, Viken Shipping, AET and J. Lauritzen which, as of December 31, 2013, controlled smaller fleets of
3 to 22 shuttle tankers each. We believe that we have certain 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 and Brazil.
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 mooring arrangement and
where they are located, FSO units may or may not have any propulsion systems. FSO units are usually conversions of older conventional or shuttle
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 or shuttle 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 31, 2013, there were approximately 90 FSO units operating and ten FSO units on order in the world fleet. As at December 31,
2013, we had ownership interests in five FSO units and one tanker being converted into an FSO unit. The major markets for FSO units are South
East Asia, West Africa, Northern Europe, the Mediterranean and South West Asia/the Middle East. 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
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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 2013, there
were approximately 174 FPSO units operating and 38 FPSO units on order in the world fleet. At December 31, 2013, we had ownership interests in
ten FPSO units (including one unit under construction). Most independent FPSO contractors have backgrounds in marine energy transportation, oil
field services or oil field engineering and construction. Other major independent FPSO contractors are SBM Offshore N.V., BW Offshore, MODEC,
Bluewater and Bumi Armada.
During 2013, a total of approximately 61% of our consolidated net revenues were earned by the vessels in our shuttle tankers and FSO segment
and FPSO segment, compared to approximately 60% in 2012 and 55% in 2011. 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 Qatar Gas Transport (Nakilat), Malaysian International Shipping Company, Mitsui O.S.K Lines, NYK Line, Golar LNG, Shell and BW Group.
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 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 35 to 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, 2013, there were approximately 386 vessels in the worldwide LNG fleet,
with an average age of approximately 11 years, and an additional 112 LNG carriers under construction or on order for delivery through 2017. As of
December 31, 2013, the worldwide LPG tanker fleet consisted of approximately 1,268 vessels with an average age of approximately 16 years and
approximately 171 additional LPG vessels were on order for delivery through 2017. LPG carriers range in size from approximately 250 to
approximately 85,000 cubic meters (or cbm). Approximately 52% (in terms of vessel numbers) of the worldwide fleet is less than 5,000 cbm.
Our liquefied gas segment includes our LNG and LPG carriers. LNG carriers are usually chartered to carry LNG pursuant to time-charter contracts,
where a vessel is hired for a fixed period of time. LPG carriers are mainly chartered to carry LPG on time-charters, on contracts of affreightment or
spot voyage charters. As at December 31, 2013, we had ownership interests in 29 LNG carriers, as well as five additional newbuilding LNG carriers
on order. In addition, as at December 31, 2013, we had full ownership of five LPG carriers and part ownership, through our joint venture agreement
with Belgium-based Exmar NV (or Exmar), in another 11 LPG carriers, 12 newbuilding LPG carriers on order, and five chartered-in LPG carriers.
During 2013, approximately 17% of our consolidated net revenues were earned by the vessels in our liquefied gas segment, compared to
approximately 16% in 2012, and 15% in 2011. Please read "Item 5. Operating and Financial Review and Prospects: Results of Operations."
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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.
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 limited 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 or revenue sharing commercial management arrangements.
Under such arrangements, 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 or revenue sharing commercial management arrangement, less
related voyage expenses (such as fuel and port charges) and administrative expenses, are pooled and allocated to the vessel owners according to
a pre-determined formula. As of December 31, 2013, we participated in three main pooling or revenue sharing commercial management
arrangements. These include an Aframax tanker revenue sharing commercial management arrangement (or the Aframax RSA), an LR2 tanker pool
(or the Taurus Pool), and a Suezmax tanker pool (or the Gemini Pool). As of 2013, nine of our Aframax tankers operated in the Aframax RSA, three
of our LR2 tankers operated in the Taurus Pool, and twelve of our Suezmax tankers operated in the Gemini Pool. Each of these pools or revenue
sharing commercial management arrangements 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, 2013, our Aframax tanker fleet (excluding Aframax-size
shuttle tankers and newbuildings) had an average age of approximately 10.1 years and our Suezmax tanker fleet (excluding Suezmax-size shuttle
tankers and newbuildings) had an average age of approximately 7.8 years. This compares to an average age for the world oil tanker fleet of
approximately 9.1 years, for the world Aframax tanker fleet of approximately 8.8 years and for the world Suezmax tanker fleet of approximately 8.0
years.
As of December 31, 2013, other large operators of Aframax tonnage (including newbuildings on order) included Malaysian International Shipping
Corporation (approximately 50 Aframax vessels), Sovcomflot (approximately 42 vessels), the Navig8 Pool (approximately 24 vessels), and the
Sigma Pool (approximately 28 vessels). Other large operators of Suezmax tonnage (including newbuildings on order) included the Stena Sonangol
Pool (approximately 21 vessels), Nordic American Tankers (approximately 20 vessels), the Blue Fin Pool (approximately 18 vessels), Euronav
(approximately 21 vessels), and Sovcomflot (approximately 18 vessels).
We have chartering staff located in Singapore; London, England; and Houston, USA. 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 2013, approximately 7% of our consolidated net revenues were earned by the vessels in our spot tanker sub-segment, compared to
approximately 7% in 2012 and 9% in 2011. 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 one year duration or more to be long-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 2013,
approximately 15% of our consolidated net revenues were earned by the vessels in the fixed-rate tanker sub-segment, compared to approximately
17% in 2012 and 21% in 2011. Please read "Item 5. Operating and Financial Review and Prospects: Results of Operations."
Our Fleet
As at December 31, 2013, our fleet (excluding vessels managed for third parties) consisted of 171 vessels, including chartered-in vessels and
newbuildings/conversions on order. The following table summarizes our fleet as at December 31, 2013:
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Shuttle Tanker and FSO Segment
Shuttle Tankers
FSO Units
Total Shuttle Tanker and FSO 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
Number of Vessels
Owned
Vessels
Chartered-in
Vessels
Newbuildings /
Conversions
Total
30 (1)
4 (4)
34
2 (1)
1 (4)
9 (5)
12
29 (7)
16 (9)
45
12 (11)
3 (12)
5 (13)
20
26 (14)
26
137
3 (2)
-
3
-
-
-
-
-
5
5
-
6
-
6
1
1
15
-
1 (3)
1
-
-
1 (6)
1
5 (8)
12 (10)
17
-
-
-
-
-
-
19
33
5
38
2
1
10
13
34
33
67
12
9
5
26
27
27
171
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). Of these
vessels, one shuttle tanker which Teekay Offshore owns through a 67% owned subsidiary is being converted into an FSO unit which is scheduled for completion
in 2017.
(2) All three vessels chartered-in by Teekay Offshore and one redelivered after December 31, 2013.
(3) One tanker owned 100% by Teekay Offshore, which is being converted into an FSO unit.
(4)
Includes four FSO units owned 100% by Teekay Offshore and one FSO unit owned through an 89% subsidiary of Teekay Offshore.
(5)
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. Four FPSO units are owned 100% by Teekay Offshore. One FPSO unit is owned 50% 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.
(6)
Includes one FPSO unit owned 100% by us, which is scheduled to deliver mid-2014.
(7)
(8)
Includes the following interests of Teekay LNG: a 100% interest in eight LNG carriers, a 70% interest in five LNG carriers, a 40% interest in four LNG carriers, a
50% interest in two LNG carriers, a 52% interest in six LNG carriers, and a 33% interest in four LNG carriers.
Includes five newbuilding vessels owned 100% by Teekay LNG, two of which are scheduled to be delivered in 2016 and the remaining three are scheduled to be
delivered in 2017.
(9)
Includes five vessels owned 100% by Teekay LNG and 11 vessels owned Teekay LNG (through 50% controlled subsidiaries).
(10) Includes 12 newbuilding vessels owned by Teekay LNG (through 50% controlled subsidiaries), three of which are scheduled to be delivered in each of the years
ending 2014, 2015, 2016 and 2017, respectively.
(11) Includes eight Suezmax tankers owned 100% by Teekay Tankers and four Suezmax tankers owned 100% by us and sold in March 2014.
(12) Includes one vessel owned 100% by Teekay Offshore, which is chartered to Teekay, and two vessels owned 100% by Teekay Tankers.
(13) Included five vessels owned 100% by Teekay Tankers.
(14) Includes ten vessels owned 100% by Teekay LNG, three vessels owned 100% by Teekay Offshore, 13 vessels owned 100% by Teekay Tankers and one owned
50% by Teekay Tankers.
Our vessels are of Bahamian, Belgian, Danish, Hong Kong, Isle of Man, Liberian, Marshall Islands, Norwegian, Panama, Singapore, and Spanish
registry.
26
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 utilization. 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, 2013, we had five LNG carriers, one FSO under conversion, one planned FSO conversion, and one FPSO unit on order. In
addition, we had a 50% interest in 12 LPG newbuilding orders. 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 protect 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
eliminating incidents that threaten the safety and integrity of our vessels, such as groundings, fires, collisions and petroleum spills. In 2008, we
introduced the Quality Assurance and Training Officers Program (or QATO) 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. In 2010, Teekay Corporation introduced the “Operational
Leadership” campaign to reinforce commitment to personal and operational safety.
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 quarterly 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, Occupational
Health and Safety Advisory Services (or OHSAS) 18001 and the new Maritime Labour Convention 2006 (MLC 2006) that became enforceable on
August 20, 2013. 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.
Critical ship management functions undertaken by our subsidiaries are:
•
•
•
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 on-board and on-shore 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 some 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 operating vessels, including
injury to our crew or third parties, cargo loss and pollution. The current maximum amount of our coverage for pollution is $1 billion per vessel per
27
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 claim 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, risk analysis tools, maintenance and assessment
programs, a seafarers competence training program, seafarers workshops and membership in emergency response organizations.
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, to the extent we do not
contract in U.S. dollars, 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. Three customers, international oil companies, accounted
for a total of 37%, or $677.3 million, of our consolidated revenues during 2013 (2012 - two customers for 30% or $588.4 million, 2011 - two
customers for 27% or $508.6 million). No other customer accounted for more than 10% of our consolidated revenues during 2013, 2012 or 2011.
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.
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 (or IACS): BV, 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.
The classification society 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 classification society, 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 visiting their jurisdiction.
Processes followed onboard 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 ISM Code. DNV 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 annually, which helps ensure us that:
•
•
our vessels and operations adhere to our operating standards;
the structural integrity of the vessel is being maintained;
• machinery and equipment is being maintained to give reliable service;
• we are optimizing performance in terms of speed and fuel consumption; and
•
the vessel’s appearance supports our brand and meets customer expectations.
28
Our customers also often carry out vetting inspections under the Ship Inspection Report Program, which is a significant safety initiative introduced
by the Oil Companies International Marine Forum to specifically address concerns about sub-standard vessels. The inspection results permit
charterers to screen a vessel to ensure that it meets their general and specific risk-based shipping requirements.
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 Ship and Port Facility Security Code (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, lifesaving 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.
The IMO has issued guidance regarding protecting against acts of piracy off the coast of Somalia. We comply with these guidelines.
In addition, the IMO has proposed (by the adoption in 2004 of the International Convention for the Control and Management of Ships' Ballast Water
and Sediments (or the Ballast Water Convention)) 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 in order to comply with their first renewal or renewal survey
after 2016 in order to comply with the renewal survey required for the International Oil Pollution Prevention certificate. This convention has not yet
29
entered into force, 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.
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 with 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/EC on Port State Control) 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); creates obligations on the part of EU member
port states to inspect minimum percentages 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 (Directive 2009/15/EC).
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.
The EU has adopted regulations requiring the use of low sulfur fuel. Currently, vessels are required to burn fuel with a sulfur content not exceeding
1% (while within EU member states’ territorial seas, exclusive economic zones and pollution control zones that are included in SOx Emission
Control Areas). Beginning January 1, 2015, vessels are required to burn fuel with sulfur content not exceeding 0.1% while within EU member states’
territorial seas, exclusive economic zones and pollution control zones that are included in SOX Emission Control Areas. Other jurisdictions have
also adopted regulations requiring the use of low sulfur fuel. The California Air Resources Board (or CARB) requires vessels to burn fuel with 0.1%
sulfur content or less within 24 nautical miles of California as of January 1, 2014. IMO regulations require that as of January 1, 2015, all vessels
operating within Emissions Control Areas (or ECA) 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). Currently, the only grade of fuel meeting this low sulfur content
requirement is low sulfur marine gas oil (or LSMGO). Since July 1, 2010, the applicable sulfur content limits in the North Sea, the Baltic Sea and the
English Channel sulfur control areas have been 1.00%. Certain modifications were completed on our Suezmax tankers in order to optimize
operation on LSMGO of equipment originally designed to operate on Heavy Fuel Oil (or HFO), and to ensure our compliance with the Directive. 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
competitors 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.
The EU has recently adopted Regulation (EU) No 1257/2013 which imposes rules regarding ship recycling and management of hazardous materials
on vessels. The Regulation includes requirements to recycle vessels in an environmentally sound manner at certain approved recycling facilities, so
as to minimize the adverse effects of recycling on human health and the environment. The Regulation also contains rules to control and properly
manage hazardous materials on vessels and prohibits or restricts the installation or use of certain hazardous materials on vessels. The Regulation
aims to ratify the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships adopted by the IMO in 2009
(which has not entered into force). It applies to vessels flying the flag of a Member State. In addition, certain of its provisions also apply to vessels
flying the flag of a third country calling at a port or anchorage of a Member State. For example, when calling at a port or anchorage of a Member
State, the vessels flying the flag of a third country will be required, amongst other things, to have on board an inventory of hazardous materials
which complies with the requirements of the Regulation and to be able to submit to the relevant authorities of that Member State a copy of a
statement of compliance issued by the relevant authorities of the country of their flag and verifying the inventory. The Regulation will generally
become effective between December 31, 2015 and December 31, 2018, although certain of its provisions are set to become effective on December
31, 2014 and certain others on December 31, 2020.
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) reduction units on
most shuttle tankers serving the Norwegian continental shelf. Customers bear the cost to install and operate the VOC equipment on board the
shuttle tankers.
In Brazil, Petrobras serves in a regulatory capacity, and has adopted standards similar to those in the North Sea.
30
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;
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, safety 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 the 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 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 necessary 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 conduct regular oil spill
response drills in accordance with the guidelines set out in OPA 90. The Coast Guard has announced it intends to propose similar 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 application of this doctrine
varies by jurisdiction.
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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 from the Environmental
Protection Agency (or EPA) titled the “Vessel General Permit” and comply with a range of effluent limitations, best management practices, reporting,
inspections and other requirements. The current Vessel General Permit incorporates Coast Guard requirements for ballast water exchange and
includes specific technology-based requirements for vessels, and includes an implementation schedule to require vessels to meet the ballast water
effluent limitations by the first drydocking after January 1, 2014 or January 1, 2016, depending on the vessel size. Vessels that are constructed after
December 1, 2013 are subject to the ballast water numeric effluent limitations immediately upon the effective date of the 2013 Vessel General
Permit. 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.
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. In July 2011 the IMO adopted regulations imposing
technical and operational measures for the reduction of greenhouse gas emissions. These new regulations formed a new chapter in Annex VI and
became effective on January 1, 2013. The new technical and operational measures include the “Energy Efficiency Design Index,” which is
mandatory for newbuilding vessels, and the “Ship Energy Efficiency Management Plan,” which is mandatory for all vessels. In addition, 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 initiatives 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. Each of the existing vessels in our fleet currently complies with the
requirements of ISPS and Maritime Transportation Security Act of 2002 (U.S. specific requirements) and regularly exercise these plans to ensure
efficient use and familiarity by all involved.
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, 2014. Please read Exhibit 8.1 to this Annual Report for a list
of our significant subsidiaries as at March 1, 2014.
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Teekay Corporation (NYSE: TK)
Teekay Holdings Limited (Bermuda)
27.3% Limited Partner
Interest and 2% General
Partner Interest (1)
33.3% Limited Partner
Interest and 2% General
Partner Interest (1)
25.1% 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 53.1%.
(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, 2013, Teekay LNG operated a fleet of 39 LNG carriers (including five newbuildings), 33
LPG/multigas carriers, 9 conventional 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, 2013, Teekay Offshore owned and operated a fleet of 35 shuttle tankers
(including three chartered-in vessels), one HiLoad DP unit, five FSO units, four conventional Aframax tankers and five 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. 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 own our
conventional tanker business. As of December 31, 2013, Teekay Tankers owned a fleet of 11 double-hull Aframax tankers, ten double-hull Suezmax
tankers, six product tankers, one VLCC and one in-chartered Aframax, all of 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. Teekay Tankers’ 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.
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, we entered into a non-competition agreement with Teekay Tankers, which provides Teekay Tankers with a right of first
refusal to participate in any future conventional crude oil tanker and product tanker opportunities developed by us for a period of three years from
June 2012.
33
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 (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.
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 and 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 expect 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, among other things, 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.
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 been or will be U.S. Source Domestic Transportation Income.
34
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 2014,
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 be approximately $1.1 million. In addition, we estimate that certain of our subsidiaries that are unable to claim the
Section 883 Exemption were subject to less than $200,000 in the aggregate of U.S. federal income tax on the U.S. source portion of their U.S.
Source International Transportation Income for 2014 and we estimate that these subsidiaries will be subject to less than $200,000 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 the continuation 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 164
liquefied gas, offshore, and conventional tanker assets with total consolidated assets of over $11.5 billion. With offices in 15 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.
SIGNIFICANT DEVELOPMENTS IN 2013 AND EARLY 2014
Recent Developments in our Gas Business
In August 2013, Teekay LNG agreed to acquire a 155,900 cubic meter (or cbm) LNG carrier newbuilding from Norway-based Awilco LNG ASA (or
Awilco), that was constructed by Daewoo Shipbuilding & Marine Engineering Co., Ltd., (or DSME) in South Korea. Upon the vessel’s delivery on
September 16, 2013, Awilco sold the vessel to Teekay LNG and Teekay LNG bareboat chartered the vessel back to Awilco on a five-year fixed-rate
charter contract (plus a one-year extension option) with a fixed-price purchase obligation at the end of the charter. Teekay LNG financed the
acquisition from its existing liquidity and has secured a long-term debt facility. In September 2013, Teekay LNG agreed to acquire a second 155,900
cbm LNG carrier newbuilding from Awilco. Upon delivery in November 2013, Awilco sold the vessel to Teekay LNG and Teekay LNG bareboat
chartered the vessel back to Awilco on a four-year fixed rate charter contract (plus a one year extension option) with a fixed-price purchase
obligation at the end of the charter. Teekay LNG financed the acquisition with a portion of the proceeds generated from its October 2013 equity
offering, and has also secured a separate long-term debt facility for this vessel. The purchase price of each vessel is $205 million less a $51 million
upfront prepayment of charter hire by Awilco (inclusive of a $1.0 million upfront fee), which is in addition to the daily bareboat charter rate.
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In July 2013 and November 2013, Teekay LNG exercised options with DSME to construct a total of three LNG carrier newbuildings for a total cost of
approximately $637 million. These newbuilding vessels will be equipped with the M-type, Electronically Controlled, Gas Injection (or MEGI) twin
engines, which are expected to be significantly more fuel-efficient and have lower emission levels than other engines currently being utilized in LNG
shipping. Teekay LNG intends to secure charter contracts for these vessels prior to their delivery in 2017. In connection with the exercise of the two
options in July 2013, Teekay LNG obtained options to order up to three additional LNG carrier newbuildings that expire in May 2014.
In June 2013, Teekay LNG was awarded five-year time-charter contracts with Cheniere Marketing L.L.C. (or Cheniere) for the two 173,400 cbm
LNG carrier newbuildings that Teekay LNG ordered in December 2012. The newbuilding LNG carriers, also equipped with MEGI twin engines, are
currently under construction by DSME and are scheduled to deliver in the first half of 2016. Upon delivery, the vessels will commence their charters
with Cheniere, which will export LNG from its Sabine Pass LNG export facility in Louisiana, USA.
In February 2013, Teekay LNG entered into a joint venture agreement with Belgium-based Exmar NV (or Exmar) to own and charter-in liquefied
petroleum gas (or LPG) carriers with a primary focus on the mid-size gas carrier segment. The joint venture entity, called Exmar LPG BVBA, took
economic effect as of November 1, 2012 and, as of December 31, 2013, included 23 owned LPG carriers (including 12 newbuilding carriers
scheduled for delivery between 2014 and 2018) and five chartered-in LPG carriers. For Teekay LNG’s 50% ownership interest in the joint venture,
including newbuilding payments made prior to the November 1, 2012 economic effective date of the joint venture, Teekay LNG invested
approximately $133 million in exchange for equity and a shareholder loan and assumed approximately $108 million of its pro rata share of the
existing debt and lease obligations as of the economic effective date. These debt and lease obligations are secured by certain vessels in the Exmar
LPG BVBA fleet. Exmar continues to commercially and technically manage and operate the vessels. Since control of Exmar LPG BVBA is shared
jointly between Exmar and Teekay LNG, Teekay LNG accounts for Exmar LPG BVBA using the equity method.
Recent Developments in our Offshore Business
In March 2014, Teekay Offshore acquired 100% of the shares of ALP Maritime Services B.V. (or ALP), a Netherlands-based provider of long-haul
ocean towage and offshore installation services to the global offshore oil and gas industry. Concurrent with this transaction, Teekay Offshore and
ALP entered into an agreement with Niigata Shipbuilding & Repair of Japan for the construction of four state-of-the-art SX-157 Ulstein Design ultra-
long distance towing and anchor handling vessel newbuildings. These vessels will be equipped with dynamic positioning capability and are
scheduled for delivery in 2015 and 2016. Teekay Offshore is committed to acquire these newbuildings for a total cost of approximately $258 million.
Teekay Offshore acquired ALP for a purchase price of $6.1 million, of which $2.6 million was paid in cash on closing and a further $3.5 million
representing the fair value of contingent consideration. The contingent consideration consists of $2.4 million which is contingently payable upon the
delivery and employment of ALP’s four newbuildings. In addition, the contingent consideration includes a further amount of up to $2.6 million, based
on ALP’s annual operating results from 2017 to 2021. Teekay Offshore has the option to pay up to one half of the contingent consideration through
the issuance of common units of Teekay Offshore. Teekay Offshore also incurred $1.0 million of acquisition-related costs which have been
recognized in general and administrative expenses in March 2014. Teekay Offshore financed the ALP acquisition and initial newbuilding payments
through its existing liquidity and expects to secure long-term debt financing for the newbuildings prior to their deliveries. This acquisition represents
Teekay Offshore’s entrance into the long-haul ocean towage and offshore installation services business. This acquisition allows Teekay Offshore to
combine its infrastructure and access to capital with ALP’s experienced management team to further grow this niche business that is in an adjacent
sector to Teekay Offshore’s FPSO and shuttle tanker businesses. Please read “Item 18 – Financial Statements: Note 25 (c) – Subsequent Events.”
In June 2013, Teekay Offshore completed its acquisition from us of our 50% interest in a joint venture that owns the Cidade de Itajai FPSO unit (or
Itajai), and assumed 50% of the joint venture’s originally drawn debt of $300.0 million for a purchase price of $53.8 million. Prior to finalizing the
purchase, the joint venture repaid $10.5 million of its originally drawn debt and, as a result, Teekay Offshore assumed on the purchase date 50% of
the joint venture’s outstanding debt of $289.5 million. The Itajai FPSO has been operating on the Baúna and Piracaba (previously named Tiro and
Sidon) fields in the Santos Basin offshore Brazil since February 2013 under a nine-year fixed-rate time-charter contract, plus extension options, with
Petrobras. The remaining 50% interest in the Itajai FPSO unit is owned by Brazilian-based Odebrecht Oil & Gas S.A. (a member of the Odebrecht
group) (or Odebrecht).
In May 2013, Teekay Offshore finalized a ten-year charter contract, plus extension options, with Salamander Energy plc (or Salamander) to supply a
floating, storage and offloading (or FSO) unit in Asia. Teekay Offshore is converting its 1993-built shuttle tanker, the Navion Clipper, into an FSO
unit for an estimated fully built-up cost of approximately $51 million. The unit is expected to commence its contract with Salamander in the third
quarter of 2014.
In May 2013, Teekay Offshore entered into an agreement with Statoil Petroleum AS (or Statoil), on behalf of the field license partners, to provide an
FSO unit for the Gina Krog oil and gas field located in the North Sea. The contract will be serviced by a new FSO unit converted from the 1995-built
shuttle tanker, the Randgrid, which Teekay Offshore currently owns through a 67% owned subsidiary. The FSO conversion project is expected to be
completed for a gross capital cost of approximately $260 million, including amounts reimbursable upon delivery of the unit relating to installation and
mobilization costs, and the cost of acquiring the remaining 33% ownership interest in the Randgrid shuttle tanker. Following scheduled completion in
early 2017, the newly converted FSO unit will commence operations under a three-year firm period time-charter contract to Statoil, which also
includes 12 additional one-year extension options.
In November 2011, we agreed to acquire from Sevan Marine ASA (or Sevan) the Voyageur Spirit (formerly known as the Sevan Voyageur) floating,
production, storage and offloading (or FPSO) unit upon the completion of certain upgrades. In September 2012, we entered into an agreement to
sell, subject to certain conditions, the Voyageur Spirit FPSO unit to Teekay Offshore for a price of $540.0 million following its commencement of
operations under a long-term charter contract with E.ON Ruhrgas UK E&P Limited (or E.ON). On April 13, 2013, the Voyageur Spirit FPSO unit
began production on the Huntington Field and commenced its five-year charter with E.ON. In May 2013, we completed the acquisition of the
Voyageur Spirit FPSO unit from Sevan. The excess of the price paid over the carrying value of the non-controlling interest acquired was $35.4
million and has been accounted for as a reduction to equity. Immediately after acquiring the FPSO unit from Sevan, we sold it to Teekay Offshore
for $540.0 million. The Voyageur Spirit FPSO unit has been consolidated by us since November 30, 2011, as the Voyageur Spirit FPSO unit was a
variable interest entity (or VIE) and we were the primary beneficiary from November 30, 2011 until its purchase in May 2013.
Upon commencing production on April 13, 2013, the Voyageur Spirit FPSO unit had a specified time period to receive final acceptance from the
charterer, E.ON, at which point the unit would commence full operations under the contract with E.ON. However, due to a defect encountered in one
of its two gas compressors, the FPSO unit was unable to achieve final acceptance within the allowable timeframe, resulting in the FPSO unit being
36
declared off-hire by the charterer retroactive to April 13, 2013. We agreed to indemnify Teekay Offshore for lost revenues and certain unrecovered
vessel operating expenses up until receipt of the certificate of final acceptance from E.ON, subject to a maximum of $54 million.
On August 27, 2013, repairs to the defective gas compressor on the Voyageur Spirit FPSO were completed and the unit achieved full production
capacity. Since that time, Teekay Offshore has been receiving full rate either directly from the charterer or through the indemnification from us. In
April 2014, Teekay Offshore received the certificate of final acceptance from the charterer, which declared the unit on-hire retroactive to February
22, 2014.
Any amounts paid as indemnification from us to Teekay Offshore are effectively treated for accounting purposes as a reduction in the purchase
price paid to us for the FPSO unit. Any compensation received by Teekay Offshore from the charterer related to the indemnification period reduces
the amount of our indemnification paid to Teekay Offshore. As at December 31, 2013, the $540.0 million original purchase price of the Voyageur
Spirit FPSO unit has effectively been reduced to $509.3 million ($279.3 million net of assumed debt of $230.0 million) to reflect the indemnification
amount of $34.9 million for the year ended December 31, 2013, partially offset by the excess value of $4.3 million relating to the 1.4 million Teekay
Offshore common units issued to us as partial consideration for the FPSO unit on the date of closing of the transaction in May 2013 compared to the
fair value of the common units on the date we offered to sell the FPSO unit to Teekay Offshore.
In September 2013, Teekay Offshore acquired a 2010-built HiLoad dynamic positioning (or DP) unit from Remora AS (or Remora), a Norway-based
offshore marine technology company, for a total purchase price of approximately $55 million, including modification costs. The HiLoad DP unit
arrived in Brazil in November 2013 and is expected to commence operations under its full time-charter rate under a ten-year time-charter contract
with Petrobras in Brazil in the second quarter of 2014, once operational testing has been completed. Under the terms of an agreement between
Remora and Teekay Offshore, Teekay Offshore has a right of first refusal to acquire any future HiLoad projects developed by Remora. In July 2013,
Remora was awarded a contract by BG E&P Brasil Ltda. to perform a front-end engineering and design study to develop the next generation of
HiLoad DP units. The design of the next generation of HiLoad DP units, which is based on the main parameters of the first generation design, is
expected to include new features, such as increased engine power and the capability to maneuver vessels larger than Suezmax conventional
tankers.
Recent Developments in our Tanker Business
In January 2014, Teekay Tankers, along with us, formed Tanker Investments Ltd. (or TIL). Teekay Tankers, and us, purchased 5.0 million shares of
common stock, representing a 20% interest in TIL, as part of a $250 million private placement by TIL, which represents a total investment of $50.0
million. In addition, Teekay Tankers, and us, received stock purchase warrants entitling it to purchase up to 1,500,000 shares of common stock of
TIL at a fixed price of $10 per share. The stock purchase warrants expire on January 23, 2019. For purposes of vesting, the stock purchase
warrants are divided into four equally sized tranches. Each tranche will vest and become exercisable when and if the fair market value of a share of
the Common Stock equals or exceeds $12.50, $15.00, $17.50 and $20.00, respectively (or equivalent amounts in NOK converted using an
exchange rate of 6.17) for such tranche for any ten consecutive trading days. Teekay Tankers, and us, also received one Series A-1 preferred share
and one Series A-2 preferred share, each of which entitles the holder to elect one board member of TIL. The preferred shares do not give the holder
a right any dividends or distributions of TIL. In March 2014, TIL issued additional common shares and listed its shares on the Oslo Stock Exchange.
As of March 31, 2014, the combined interest of Teekay Tankers and us in TIL was 13.0%. TIL will seek to opportunistically acquire, operate and sell
modern second hand tankers to benefit from an expected recovery in the current cyclical low of the tanker market. A portion of the net proceeds
from the equity issuances by TIL will be used to acquire five modern Aframax crude oil tankers from third parties and four modern Suezmax crude
oil tankers from us. TIL shares were listed on the Oslo Stock Exchange effective March 25, 2014. Please read “Item 18 – Financial Statements:
Note 25 (b) – Subsequent Events.”
In April 2013, Teekay Tankers entered into agreements with STX Offshore & Shipbuilding Co. Ltd. (or STX) of South Korea to construct four fuel-
efficient 113,000 dead-weight tonne LR2 product tanker newbuildings plus options to order up to an additional 12 vessels. The payment of Teekay
Tankers’ first shipyard installment was contingent on Teekay Tankers receiving acceptable refund guarantees for the shipyard installment payments.
In October and November 2013, Teekay Tankers exercised its options to order eight additional LR2 newbuildings, in aggregate, under option
agreements relating to the original STX LR2 shipbuilding agreements signed in April 2013. STX did not produce shipbuilding contracts within the
specified timeframe of the option declarations and, therefore, is in breach of the option agreements. In December 2013, the newbuilding agreements
were terminated by Teekay Tankers and in February 2014 the option agreements were terminated. In February 2014, we commenced legal actions
for damages.
OTHER SIGNIFICANT PROJECTS AND DEVELOPMENTS
Storm Damage to Banff FPSO Unit
On December 7, 2011, the Petrojarl Banff FPSO unit (or Banff), which operates on the Banff field in the U.K. sector of the North Sea, suffered 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 the damage, we declared force majeure under the customer contract on December 8, 2011 and the Banff FPSO unit commenced a period of
off-hire which is currently expected to continue until the second quarter of 2014 while the necessary repairs and upgrades are completed and the
weather permits re-installation of the unit on the Banff field. We do not have off-hire insurance covering the Banff FPSO. After the repairs and
upgrades are completed, 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 expect that repair costs to the Banff FPSO unit and equipment and costs associated with the emergency response to prevent loss or further
damage during the December 7, 2011 storm event will be primarily reimbursed through our insurance coverage, subject to a $0.8 million deductible
and the other terms and conditions of the applicable policies. In addition, we will also incur certain capital upgrade costs for the Banff FPSO unit and
the Apollo Spirit related to upgrades to the mooring system required by the relevant regulatory authorities due to the extreme weather and sea
states experienced during the December 7, 2011 storm. The Apollo Spirit was operating on the Banff field as a storage tanker and is expected to
return to the Banff field at the same time as the Banff FPSO unit. The total of these capital upgrade costs is expected to total approximately $155
million. The recovery of the capital upgrade costs from the charterer is subject to commercial negotiations or, failing agreement, the responsibility for
37
these costs will be determined by an expedited arbitration procedure already agreed to by the parties. Any capital upgrade costs not recovered from
the charterer will be capitalized to the vessel cost.
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.
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 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 expenses. 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
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 dockings 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 capital lease arrangements for three of our LNG carriers, we (a) borrowed under term loans and deposited the
proceeds into restricted cash accounts and (b) entered into capital leases, also referred to as “bareboat charters,” for the vessels. The restricted
cash deposits, together with interest earned on the deposits, will equal the remaining amounts we owe under the lease arrangements, including our
obligation to purchase the vessels at the end of the lease terms, where applicable. Please read "Item 18. Financial Statements: Note 10 – Capital
Lease Obligations and Restricted Cash."
38
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.
•
•
•
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 and other costs are facing industry-wide cost pressures. The shipping industry continues to experience a global
manpower shortage of qualified seafarers in certain sectors due to growth in the world fleet and competition for qualified personnel. In
recent years, upward pressure on manning costs has temporarily stabilized and resulted in lower wage increases than have been seen in
the past. However, this situation will likely not continue in the long term. Going forward, there may be significant increases in crew
compensation as vessel and officer supply dynamics continue to change. In addition, factors such as pressure on commodity and raw
material prices, as well as changes in regulatory requirements could also contribute to operating expenditure increases. We continue to
take action aimed at improving operational efficiencies, and to temper the effect of inflationary and other price escalations, however
increases to operational costs are still likely to occur in the future.
• 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 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 2013 and 2012 we incurred 605 and 358 off-hire days relating to dry
docking, respectively. The financial impact from these periods of off-hire, if material, is explained in further detail below in "—Results of
Operations”. Twenty-four of our vessels are scheduled for dry docking during 2014.
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, 2013 versus Year Ended December 31, 2012
Shuttle Tanker and FSO Segment
Our shuttle tanker and FSO segment (which includes our Teekay Shuttle and Offshore business unit) includes our shuttle tankers, FSO units and
one HiLoad DP unit. As at December 31, 2013, our shuttle tanker fleet consisted of 33 vessels that operate under fixed-rate contracts of
affreightment, time charters and bareboat charters. Of the 33 shuttle tankers, six were owned through 50% owned subsidiaries of Teekay Offshore,
three through a 67% owned subsidiary of Teekay Offshore and three were chartered-in by Teekay Offshore. The remaining vessels are owned
100% by Teekay Offshore. 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 tanker market from time to time. Teekay Offshore has committed one shuttle tanker, the Randgrid,
to conversion into an FSO unit upon the expiry of its existing shuttle tanker contract in 2015. Our FSO fleet consists of five vessels (including the
Navion Clipper, which is being converted to an FSO unit) owned by Teekay Offshore that operate under fixed-rate time charters or fixed-rate
bareboat charters. Teekay Offshore has 100% ownership interests in the operating FSO units. FSO units provide an on-site storage solution to oil
field installations that have no oil storage facilities or that require supplemental storage.
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:
39
(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
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,
2013
2012
% Change
583,201
99,111
484,090
182,973
56,682
116,376
37,529
76,782
-
2,123
11,625
11,918
1,456
13,374
616,295
104,382
511,913
196,021
56,989
125,104
36,484
28,830
1,112
652
66,721
12,262
1,459
13,721
(5.4)
(5.0)
(5.4)
(6.7)
(0.5)
(7.0)
2.9
166.3
(100.0)
225.6
(82.6)
(2.8)
(0.2)
(2.5)
(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 size of our shuttle tanker and FSO segment fleet decreased in 2013 compared to 2012. The decreases were primarily due to the sale
of the Navion Fennia in July 2012, the sale of the Navion Savonita in December 2012 and the sale of the Basker Spirit in January 2013, partially
offset by the delivery of four newbuilding shuttle tankers, the Samba Spirit, Lambada Spirit, Bossa Nova Spirit and the Sertanejo Spirit in 2013.
Included in calendar-ship-days is one owned shuttle tanker that has been in lay-up since May 2012, following its redelivery to us upon the maturity
of its time-charter-out contract in April 2012.
Net Revenues. Net revenues decreased to $484.1 million for 2013, from $511.9 million for 2012, primarily due to:
•
•
•
•
•
•
a decrease of $18.8 million due to the lay-up of two vessels following their redelivery to us in April 2012 and November 2012, respectively,
upon maturity of their time-charter-out contracts; one of these vessels, the Navion Clipper, is being converted to an FSO unit;
a decrease of $12.0 million due to the sale of the Navion Savonita in December 2012;
a decrease of $5.9 million primarily due to fewer revenue days as a result of the redelivery of four vessels to us in February 2012, March
2012, April 2012 and July 2013, as they completed their time-charter-out agreements, partially offset by an increase in revenues in our
contract of affreightment fleet and an increase in revenues in our time-chartered-out fleet from entering into new contracts and an increase
in rates as provided in certain contracts;
a decrease of $5.5 million from engineering studies completed in 2012 to support our FSO tenders;
a decrease of $3.5 million due to fewer opportunities to trade excess shuttle tanker capacity on short-term offshore projects; and
a decrease of $2.0 million due to fewer opportunities to trade excess shuttle tanker capacity in the conventional spot market;
partially offset by
•
•
•
an increase of $15.4 million due to the commencement of the ten-year time-charter contracts in June 2013, August 2013 and November
2013 for the Samba Spirit, Lambada Spirit and Bossa Nova Spirit, respectively;
an increase of $3.8 million due to fewer repair off-hire days in our time-chartered-out fleet compared to 2012; and
an increase of $3.4 million due to the drydocking of the Navion Saga during 2012 and to a recovery of certain expenses in 2013.
Vessel Operating Expenses. Vessel operating expenses decreased to $183.0 million for 2013, from $196.0 million for 2012, primarily due to:
•
•
•
a decrease of $11.6 million relating to the lay-up of two of our shuttle tankers since May 2012 and February 2013 (one of these vessels,
the Navion Clipper, is currently being converted to an FSO unit) and the reduction in costs associated with the sale of two of our older
shuttle tankers in July 2012 and December 2012;
a decrease of $5.3 million due to decreases in ship management costs from the reduction in our contract of affreightment and time-charter
fleets and cost savings initiatives; and
a decrease of $5.7 million relating to expenditures on projects completed in 2012 to support our FSO tenders;
partially offset by
•
an increase of $7.5 million due to the delivery of four newbuilding shuttle tankers during 2013.
40
Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $116.4 million for 2013, from $125.1 million for 2012,
primarily due to the write-down of two older shuttle tankers and one FSO unit in 2012 to their estimated fair value, the write-down of four older
shuttle tankers in 2013 to their estimated fair value, the sale of the two older shuttle tankers in 2012 and one older shuttle tanker in 2013, lower
vessel contract amortization and the completion of dry-dock amortization for various shuttle tankers and an FSO unit, partially offset by additional
amortization relating to the deliveries of the four newbuilding shuttle tankers, vessels upgrade costs and dry docking costs.
Asset Impairments. Asset impairments of vessels was $76.8 million for 2013, of which $56.5 million relates to four shuttle tankers which Teekay
Offshore owns through subsidiaries with ownership interests ranging from 50% to 67%. During 2013, four of these six shuttle tankers were written
down as the result of the re-contracting of one of the vessels at lower rates than expected during the third quarter of 2013, the cancellation of a
short-term contract which occurred in September 2013 and a change in expectations for the contract renewal for two of the shuttle tankers. In the
fourth quarter of 2013, the remaining two of the six shuttle tankers were written down due to a cancellation in their contract renewal.
Asset impairments on vessels was $28.8 million for 2012. In 2012, the carrying values of five of our shuttle tankers were written down to their
estimated fair value. In the third quarter of 2012, a 1993-built shuttle tanker was written down to its estimated fair value due to a change in the
operating plan for the vessel. In the third and fourth quarters of 2012, two shuttle tankers, which were written down in 2011, were further written
down to their estimated fair value upon sale in 2012. In the fourth quarter of 2012, a 1992-built shuttle tanker, which was written down in 2010, was
further written down to its estimated fair value and classified as held-for-sale at December 31, 2012. The vessel was sold in 2013. In the fourth
quarter of 2012, a 1995-built shuttle tanker was written down to its estimated fair value using discounted cash flows. The write-down was caused by
the combination of the age of the vessel, the requirements of trading in the North Sea and Brazil and the weak tanker market. The estimated fair
value for each of the other four vessels written down in 2012 was determined using appraised values.
Net loss on sale of vessels. Loss on sale of vessels was $1.1 million for 2012 relating to the sale of two 1992-built shuttle tankers.
Restructuring Charges. Restructuring charges were $2.1 million for 2013, up from $0.7 million for 2012, resulting from a reorganization of marine
operations to create better alignment within the shuttle tanker business unit, to create a reduced-cost organization going forward and the reflagging
of a shuttle tanker.
FPSO Segment
Our FPSO segment (which includes our Teekay Petrojarl business unit) includes the FPSO units and other vessels used to service our FPSO
contracts. As at December 31, 2013, in addition to the four 100% owned FPSO units and the four FPSO units owned by Teekay Offshore, the FPSO
segment had one FPSO unit under construction, scheduled to deliver in mid-2014, and a 50% interest held by Teekay Offshore in one FPSO unit.
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 charter contracts, some of which also include certain incentive
compensation based on the level of oil production and other operational measures. 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 our offshore oil platforms, which generally reduce oil production. The charter contract for the Petrojarl I FPSO unit ended in April 2013 and the
unit has since been off-hire. From the fourth quarter of 2012 through the fourth quarter of 2013, the Foinaven FPSO unit experienced lower than
planned production levels due to equipment-related operational issues. In mid-July 2013, we and the charterer agreed to temporarily halt production
to repair the FPSO unit’s gas compression trains and repair the subsea system. The first compressor train was repaired in August 2013 allowing the
unit to recommence operations, however the compressor was down for one and a half months in early 2014 to address necessary repairs. The
second compressor train is expected to be repaired by the end of May 2014, at which point the Foinaven FPSO unit is expected to reach full
production capacity. In April 2014, the customer indicated its intention to extend the Hummingbird Spirit FPSO unit’s charter contract by a firm
period of one year until December 31, 2015 with charterer’s options to extend the contract up to March 2017. The Banff FPSO unit remains under
repair following storm damage in December 2011, as discussed above.
The following table presents our FPSO segment’s operating results for 2013 and 2012 and also provides a summary of the calendar-ship-days for
our FPSO segment. The table excludes the results of the Itajai FPSO, which is accounted for under the equity method.
(in thousands of U.S. dollars, except calendar-ship-days and percentages)
Revenues
Voyage expenses
Vessel operating expenses
Depreciation and amortization
General and administrative (1)
Gain on sale of equipment
Loan loss provisions
(Loss) income from vessel operations
Calendar-Ship-Days
Owned Vessels
Year Ended
December 31,
2013
2012
% Change
567,620
-
364,986
151,365
51,891
(1,338)
2,634
(1,918)
581,215
232
354,020
135,413
45,139
-
-
46,411
(2.3)
(100.0)
3.1
11.8
15.0
(100.0)
-
(104.1)
3,893
3,660
6.4
(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.”
41
The number of our FPSO units for 2013 increased compared to the same periods last year due to the acquisition of the Voyageur Spirit, although
the unit had been accounted for as a VIE since November 2011 until its acquisition on May 2, 2013. Please read "Item 18 – Financial Statements:
Note 3(a) – Acquisitions – FPSO Units and Investment in Sevan Marine ASA."
Revenues. Revenues decreased to $567.6 million for 2013, from $581.2 million for 2012 primarily due to:
•
•
•
a decrease of $39.8 million due to the expiration of the charter contract for the Petrojarl I in the second quarter of 2013, partially offset by a
higher rate earned and a recovery of fuel costs for that unit during the first quarter of 2013;
a decrease of $4.0 million due to lower amortization of in-process revenue contracts for the Hummingbird Spirit, partially offset by higher
incentive revenues earned; and
a decrease of $1.9 million due to the Rio das Ostras earning only a standby rate, and no production revenue, while it was being relocated
during 2013 to a new oil field and a lower credit earned for unused maintenance days under the service contract of the Rio das Ostras
compared to the same periods last year, partially offset by the recovery of certain upgrade costs in 2013;
partially offset by
•
•
•
an increase of $29.4 million related to the acquisition of the Voyageur Spirit FPSO unit, partially offset by the capitalization of pre-operating
costs during its mobilization phase, which occurred mainly during the first quarter of 2013;
an increase of $4.0 million from the Petrojarl Foinaven due to the finalization with our customer of contingent revenue for the prior year,
which is based on various annual operational performance measures, oil production levels and the average oil price for the year, partially
offset by lower supplemental efficiency and tariff payments accrued; and
an increase of $1.2 million due to increase in rates on the Piranema Spirit in accordance with the annual escalation of the charter
component.
Vessel Operating Expenses. Vessel operating expenses increased to $365.0 million for 2013, from $354.0 million for 2012, primarily due to:
•
•
•
•
•
•
•
an increase of $16.4 million due to repairs and maintenance costs on the Banff FPSO unit as it is being prepared to resume operations in
2014 as a result of the December 2011 weather-related incident;
an increase of $5.0 million relating to the Petrojarl Varg mainly from higher salaries, crew levels and higher maintenance costs compared
to the prior year;
an increase of $3.9 million due to higher crew and maintenance costs from equipment-related operational issues on the Petrojarl Foinaven
compared to the prior year;
an increase of $3.6 million from the cost of front-end engineering and design (or FEED) studies compared to 2012; an increase of $3.4
million for higher maintenance costs for the Rio das Ostras and the cost of relocating the unit to a new field during 2013;
an increase of $2.9 million due to an increase in ship management costs as the number of operating vessels increased compared to the
prior year, due to the acquisition of the Voyageur Spirit;
an increase of $3.2 million incurred for pre-operating costs on our FPSO under construction compared to the prior year; and
an increase of $1.2 million from higher salaries and crew levels on the Piranema Spirit compared to the prior year;
partially offset by
•
•
a decrease of $24.6 million due to reduced operations for the Petrojarl I resulting from its charter contract expiration in the second quarter
of 2013; and
a decrease of $5.7 million as the Voyageur Spirit’s pre-operating costs were capitalized during its mobilization phase, which occurred
mainly during the first quarter of 2013 until first oil was achieved in mid-April, partially offset by higher operating costs incurred since first oil
was achieved.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to $151.4 million for 2013, from $135.4 million for 2012
primarily due to capital upgrades and the acquisition of the Voyageur Spirit FPSO unit during the second quarter of 2013.
Gain on Sale of Equipment. Gain on sale of equipment in 2013 relates the sale of sub-sea equipment of the Petrojarl I. Please read "Item 18.
Financial Statements—Note 18a: Vessel Sales."
Loan Loss Provisions. Loan loss provisions in 2013 relates to a receivable for an FPSO front-end engineering and design study which was
completed during the year.
Liquefied Gas Segment
As at December 31, 2013, our liquefied gas segment (which includes our Teekay Gas Services business unit) consisted of 34 LNG carriers and 33
LPG/Multigas carriers (in which Teekay LNG’s interests ranged from 33% to 100%). However, the table below includes only those carriers we
consolidate, comprising 13 LNG carriers and five LPG carriers. The table excludes five newbuilding LNG carriers and the following vessels
accounted for under the equity method: (i) six LNG carriers relating to Teekay LNG’s joint venture with Marubeni Corporation (or the MALT LNG
42
Carriers), (ii) the four LNG carriers relating to the Angola LNG Project (or the Angola LNG Carriers), (iii) four LNG carriers relating to Teekay LNG’s
joint venture with QGTC Nakilat (1643-6) Holdings Corporation (or the RasGas 3 LNG Carriers), (iv) two LNG carriers relating to Teekay LNG’s joint
ventures with Exmar (or the Exmar LNG Carriers) and (v) the 28 Exmar LPG Carriers.
The following table compares our liquefied gas segment’s operating results for 2013 and 2012, and compares its net voyage revenues (which is a
non-GAAP financial measure) for 2013 and 2012 to voyage revenues, the most directly comparable GAAP financial measure. The following tables
also provide a summary of the changes in calendar-ship-days 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)
Income from vessel operations
Calendar-Ship-Days
Year Ended
December 31,
2013
2012
% Change
298,228
602
297,626
61,471
71,485
19,597
145,073
291,712
283
291,429
54,773
69,064
18,643
148,949
2.2
112.8
2.1
12.2
3.5
5.1
(2.6)
Owned Vessels and Vessels under Direct Financing Lease
5,981
5,856
2.1
(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.”
Our liquefied gas segment’s total calendar-ship-days increased to 5,981 days in 2013 from 5,856 days in 2012, as a result of the acquisition and
delivery of two LNG carriers from Awilco (or the Awilco LNG Carriers), Wilforce and Wilpride, on September 16, 2013 and November 28, 2013,
respectively.
Net Revenues. Net revenues increased to $297.6 million for 2013, from $291.4 million for 2012, primarily due to:
•
•
•
•
an increase of $5.0 million as a result of the acquisition and delivery of the Awilco LNG Carriers in September 2013 and November 2013;
an increase of $3.2 million due to the effect on our Euro-denominated revenues from the strengthening of the Euro against the U.S. Dollar
in 2013 compared to the prior year;
an increase of $2.0 million due to operating expense and dry-docking recovery adjustments under our charter provisions for the Tangguh
Hiri and Tangguh Sago; and
an increase of $1.4 million due to the Hispania Spirit being off-hire for 21 days in 2012 for a scheduled dry docking;
partially offset by
•
•
a decrease of $4.0 million due to the Arctic Spirit being off-hire for 41 days in 2013 for a scheduled dry docking and revenue adjustments
relating to cooling of the cargo tanks subsequent to the dry docking; and
a decrease of $2.0 million due to the Catalunya Spirit being off-hire for 21 days in 2013 for scheduled dry docking.
Vessel Operating Expenses. Vessel operating expenses increased to $61.5 million for 2013, from $54.8 million for 2012, primarily due to:
•
•
•
•
an increase of $2.1 million as a result of higher manning costs due to wage increases in certain of our LNG carriers;
an increase of $1.8 million due to main engine overhauls and spares and consumables purchased for the Tangguh Hiri and Tangguh Sago
for the dry docking of these vessels in 2013 (however, we had a corresponding increase in our revenues relating to operating expense
adjustments in our charter provisions);
an increase of $1.6 million due to an increase in ship management costs; and
an increase of $1.0 million primarily due to the effect on our Euro-denominated crew manning expenses from the strengthening of the Euro
against the U.S. Dollar during 2013 compared to 2012 (a portion of our vessel operating expenses are denominated in Euros, which is
primarily due to the nationality of our crew).
Depreciation and Amortization. Depreciation and amortization increased to $71.5 million for 2013, from $69.1 million for 2012, primarily as a result of
the amortization of dry-dock expenditures incurred throughout 2012 and 2013.
43
Conventional Tanker Segment
Our 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).
a) Fixed-Rate Tanker Sub-Segment
Our fixed-rate tanker sub-segment, a subset of our conventional tanker segment (which primarily includes our Teekay Tanker Services business
unit), includes conventional crude oil and product tankers on fixed-rate time charters with an original duration of more than one year. In addition,
Teekay Tankers has a 50% interest in a Very Large Crude Carrier (or VLCC) that was delivered in the second quarter of 2013, and is accounted for
under the equity method. Upon delivery, this vessel commenced operations under a time-charter for a term of five years.
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 tables also provide a summary of the changes in
calendar-ship-days for our fixed-rate 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
Loan loss (reversal) provision
Gain on sale of vessel
Restructuring charges
(Loss) income from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
Year Ended
December 31,
2013
2012
% Change
260,811
5,507
255,304
120,469
4,974
55,524
19,691
10
(1,886)
(732)
3,115
54,139
10,006
365
10,371
328,111
6,083
322,028
133,033
20,594
74,394
26,282
146,571
1,886
-
3,382
(84,114)
11,416
1,201
12,617
(20.5)
(9.5)
(20.7)
(9.4)
(75.8)
(25.4)
(25.1)
(100.0)
(200.0)
(100.0)
(7.9)
(164.4)
(12.4)
(69.6)
(17.8)
(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 in 2013
compared with the same period last year due to:
•
•
•
•
the transfer of four Suezmax tankers, three Aframax tankers and two medium-range (or MR) product tanker to the spot tanker sub-
segment in 2012 and 2013;
the redelivery to its owner of one in-chartered Suezmax tanker in mid-2012;
the sale of one Aframax tanker and one Suezmax tanker in late 2013; and
an overall decrease in the number of calendar days for the current period due to 2012 being a leap year;
partially offset by
•
the transfer of two Aframax tankers from the spot tanker sub-segment in 2012 and 2013.
The collective impact from the above noted fleet changes are referred to below as the Net Fleet Reductions.
Net Revenues. Net revenues decreased to $255.3 million for 2013, from $322.0 million for 2012, primarily due to:
•
•
•
•
a net decrease of $50.4 million mainly due to the Net Fleet Reductions;
a decrease of $9.2 million of interest income earned on our investments in term loans;
a decrease of $4.8 million due to lower average charter rates earned from charter renewals and new charters; and
a net decrease of $4.6 million due to more off-hire days in 2013 relating to increased dry docking activities;
44
partially offset by
•
an increase of $2.9 million due to adjustments to the daily charter rates based on inflation and an increase in interest rates in accordance
with the time-charter contracts for the Suezmax tankers subject to capital leases (however, under the terms of these capital leases, we had
corresponding increases in our lease payments, which are reflected as increases to interest expense; therefore, these and future similar
interest rate adjustments do not affect our cash flow or net income).
Vessel Operating Expenses. Vessel operating expenses decreased to $120.5 million for 2013, from $133.0 million for 2012, primarily due to:
•
a net decrease of $14.7 million mainly due to the Net Fleet Reductions;
partially offset by
•
an increase of $3.5 million due to costs incurred relating to two vessels managed by a joint venture which we do not expect to recover.
Time-Charter Hire Expense. Time-charter hire expense decreased to $5.0 million for 2013, from $20.6 million for 2012, primarily due to the
redelivery to its owner of one in-chartered Suezmax tanker in mid-2012, the change in segment employment for two in-chartered Aframax tankers in
late-2012 and the decrease in in-charter contract hire rates.
Depreciation and Amortization. Depreciation and amortization expense decreased to $55.5 million for 2013, from $74.4 million for 2012, primarily
due to:
•
•
a net decrease of $12.3 million mainly due to the Net Fleet Reductions; and
a decrease of $8.9 million due to the effect of vessel impairments incurred in the fourth quarter of 2012;
partially offset by
•
an increase of $2.8 million due to accelerated amortization of intangible assets relating to the charter contracts of three Suezmax tankers,
as we expect the life of these intangible assets will be shorter than originally assumed in prior periods.
Asset Impairments. The impairments for 2012 relate to nine vessels. We determined these vessels were impaired and wrote down the carrying
values of these vessels to their estimated fair value. The primary factors that occurred during the fourth quarter of 2012 that caused the write downs
were the effects on our estimated future cash flows from negative changes in the outlook for the crude tanker market, delays in the recovery of the
crude tanker market as well as the expected discrimination impact from more fuel efficient vessels being constructed. Please read Item 18. Financial
Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— b) Asset Impairments and Provisions and also read Item 18. Financial
Statements: Note 11 Fair Value Measurements.
Loan Loss (Reversal) Provision. Loan loss provision reversal for 2013 relates to the reversal of allowances provided in 2012 in respect of our
investments in term loans. In July 2010 and February 2011, we invested a total of $183.0 million in three loans, two maturing in July 2013 and one
maturing in February 2014, secured by first priority mortgages registered on two 2010-built and one 2011-built VLCC vessels, respectively. The
borrowers have been in default on their interest payment obligations since the first quarter of 2013, and subsequently in default of the repayment of
the loan principal on two loans scheduled to mature in July 2013. As of December 31, 2013, the VLCC vessels that collateralize the Loans were
trading in the spot tanker market under our management. During 2013, we estimated that the value of the collateral was sufficient to recover
amounts owing under the Loans, and as a result reversed prior provisions. During March 2014, we assumed ownership of the three VLCCs that
collateralized the Loans. Please read Item 18. Financial Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— b) Asset
Impairments and Provisions.
Gain on Sale of Vessel. Gain on sale of vessel for 2013 relates primarily to a gain on sale of a 1995-built conventional tanker.
Restructuring Charges. Restructuring charges for 2013 and 2012 primarily relate to the seafarer severance payments upon Compania Espanole de
Petroles, S.A. (or CEPSA) selling two of our vessels under capital leases. Please read Item 18. Financial Statements: Note 20 —Restructuring
Charges.
b) Spot Tanker Sub-Segment
Our spot tanker sub-segment, a subset of our conventional tanker segment (which primarily includes our Teekay Tanker Services business unit),
consists of conventional crude oil tankers and product carriers 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. Our conventional Aframax, Suezmax, and large and medium product tankers are among the vessels
included in the 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 tables also provide a summary of the changes in
calendar-ship-days for our spot tanker sub-segment:
45
(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
Net loss 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,
2013
2012
% Change
120,225
6,998
113,227
76,253
41,990
36,336
12,250
90,813
75
1,683
(146,173)
7,213
2,407
9,620
163,438
27,303
136,135
75,479
53,156
51,923
17,748
256,795
5,863
3,531
(328,360)
7,759
3,030
10,789
(26.4)
(74.4)
(16.8)
1.0
(21.0)
(30.0)
(31.0)
(64.6)
(98.7)
(52.3)
(55.5)
(7.0)
(20.6)
(10.8)
(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 in 2013 compared to
2012, primarily due to:
•
•
•
•
the in-charter redeliveries by us in 2012 and 2013 to their owners of three Suezmax tankers, seven Aframax tankers and two long-range 2
(or LR2) product tankers (or the In-charter Redeliveries);
the sale of six Aframax tankers in 2012 and 2013;
the transfer of two Aframax tanker to the fixed tanker sub-segment in 2012 and 2013; and
an overall decrease in the number of calendar days for the current period due to 2012 being a leap year;
partially offset by
•
•
the transfer of four Suezmax tankers, three Aframax tankers and two MR product tanker from the fixed-rate tanker sub-segment in 2012
and 2013; and
the new in-charter of one Aframax tanker in early 2013.
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 spot rates were historically low for the majority of 2013 before hitting multi-year highs at the end of the fourth quarter of 2013. Demand
for crude tankers through the majority of 2013 was dampened by decreased Saudi Arabian production, supply disruptions in Libya, Iranian
sanctions, and heavy refinery maintenance. The combined effect of decreased crude demand and a decrease in long-haul OPEC barrels put
downward pressure on crude tanker tonne-mile demand through the majority of 2013.
By the end of 2013, the situation was reversed with spot rates in the large crude tanker segments strengthening to levels last seen in mid-2008. This
increase was primarily due to strong Chinese crude imports, an increase in long-haul movements from the Atlantic basin to Asia, improved demand
in the OECD, and seasonal factors. While crude spot tanker rates exhibited a rebound to historic highs in the fourth quarter of 2013 due to increased
demand and seasonal factors, overall average rates for 2013 remained below the long-term average.
In the product tanker sector, earnings were steady during first half of 2013 giving way to a slightly softer second half of 2013. LR2 spot tanker rates
were supported in the middle of 2013 by a combination of increased long-haul naphtha movements into Asia and the emergence of an East-West
gasoil arbitrage. However, in the second half of 2013, the East-West gasoil arbitrage was shut intermittently, while the impact of ships switching
from dirty to clean trades led to increased vessel supply which put downward pressure on LR spot tanker rates.
The global tanker fleet grew by a net 9.2 million deadweight tonnes (or mdwt), or 1.9 percent, during 2013. A total of 21.4 mdwt of tankers delivered
into the fleet, down from 32.4 mdwt in 2012, while scrapping and removals decreased slightly to 12.8 mdwt from 14.7 mdwt in 2012. Looking ahead
to 2014, based on internal forecasts, we estimate that tanker deliveries will total approximately 18.5 mdwt while scrapping is forecast to total
approximately 12.5 mdwt. As a result, we estimate net tanker fleet growth of approximately 6.0 mdwt, or 1.2%, in 2014, the lowest level of tanker
fleet growth in percentage terms since 2002. Fleet growth during 2014 is expected to be weighted towards the MR and LR2 sectors with negligible
or declining growth in the crude Aframax and Suezmax sectors.
46
Global oil demand is expected to grow by 1.2 million barrels per day (or mb/d) during 2014 according to the average of forecasts from the
International Energy Agency, Energy Information Administration and Organization of Petroleum Exporting Countries (or OPEC). This represents the
same growth in oil demand growth as 2012, with the non-OECD countries, and China in particular, accounting for the majority of the growth.
However, the “call on OPEC” crude is expected to decline by approximately 0.6 mb/d during 2014, which could have a negative impact on crude
tanker tonne-mile demand in 2014.
The following table presents the net revenue, revenue days and TCE rates for the spot tanker sub-segment for 2013, 2012 and 2011:
Vessel Type
Spot Fleet(1)
Suezmax Tankers
Aframax Tankers
Large/Medium Product
Tankers/VLCC
Other(2)
Totals
December 31, 2013
Net
Revenues Revenue
($000’s)
Days
TCE
Rate
$
Year Ended
December 31, 2012
December 31, 2011
Net
Revenues Revenue
($000’s)
Days
TCE
Rate
$
Net
Revenues Revenue
($000’s)
Days
TCE
Rate
$
57,101
39,345
22,107
(5,326)
113,227
4,209
3,332
13,568
11,807
72,223
56,345
3,785
4,847
19,084
11,625
64,529
76,606
4,387
6,332
14,709
12,098
1,649
-
9,190
13,403
-
12,320
16,908
(9,341)
136,135
1,327
-
9,959
12,742
-
13,681
23,486
(850)
163,771
1,832
-
12,551
12,820
-
13,048
(1) Spot fleet includes short-term time-charters and fixed-rate contracts of affreightment less than one year.
(2)
Includes the cost of spot in-charter vessels servicing fixed-rate contract of affreightment cargoes, the write-off of doubtful debts and the cost of fuel while off-hire.
Average spot tanker TCE rates decreased in 2013 compared to 2012. In general, this change reflected continued weak demand fundamentals,
surplus tonnage, and low global economic growth. During 2013, we realized a slight reduction in our revenue day exposure to the spot tanker
market through the re-delivery of in-chartered vessels and vessel sales. We continue to maintain a mix of both spot and fixed-rate employment for
our vessels in order to balance our exposure to the volatile spot tanker market with the cash flow stability from the fixed segment.
Net Revenues. Net revenues decreased to $113.2 million for 2013, from $136.1 million for 2012, primarily due to:
•
•
a net decrease of $19.1 million due to the decrease in our average spot tanker TCE rates; and
a net decrease of $7.8 million mainly due to the Net Spot Fleet Reductions;
partially offset by
•
a net increase of $4.0 million due to net decrease in management fees, commissions, and cost of fuel while off-hire.
Vessel Operating Expenses. Vessel operating expenses increased to $76.3 million for 2013, from $75.5 million for 2012 primarily due to the timing
of repairs and maintenance, which is partially offset by the Net Spot Fleet Reductions.
Time-Charter Hire Expense. Time-charter hire expense decreased to $42.0 million for 2013, from $53.2 million for 2012, primarily due to:
•
a decrease of $28.0 million due to the redeliveries by us of various in-chartered vessels to their owners in 2012 and 2013;
partially offset by
•
•
an increase of $14.5 million due to various in-chartered vessels trading in the spot market subsequent to their expiry of time-charter out
contracts and the new in-charter of one Aframax tanker in 2013; and
an increase of $2.0 million due to an increase in certain in-charter contract hire rates.
Depreciation and Amortization. Depreciation and amortization expense decreased to $36.3 million for 2013, from $51.9 million for 2012, primarily
due to:
•
•
•
a decrease of $13.3 million due to the effect of vessel impairments incurred in the fourth quarter of 2012;
a decrease of $2.0 million mainly due to the Net Spot Fleet Reductions; and
a decrease of $0.9 million due to an intangible asset that was fully amortized in the first quarter of 2012.
Asset Impairments. The impairments for 2013 relate to the disposal of four 2009-built Suezmax tankers to a new entity. We wrote down the four
Suezmax tankers to their estimated fair value of $163.2 million, which consists of their sale price, resulting in the recognition of an asset impairment
of $90.8 million. The impairments for 2012 relate to nine vessels. We determined these vessels were impaired and wrote down the carrying values
of these vessels to their estimated fair value. The primary factors that occurred in during the fourth quarter of 2012 that caused the write downs were
the effects on our estimated future cash flows from negative changes in the outlook for the crude tanker market, delays in the recovery of the crude
tanker market as well as the expected discrimination impact from more fuel efficient vessels being constructed. Please read Item 18. Financial
47
Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— b) Asset Impairments and Provisions and also read Item 18. Financial
Statements: Note 11 Fair Value Measurements.
Net Loss on Sale of Vessels and Equipment. Loss on sale of vessels was $0.1 million for 2013 and $5.9 million for 2012. The loss on sale of vessel
in 2013 relates primarily to the sale of a 1997-built conventional tanker and in 2012 relates to the sale of three Aframaxes. Please read Item 18.
Financial Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— a) Vessel Sales.
Restructuring Charges. Restructuring charges for 2013 and 2012 primarily relate to costs incurred in association with the reorganization of our
marine operations. Please read Item 18 – Financial Statements: Note 20 – Restructuring Charges.
Other Operating Results
The following table compares our other operating results for 2013 and 2012:
(in thousands of U.S. dollars, except percentages)
General and administrative
Interest expense
Interest income
Realized and unrealized gains (losses) on non-designated derivative instruments
Equity income from joint ventures
Foreign exchange loss
Other income
Income tax (expense) recovery
Year Ended
December 31,
2013
2012
% Change
(140,958)
(181,396)
9,708
18,414
136,538
(13,304)
5,646
(2,872)
(144,296)
(167,615)
6,159
(80,352)
79,211
(12,898)
366
14,406
(2.3)
8.2
57.6
(122.9)
72.4
3.1
1,442.6
(119.9)
General and Administrative. General and administrative expenses decreased to $141.0 million in 2013, compared to $144.3 million in 2012, despite
the growth in our offshore businesses, primarily as a result of various cost saving initiatives that we have undertaken.
Interest Expense. Interest expense increased to $181.4 million in 2013, compared to $167.6 million in 2013, primarily due to:
•
•
•
•
•
•
an increase of $11.9 million as a result of the Norwegian Kroner (or NOK) denominated bond issuances by Teekay LNG in May 2012 and
September 2013 and Teekay in October 2012;
an increase of $10.8 million related to the Voyageur Spirit credit facility as interest expense was capitalized during the upgrade period of
the Voyageur Spirit FPSO unit, which ended in May 2013;
a net increase of $7.3 million primarily from the issuance by Teekay Offshore of the NOK 1.3 billion senior unsecured bonds in January
2013, partially offset by the repurchase of NOK 388.5 million of Teekay Offshore’s existing NOK 600 million senior unsecured bond issue
that matured in November 2013;
an increase of $5.9 million due to the drawdown of new debt facilities relating to the four newbuilding shuttle tankers that delivered during
the last three quarters of 2013;
an increase of $4.8 million as a result of a new revolving credit facility we entered into in December 2012; and
an increase of $1.8 million due to an interest rate adjustment on our Suezmax tanker capital lease obligations (however, as described
above, under the terms of the time-charter contracts for these vessels, we have a corresponding increase in charter receipts, which are
reflected as an increase to voyage revenues);
partially offset by
•
•
a decrease of $28.9 million due to decreased LIBOR and lower principal U.S. Dollar debt balances due to debt repayments during 2012
and 2013; and
a decrease of $1.0 million due to lower EURIBOR relating to Euro-denominated debt.
Realized and unrealized gains (losses) on non-designated derivative instruments. Realized and unrealized gains (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 loss.
Net realized and unrealized gains (losses) on non-designated derivatives were $18.4 million for 2013, compared to $(80.4) million for 2012, as
detailed in the table below:
48
(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
Foinaven embedded derivative
Unrealized gains (losses) relating to:
Interest rate swap agreements
Foreign currency forward contracts
Foinaven embedded derivative
Year Ended
December 31,
2013
2012
(122,439)
(35,985)
(2,027)
-
(160,451)
182,800
(3,935)
-
178,865
(123,277)
-
1,155
11,452
(110,670)
26,770
6,933
(3,385)
30,318
Total realized and unrealized gains (losses) on derivative instruments
18,414
(80,352)
The realized losses relate to amounts we actually realized or paid to settle such derivative instruments and interest rate swap agreement
amendments. The unrealized gains on interest rate swaps for 2013 and 2012 were primarily due to changes in the forward interest rates.
During 2013 and 2012, we had interest rate swap agreements with aggregate average net outstanding notional amounts of approximately $3.8
billion and $3.9 billion, respectively, with average fixed rates of approximately 3.6% and 3.9%, respectively. Short-term variable benchmark interest
rates during these periods were generally less than 1.0% and, as such, we incurred realized losses of $122.4 million and $123.3 million during 2013
and 2012, respectively, under the interest rate swap agreements. We also incurred realized losses of $36.0 million during 2013 from the termination
of two interest rate swaps, one of which was prior to our acquisition of the Voyageur Spirit FPSO unit and while we accounted for the unit as a VIE.
Primarily as a result of significant changes in long-term benchmark interest rates during 2013 and 2012, we recognized unrealized gains of $178.9
million and $30.3 million, respectively. Please read “Item 18. Financial Statements: Note 15 - Derivative Instruments and Hedging Activities.”
Equity Income. Our equity income increased to $136.5 million in 2013 compared to $79.2 million in 2012, primarily due to:
•
•
•
•
•
•
•
•
•
•
an increase of $17.4 million due to Teekay LNG’s acquisition of a 50% ownership interest in Exmar LPG BVBA joint venture in February
2013;
an increase of $16.6 million in Teekay LNG’s 33% investment in the Angola LNG Carriers, primarily due to the change in unrealized gains
on derivative instruments as a result of long-term LIBOR benchmark interest rates increasing, as compared to 2012;
an increase of $12.7 million from the Baúna and Piracaba (previously named Tiro and Sidon) joint venture as the Itajai FPSO unit
commenced operations in February 2013;
an increase of $4.1 million in Teekay LNG’s 40% investment in Teekay Nakilat (III) Corporation, primarily due to the change in unrealized
gains on derivative instruments as a result of long-term LIBOR benchmark interest rates increasing, as compared to 2012;
an increase of $5.4 million related to equity income from our investment in Petrotrans Holdings Ltd.;
an increase of $3.7 million due to full year of operations from Teekay LNG’s 52% ownership interest in the six LNG carriers from A.P.
Moller Maersk A/S (the MALT LNG Carriers) which was acquired in February 2012.
an increase of $2.7 million due to higher net income from Teekay LNG’s 50% investment in the Exmar LNG Carriers primarily resulting
from a 2012 provision against a customer’s claim relating to the two LNG carriers and from the off-hire of Excalibur for a scheduled
dry docking during 2012;
an increase of $2.5 million from our investment in Sevan Marine;
an increase of $1.8 million related to the impairment of Alta Shipping in the prior year; and
an increase of $0.9 million related to Teekay Tankers’ 50% investment with Wah Kwong Maritime Transport Holdings Limited which owns
a VLCC which delivered in June 2013;
partially offset by
•
a decrease of $10.8 million due to the gain on sale of our interest in the Ikdam FPSO unit in the prior year.
For 2013, equity income includes $31.2 million which relates to our share of unrealized gains on interest rate swaps, compared to unrealized gains
on interest rate swaps of $5.3 million included in equity income for the same period last year.
Foreign Exchange Loss. Foreign currency exchange losses were $13.3 million in 2013 compared to $12.9 million in 2012. Our foreign currency
exchange losses, substantially all of which are unrealized, are due primarily to the relevant period-end revaluation of our NOK-denominated debt
and our Euro-denominated term loans, capital leases and restricted cash for financial reporting purposes and the realized and unrealized losses on
49
our cross currency swaps. Losses on NOK-denominated and Euro-denominated monetary liabilities reflect a weaker U.S. Dollar against the NOK
and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. Gains on NOK-denominated and
Euro-denominated monetary liabilities reflect a stronger U.S. Dollar against the NOK and Euro on the date of revaluation or settlement compared to
the rate in effect at the beginning of the period. During 2013, Teekay Offshore repurchased NOK 388.5 million of its existing NOK 600 million senior
unsecured bond issue that matures in November 2013. Associated with this, we recorded $6.6 million of realized losses on the repurchased bonds,
and recorded $6.8 million of realized gains on the settlements of the associated cross currency swap. Excluding this, for 2013, foreign currency
exchange gains include realized gains of $2.1 million (2012 - $3.6 million) and unrealized losses of $65.4 million (2012 - unrealized gain of $10.7
million) on our cross currency swaps and unrealized gains of $53.8 million (2012 - losses of $17.7 million) on the revaluation of our NOK-
denominated debt. For 2013, foreign currency exchange losses include the revaluation of our Euro-denominated restricted cash, debt and capital
leases of $12.5 million as compared to $4.7 million for 2012.
Income Tax (Expense) Recovery. Income tax expense was $2.9 million in 2013 and compared to income tax recovery of $(14.4) million in 2012. The
increase in income tax expense was primarily due to (i) the reversal of uncertain tax position accruals during 2012, partially offset by reversals of
uncertain tax position accruals in 2013; (ii) a new Norwegian tax structure established in the fourth quarter of 2012 which resulted in a deferred tax
recovery for the Norwegian tax group by being able to utilize past losses carried forward against future projected income; (iii) recognition or increase
of valuation allowances against deferred tax assets in 2013. These increases were partially offset by current income tax recoveries relating to prior
years and deferred tax adjustments relating to pension funds in 2013.
Year Ended December 31, 2012 versus Year Ended December 31, 2011
Shuttle Tanker and FSO Segment
Our shuttle tanker and floating storage and offtake (or FSO) segment (which includes our Teekay Shuttle and Offshore business unit) includes our
shuttle tankers and FSO units. As at December 31, 2012, our shuttle tanker fleet consisted of 32 vessels that operate under fixed-rate contracts of
affreightment, time charters and bareboat charters. Of the 32 shuttle tankers, six were owned through 50% owned subsidiaries of Teekay Offshore,
three through a 67% owned subsidiary of Teekay Offshore and four were chartered-in by Teekay Offshore, with the remainder owned 100% by
Teekay Offshore. Our FSO fleet consisted of four vessels owned by Teekay Offshore that operate under fixed-rate time charters or fixed-rate
bareboat charters. Teekay Offshore has 100% ownership interests in these units. Teekay Offshore also had four newbuilding shuttle tankers on
order which were scheduled to deliver in mid-to late-2013. We use these vessels to provide transportation and storage services to oil companies
operating offshore oil field installations, primarily in the North Sea and Brazil. Our shuttle tankers in this segment 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)
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
Net loss on sale of vessels and equipment
Restructuring charges
Income from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
2012
616,295
104,382
511,913
196,021
56,989
125,104
36,484
28,830
1,112
652
66,721
12,262
1,459
13,721
2011
% Change
617,650
97,743
519,907
216,183
74,478
129,293
44,594
43,185
171
5,351
6,652
12,114
2,007
14,121
(0.2)
6.8
(1.5)
(9.3)
(23.5)
(3.2)
(18.2)
(33.2)
550.3
(87.8)
903.0
1.2
(27.3)
(2.8)
(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 size of our shuttle tanker and FSO segment fleet decreased for the year ended December 31, 2012 compared to the prior year. The
decrease was primarily due to the sale of the Navion Fennia in July 2012 and Navion Savonita in November 2012, the redelivery of one bareboat-in
vessel to its owner in October 2011, decreased spot in-chartering of vessels, and the sale of the Karratha Spirit FSO unit in March 2011, partially
offset by the delivery of two newbuilding shuttle tankers, the Peary Spirit and the Scott Spirit, in May 2011 and July 2011, respectively (or the 2011
Newbuilding Shuttle Tanker Acquisitions). Included in calendar-ship-days are two owned shuttle tankers which have been in lay-up since July 2011
and May 2012 following their redelivery to us upon termination of their time-charter-out contracts in March 2011 and April 2012.
Net Revenues. Net revenues decreased to $511.9 million for 2012, from $519.9 million for 2011, primarily due to:
50
•
•
•
•
•
•
a decrease of $11.6 million due to the lay-up of two vessels since July 2011 and May 2012 following their redeliveries in March 2011 and
April 2012 after completion of their time-charter agreements;
a decrease of $3.6 million due to more repair off-hire days in our time-chartered-out fleet in 2012 as compared to 2011;
a decrease of $3.2 million due to lower revenues related to the sale of the Karratha Spirit;
a decrease of $3.1 million due to fewer opportunities to trade excess shuttle tanker capacity in the conventional spot tanker market and on
short-term offshore projects due to decreased demand for conventional crude transportation;
a decrease of $2.3 million due to the dry docking of the Navion Saga during the third quarter of 2012; and
a decrease of $1.0 million due to changes in revenues from ship management activities;
partially offset by
• a net increase of $11.0 million due to an increase in our contract of affreightment fleet, and an increase in revenues in our time-chartered-
out fleet from entering into new contracts and an increase in rates as provided in certain contracts, partially offset by fewer revenue days
from the redelivery of six vessels to us in March 2011, July 2011, February 2012, April 2012, and two in November 2012 as they completed
their time-charter-out agreements; and
• an increase of $5.5 million from customer-paid engineering studies completed to support our FSO tenders.
Vessel Operating Expenses. Vessel operating expenses decreased to $196.0 million for 2012, from $216.2 million for 2011, primarily due to:
• a decrease of $10.6 million relating to the lay-up of two of our shuttle tankers since July 2011 and May 2012 and the reduction of costs
associated with the sale of two of our shuttle tankers in July 2012 and November 2012;
• a decrease of $7.1 million due to decrease in costs related to services and spares and the number of vessels dry docked. 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;
• a decrease of $5.9 million for crew changes and manning costs as compared to the same periods last year primarily from a change in crew
composition and reduced helicopter usage;
• a decrease of $4.5 million relating to the redelivery of one of our bareboat in-chartered vessels to its owner in October 2011;
• a decrease of $1.8 million related to the sale of the Karratha Spirit in March 2011; and
• a decrease of $1.3 million relating to a decrease in start-up costs associated with less short-term offshore projects;
partially offset by
• an increase of $7.3 million due to expenditures on projects completed to support our FSO tenders;
• an increase of $4.3 million due to the 2011 Newbuilding Shuttle Tanker Acquisitions; and
• an increase of $0.9 million due to an increase in ship management costs.
Time-Charter Hire Expense. Time-charter hire expense decreased to $57.0 million for 2012, from $74.5 million for 2011 primarily due to:
• decrease of $8.7 million due to the redelivery of one bareboat in-chartered vessel to its owner in October 2011; and
• decrease of $7.8 million due to decreased spot in-chartering of vessels as a result of increased capacity available from our owned fleet.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $125.1 million for 2012, from $129.3 million for 2011,
primarily related to sale of two shuttle tankers in 2012, lower depreciation relating to the impairment and write-down of two older shuttle tankers in
2011 to fair value and the write-down of the carrying value of the FSO unit Navion Saga to its fair value in December 2011, partially offset by
accelerated depreciation related to a reduction of the estimated useful life of six older shuttle tankers as well as the 2011 Newbuilding Shuttle
Tanker Acquisitions.
Asset Impairments. Asset impairments of vessels was $28.8 million for 2012, resulting from the impairment of four older shuttle tankers and one
FSO unit. The write downs were the result of the Company entering into agreements in the fourth quarter of 2012 to sell two shuttle tankers and a
change in the operating plans for the remaining vessels. Write down of vessels was $43.2 million for 2011, resulting from the impairment of three
shuttle tankers, all of which were 20-years old in 2012, and one FSO unit. These vessels carrying values were written down to their estimated fair
value.
Net loss on sale of vessels. Loss on sale of vessels was $1.1 million for 2012 relating to the sale of two 1992-built shuttle tankers. We sold one FSO
unit in March 2011 which resulted in a loss of $0.2 million.
Restructuring Charges. Restructuring charges were $0.7 million for 2012, resulting from a reorganization of marine operations to create better
alignment within the shuttle tanker business unit to create a reduced-cost organization going forward. The restructuring charges in the prior year
51
were $5.4 million and related to the termination of employment of certain crew members following the sale of an FSO unit, Karratha Spirit and the
termination of the time-charter for the shuttle tanker Basker Spirit.
FPSO Segment
Our floating, production, storage and offloading (or FPSO) segment (which includes our Teekay Petrojarl business unit) includes the FPSO units
and other vessels used to service our FPSO contracts. As at December 31, 2012, in addition to the four 100% owned FPSO units and the three
FPSO units owned by Teekay Offshore, the FPSO segment had one FPSO unit under construction, scheduled to deliver in 2014, a 50% interest in
one FPSO unit which commenced its charter contract in February 2013 after achieving first oil, and accounted for one FPSO unit which was
acquired in the second quarter of 2013 as a variable interest entity (or VIE). 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 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 our offshore oil
platforms, which generally reduce oil production.
The following table presents our FPSO segment’s operating results for 2012 and 2011 and also provides a summary of the calendar-ship-days for
our FPSO segment:
(in thousands of U.S. dollars, except calendar-ship-days
and percentages)
Revenues
Voyage expenses
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
Year Ended
December 31
2012
581,215
232
354,020
135,413
45,139
-
-
46,411
2011
% Change
464,810
-
255,925
96,915
39,261
(4,888)
(68,535)
146,132
25.0
100.0
38.3
39.7
15.0
(100.0)
(100.0)
(68.2)
3,660
2,982
22.7
(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 number of calendar days for our FPSO units for 2012 increased from the prior year due to our acquisition of the Hummingbird Spirit FPSO unit
and the acquisition of Piranema Spirit FPSO unit by Teekay Offshore from Sevan during the fourth quarter of 2011 (or the Sevan Acquisitions). We
agreed to acquire from Sevan the Voyageur Spirit upon completion of certain upgrades (which was acquired in the second quarter of 2013). The
Voyageur Spirit has been accounted for as a VIE since the fourth quarter of 2011 and does not have an impact on our calendar days. Please read
"Item 18 – Financial Statements: Note 3(a) – Acquisitions – FPSO Unit from Sevan Marine ASA."
Revenues. Revenues increased to $581.2 million for 2012, from $464.8 million for 2011 primarily due to:
•
•
•
•
an increase of $161.4 million due to the Sevan Acquisitions;
an increase of $20.8 million due to revenue recognized on the completion of a front end engineering and design study;
an increase of $6.7 million due to the recovery of crew and manning costs. In 2011, these recoveries were reported on a net basis in
vessel operating expenses; and
an increase of $5.6 million due to increased rates on the Rio das Ostras FPSO unit and Petrojarl Varg FPSO unit in accordance with the
annual contractual escalation adjustments;
partially offset by
•
•
•
•
•
a decrease of $50.1 million due the weather-related incident in December 2011 with the Petrojarl Banff FPSO unit resulting in the unit
being off hire during 2012;
a decrease of $23.4 million due to a shutdown for Petrojarl Foinaven in mid-August 2012 and lower revenues associated with annual
performance targets;
a decrease of $3.5 million relating to payments during 2011 to us for services previously rendered to the charterer of the Rio das Ostras
FPSO unit;
a decrease of $3.5 million due to decreased incentives earned and lower production on the Petrojarl Varg and a planned maintenance
shutdown during the second quarter of 2012; and
a decrease of $2.0 million due to the strengthening of the U.S. Dollar against the Norwegian Kroner.
52
Vessel Operating Expenses. Vessel operating expenses increased to $354.0 million for 2012, from $255.9 million for 2011, primarily due to:
•
•
•
•
•
an increase of $95.5 million due to the Sevan Acquisitions;
an increase of $20.8 million due to costs recognized on the completion of a Front End Engineering and Design study;
an increase of $9.3 million due to an increase in ship management costs;
an increase of $5.1 million due to the recovery of certain crew and manning costs, where the recovery is reported in revenue in 2012. In
2011, these recoveries were reported on a net basis in vessel operating expenses; and
an increase of $2.7 million due to higher maintenance costs relating to the Petrojarl Varg during the third quarter of 2012;
partially offset by
•
•
•
•
a decrease of $26.6 million due to the off-hire of the Petrojarl Banff FPSO unit as a result of the December 2011 weather-related incident;
a decrease of $4.0 million due to the strengthening of the U.S. Dollar against the Norwegian Kroner compared to 2011;
a decrease of $4.8 million due to repairs on the Rio das Ostras FPSO unit while on yard stay and higher consumables and spares during
the first quarter of 2011 and lower crew and manning costs relating to its deployment to the field during the second quarter of 2011; and
a decrease of $3.3 million due to lower repair and maintenance costs on the Petrojarl I FPSO unit.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to $135.4 million for 2012, from $96.9 million for 2011
primarily due to the Sevan Acquisitions.
Gain on Sale of Vessels and Equipment. Gain on sale of vessels and equipment for 2011 relates to a gain on sale of equipment related to the Tiro
and Sidon project.
Bargain purchase gain. In connection with the acquisition of FPSO units by us and Teekay Offshore from Sevan and our 40% equity investment in
Sevan, we recognized a final bargain purchase gain on acquisition of $68.5 million. Please read "Item 18 – Financial Statements: Note 3(a) –
Acquisitions – FPSO Unit from Sevan Marine ASA."
Liquefied Gas Segment
As at December 31, 2012, our liquefied gas segment (which includes our Teekay Gas Services business unit) consisted of 27 liquefied natural gas
(or LNG) (in which Teekay LNG’s interests ranged from 33% to 100%) and five liquefied petroleum gas (or LPG) carriers subject to long-term, fixed-
rate time-charter contracts. Teekay LNG’s partial interests in LNG carriers included their 33% interest in the four Angola LNG Carriers, their 40%
interest in Teekay Nakilat (III) Corporation, which owns the four RasGas 3 LNG Carriers, their 50% interest in their joint ventures with Exmar NV (or
the Excalibur and Excelsior Joint Venture), which own two LNG carriers (or the Excalibur and Excelsior LNG Carriers), their 52% interest in the
Teekay LNG-Marubeni Joint Venture, which owns the six MALT LNG Carriers, their 69% interest in the Teekay Tangguh Joint Venture (or Teekay
BLT Corporation), which owns the Tangguh Hiri and the Tangguh Sago (or the Tangguh LNG Carriers), their 70% interest in Teekay Nakilat
Corporation (or Teekay Nakilat), which is the lessee under 30-year capital lease arrangements relating to three LNG carriers (or the RasGas II LNG
Carriers), their 99% interest in the Arctic Spirit and Polar Spirit LNG carriers (or the Kenai LNG Carriers) and their 99% interest in five LPG/Multigas
carriers. The table below only includes 11 LNG carriers and five LPG carriers because it excludes the six MALT LNG Carriers, the four Angola LNG
Carriers, the four RasGas 3 LNG Carriers and the Excalibur and Excelsior LNG Carriers, which are all accounted for under the equity method.
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)
Income from vessel operations
Year Ended
December 31
2012
291,712
283
291,429
54,773
69,064
18,643
148,949
2011
% Change
273,786
4,862
268,924
54,174
63,641
16,315
134,794
6.5
(94.2)
8.4
1.1
8.5
14.3
10.5
Calendar-Ship-Days
Owned Vessels and Vessels under Direct Financing
Lease
5,856
5,126
14.2
(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 “Operating Results – General and Administrative Expenses.”
53
Our total calendar-ship-days increased by 14.2% for 2012, compared to 2011, primarily as a result of the delivery of two multigas carriers, the
Norgas Unikum, on June 15, 2011, and the Norgas Vision, on October 17, 2011, and the delivery of an LPG carrier, the Norgas Camilla, on
September 15, 2011 (collectively, the 2011 Gas Carrier Deliveries).
Net Revenues. Net revenues increased to $291.4 million for 2012, from $268.9 million for 2011, primarily due to:
•
•
•
•
•
an increase of $12.4 million from the Arctic Spirit and Polar Spirit due to the increase in hire rates under new charter contracts signed in
April 2011 and less off-hire of the vessels in 2012 compared to 2011;
an increase of $9.8 million due to the 2011 Gas Carrier Deliveries;
an increase of $3.7 million due to changes in revenues from ship management activities;
an increase of $1.6 million due to operating expense recovery adjustments under charter provisions and increases in the charter-hire rates
for the Tangguh Hiri and Tangguh Sago at the beginning of 2012; and
an increase of $0.8 million due to one additional calendar day during 2012;
partially offset by
•
•
•
a decrease of $4.2 million due to the effect on our Euro-denominated revenues from the weakening of the Euro against the U.S. Dollar in
2012 compared to 2011;
a decrease of $1.4 million due to the Hispania Spirit being off-hire for 21 days in the second quarter of 2012 for a scheduled dry docking;
and
a decrease of $0.5 million related to payments in 2012 and 2011 for delaying the scheduled dry docking if the Galicia Spirit in 2012 and the
Catalunya Spirit in 2011.
Vessel Operating Expenses. Vessel operating expenses increased to $54.8 million for 2012, from $54.2 million for 2011, primarily due to:
•
an increase of $2.8 million due to an increase in ship management costs; and
partially offset by
•
•
a decrease of $1.5 million primarily due to the effect on our Euro-denominated crew manning expenses from the weakening of the Euro
against the U.S. Dollar during 2012 compared to 2011 (a portion of our vessel operating expenses are denominated in Euros, which is
primarily due to the nationality of our crew); and
a decrease of $0.9 million due to the cancellation of loss of hire insurance on Tangguh Hiri and Tangguh Sago in the third quarter of 2011
and lower insurance premiums on certain LNG carriers.
Depreciation and Amortization. Depreciation and amortization increased to $69.1 million for 2012, from $63.6 million for 2011, primarily due to:
•
•
an increase of $3.3 million primarily due to amortization of dry-dock expenditures incurred in 2011 and the first and second quarters of
2012; and
an increase of $2.9 million due to the 2011 Gas Carrier Deliveries.
Conventional Tanker Segment
Our 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).
a) Fixed-Rate Tanker Sub-Segment
Our fixed-rate tanker sub-segment, a subset of our conventional tanker segment (which includes our Teekay Gas Services, Teekay Shuttle Offshore
and Teekay Tankers Services business units), includes conventional crude oil and product tankers on fixed-rate time charters with an original
duration of more than one year. Teekay Tankers also has a 50% interest in a VLCC under construction that was scheduled for delivery in the
second quarter of 2013, which is accounted for under the equity basis. Upon delivery, this vessel commenced operation under a time-charter for a
term of five years.
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.
54
(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
Loan loss provisions
Net loss on sale of vessels and equipment
Goodwill impairment
Restructuring charges
(Loss) income from vessel operations
Calendar-Ship-Days
Owned Vessels
Chartered-in Vessels
Total
2012
328,111
6,083
322,028
133,033
20,594
74,394
26,282
146,571
1,886
-
-
3,382
(84,114)
11,416
1,201
12,617
2011
% Change
386,462
4,406
382,056
148,413
33,623
84,256
35,845
58,034
-
218
10,809
16
10,842
12,199
1,911
14,110
(15.1)
38.1
(15.7)
(10.4)
(38.8)
(11.7)
(26.7)
152.6
100.0
(100.0)
(100.0)
21,037.5
(875.8)
(6.4)
(37.1)
(10.6)
(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 in 2012
compared with the prior year due to:
•
•
the transfer of net four Aframax tankers and two Suezmax tankers to the spot-rate tanker sub-segment; and
the redeliveries of one Suezmax tanker, one VLCC and one MR product tanker;
partially offset by
•
the addition of a bareboat-in MR product tanker during 2011.
The collective impact from the above noted fleet changes are referred to below as the Net Fleet Reductions.
Net Revenues. Net revenues decreased to $322.0 million for 2012, from $382.1 million for 2011, primarily due to:
•
•
•
a decrease of $58.5 million due to the Net Fleet Reductions;
a net decrease of $5.0 million from renewed time-charter out contracts at a lower rates for certain of our Aframax and Suezmax tankers
during 2012; and
a decrease of $0.5 million due to changes in revenues from ship management activities;
partially offset by
•
•
•
•
a net increase of $1.4 million due to adjustments to the daily charter rates based on inflation and an increase in interest rates in
accordance with the time-charter contracts for five Suezmax tankers (however, under the terms of the related capital leases, we had
corresponding increases in our lease payments, which are reflected as increases to interest expense; therefore, these and future similar
interest rate adjustments do not affect our cash flow or net income);
an increase of $1.1 million from interest income earned by our investment in a term loan entered into during 2011;
a net increase of $0.9 million due to certain vessels being off-hire during 2012 and 2011; and
an increase of $0.5 million relating to crew manning adjustments in the charter-hire rates; the crew manning adjustments increased due to
higher crewing costs and the strengthening of the Australian Dollar against the U.S. Dollar compared to 2011.
Vessel Operating Expenses. Vessel operating expenses decreased to $133.0 million for 2012, from $148.4 million for 2011, primarily due to the Net
Fleet Reductions and timing of repairs and maintenance costs.
Time-Charter Hire Expense. Time-charter hire expense decreased to $20.6 million for 2012, from $33.6 million for 2011, primarily due to the Net
Fleet Reductions.
Depreciation and Amortization. Depreciation and amortization expense decreased to $74.4 million for 2012, from $84.3 million for 2011, primarily
due to:
55
•
•
a net decrease of $8.8 million due to the Net Fleet Reductions; and
a decrease of $2.8 million due to lower net book values for certain vessels in the fixed tanker sub-segment as a result of write-downs taken
in 2011;
partially offset by
•
•
an increase of $1.2 million due to the accelerated amortization of the intangible assets relating to the charter contracts of five Suezmax
tankers as we expect the life of these intangible assets will be shorter than originally assumed; and
an increase of $0.5 million due to a full year of amortization of dry-dock expenditures incurred in 2011.
Asset Impairments. Asset impairments increased to $146.6 million for 2012, from $58.0 million for 2011. The impairments for 2012 relate to nine
vessels. We determined these vessels were impaired and wrote down the carrying values of these vessels to their estimated fair value. The primary
factors that caused the write downs were a negative change in the outlook for the crude tanker market, a delay in the expected timing of a recovery
of the crude tanker market as well as the expected discrimination impact from more fuel efficient vessels being constructed. Please read Item 18.
Financial Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— b) Asset Impairments and Provisions and also read Item 18.
Financial Statements: Note 11(a) Fair Value Measurements.
Loan Loss Provisions. Loan loss provisions for 2012 relate to allowances provided in respect of our investments in term loans. Please read Item 18.
Financial Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— b) Asset Impairments and Provisions and also read Item 18.
Financial Statements: Note 11(a) Fair Value Measurements.
Goodwill Impairment. Goodwill impairment for 2011 relates to the write-down of goodwill from a previous acquisition. Please read “Item 18 –
Financial Statements: Note 6 – Goodwill Impairment Charge and “Critical Accounting Estimates.”
b) Spot Tanker Sub-Segment
Our spot tanker sub-segment, a subset of our conventional tanker segment (which includes our Teekay Shuttle Offshore and Teekay Tankers
Services business units), consists of conventional crude oil tankers and product carriers 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. 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 (loss). 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 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:
(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
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
2012
163,438
27,303
136,135
78,479
53,156
51,923
17,748
256,795
5,863
-
3,531
(328,360)
7,759
3,030
10,789
2011
% Change
233,314
69,603
163,711
75,244
106,078
54,503
37,589
54,069
270
25,843
123
(190,008)
7,367
5,555
12,922
(29.9)
(60.8)
(16.8)
0.3
(49.9)
(4.7)
(52.8)
374.9
2,071.5
(100.0)
2,770.7
72.8
5.3
(45.5)
(16.5)
(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 in 2012 compared to
2011, primarily due to:
56
•
•
the sale of three Aframax tankers in 2012 and one in 2011; and
the in-charter redeliveries to their owners of eight Aframax tankers, six Suezmax tankers, two long-range 2 (or LR2) product tankers and
one VLCC;
partially offset by
•
the transfer of net four Aframax tankers and two Suezmax tankers from the fixed-rate tanker sub-segment.
The collective impact from the above noted fleet changes are referred to below as the Net Spot Fleet Reductions.
Net Revenues. Net revenues decreased to $136.1 million for 2012, from $163.7 million for 2011, primarily due to:
•
a net decrease of $35.2 million due to the Net Spot Fleet Reductions and lay-up of two vessels since March 2012;
partially offset by
•
an increases of $7.6 million from increase in our average spot tanker TCE rates, predominantly from our Suezmax tankers.
Vessel Operating Expenses. Vessel operating expenses decreased to $78.5 million for 2012, from $75.2 million for 2011 primarily due to the Net
Spot Fleet Reductions.
Time-Charter Hire Expense. Time-charter hire expense decreased to $53.2 million for 2012, from $106.1 million for 2011, primarily due to the Net
Spot Fleet Reductions and redeliveries of previously chartered-in vessels upon expiration of their in-charter contracts.
Depreciation and Amortization. Depreciation and amortization expense decreased to $51.9 million for 2012, from $54.5 million for 2011, primarily
due to the Net Fleet Reductions.
Asset Impairments. Asset impairments increased to $256.8 million for 2012, from $54.1 million for 2011. The impairments for 2012 relate to nine
vessels. We determined these vessels were impaired and wrote down the carrying values of these vessels to their estimated fair value. The primary
factors that caused the write downs were a negative change in the outlook for the crude tanker market, a delay in the expected timing of a recovery
of the crude tanker market as well as the expected discrimination impact from more fuel efficient vessels being constructed. Please read Item 18.
Financial Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— b) Loan Loss Provisions, Asset Impairments and Equity
Accounted Investments and also read Item 18. Financial Statements: Note 11(a) Fair Value Measurements.
Net Loss on Sale of Vessels and Equipment. Loss on sale of vessels and equipment relates to the sale of three Aframaxes during 2012. Please
read “Item 18. Financial Statements: Note 18—Vessel Sales, Asset Impairments and Provisions— a) Vessel Sales.”
Goodwill Impairment. Goodwill impairment for 2011, relates to the write-down of goodwill from a previous acquisition. Please read “Item 18 –
Financial Statements: Note 6 – Goodwill Impairment Charge and “Critical Accounting Estimates.”
Restructuring Charges. Restructuring charges for 2012, primarily relate to costs incurred in association with the reorganization of our marine
operations. Please read “Item 18 – Financial Statements: Note 20 – Restructuring Charges.”
Other Operating Results
The following table compares our other operating results for 2012 and 2011:
(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 income (loss) from joint ventures
Foreign exchange (loss) gain
Other income
Income tax recovery (expense)
Year Ended
December 31,
2012
2011
% Change
(144,296)
(167,615)
6,159
(80,352)
79,211
(12,898)
366
14,406
(173,604)
(137,604)
10,078
(342,722)
(35,309)
12,654
12,360
(4,290)
(16.9)
21.8
(38.9)
(76.6)
(324.3)
(201.9)
(97.0)
(435.8)
General and Administrative. General and administrative expenses were $144.3 million in 2012, compared to $173.6 million in 2011, primarily due to:
•
•
•
a decrease of $11.5 million in salaries and benefits, primarily due to a one-time pension expense in 2011 related to the retirement of our
former President and Chief Executive Officer;
a decrease of $7.0 million in equity-based compensation for management, primarily due to the accelerated timing of accounting
recognition of certain stock awards as a result of certain management employees meeting retirement eligibility criteria in 2011;
a net decrease of $8.7 million in 2012 due to decreases in ship management activities;
57
•
•
a decrease of $5.7 million in 2012, from increased pool commissions and cost recoveries from management fees; and
a decrease of $5.3 million in 2012, in travel-related and other personnel expenses from restructuring initiatives;
partially offset by
•
an increase of $8.8 million as a result of the Sevan Acquisitions.
During 2012, we commenced the reorganization of our marine operations to create greater alignment with our business units and our three publicly-
listed subsidiaries. We expect to incur approximately $12 million in total of one-time restructuring charges associated with this reorganization and
realize annual cost savings of approximately $15 million commencing in the fourth quarter of 2012. A majority of the reorganization has been
completed in 2012; however, certain portions was not completed until 2013. Please read “Item 18 – Financial Statements: Note 20 Restructuring
Charges.”
Interest Expense. Interest expense increased to $167.6 million in 2012, compared to $137.6 million in 2012, primarily due to:
•
•
•
•
•
•
•
an increase of $15.1 million from the issuances of the NOK senior unsecured bonds in January, May and October 2012;
an increase of $5.6 million due to the acquisition of the Hummingbird Spirit FPSO unit in November 2011 and the associated debt facility;
an increase of $4.3 million due to increased loan and bond cost amortization in 2012;
an increase of $4.1 million related to the new $130 million debt facility secured by the Piranema Spirit FPSO unit in February 2012;
an increase of $4.4 million as a result of higher average outstanding debt balances;
an increase of $3.1 million as a result of higher margins on the refinancing of a debt facility; and
an increase of $2.3 million due to an increase in our borrowings upon our acquisitions of three LPG/multigas vessels during the second,
third and fourth quarters of 2011;
partially offset by
•
•
a decrease of $5.1 million due to the termination of the Madrid Spirit LNG carrier capital lease in the fourth quarter of 2011. 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; and
a decrease of $4.0 million due to lower EURIBOR related to Euro-denominated debt.
Interest Income. Interest income decreased to $6.2 million in 2012 from $10.1 million in 2011, primarily due to the repayment of the capital lease on
one LNG carrier, the Madrid Spirit, during the fourth quarter of 2011, which was funded from restricted cash, partially offset by a higher principal
balance in restricted cash deposits compared to prior year.
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 loss. Net realized and
unrealized losses on non-designated derivatives were $80.4 million for 2012, compared to $342.7 million for 2011, 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
Foreign currency forward contracts
Forward freight agreements and bunker fuel swap contracts
Foinaven embedded derivative
Unrealized gains (losses) relating to:
Interest rate swap agreements
Foreign currency forward contracts
Foinaven embedded derivative
Total realized and unrealized losses on derivative instruments
Year Ended
December 31
2012
2011
(123,277)
-
1,155
-
11,452
(110,670)
26,770
6,933
(3,385)
30,318
(80,352)
(132,931)
(149,666)
9,965
36
-
(272,596)
(58,405)
(11,399)
(322)
(70,126)
(342,722)
The realized losses relate to amounts we actually realized or paid to settle such derivative instruments and interest rate swap agreement
amendments. The unrealized losses on interest rate swaps for 2012 and 2011 were primarily due to changes in the forward interest swap rates.
58
During 2012 and 2011, we had interest rate swap agreements with aggregate average net outstanding notional amounts of approximately $3.9
billion in both periods, with average fixed rates of approximately 3.9% and 3.8%, respectively. Short-term variable benchmark interest rates during
these periods were generally less than 1.0% and, as such, we incurred realized losses of $123.3 million and $132.9 million, during 2012 and 2011
under the interest rate swap agreements. We also incurred realized losses of $149.7 million during 2011, for amending the terms of five interest rate
swaps to reduce the weighted-average fixed interest rate from 5.1% to 2.5% and the termination of a swap.
Primarily as a result of significant changes in long-term benchmark interest rates during 2012 and 2011, we recognized unrealized gains and
(losses) of $30.3 million and $(70.1) million, respectively. Please read “Item 18. Financial Statements: Note 15 - Derivative Instruments and
Hedging Activities.”
Equity Income (Loss). Our equity income increased to $79.2 million in 2012 compared to a loss of $35.3 million in 2011, primarily due to:
•
•
•
•
•
an increase of $40.2 million due to the acquisition of a 52% ownership interest in the six MALT LNG carriers in February 2012;
an increase of $41.8 million related to the Angola LNG Project;
an increase of $17.5 million due to the equity loss and write-down of our investment in Petrotrans Holdings Ltd., a 50% joint venture in the
prior year;
an increase of $10.8 million due to the sale of our interest in the Ikdam FPSO unit; and
an increase of $5.0 million related to the Exmar and RasGas 3 joint ventures.
For 2012, equity income includes $5.3 million which relates to our share of unrealized gains on interest rate swaps, compared to unrealized losses
on interest rate swaps of $(35.3) million included in equity income (loss) for the same period last year.
Foreign Exchange Gain (Loss). Foreign currency exchange losses were $12.9 million in 2012 compared to foreign currency exchange gains of
$12.7 million in 2011. Our foreign currency exchange gains (losses), substantially all of which are unrealized, are due primarily to the relevant
period-end revaluation of our Norwegian Kroner-denominated debt and our Euro-denominated term loans, capital leases and restricted cash for
financial reporting purposes and the realized and unrealized gains (losses) on our cross currency swaps. Losses on Norwegian Kroner-denominated
and Euro-denominated monetary liabilities reflect a weaker U.S. Dollar against the Norwegian Kroner and Euro on the date of revaluation or
settlement compared to the rate in effect at the beginning of the period. Gains on Norwegian Kroner-denominated and Euro-denominated monetary
liabilities reflect a stronger U.S. Dollar against the Norwegian Kroner and Euro on the date of revaluation or settlement compared to the rate in effect
at the beginning of the period. For 2012, foreign currency exchange gains include realized gains of $3.6 million (2011 - $2.9 million) and unrealized
gains of $10.7 million (2011 - unrealized loss of $(1.6) million) on our cross currency swap and unrealized losses of $17.7 million (2011 - gains of
$2.6 million) on the revaluation of our NOK-denominated debt. For 2012, foreign currency exchange (losses) gains include the revaluation of our
Euro-denominated restricted cash, debt and capital leases of ($4.7) million as compared to $10.5 million for 2011.
Income Tax (Expense) Recovery. Income tax recovery was $14.4 million in 2012 and compared to income tax expense of $4.3 million in 2011. The
increase in the income tax recovery was primarily due to (i) a new Norwegian tax structure established in the fourth quarter of 2012 which resulted in
a deferred tax recovery for the Norwegian tax group by being able to utilize past losses carried forward against future projected income, and (ii) a
reversal of uncertain tax position accruals during 2012.
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 facilities, proceeds from
the sale of vessels, and capital raised through financing transactions by us or our 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, 2013, our total cash and cash equivalents totaled $614.7 million, compared to $639.5 million as at December 31,
2012. As at December 31, 2013 and December 31, 2012, our total liquidity, including cash and undrawn credit facilities, was $1.2 billion and $1.9
billion, respectively.
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 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. In
addition, the revenue we receive from certain of our FPSOs may vary based on oil production and performance metrics.
As at December 31, 2013, we had $996.4 million of scheduled debt repayments coming due within the next twelve months. In addition, as at
December 31, 2013, we had $31.7 million current lease obligation for three of the four Suezmax tankers, under which the owner has the option to
require us to purchase the vessels. The owner also has cancellation rights, as the charterer, under the charter contracts for these four Suezmax
tankers. For one of the four Suezmax tankers, the cancellation option was first exercisable in November 2013. In July 2013, we received notice of
termination from the owner for the vessel and the owner reached an agreement in January 2014 to sell the Algeciras Spirit and the vessel was
delivered to the new owner in late-February 2014. Upon sale of the vessel, we were not required to pay the balance of the capital lease obligation
of $30.1 million, as the vessel under capital lease was returned to the owner and the full amount of the capital lease obligation was concurrently
extinguished. While we do not expect the owner to exercise its option to require us to purchase the three remaining Suezmax tankers, such exercise
would require us to satisfy the purchase price either by assuming the existing vessel financing, if the lenders consent, or by financing the purchase
using existing liquidity or by obtaining new debt or equity financing. For the remaining three Suezmax tankers, the cancellation options are first
exercisable in April 2014, October 2017 and July 2018, respectively.
59
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 have pre-arranged financing of approximately $589.4 million,
which mostly relates to our 2014 capital expenditure commitments. In February 2014, we secured an $815 million long-term debt financing for our
FPSO unit under construction. We are currently in the process of obtaining additional debt financing for our remaining capital commitments relating
to our portion of newbuildings on order as at December 31, 2013.
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, 2013, our revolving credit facilities provided for borrowings of up to $2.6 billion, of which $0.6 billion was undrawn. The amount
available under these revolving credit facilities reduces by $776.9 million (2014), $297.5 million (2015), $713.6 million (2016), $445.0 million (2017)
and $321.0 million (2018). The revolving credit facilities are collateralized by first-priority mortgages granted on 54 of our vessels, together with other
related security, and are guaranteed by us 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 37 of our vessels, together with other
related security, and are generally guaranteed by us or our subsidiaries.
Among other matters, our long-term debt agreements generally provide for maintenance of minimum consolidated financial covenants and five loan
agreements require the maintenance of vessel market value to loan ratios. As at December 31, 2013, these ratios ranged from 122.9% to 388.9%
compared to their minimum required ratios of 105% to 120%, respectively. The vessel values used in these ratios are the appraised values prepared
by us based on second hand sale and purchase market data. A delay in the recovery of the conventional tanker market and a weakening of the
LNG/LPG carrier market could negatively affect the ratios. Certain loan agreements require that a minimum level of free cash be maintained and as
at December 31, 2013 this amount was $100.0 million. Most of the loan agreements also require that we maintain an aggregate minimum level of
free liquidity and undrawn revolving credit lines with at least six months to maturity from 5% to 7.5% of total debt. As at December 31, 2013, this
aggregate amount was $332.6 million. We were in compliance with all of our loan covenants at December 31, 2013.
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. 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 activities for the periods
presented:
Net operating cash flows
Net financing cash flows
Net investing cash flows
Operating Cash Flows
Year Ended December 31,
2013
2012
2011
292,584
866,577
(1,183,992)
288,936
299,671
(641,243)
107,193
976,645
(1,171,459)
Our net cash flow from operating activities fluctuates primarily as a result of changes in vessel utilization and TCE rates, changes in interest rates,
fluctuations in working capital balances, the timing and amount of drydocking expenditures, repairs and maintenance activities, vessel additions and
dispositions, and foreign currency rates. Our exposure to the spot tanker market 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 an increase in tanker supply and the reduction in global oil
demand that was caused by a slow-down in global economic activity that began in late 2008.
Net cash flow from operating activities increased to $292.6 million for the year ended December 31, 2013, from $288.9 million for the year ended
December 31, 2012. This increase was primarily due to an increase in changes to non-cash working capital items of $179.4 million primarily due the
timing of payments made to vendors and the timing of payments received from customers, partially offset by a $75.1 million net decrease in income
from vessel operations before depreciation, amortization, asset impairments, loan loss provisions, net (gain) loss on sale of vessels and equipment
and the amortization of in-process revenue contracts of our four reportable segments, primarily as a result of reduced operating cash flows from our
FPSO and conventional tanker segments. There was an increase of $37.2 million on expenditures for dry docking due to more vessels dry-docked
in 2013 compared to 2012. In addition, there was a $45.4 million increase in interest expense (net of interest income and including realized losses
on interest rate swaps and interest rate swaps terminations) in 2013 compared to 2012.
60
Net cash flow from operating activities increased to $288.9 million for the year ended December 31, 2012, from $107.2 million for the year ended
December 31, 2011. This increase was primarily due to a $63.9 million net increase in income from vessel operations before depreciation,
amortization, asset impairments, net loss (gain) on sale of vessels and equipment, bargain purchase gain and the amortization of in-process
revenue contracts of our four reportable segments. In addition, there was a $125.4 million decrease in interest expense (including interest income
and realized losses on interest rate swaps) in the year ended December 31, 2012 compared to the same period in 2011. Of the $125.4 million
decrease in interest expense, $149.7 million was paid in the year ended December 31, 2011 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%, and the termination of a swap. There was a decrease of $20.6 million on expenditures for dry docking
in the year ended December 31, 2012 compared to the same period in 2011, which also contributed to the increase in cash flows from operating
activities.
For further discussion of changes in income from vessel operations before depreciation, amortization, asset impairments, net loss (gain) on sale of
vessels and equipment, bargain purchase gain and the amortization of in-process revenue contracts of our four reportable segments, please read
“Results of Operations.”
Financing Cash Flows
We have three publicly-traded subsidiaries, Teekay LNG, Teekay Offshore and Teekay Tankers (collectively, the Daughter Companies), in which we
have less than 100% ownership interests. It is our intention that the Daughter Companies hold most of our: liquefied gas transportation assets
(Teekay LNG); 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. Historically, the Daughter Companies have distributed operating cash flows to their owners in the
form of distributions or dividends. The Daughter Companies typically finance acquisitions, including acquisitions of assets from Teekay, with a
combination of debt and new equity from public or private investors or the assumption of debt related to acquired vessels. The Daughter Companies
raised net proceeds from issuances of new equity to the public and to third-party investors of $446.9 million in the year ended December 31, 2013,
compared to $496.2 million in 2012, and $631.1 million in 2011. As the size of the Daughter Companies have grown through acquisitions, whether
from Teekay or otherwise, the amount of the operating cash flows generally have increased, which has resulted in larger aggregate distributions.
Consequently, distributions from the Daughter Companies to non-controlling interests have increased to $270.0 million in 2013 from $246.6 million
in 2012, and from $201.9 million in 2011.
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, was $1,434.0 million in
the year ended December 31, 2013, and $347.1 million in 2012 and $1,223.0 million in 2011. We primarily used the net proceeds from drawing on
undrawn revolvers to fund the acquisition of Teekay LNG’s 50% interest in the Exmar LPG carriers, as well as funding our newbuilding installments
and capital expenditures.
We actively manage the maturity profile of our outstanding financing arrangements. Our scheduled repayments of long-term debt were $695.7
million in the year ended December 31, 2013, compared to $266.2 million in 2012 and $449.6 million in 2011.
In October 2008, Teekay announced a $200 million share repurchase program. During 2013, we repurchased 0.3 million shares of our common
stock for $12.0 million at an average cost of $40.00 per share, pursuant to a separate authorization. During 2012, we repurchased no shares of our
common stock. During 2011, we repurchased 3.9 million shares of our common stock for $122.2 million at an average cost of $31.15 per share,
pursuant to the share repurchase program. As at December 31, 2013, the total remaining amount under the 2008 share repurchase authorization
was $37.7 million.
Dividends paid during the year ended December 31, 2013 were $90.3 million, compared to $83.3 million in 2012 and $93.5 million in 2011, or
$1.265 per share for each such period. 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.
Investing Cash Flows
During 2013, we incurred capital expenditures for vessels and equipment of $753.8 million, primarily for capitalized vessel modifications and
shipyard construction installment payments on our newbuilding shuttle tankers, five LNG carriers, two FSO conversions and the installment
payments and conversion costs of our FPSO units under construction or conversion. We invested an aggregate of $308.0 million in a direct
financing lease to fund the acquisition the Awilco LNG carriers in September 2013 and November 2013. We received aggregate net proceeds
of $47.7 million from the sales of a 1992-built shuttle tanker, a 1992-built conventional tanker, two 1995-built conventional tankers, a 1998-built
conventional tanker and sub-sea equipment from the Petrojarl I FPSO unit. In addition, we invested $157.8 million in our equity accounted
investees, primarily related to the Exmar LPG BVBA joint venture (including working capital contribution and acquisition costs), and advanced $14.5
million to our equity accounted investees.
During 2012, we incurred capital expenditures for vessels and equipment of $523.6 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 or conversion. In November 2012, we prepaid $92.3 million of the Voyageur Spirit purchase price. We received aggregate
net proceeds of $250.8 million from the sale of the Tiro and Sidon FPSO project to the 50% joint venture with Odebrecht, sale of three conventional
tankers, sale of two shuttle tankers and the sale of a joint venture. In addition, we invested $183.6 million in our equity accounted investees, mainly
related to the Teekay LNG-Marubeni Joint Venture (including working capital contribution and acquisition costs), and advanced $117.2 million to our
equity accounted investees.
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
61
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 made a 40% equity investment in a recapitalized
Sevan.
COMMITMENTS AND CONTINGENCIES
The following table summarizes our long-term contractual obligations as at December 31, 2013:
Total
2014
2015
and
2016
2017
and
2018
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/conversion (5)(6)
Asset retirement obligation
Total U.S. Dollar-Denominated Obligations
Euro-Denominated Obligations: (7)
Long-term debt (8)
Total Euro-Denominated Obligations
Norwegian Kroner-Denominated Obligations: (7)
Long-term debt (9)
Total Norwegian Kroner-Denominated Obligations
Total
5,242.1
78.3
140.1
953.1
378.0
1,695.2
27.2
8,514.0
340.2
340.2
691.8
691.8
9,546.0
1,252.3
43.7
66.4
24.0
24.8
547.5
-
1,958.7
1,135.9
25.1
15.5
48.0
49.6
674.6
-
1,948.7
16.5
16.5
36.7
36.7
-
-
197.7
197.7
1,487.5
9.5
58.2
48.0
49.5
473.1
-
2,125.8
183.5
183.5
494.1
494.1
Beyond
2018
1,366.4
-
-
833.1
254.1
-
27.2
2,480.8
103.5
103.5
-
-
1,975.2
2,183.1
2,803.4
2,584.3
(1) Excludes expected interest payments of $126.2 million (2014), $201.9 million (2015 and 2016), $141.6 million (2017 and 2018) and $112.1 million (beyond 2018).
Expected interest payments are based on the existing interest rates (fixed-rate loans) and LIBOR at December 31, 2013, plus margins on debt that has been
drawn that ranges up to 4.5% (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 on certain of our floating-rate debt.
(2)
Includes, in addition to lease payments, amounts we may be required to pay to purchase four leased vessels from 2014 to the end of the period when cancellation
options are first exercisable. The purchase price will be based on the unamortized portion of the vessel construction financing costs for the vessels, which are
included in the table above. 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. Subsequent to December 31, 2013,
CEPSA reached an agreement to sell one of the vessels, the Algeciras Spirit, and upon redelivery to its new owner in February 2014, the charter contract with us
was terminated. As a result of the sale of the vessel, we were not required to pay the $30.1 million balance of the capital lease obligation as the vessel under
capital lease was returned to the owner and the capital lease obligation was concurrently extinguished. Please read “Item 18 – Financial Statements: Note 10 –
Capital Lease Obligations and Restricted Cash.”
(3) Existing restricted cash deposits of $475.6 million, together with the interest earned on these deposits, are expected to be sufficient to repay the remaining
amounts we currently owe under the lease arrangements.
(4) We have corresponding leases whereby we are the lessor. We expect to receive approximately $332.6 million for these leases from 2014 to 2029. Please read
“Item 18 – Financial Statements: Note 9 – Operating and Direct Financing Leases.”
(5) Represents remaining construction costs (excluding capitalized interest and miscellaneous construction costs for five LNG carriers, two FSO conversions and one
FPSO unit as of December 31, 2013. Please read “Financial Statements: Note 16 (a) – Commitments and Contingencies – Vessels Under Construction.”
(6) Teekay LNG has a 50% interest in a joint venture, Exmar LPG BVBA, that has entered into an agreement for the construction of 12 LPG carriers scheduled for
delivery between 2014 and 2018. As at December 31, 2013, the remaining commitments on these vessels, excluding capitalized interest and other miscellaneous
construction costs, totaled $130.5 million (2014), $190.0 million (2015 and 2016) and $148.3 million (2017 and 2018), of which our share is $65.3 million (2014),
$95.0 million (2015 and 2016) and $74.1 million (2017 and 2018). Please read “Item 1 – Financial Statements: Note 16(b) – Commitments and Contingencies –
Joint Ventures.”
(7) Euro-denominated and Norwegian-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing exchange rate as of
December 31, 2013.
(8) Excludes expected interest payments of $5.9 million (2014), $10.8 million (2015 and 2016), $7.8 million (2017 and 2018) and $2.9 million (beyond 2018).
Expected interest payments are based on EURIBOR at December 31, 2013, plus margins that range up to 2.25%, as well as the prevailing U.S. Dollar/Euro
exchange rate as of December 31, 2013. 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 variable-rate debt.
(9)
Excludes expected interest payments of $44.8 million (2014), $74.2 million (2015 and 2016) and $27.3 million (2017 and 2018). Expected interest payments are
based on NIBOR at December 31, 2013, plus a margin between 4.00% to 5.75%, as well as the prevailing U.S. Dollar/Norwegian Kroner exchange rate as of
December 31, 2013. The expected interest payments and principal repayments do not reflect the effect of the related cross currency swap that we have used as
an economic hedge of our foreign exchange and interest rate exposure associated with our Norwegian Kroner-denominated long-term debt.
62
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,
changes in financial condition, revenues or expenses, 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 application 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 proportionate performance method. Under such method, voyages may be calculated on either
a load-to-load or discharge-to-discharge basis. This means 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 proportionate performance 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 proportionate performance method.
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 the 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, including the carrying
value of the charter contract, if any, under which the vessel is employed, may not be recoverable. This 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. If the estimated future undiscounted
cash flows of an asset exceed the asset’s carrying value, no impairment is recognized even though the 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. 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.
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, 2013. Specifically, the table below 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 that 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 table is disaggregated for vessels
which have estimated future undiscounted cash flows that are marginally or significantly greater than their respective carrying values. Vessels with
estimated future cash flows significantly greater than their respective carrying values would not necessarily represent vessels that would likely be
impaired in the next 12 months. In deciding whether to dispose of a vessel, we determine whether it is economically preferable to sell the vessel or
continue to operate it. This assessment includes an estimate of the net proceeds expected to be received if the vessel is sold in its existing condition
compared to the present value of the vessel’s estimated future revenue, net of operating costs. Such estimates are based on the terms of the
existing charter, charter market outlook and estimated operating costs, given a vessel’s type, condition and age. In addition, we typically do not
dispose of a vessel that is servicing an existing customer contract. The recognition of an impairment in the future may be more likely for those
vessels that have estimated future undiscounted cash only marginally greater than their respective carrying value.
63
(in thousands of U.S. dollars, except number of vessels)
Reportable Segment
Shuttle Tanker(2)
Shuttle Tanker(3)
FSO Segment(3)
Liquefied Gas Segment(3)
Conventional Tanker Segment(2)
Conventional Tanker Segment(3)
Number of
Vessels
2
2
1
2
2
31
Market
Values (1)
$
44,000
52,000
6,500
128,000
42,000
785,100
Carrying
Values
$
79,440
73,704
11,153
180,285
66,659
1,026,094
(1)
Market values are based on second-hand market comparable values or using a depreciated replacement cost approach as at December 31, 2013. Since vessel
values can be 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 and FSO units may involve considerable judgment, given the illiquidity of the
second-hand market for these types of vessels. The estimated market values for the FSO units in the table above were based on second-hand market
comparables for similar vessels. Given the advanced age of these vessels, the estimated market values substantially reflect the price of steel and amount of
steel in the vessel. The estimated market values for the shuttle tankers were based on second-hand market comparable values for conventional tankers of
similar age and size, adjusted for shuttle tanker specific functionality.
(2)
Undiscounted cash flows are marginally greater than the carrying values.
Undiscounted cash flows are significantly greater than the carrying values.
(3)
Judgments and Uncertainties. Depreciation is calculated using an estimated useful life of 20 to 25 years for conventional tankers and shuttle
tankers, 20 to 25 years for FPSO 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. FSO units are depreciated over the term of the contract. 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 the calculations of depreciation.
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
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.
64
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.
As of December 31, 2013, 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. However, 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 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 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 agreement 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 short-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. We economically hedge the
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).
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 December 31, 2013 are listed below:
65
Name
Age Position
C. Sean Day
Peter Evensen
Axel Karlshoej
Dr. Ian D. Blackburne
William B. 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
64
55
73
68
61
66
67
66
56
66
56
41
60
45
45
56
45
50
Director and Chair of the Board
Director, President and Chief Executive Officer
Director and Chair Emeritus
Director
Director
Director
Director
Director
Director
Director
Executive Vice President, Secretary and General Counsel
President, Teekay Tanker Services, a division of Teekay(1)
President, Teekay Gas Services, a division of Teekay
Executive Vice President and Chief Strategy Officer
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
(1) Mr. Chan has tendered his resignation from his position effective June 20, 2014.
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 Partners L.P. and Chairman of Teekay Offshore GP L.L.C., the general partner of Teekay
Offshore Partners L.P. He served as Chairman of Teekay Tankers from 2007 until 2013. 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 currently serves as a director of Kirby Corporation and is Chairman of Compass
Diversified Holdings. Mr. Day 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.
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. In April 2011, he became a
Teekay director and assumed the position of President and Chief Executive Officer. Mr. Evensen also serves as Chief Executive Officer and Chief
Financial Officer and a director of Teekay GP L.L.C., Chief Executive Officer and Chief Financial Officer and a director of Teekay Offshore GP
L.L.C. He served as a director of Teekay Tankers Ltd. from October 2007 until June 2013. Mr. Evensen has over 30 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 industry 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 Chairman 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 Teekay’s founder, the late J. Torben Karlshoej.
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 had 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 Recall Holdings Limited. He is a
former Chairman of CSR Limited and director of 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.
William B. Berry has served as a Teekay director since June 2011. Mr. Berry held various positions with ConocoPhillips and its predecessors from
1976 until his retirement in 2008, 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 serves on the boards of
directors of Access Midstream Partners and Willbros Group, Inc., and serves as an Honorary Consulate 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.
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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 42 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 of the
Ontario Teachers' Pension Plan, as a trustee of The University Health Network, and as a director and Chair of Audit and Risk Management for Intact
Financial Corporation.
Bjorn Moller has served as a Teekay director since 1998. Mr. Moller also served as Teekay's President and Chief Executive Officer from 1998 until
March, 2011. Also until March, 2011, Mr. Moller served as Vice Chairman of Teekay GP L.L.C., Vice Chairman of Teekay Offshore GP L.L.C., and
as the Chief Executive Officer of Teekay Tankers Ltd. Mr. Moller remains a director of Teekay Tankers Ltd. Mr. Moller has over 35 years of
experience in the shipping industry, and has served as Chairman of the International Tanker Owners Pollution Federation from December 2006 to
2013. He served in senior management positions with Teekay for more than 20 years and headed our overall operations beginning in January 1997,
following his promotion to the position of Chief Operating Officer. Prior to this, 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 international 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 Limited,
Lambert Energy Advisory Ltd., Energy Policy Foundation of Norway, Rowan Companies plc 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 Corporate
Secretary in 2003. He was appointed Senior Vice President in 2004 and Executive Vice President in 2006. In June 2013, Mr. Bensler was appointed
Director and Chairman of Teekay Tankers Ltd. having served as Secretary since 2007. 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, 2011, Mr. Chan also assumed the position of Chief
Executive Officer of Teekay Tankers Ltd. and was subsequently appointed as Director in June, 2013. Mr. Chan has tendered his resignation from
his roles with Teekay and Teekay Tankers Ltd. effective June 20, 2014. 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
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 Navion Shuttle Tankers and Offshore division. In
that role he was responsible for our global shuttle tanker business as well as initiatives in the floating storage and offtake business and related
offshore activities. Effective April, 2011, Mr. Hvid assumed the positions of Chief Strategy Officer and Executive Vice President, and became a
director of Teekay GP L.L.C. and a director of Teekay Offshore GP L.L.C. Mr. Hvid resigned from the board of Teekay GP L.L.C in September, 2012
to maintain its balance of independent directors and rejoined the board in February, 2013. Mr. Hvid has 25 years of global shipping experience, 12
of which were spent with A.P. Moller in Copenhagen, San Francisco and Hong Kong. In 2007, Mr. Hvid joined the board of Gard P. &.I. (Bermuda)
Ltd.
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, including Controller from 1997 until his promotions to the positions of Vice President, Finance in 2002, Senior
Vice President and Treasurer in 2004, and Senior Vice President and Chief Financial Officer in 2006. Mr. Lok has also served as the Chief Financial
Officer of Teekay Tankers Ltd. since 2007. Prior to joining Teekay, Mr. Lok worked as a Chartered Accountant with Deloitte & Touche LLP. Mr. Lok
is also a Chartered Financial Analyst.
Peter Lytzen joined Teekay Petrojarl ASA 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 units 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 resources, 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.
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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. Sæther assumed the position of President, Teekay Shuttle and Offshore Services. Ms. Sæther holds an Executive MBA in Shipping
Management and has over 20 years of industry experience.
Compensation of Directors and Senior Management
Director Compensation
During 2013, 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 Chair 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 2013 Equity Incentive Plan. Pursuant to this annual retainer, during 2013 we granted
stock options to purchase an aggregate of 28,836 shares of our common stock at an exercise price of $34.07 per share and 11,884 shares of
restricted stock. During 2013, the Chair of the Board received his retainer in the form of 14,528 shares of restricted stock under our 2013 Equity
Incentive Plan. The stock options described in this section expire March 12, 2023, 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 dates.
Annual Executive Compensation
The aggregate compensation earned by Teekay’s 9 executive officers listed above (or the Executive Officers) for 2013, as well as by Geir
Sekkesaeter who resigned from Teekay effective March 31, 2013, was $9.2 million. This is comprised of base salary ($4.1 million), annual bonus
($4.5 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 1.06 Canadian Dollars for each U.S. Dollar, the exchange rate on December 31, 2013. Teekay’s annual bonus
plan considers company performance, team performance, and individual performance (through comparison to established targets).
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 2013 were made under our 2013 Equity Incentive Plan.
During March 2013, we granted stock options to purchase an aggregate of 43,974 shares of our common stock at an exercise price of $34.07,
158,957 shares of restricted stock and 54,773 performance shares to the Executive Officers under our 2013 Equity Incentive Plan. The stock
options expire March 12, 2023, 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 if
the performance conditions are met.
During March 2014, we granted stock options to purchase an aggregate of 4,247 shares of our common stock at an exercise price of $56.76, 82,327
shares of restricted stock and 48,824 performance shares to the Executive Officers under our 2013 Equity Incentive Plan. The stock options expire
March 11, 2024, 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 two or three year performance cycle if the
performance conditions are met.
Options to Purchase Securities from Registrant or Subsidiaries
In March 2013, we adopted the 2013 Equity Incentive Plan (or the 2013 Plan) and suspended the 1995 Stock Option Plan and the 2003 Equity
Incentive Plan (collectively referred to as the Plans). As at December 31, 2013, we had reserved pursuant to our 2013 Plan 4,133,987 shares of
Common Stock, and at December 31, 2012, we had reserved pursuant to our Plans 8,924,470 shares of Common Stock, for issuance upon
exercise of options or equity awards granted or to be granted.
During the year ended December 31, 2013, we have granted options under the 2013 Plan to acquire up to 72,810 shares of Common Stock, and
during the years ended December 31, 2012 and 2011, we granted options under the Plans to acquire up to 432,971 and 95,604 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 $36.33 per share, and expire between March 9, 2014 and March 12, 2023.
Starting in 2013, employees who provide services to our publicly listed subsidiaries (Teekay LNG, Teekay Offshore and Teekay Tankers) received a
proportion of their annual equity compensation award under the equity compensation plan of the applicable subsidiary (the Teekay Tanker Ltd. 2007
Long-Term Incentive Plan, the Teekay Offshore Partners L.P. 2006 Long-Term Incentive Plan or the Teekay LNG Partners L.P. 2005 Long-Term
Incentive Plan), depending on their level of contribution towards the applicable subsidiary. These awards took the form of Restricted Stock Units (or
RSUs), which are described as Phantom Units under the Teekay Offshore Partners L.P. 2006 Long-Term Incentive Plan and the Teekay LNG
Partners L.P. 2005 Long-Term Incentive Plan, but we refer to all of these awards as RSUs for purposes of this disclosure. The RSUs vest and
become payable with respect to one-third of the shares on each of the first three years following the grant date and accrue dividends from the date
of the grant to the date of vesting.
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Board Practices
As at December 31, 2013, the Board of Directors consisted of 10 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 Dr. Ian D. Blackburne, William B. 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 2016. Directors Thomas Kuo-Yuen Hsu, Axel Karlshoej, Bjorn Moller, and Peter Evensen have terms
expiring in 2014.
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 Peter Evensen, our 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 2013 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 2013, the Board held seven
meetings. Each director attended all Board meetings, except for three directors who each missed one meeting. Each committee member attended
all applicable committee meetings, except for one meeting where one director was absent.
Our Audit Committee is composed entirely of directors who satisfy applicable NYSE and SEC audit committee independence standards. Our Audit
Committee is currently comprised of Eileen A. Mercier (Chairman), Peter S. Janson, and William B. Berry. 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.
Our Compensation and Human Resources Committee is currently comprised of 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.
Our Nominating and Governance Committee is currently comprised of 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.
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Crewing and Staff
As at December 31, 2013, we employed approximately 5,700 seagoing and 900 shore-based personnel, compared to approximately 5,600 seagoing
and 900 shore-based personnel as at December 31, 2012, and approximately 5,500 seagoing and 1,000 shore-based personnel as at December
31, 2011.
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 operations. 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 December 31, 2013, 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 March 1, 2014 (60 days after December 31, 2013) 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 as a group (18 persons)(1)
Shares Owned
3,047,593(3)
Percent of Class
4.3%(2)
(1)
Includes 2,289,698 shares of common stock subject to stock options exercisable by March 1, 2014 under the Company’s equity incentive plans with a weighted-
average exercise price of $36.47 that expire between March 10, 2015 and March 6, 2022. Excludes (a) 254,327 shares of common stock subject to stock options
exercisable after March 1, 2014 under the plans with a weighted average exercise price of $28.72, that expire between March 14, 2021 and March 12, 2023.
(2) Based on a total of approximately 70.7 million outstanding shares of our common stock as of December 31, 2013. 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 March 1, 2014 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 2015 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, 2014, 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, 2014 (60 days after March 1, 2014) through the exercise of any stock option or other right. Unless otherwise
indicated, each person or entity has sole voting and investment power 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)
Magnetar Financial LLC(3)
___________________________
Shares Owned
25,261,780
6,154,865
5,899,142
Percent of Class(4)
35.3%
8.6%
8.2%
(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. 6) filed by Resolute and Path with the SEC on December 3, 2013. Resolute's beneficial ownership was 35.7% on March 1, 2014, and 44.7% on March 1,
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2013. 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)
(3)
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 12,
2014.
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 14,
2014.
(4) Based on a total of 71.5 million outstanding shares of our common stock as of March 1, 2014.
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, 2014, Resolute owned approximately 35.3% 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 Offshore GP L.L.C. (the general partner of Teekay
Offshore) and Teekay GP L.L.C. (the general partner of Teekay LNG), and was also the Chairman of Teekay Tankers Ltd. from 2007 until 2013.
Bjorn Moller is one of Teekay’s current directors and is also a director of Teekay Tankers Ltd.. Mr. Moller also served as Teekay’s Chief Executive
Officer, Teekay Tankers’ Chief Executive Officer, and as a Vice Chairman and director of each of Teekay Offshore GP L.L.C. and Teekay GP
L.L.C., in each case until April 1, 2011. Peter Evensen, a Teekay director and President and Chief Executive Officer of Teekay, 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. In June 2013, Arthur Bensler was appointed Director and Chairman of Teekay Tankers Ltd. having served as Secretary since 2007.
Vincent Lok, Teekay's Executive Vice President and Chief Financial Officer, is also the Chief Financial Officer of Teekay Tankers. 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.
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 2013, these
reimbursement obligations totaled approximately $3.0 million, $3.8 million, and $3.2 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 2011 and 2012, these reimbursement obligations for Teekay Tankers,
Teekay Offshore and Teekay LNG totaled $1.7 million, $3.0 million, and $2.4 million; and $2.7 million, $4.0 million, and $3.7 million, respectively.
Relationships with Our Public Entity 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 Tankers’ initial public offering in December 2007. Teekay Tankers’ 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, 2014, we owned shares of Teekay Tankers' Class A and Class B common stock that represented an ownership interest of 25.1%
and voting power of 53.1% of Teekay Tankers' outstanding common stock.
Until December 31, 2012, Teekay Tankers distributed to its stockholders on a quarterly basis all of its Cash Available for Distribution, subject to any
reserves the board of directors may from time to time determine are required for the prudent conduct of the business. Cash Available for Distribution
represented 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 acquired
by Teekay Tankers from us, prior to their acquisition by Teekay Tankers, for the period when these vessels were owned and operated by us.
Effective January 1, 2013, Teekay Tankers changed to a fixed dividend policy of $0.12 per share per annum. We received distributions from Teekay
Tankers of $13.4 million, $7.1 million and $2.5 million in 2011, 2012 and 2013, respectively.
In late 2013, Teekay Tankers, along with us, agreed to create and co-invest $25 million each in TIL for a combined 20% initial ownership in TIL, as
part of a $250 million equity private placement by TIL. Please see “Management's Discussion and Analysis of Financial Condition and Results of
Operations - Significant Developments In 2013 And Early 2014 - Recent Developments in our Tanker Business” for additional information.
71
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, 2014, we owned a 27.3% limited partner and a 2% general partner interest in Teekay Offshore.
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, 2014, we owned a 33.3% 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 each of Teekay Offshore and Teekay LNG. 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 $48.7 million, $56.8 million, and $62.3 million,
respectively, with respect to 2011, 2012, and 2013.
Teekay received total distributions, including incentive distributions, from Teekay LNG of $76.0 million, $87.4 million, and $92.2 million, respectively,
with respect to 2011, 2012, and 2013.
Competition with Teekay Tankers, Teekay Offshore and Teekay LNG
We have 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 tankers, 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.
In addition, Teekay Tankers’ organization documents provide 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.
In June 2012, in connection with the acquisition by Teekay Tankers of 13 vessels from Teekay, we entered into a non-competition agreement with
Teekay Tankers that provides Teekay Tankers with a right of first refusal to participate in any future conventional crude oil tanker and product tanker
opportunities identified or developed by us for a period of three years.
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:
• We are obligated to offer to sell the Petrojarl Foinaven FPSO unit to Teekay Offshore, subject to approvals required from the charterer.
The purchase price for the Foinaven FPSO unit 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.
•
Pursuant to the omnibus agreement, we are only obligated to offer Teekay Offshore the Hummingbird Spirit FPSO unit following the
commencement of a charter contract with a firm period of greater than three years duration.
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 2013, four of Teekay Offshore's conventional tankers were chartered out to Teekay subsidiaries under long-term time charters, of
which two tankers were sold. Two of Teekay Offshore's shuttle tankers were chartered out to Teekay subsidiaries under short-term
72
projects. 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 $140.9 million, $102.8 million, and $70.2 million, respectively, for
2011, 2012, and 2013.
•
•
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 $11.0 million, $11.2 million, and $11.2 million, respectively, for 2011, 2012,
and 2013.
Since April 2008, Teekay has chartered 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 2011, 2012, and 2013, Teekay
LNG earned revenues of $35.1 million, $37.6 million, and $34.6 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 2011, 2012, and 2013, Teekay LNG and Teekay Offshore
incurred expenses of $18.2 million, $22.3 million, and $22.8 million; and $60.3 million, $59.9 million, and $64.4 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
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 2011, 2012, and 2013, Teekay Tankers
incurred $7.5 million, $9.9 million, and $16.4 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 for 2013, 2012 or 2011.
Pooling Arrangements. Certain Aframax tankers, Suezmax tankers and LR2 product 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 $325 (for the Suezmax tanker pool) to $350 (for the Aframax tanker pool and LR2 product 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 2011, 2012, and 2013 of $1.8 million, $3.6
million and $4.0 million, respectively.
Item 8. Financial Information
Consolidated Financial Statements and Notes
Please see Item 18 below for additional information required to be disclosed under this Item.
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 course 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 recent legal proceedings, please read "Item 18. Financial
Statements: Note 16 (c)—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
73
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 prices for our common stock on the
NYSE for each of the periods indicated.
Years Ended
Dec. 31,
2013
Dec. 31,
2012
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2009
High
Low
$48.13
$32.49
$36.60
$24.89
$37.93
$20.67
$33.96
$20.42
$24.94
$11.10
Quarters Ended
Mar. 31,
2014
Dec. 31,
2013
Sept. 30,
2013
Jun. 30,
2013
Mar. 31,
2013
Dec. 31,
2012
Sept. 30,
2012
Jun. 30,
2012
Mar. 31,
2012
High
Low
$60.42
$46.59
$48.13
$40.59
$42.91
$37.20
$41.27
$32.69
$36.69
$32.49
$32.97
$28.88
$33.70
$27.35
$36.60
$24.98
$35.60
$24.89
Months Ended
Mar. 31,
2014
Feb. 28,
2014
Jan. 31,
2014
Dec. 31,
2013
Nov. 30,
2013
Oct. 31,
2013
High
Low
$60.42
$54.99
$60.26
$51.93
$54.86
$46.59
$48.13
$41.75
$44.67
$42.53
$44.48
$40.59
Item 10. Additional Information
Memorandum and Articles of Association
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.
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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)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
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.
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 Holdings
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.
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.
Agreement, dated October 5, 2012, for NOK 700,000,000 Senior Unsecured Bonds due October 2015, among us and Norsk Tillitsmann
ASA. All payments are at NIBOR plus 4.75% per annum.
2013 Equity Incentive Plan.
Agreement, dated December 21, 2012 for a U.S. $200,000,000 Margin Loan Agreement among Teekay Finance Limited, Citibank, N.A.
and others.
Agreement, dated October 5, 2012, for NOK 700,000,000 Senior Unsecured Bonds due October 2015, among us and Norsk Tillitsman
ASA. All payments are at NIBOR plus 4.75% per annum.
Amendment Agreement, dated December 18, 2013 for a U.S. $300,000,000 Margin Loan Agreement among Teekay Finance Limited,
Citibank, N.A. and others.
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.
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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 certain 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 (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 categories 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
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, for U.S. federal income tax purposes: (i) a U.S. citizen
or U.S. resident alien (or a U.S. Individual Holder), (ii) a corporation or other entity taxable as a corporation, that was created or organized in or
under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate whose income is subject to U.S. federal income
taxation regardless of its source, or (iv) 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 Treasury Regulations to be
treated as a U.S. 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, which will be either long term or short term capital gain depending upon whether the U.S. Holder
has held the shares for more than one year. 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. For purposes of computing allowable foreign tax credits
for U.S. federal income tax purposes, dividends paid with respect to our common stock generally will be treated as foreign source income and
generally will be treated as “passive category income.”.
Dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate (or a Non-Corporate U.S. Holder) will be treated as
“qualified dividend income” that is taxable to such Non-Corporate U.S. 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 common
stock is traded); (ii) we are not classified as 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 classified as a PFIC, as discussed below); (iii) the Non-Corporate
U.S. 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
76
stock becomes ex-dividend; (iv) the Non-Corporate U.S. 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 Non-Corporate U.S. Holder. Any dividends paid on our common stock not eligible
for these preferential rates will be taxed as ordinary income to a Non-Corporate U.S. Holder.
Special rules may apply to any “extraordinary dividend” paid by us. An extraordinary dividend is, generally, a dividend with respect to a share of
common stock if the amount of the dividend is equal to or in excess of 10% of a common stockholder’s adjusted basis (or fair market value in certain
circumstances) in such common stock. In addition, extraordinary dividends include dividends received within a one year period that, in the
aggregate, equal or exceed 20% of a shareholder’s adjusted tax basis. If we pay an “extraordinary dividend” on our common stock that is treated as
“qualified dividend income,” then any loss derived by a Non-Corporate U.S. 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 Non-Corporate U.S. Holders are subject to a 3.8% tax on certain investment income, including dividends. Non-Corporate 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
Subject to the discussion of PFICs below, 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 generally will
be treated as (a) 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, or short -term capital gain or loss otherwise and (b) U.S.-source gain or loss, as applicable, for foreign tax credit purposes. Non-
Corporate U.S. Holders may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. A U.S. Holder’s ability
to deduct capital losses is subject to certain limitations.
Certain Non-Corporate U.S. Holders are subject to a 3.8% tax on certain investment income, including capital gains from the sale or other
disposition of stock. Non-Corporate 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 or are held for the production of passive
income. For purposes of these tests, “passive income” includes dividends, interest, 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 legal uncertainties arising from 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 2010-01) 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 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 each taxable year for which we are a PFIC that ends 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 income inclusions would not be eligible for the preferential tax rates applicable
to qualified dividend income. The Electing Holder’s adjusted tax basis in our 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 corresponding reduction in the Electing Holder’s
adjusted tax basis in our 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 U.S. 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 U.S. Holder’s holding period of our common stock during
which we qualified as a PFIC, the U.S. Holder may be treated as having made a timely QEF election by filing a QEF election with the U.S. 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 U.S. Holder would otherwise recognize if the U.S.
Holder sold the U.S. 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 U.S. Holder failed to file the QEF election documents in a timely manner. If a U.S. Holder
77
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 U.S. Holder’s holding
period of our common stock during which we qualified as a PFIC and the U.S. Holder did not make the deemed sale election described above, the
U.S. 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 U.S. Holder with certain information concerning our income and
gain, calculated in accordance with the Code, to be included with the U.S. 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 U.S. 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 our 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 our common stock in 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 U.S.
Holder held our common stock and for which (i) we were not a QEF with respect to such U.S. Holder and (ii) such U.S. Holder did not make a timely
mark-to-market election, such U.S. 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 U.S. 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
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 our common stock), and (ii) any gain realized on the
sale, exchange or other disposition of our common stock. Under these special rules:
•
•
•
•
the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for our 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.
Additionally, for each year during which a U.S. Holder owns shares, we are a PFIC, and the total value of all PFIC stock that such U.S. Holder
directly or indirectly owns exceeds certain thresholds, such U.S. Holder will be required to file IRS Form 8621 with its annual U.S. federal income tax
return to report its ownership of our common stock. In addition, if a Non-Electing Holder who is an individual dies while owning our common stock,
such Non-Electing Holder’s successor generally would not receive a step-up in tax basis with respect to such common stock.
U.S. Holders are urged to consult their own tax advisors regarding the PFIC rules, including the PFIC annual reporting requirements, as
well as 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 respective share 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.
78
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 financial assets, including stock in a foreign corporation that is not held in an account
maintained by a financial institution, with an aggregate value in excess of $50,000 on the last day of a taxable year, or $75,000 at any time during
that taxable year, may be required to report such assets on IRS Form 8938 with their U.S. federal income tax return for that taxable year. This
reporting requirement does not apply to U.S. Individual Holders who report their ownership of our shares under the PFIC annual reporting rules
described above. Penalties apply for failure to properly complete and file IRS Form 8938. Investors are encouraged to consult with their own tax
advisor regarding the possible application of this disclosure requirement.
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
In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on distributions received from us with respect to our common stock
unless the distributions are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required
by an applicable income tax treaty, are attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States). If a
Non-U.S. Holder is engaged in a U.S. trade or business and the distributions are deemed to be effectively connected to that trade or business, the
Non-U.S. Holder generally will be subject to U.S. federal income tax on those distributions in the same manner as if it were a U.S. Holder.
Sale, Exchange or Other Disposition of Common Stock
In general, a Non-U.S. Holder is not subject to U.S. federal income tax on any gain resulting from the disposition of our common stock unless (a)
such gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, is attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States) or (b) the Non-U.S. Holder
is an individual who is present in the United States for 183 days or more during the taxable year in which such disposition occurs and meets certain
other requirements. If a Non-U.S. Holder is engaged in a U.S. trade or business and the disposition of our common stock is deemed to be
effectively connected to that trade or business, the Non-U.S. Holder generally will be subject to U.S. federal income tax on the resulting gain in the
same manner as if it were a U.S. Holder.
Information Reporting and Backup Withholding
In general, payments of distributions with respect to, or the proceeds of a disposition of, our 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 made to them within
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 U.S. federal income
tax return with the IRS.
Non-United States Tax Considerations
Marshall Islands Tax Considerations. 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 be 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.
79
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. 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, drydocking and overhead costs in foreign currencies, the most significant of which are the Australian Dollar, British Pound, Canadian
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 our net foreign currency exposure for the
following nine to 12 months. We generally do not hedge our net foreign currency exposure beyond three years forward.
As at December 31, 2013, we had the following foreign currency forward contracts:
Norwegian Kroner
Canadian Dollar
Contract Amount
in Foreign
Currency (1)
641,100
10,000
Average
Forward Rate (2)
6.03
1.06
Fair Value /
Carrying Amount
of Asset (Liability) (3)
$
(1,424)
(56)
(1,480)
Expected Maturity
2014 (3)
2015 (3)
$
92,772
9,457
102,229
13,541
-
13,541
(1) Foreign currency contract amounts in thousands.
(2) Average contractual exchange rate represents the contractual amount of foreign currency one U.S. Dollar will buy.
(3) Contract amounts and fair value amounts in thousands of U.S. Dollars.
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, 2013, we had Euro-
denominated term loans of 247.6 million Euros ($340.2 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
net exposure to fluctuations in the Euro will not increase in the future.
We enter into cross currency swaps, and pursuant to these swaps we receive the principal amount in NOK on the maturity date of the swap, in
exchange for payment of a fixed U.S. Dollar amount. In addition, the cross currency swaps exchange a receipt of floating interest in NOK based on
NIBOR plus a margin for a payment of U.S. Dollar fixed interest. The purpose of the cross currency swaps is to economically hedge the foreign
currency exposure on the payment of interest and principal of our NOK bonds due in 2015 through 2018. In addition, the cross currency swaps
economically hedge the interest rate exposure on the NOK bonds due in 2015 through 2018. We have not designated, for accounting purposes,
these cross currency swaps as cash flow hedges of its NOK-denominated bonds due in 2015 through 2018. As at December 31, 2013, we were
committed to the following cross currency swaps:
Notional
Amount
NOK (1)
700,000
500,000
600,000
700,000
800,000
900,000
Notional
Amount
USD (1)
122,800
89,710
101,351
125,000
143,536
150,000
Floating Rate Receivable
Reference
Rate
NIBOR
NIBOR
NIBOR
NIBOR
NIBOR
NIBOR
Margin
4.75%
4.00%
5.75%
5.25%
4.75%
4.35%
Fixed
Rate
Payable
5.52%
4.80%
7.49%
6.88%
5.93%
6.43%
Fair Value /
Asset
(Liability) (1)
(8,550)
(8,185)
(5,503)
(13,247)
(11,744)
(4,990)
(52,219)
Remaining
Term (years)
1.8
2.1
3.1
3.3
4.1
4.7
(1)
In thousands of Norwegian Kroner and U.S. Dollars.
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,
NIBOR or EURIBOR. Significant increases in interest rates could adversely affect our operating margins, results of operations and our ability to
service our debt. We use interest rate swaps to reduce our exposure to market risk from changes in interest rates. Generally our approach is to
economically hedge a substantial majority of floating-rate debt associated with our vessels that are operating on long-term fixed-rate contracts. We
80
manage the rest of our debt based on our outlook for interest rates and other factors. We have not designated any of our interest rate swap
agreements in our consolidated entities as cash flow hedges for accounting purposes.
We are exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. 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 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.
The table below provides information about our financial instruments at December 31, 2013, that 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
2014
2015
2016
2017
2018
Thereafter
(in millions of U.S. dollars)
Fair Value
Asset /
(Liability)
Rate(1)
Total
Long-Term Debt:
Variable Rate ($U.S.)(2)
Variable Rate (Euro)(3)(4)
Variable Rate (NOK)(4)(5)
Fixed-Rate Debt ($U.S.)
Average Interest Rate
Capital Lease Obligations(6)
Variable-Rate ($U.S.)(7)
Average Interest Rate(8)
Interest Rate Swaps:
Contract Amount ($U.S.)(6)(9)
Average Fixed Pay Rate(2)
Contract Amount (Euro)(4)(10)
Average Fixed Pay Rate(3)
1,199.9
16.5
-
52.4
5.2%
62.0
8.5%
712.4
2.8%
16.5
3.1%
359.3
17.7
115.3
665.2
19.0
82.4
706.1
20.4
214.1
676.3
163.1
280.0
716.9
103.5
-
4,323.7
340.2
691.8
(4,301.1)
(313.9)
(714.2)
55.1
5.2%
56.3
5.2%
48.7
5.2%
56.4
5.2%
649.5
7.4%
918.4
6.8%
(786.3)
1.8%
1.8%
6.3%
6.8%
4.4
5.4%
4.6
5.4%
28.3
4.6%
26.3
6.4%
-
-
125.6
7.0%
(125.6)
7.0%
338.1
3.8%
17.7
3.1%
759.2
2.7%
19.0
3.1%
412.0
3.9%
20.4
3.1%
271.5
3.1%
163.0
2.6%
1,024.2
4.9%
103.6
3.8%
3,517.5
3.6%
340.2
3.1%
(301.7)
(31.7)
3.6%
3.1%
(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, 2013, ranged from 0.3% to 4.5%. 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 and NOK-denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of December 31, 2013.
(5)
Interest payments on our NOK-denominated debt and on our cross currency swaps are based on NIBOR. Our NOK-denominated debt has been economically
hedged with 12 cross currency swaps, to swap all interest and principal payments at maturity into U.S. Dollars, with the interest payments fixed at a rate between
4.80% to 7.49% and interest rate payments swapped from NIBOR plus a margin between 4.00% to 5.75% and the transfer of principal fixed between $89.7 million
to $150.0 million upon maturity in exchange for NOK 500 million to NOK 900 million.
(6) 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, 2013 totaled $475.6 million, and the lease obligations, which as
at December 31, 2013 totaled $472.8 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, 2013, 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 $404.5 million and $469.0 million, ($66.8) million and $81.1 million, and 4.9% and 4.8%, respectively.
(7) The amount of capital lease obligations represents the present value of minimum lease payments together with our purchase obligation, as applicable.
(8) The average interest rate is the weighted-average interest rate implicit in the capital lease obligations at the inception of the leases. Interest rate adjustments on
these leases have corresponding adjustments in charter receipts under the terms of the charter contracts related to these leases.
(9) The average variable receive rate for our interest rate swaps is set quarterly at the 3-month LIBOR or semi-annually at the 6-month LIBOR.
(10) The average variable receive rate for our Euro-denominated interest rate swaps is set at 1-month EURIBOR.
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, 2013, we were
not committed to any bunker fuel swap contracts.
81
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 entered 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, 2013 and 2012, we had no FFA commitments.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
PART II
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. 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 U.S. 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 persons 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, 2013.
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 directors; 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 (1992) 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.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements even when 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, 2013.
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 financial reporting can be found on
page F-2 of this Annual Report.
82
During 2013, 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.
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 2013 and 2012 was KPMG 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 for 2013 and 2012.
Fees (in thousands of U.S. dollars)
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total
2013
$3,349
44
51
50
$3,494
2012
$3,437
68
50
-
$3,555
(1)
(2)
(3)
(4)
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 2013 and 2012 include
approximately $837,000 and $719,000, respectively, of fees paid to KPMG 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 2013 and 2012 include approximately $771,000 and $716,000, respectively, of fees paid to KPMG
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 2013 and 2012 include approximately $225,000 and $359,000, respectively, of fees paid to KPMG 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 2013 and 2012, tax fees principally included international tax planning fees and corporate tax compliance fees.
All other fees principally relate to due diligence services provided in the year.
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
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 2013.
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, 2013, 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, 2013, was $37.7 million. During 2013 and under a separate authorization, Teekay
repurchased 0.3 million shares of Common Stock for $12.0 million from Resolute Investments Ltd.
Item 16F. Change in Registrant's Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
The following are the significant ways in which our corporate governance practices differ from those followed by domestic companies:
83
•
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, are filed as part of this Annual Report:
Page
Report of Independent Registered Public Accounting Firm ................................................................................................
F-1 to F-2
Consolidated Financial Statements
Consolidated Statements of Income (Loss) ................................................................................................................................
F-3
Consolidated Statements of Comprehensive Income (Loss) ................................................................................................
F-4
Consolidated Balance Sheets ................................................................................................................................................................
F-5
Consolidated Statements of Cash Flows ................................................................................................................................
F-6
Consolidated Statements of Changes in Total Equity ............................................................................................................................
F-7
Notes to the Consolidated Financial Statements ................................................................................................................................
F-8
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.
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
2.9
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
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)
Agreement, dated October 5, 2012, for NOK 700,000,000 Senior Unsecured Bonds due October 2015, among us and Norsk Tillitsmann
ASA.
1995 Stock Option Plan. (2)
Amendment to 1995 Stock Option Plan. (5)
Amended 1995 Stock Option Plan. (6)
Amended 2003 Equity Incentive Plan. (19)
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)
84
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
8.1
12.1
12.2
13.1
13.2
23.1
16.1
16.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
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 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. (14)
2013 Equity Incentive Plan. (18)
Agreement, dated December 21, 2012 for a U.S. $200,000,000 Margin Loan Agreement among Teekay Finance Limited, Citibank, N.A.
and others. (20)
Amendment Agreement, dated December 18, 2013 for a U.S. $300,000,000 Margin Loan Agreement among Teekay Finance Limited,
Citibank, N.A. and others.
List of Significant Subsidiaries.
Rule 13a-14(a)/15d-14(a) Certification of Teekay’s Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Teekay’s Chief Financial Officer.
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.
Consent of KPMG LLP, as independent registered public accounting firm.
Letter of Ernst & Young LLP, dated June 6, 2011, regarding change in independent registered public accounting firm. (17)
Letter of KPMG LLP, dated June 6, 2011, regarding change in independent registered public accounting firm. (17)
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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.
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 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 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.
85
(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.
(17) Previously filed as an exhibit to our Report on Form 6-K (File No.1-12874), filed with the SEC on June 6, 2011, and hereby incorporated by
reference to such Report.
(18) Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (Registration No. 333-187142), filed with the SEC on
March 8, 2013, and hereby incorporated by reference to such Registration Statement.
(19) Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 25, 2012, and hereby
incorporated by reference to such Report.
(20) Previously filed as an exhibit to the Company’s Report on Form 20-F (File No. 1-12874), filed with the SEC on April 29, 2013, and hereby
incorporated by reference to such Report.
86
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
(Principal Financial and Accounting Officer)
By: /s/ Vincent Lok
Vincent Lok
Executive Vice President and Chief Financial Officer
Dated: April 28, 2014
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
TEEKAY CORPORATION
We have audited the accompanying consolidated balance sheets of Teekay Corporation and subsidiaries (the “Company”)
as of December 31, 2013 and 2012, and the related consolidated statements of income (loss), comprehensive income
(loss), cash flows, and changes in total equity for each of the years in the three-year period ended December 31, 2013.
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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2013, 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, 2013, based on criteria established in
Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated April 28, 2014 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
April 28, 2014
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") internal control over financial reporting as of
December 31, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) 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 the 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
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of 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, 2013 based on the criteria established in Internal Control—Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of the Company as at December 31, 2013 and 2012, and the related consolidated
statements of income (loss), comprehensive income (loss), cash flows, and changes in total equity for each of the years in
the three-year period ended December 31, 2013, and our report dated April 28, 2014, expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
April 28, 2014
F - 2
TEEKAY CORPORATION AND SUBSIDIARIES (NOTE 1)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands of U.S. dollars, except share amounts)
Year Ended
December 31,
2013
$
Year Ended
December 31,
2012
$
Year Ended
December 31,
2011
$
REVENUES
1,830,085
1,980,771
1,976,022
OPERATING EXPENSES
Voyage expenses
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (note 12)
Asset impairments (note 18b)
Loan loss provisions (note 18b)
Net (gain) loss on sale of vessels and equipment (note 18a)
Bargain purchase gain (note 3a)
Goodwill impairment charge (note 6)
Restructuring charges (note 20)
Total operating expenses
112,218
806,152
103,646
431,086
140,958
167,605
748
(1,995)
-
-
6,921
1,767,339
138,283
813,326
130,739
455,898
144,296
432,196
1,886
6,975
-
-
7,565
2,131,164
176,614
749,939
214,179
428,608
173,604
155,288
-
(4,229)
(68,535)
36,652
5,490
1,867,610
Income (loss) from vessel operations
62,746
(150,393)
108,412
OTHER ITEMS
Interest expense
Interest income
Realized and unrealized gain (loss) on non-designated derivative instruments (note 15)
Equity income (loss) (notes 18b and 23)
Foreign exchange (loss) gain (notes 8 and 15)
Other income (note 14)
Net income (loss) before income taxes
Income tax (expense) recovery (note 21)
Net income (loss)
Less: Net (income) loss attributable to non-controlling interests
Net loss attributable to stockholders of Teekay Corporation
(181,396)
9,708
18,414
136,538
(13,304)
5,646
38,352
(2,872)
35,480
(150,218)
(114,738)
(167,615)
6,159
(80,352)
79,211
(12,898)
366
(325,522)
14,406
(311,116)
150,936
(160,180)
(137,604)
10,078
(342,722)
(35,309)
12,654
12,360
(372,131)
(4,290)
(376,421)
17,805
(358,616)
Per common share of Teekay Corporation (note 19)
• Basic loss attributable to stockholders of Teekay Corporation
• Diluted loss 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.
(1.63)
(1.63)
1.2650
(2.31)
(2.31)
1.2650
(5.11)
(5.11)
1.2650
70,457,968
70,457,968
69,263,369
69,263,369
70,234,817
70,234,817
F - 3
TEEKAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands of U.S. dollars)
Year Ended
Year Ended
December 31, December 31, December 31,
2012
$
2013
$
2011
$
Year Ended
Net income (loss)
35,480
(311,116)
(376,421)
Other comprehensive (loss) income:
Other comprehensive (loss) income before reclassifications
Unrealized loss on marketable securities
Unrealized (loss) gain on qualifying cash flow hedging instruments
Pension adjustments, net of taxes
Foreign exchange gain on currency translation
Amounts reclassified from accumulated other comprehensive (loss) income
To other income:
Impairment of marketable securities
To general and administrative expenses:
Realized loss (gain) on qualifying cash flow hedging instruments
Settlement of defined benefit pension plan
Other comprehensive (loss) income
Comprehensive income (loss)
Less: Comprehensive (income) loss attributable to non-controlling
interests
Comprehensive loss attributable to stockholders of Teekay
Corporation
The accompanying notes are an integral part of the consolidated financial statements.
(2,233)
(431)
(3,640)
740
(1,904)
2,412
6,698
1,144
(4,357)
2,019
(5,402)
-
2,062
2,560
(3,372)
257
974
(2,271)
33,209
(1,435)
-
9,475
(301,641)
(5,566)
-
(16,678)
(393,099)
(150,368)
150,601
18,751
(117,159)
(151,040)
(374,348)
F - 4
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 $109,114 (2012 - $83,046) and related party balance of
$16,371 (2012 - $9,101)
Assets held for sale (notes 11 and 18)
Net investment in direct financing leases (note 9)
Prepaid expenses and other
Current portion of loans to equity accounted investees
Current portion of investment in term loans (note 4)
Current portion of derivative assets (note 15)
Total current assets
Restricted cash - non-current (note 10)
Vessels and equipment (note 8)
At cost, less accumulated depreciation of $2,135,780 (2012 - $1,976,257)
Vessels under capital leases, at cost, less accumulated amortization of $152,020
(2012 – $133,228) (note 10)
Advances on newbuilding contracts (note 16a)
Total vessels and equipment
Net investment in direct financing leases - non-current (note 9)
Loans to equity accounted investees and joint venture partners, bearing interest between nil
to 8% (note 23)
Derivative assets (note 15)
Equity accounted investments (note 16b, 18b and 23)
Investment in term loans (note 4)
Other non-current assets
Intangible assets – net (note 6)
Goodwill (note 6)
Total assets
LIABILITIES AND EQUITY
Current
Accounts payable
Accrued liabilities (notes 7 and 15)
Liabilities associated with assets held for sale (notes 8, 11 and 18)
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
Total current liabilities
Long-term debt, including amounts due to joint venture partners of $13,282 (2012 - $13,282) (note 8)
Long-term obligation under capital leases (note 10)
Derivative liabilities (note 15)
In-process revenue contracts
Other long-term liabilities
Total liabilities
Commitments and contingencies (note 8, 9, 10, 15 and 16)
Redeemable non-controlling interest (note 16d)
Equity
Common stock and additional paid-in capital ($0.001 par value; 725,000,000 shares
authorized; 70,729,399 shares outstanding (2012 - 69,704,188); 71,528,599 shares issued
(2012 - 70,203,388) (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.
F - 5
As at
December 31,
2013
$
As at
December 31,
2012
$
614,660
4,748
528,594
176,247
21,545
57,158
37,019
211,579
23,040
1,674,590
497,984
639,491
39,390
491,656
22,364
12,303
61,549
139,183
117,820
31,669
1,555,425
494,429
6,012,940
6,004,324
571,692
766,512
7,351,144
705,717
132,229
69,797
690,309
-
159,494
107,898
166,539
11,555,701
98,415
466,824
168,007
143,999
996,425
31,668
40,176
1,945,514
5,113,045
566,661
299,570
139,676
271,621
8,336,087
624,059
692,675
7,321,058
424,298
67,720
148,581
480,043
68,114
149,682
126,136
166,539
11,002,025
111,474
367,282
-
115,835
797,411
70,272
60,627
1,522,901
4,762,303
567,302
528,187
180,964
220,079
7,781,736
16,564
28,815
713,760
435,217
2,071,262
(17,189)
3,203,050
681,933
648,224
1,876,085
(14,768)
3,191,474
11,555,701
11,002,025
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 income (loss)
Non-cash items:
Depreciation and amortization
Amortization of in-process revenue contracts (note 6)
(Gain) loss on sale of vessels and equipment (note 18a)
Goodwill impairment charge
Write-down of equity accounted investments (note 18b)
Asset impairments and loan loss provisions (note 18b)
Bargain purchase gain (note 3a)
Equity (income) loss, net of dividends received
Income tax expense (recovery)
Employee stock option compensation
Unrealized foreign exchange (gain) loss
Unrealized (gain) loss 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
Decrease (increase) in restricted cash (note 10)
Net proceeds from equity issuances of subsidiaries (note 5)
Equity contribution by joint venture partner
Repurchase of Common Stock (note 12)
Distribution from subsidiaries to non-controlling interests
Cash dividends paid
Other financing activities
Year Ended
December 31,
2013
$
Year Ended
December 31,
2012
$
Year Ended
December 31,
2011
$
35,480
(311,116)
(376,421)
431,086
(61,700)
(1,995)
-
-
168,353
-
(121,144)
2,872
7,320
(40,241)
(113,344)
(6,082)
64,184
(72,205)
292,584
2,467,795
(15,967)
(695,688)
(1,017,818)
(10,315)
31,776
446,893
4,934
(12,000)
(269,987)
(90,265)
27,219
455,898
(72,933)
6,975
-
1,767
434,082
-
(65,639)
(14,406)
9,393
22,137
(40,373)
13,383
(115,209)
(35,023)
288,936
1,417,870
(10,595)
(266,242)
(1,060,169)
(10,161)
(33,592)
496,224
86,350
-
(246,555)
(83,299)
9,840
428,608
(46,436)
(4,229)
36,652
19,411
155,288
(68,535)
31,376
4,290
16,262
(11,614)
70,822
(8,314)
(84,347)
(55,620)
107,193
2,114,879
(10,634)
(449,640)
(881,207)
(89,145)
73,105
631,057
-
(122,195)
(201,942)
(93,480)
5,847
Net financing cash flow
866,577
299,671
976,645
INVESTING ACTIVITIES
Expenditures for vessels and equipment
Proceeds from sale of vessels and equipment
Acquisition of FPSO units and Sevan Marine ASA, net of cash acquired (note 3a)
Investment in term loans (note 4)
Investment in equity accounted investees (note 23)
Advances to equity accounted investees
Investment in direct financing lease assets (note 9)
Direct financing lease payments received
Other investing activities
(753,755)
47,704
-
(12,552)
(157,762)
(14,466)
(307,950)
17,289
(2,500)
(523,597)
250,807
(92,303)
-
(183,554)
(117,235)
-
23,307
1,332
(755,045)
33,424
(322,500)
(70,000)
(38,496)
(55,156)
-
27,608
8,706
Net investing cash flow
(1,183,992)
(641,243)
(1,171,459)
Decrease 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.
(24,831)
639,491
614,660
(52,636)
692,127
639,491
(87,621)
779,748
692,127
F - 6
TEEKAY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
(in thousands of U.S. dollars and shares)
TOTAL EQUITY
Thousands
of Shares
of Common
Stock
Outstand-
ing
#
Common
Stock and
Addi-
tional
Paid-in
Capital
$
Accumul-
ated Other
Compre-
hensive
Income
(Loss)
$
Non-
control-
ling
Interest
$
Retained
Earnings
$
Redee-
mable
Non-
control-
ling
Interest
$
Total
$
Balance as at December 31, 2010
72,013
672,684
1,313,934
(8,171)
1,353,561
3,332,008
41,725
Net loss
Reclassification of redeemable non-controlling
interest in net income
Other comprehensive loss
Dividends declared
Reinvested dividends
Exercise of stock options and other (note 12)
Repurchase of Common Stock (note 12)
Employee stock compensation (note 12)
Dilution gains on public offerings of Teekay
LNG, Teekay Tankers and unit issuances
of Teekay Offshore (note 5)
Sale of 49% interest of OPCO to Teekay
Offshore
Acquisition of Voyageur FPSO unit (note 3a)
Additions to non-controlling interest from
share and unit issuances of subsidiaries
and other
Balance as at December 31, 2011
Net loss
Reclassification of redeemable non-controlling
interest in net income
Other comprehensive income
Dividends declared
Reinvested dividends
Exercise of stock options and other (note 12)
Employee stock compensation (note 12)
Dilution gain on public offerings of Teekay
Offshore, Teekay Tankers, Teekay LNG and
share issuance of Teekay Offshore (note 5)
Additions to non-controlling interest from
share and unit issuances of subsidiaries
and other
Balance as at December 31, 2012
Net (loss) income
Reclassification of redeemable non-controlling
interest in net income
Other comprehensive income
Dividends declared
Reinvested dividends
Exercise of stock options and other (note 12)
Repurchase of Common Stock (note 12)
Employee stock compensation (note 12)
Dilution gain on public offerings of Teekay LNG,
Teekay Offshore and Teekay Tankers (note 5)
Excess of purchase price over the carrying value
upon acquisition of Variable Interest
Entity (note 3a)
Additions to non-controlling interest from share and
unit issuances of subsidiaries and other
Balance as at December 31, 2013
(358,616)
(17,805)
(376,421)
1
641
(3,923)
9
5,906
(33,944)
16,262
(93,489)
(88,251)
124,247
(94,843)
(15,732)
(6,601)
(946)
(201,942)
6,601
(10,019)
(6,601)
(16,678)
(295,431)
9
5,906
(122,195)
16,262
124,247
94,843
144,600
-
144,600
68,732
660,917
802,982
(23,903)
498,088
1,863,798
498,088
3,303,794
38,307
(160,180)
(150,936)
(311,116)
(83,305)
9,135
4,520
340
(241,583)
1
971
6
11,617
9,393
88,727
(4,520)
(4,972)
4,520
9,475
(324,888)
6
11,617
9,393
88,727
69,704
681,933
648,224
(14,768)
399,946
1,876,085
399,946
3,191,474
28,815
(114,738)
150,218
35,480
1
1,324
(300)
8
27,219
(2,722)
7,322
(90,273)
(9,278)
36,703
(35,421)
(2,421)
6,391
150
(263,141)
(6,391)
(5,860)
6,391
(2,271)
(353,414)
8
27,219
(12,000)
7,322
36,703
(35,421)
70,729
713,760
435,217
(17,189)
301,559
2,071,262
301,559
3,203,050
16,564
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
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 affect
the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Given the
current credit markets, it is possible that the amounts recorded as derivative assets and liabilities could vary by material amounts.
In order to more closely align the Company’s presentation to many of its peers, the cost of ship management activities of $80.9 million related
to the Company’s fleet and to services provided to third parties for 2013 have been presented as vessel operating expenses. For 2013,
revenues of $23.2 million from ship management activities provided to third parties have been presented in revenues. Prior to 2013, the
Company included these amounts in general and administrative expenses. All such costs incurred and revenues recorded in comparative
periods have been reclassified from general and administrative expenses to vessel operating expenses and revenues to conform to the
presentation adopted in the current period. The amounts reclassified from general and administrative expenses to vessel operating expenses
were $83.2 million and $72.3 million for 2012 and 2011, respectively. The amounts reclassified from general and administrative expenses to
revenues were $24.5 million and $22.2 million for 2012 and 2011, respectively.
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 proportionate performance method. The Company uses a
discharge-to-discharge basis in determining proportionate performance 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 offloading (or FPSO) 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. Revenues and expenses relating to engineering studies are recognized when service is
completed, unless the expenses are not recoverable in which case the expenses are recognized as incurred. The consolidated balance sheets
reflect the deferred portion 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 balances
are reviewed for collectability. Account balances are charged off against the allowance when the Company believes that the receivable will not
be recovered. There was no significant amounts recorded as allowance for doubtful accounts as at December 31, 2013, 2012, and 2011.
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)
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 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 tankers carrying crude oil and refined product, 20 to 25 years for FPSO units, 35 years
for liquefied natural gas (or LNG) and 30 years for 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 those periods of time. Floating storage and
off take (or FSO) units are depreciated over the term of the contract. 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, 2013, 2012, and 2011 aggregated $346.5 million, $364.3 million and $356.0 million, respectively. Amortization of
vessels accounted for as capital leases was $22.8 million, $30.1 million and $34.7 million for the years ended December 31, 2013, 2012, and
2011, 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, 2013, 2012, and 2011, aggregated $14.6 million, $34.9
million and $8.1 million, respectively.
Generally, the Company dry docks each tanker and gas carrier 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, 2013, 2012, and 2011, is summarized as follows:
Balance at the beginning of the year
Costs incurred for drydocking
Dry-dock amortization
Write down / sale of vessels
Balance at the end of the year
2013
$
100,928
72,545
(50,325)
(4,954)
118,194
Year Ended December 31,
2012
$
128,987
35,336
(57,082)
(6,313)
100,928
2011
$
143,103
54,296
(67,180)
(1,232)
128,987
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. The estimated fair value for the Company’s
impaired vessels is determined using discounted cash flows or appraised values. In cases where an active second hand sale and purchase
market does not exist, the Company uses a discounted cash flow approach to estimate the fair value of an impaired vessel. In cases where an
active second hand sale and purchase market exists an appraised value is used to estimate the fair value of an impaired vessel. An appraised
value is generally the amount the Company would expect to receive if it were to sell the vessel. Such appraisal is normally completed by the
Company and based on second-hand sale and purchase data.
Vessels and equipment that are “held for sale” are measured at the lower of their carrying amount or fair value less costs to sell and are not
depreciated while classified as held for sale. Interest and other expenses attributable to vessels and equipment classified as held for sale, or to
their related liabilities, continue to be recognized as incurred.
F - 9
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
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 (i) employs two vessels on long-term time charters and employs an FSO unit, and (ii) 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 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 was amortized
to interest income over the term of the loan using the effective interest rate method. The Company analyzes its loans for collectability 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 (when available) any information provided by the debtor regarding their ability to repay the loan and
the fair value of the underlying collateral. 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
statements of income (loss). The carrying value of the loans will be adjusted each subsequent reporting period to reflect any changes in the
present value of estimated future cash flows.
The following table contains a summary of the Company’s financing receivables by type of borrower, the method by which the Company
monitors the credit quality of its financing receivables on a quarterly basis, and the grade as of December 31, 2013.
Class of Financing Receivable
Direct financing leases
Other loan receivables
Credit Quality
Indicator
Grade
$
$
December 31,
2013
2012
Payment activity
Performing
727,262
436,601
Investment in term loans and interest receivable
Collateral
Non-
Performing(2)
211,579
188,756
Loans to equity accounted investees and joint
venture partners (1)
Long-term receivable included in other assets
Other internal metrics
Payment activity
Performing
Performing
169,248
31,634
1,139,723
206,903
1,704
833,964
(1) The Company’s subsidiary Teekay LNG Partners L.P. (or Teekay LNG) owns a 99% interest in Teekay Tangguh, which owns a 70% interest in the Teekay
Tangguh Joint Venture. During the year ended December 31, 2012, the parent company of Teekay LNG‘s joint venture partner, BLT, suspended trading on
the Jakarta Stock Exchange and entered into a court-supervised debt restructuring in Indonesia. The remaining loans to joint venture partner, BLT LNG
Tangguh Corporation, totaling $28.5 million as at December 31, 2013 (December 31, 2012 - $24.0 million) are collectible given a signed settlement
agreement between the Company and BLT LNG Tangguh Corporation regarding repayment terms. In February 2014, the Teekay Tangguh Joint Venture
declared dividends of $69.5 million of which $14.4 million was used to offset the total advances to BLT LNG Tangguh Corporation and P.T. Berlian Laju
Tanker and $6.5 million was repaid to Teekay by BLT LNG Tangguh Corporation. In addition, $0.5 million was paid to Teekay by BLT as part of the
settlement agreement.
(2) On March 21, 2014, Teekay and its publicly-listed subsidiary Teekay Tankers Ltd. (or Teekay Tankers) took ownership of the vessels held as collateral in
satisfaction of the loans and accrued interest. (See Note 4)
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 statements of income (loss).
F - 10
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
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 sheets 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 qualifies for hedge
accounting. The Company does not apply hedge accounting to its derivative instruments, except for certain foreign exchange currency
contracts and certain types of interest rate swaps (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.
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 statements 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 statements 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 statements 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 statements of income (loss).
For derivative financial instruments that are not designated or that do not qualify as hedges under Financial Accounting Standards Board (or
FASB) Accounting Standards Codification (or 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 is not amortized, but reviewed for impairment at the reporting unit level on an annual basis or more frequently if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. When goodwill is
reviewed for impairment, the Company may elect to assess qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, including goodwill. Alternatively, the Company may bypass this step and use a fair value
approach to identify potential goodwill impairment and, when necessary, measure the amount of impairment. The Company uses a discounted
cash flow model to determine the fair value of reporting units, unless there is a readily determinable fair market value. Intangible assets 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, 2013, the ARO and associated receivable
F - 11
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
which is recorded in other non-current assets were $27.2 million and $7.5 million, respectively (2012 - $24.7 million and $6.4 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.
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.
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. 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 income (loss)
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,
net of tax
$
Balance as of December 31, 2010
Other comprehensive loss
2,295
(2,601)
Balance as of December 31, 2011
Other comprehensive income
Balance as of December 31, 2012
Other comprehensive (loss)
income
(306)
647
341
(324)
(17,539)
(5,402)
(22,941)
6,688
(16,253)
(2,666)
Balance as of December 31, 2013
17
(18,919)
Unrealized Gain
(Loss) on
Available for
Sale Marketable
Securities
$
7,073
(7,729)
(656)
656
-
(171)
(171)
Foreign
Exchange Loss
on Currency
Translation
$
-
-
-
1,144
Total
$
(8,171)
(15,732)
(23,903)
9,135
1,144
(14,768)
740
(2,421)
1,884
(17,189)
F - 12
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Employee pension plans
The Company has 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 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, salary 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 loss, the gains or losses that arise during a period but that are not recognized as part of net periodic benefit
costs.
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.
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 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 are 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, 2013, 2012, and 2011.
Year ended December 31, 2013
Revenues
Voyage expenses
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments
Loan loss provisions
Net gain on sale of vessels and equipment
Restructuring charges
Income (loss) from vessel operations
Total assets of operating segments at
December 31, 2013
Shuttle
Tanker and FSO
Segment
FPSO
Segment
Liquefied
Gas
Segment
Conventional
Tanker
Segment
$
$
$
$
583,201
99,111
182,973
56,682
116,376
37,529
76,782
-
-
2,123
11,625
567,620
-
364,986
-
151,365
51,891
-
2,634
(1,338)
-
(1,918)
298,228
602
61,471
-
71,485
19,597
-
-
-
-
145,073
381,036
12,505
196,722
46,964
91,860
31,941
90,823
(1,886)
(657)
4,798
(92,034)
Total
$
1,830,085
112,218
806,152
103,646
431,086
140,958
167,605
748
(1,995)
6,921
62,746
1,947,905
2,836,998
3,616,044
1,874,101
10,275,048
F - 13
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Year ended December 31, 2012
Revenues
Voyage expenses
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments
Loan loss provisions
Net loss on sale of vessels and equipment
Restructuring charges
Income (loss) from vessel operations
Total assets of operating segments at
December 31, 2012
Shuttle
Tanker and FSO
Segment
FPSO
Segment
Liquefied
Gas
Segment
Conventional
Tanker
Segment
$
$
$
$
616,295
104,382
196,021
56,989
125,104
36,484
28,830
-
1,112
652
66,721
581,215
232
354,020
-
135,413
45,139
-
-
-
-
46,411
291,712
283
54,773
-
69,064
18,643
-
-
-
-
148,949
491,549
33,386
208,512
73,750
126,317
44,030
403,366
1,886
5,863
6,913
(412,474)
Total
$
1,980,771
138,283
813,326
130,739
455,898
144,296
432,196
1,886
6,975
7,565
(150,393)
1,709,674
2,824,832
3,148,037
2,037,394
9,719,938
Year ended December 31, 2011
Shuttle
Tanker and FSO
Segment
FPSO
Segment
Liquefied
Gas
Segment
Conventional
Tanker
Segment
Revenues
Voyage expenses
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative (1)
Asset impairments
Net loss (gain) on sale of vessels and
equipment
Bargain purchase gain
Goodwill impairment
Restructuring charges
Income (loss) from vessel operations
$
617,650
97,743
216,183
74,478
129,293
44,594
43,185
171
-
-
5,351
6,652
$
$
$
464,810
-
255,925
-
96,915
39,261
-
(4,888)
(68,535)
-
-
146,132
273,786
4,862
54,174
-
63,641
16,315
-
-
-
-
-
134,794
619,776
74,009
223,657
139,701
138,759
73,434
112,103
488
-
36,652
139
(179,166)
Total
$
1,976,022
176,614
749,939
214,179
428,608
173,604
155,288
(4,229)
(68,535)
36,652
5,490
108,412
(1) 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, 2013
December 31, 2012
$
10,275,048
614,660
665,993
11,555,701
$
9,719,938
639,491
642,596
11,002,025
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.
F - 14
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
(U.S. dollars in millions)
Statoil ASA (1)
Petroleo Brasileiro SA (1)
BP PLC (2)
Year Ended
December 31,
2013
$250.5 or 14%
$244.3 or 13%
$182.5 or 10%
Year Ended
December 31,
2012
$299.1 or 15%
$289.3 or 15%
(3)
Year Ended
December 31,
2011
$283.7 or 14%
$224.9 or 11%
(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%
3. Acquisitions
a) 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 Spirit)
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 Spirit) and its existing customer contract for approximately $164 million (including an adjustment for working capital). The purchase
price for the acquisitions of the Hummingbird Spirit, the Piranema Spirit and the investment in Sevan were paid in cash and financed by a
combination of new debt facilities, a private placement of Teekay Offshore common units and existing liquidity.
On November 30, 2011, Teekay entered into an agreement to acquire an FPSO unit, the Sevan Voyageur (or Voyageur Spirit), and its existing
customer contract from Sevan. Teekay agreed to acquire the Voyageur Spirit once the existing upgrade project was completed and the
Voyageur Spirit commenced operations under its customer contract. In September 2012, the Voyageur Spirit completed its upgrade at the Nymo
shipyard and arrived at the Huntington Field in the U.K. sector of the North Sea in October 2012. Under the terms of the acquisition agreement,
Teekay prepaid Sevan $94 million to acquire the Voyageur Spirit, assumed the Voyageur Spirit’s existing $230.0 million credit facility, which had
an outstanding balance of $220.5 million on November 30, 2011, and was responsible for all upgrade costs incurred after November 30, 2011,
which were estimated to be between $140 million and $150 million. Teekay had control over the upgrade project and had guaranteed the
repayment of the existing credit facility.
On April 13, 2013, the Voyageur Spirit FPSO unit began production on the Huntington Field and commenced its five-year charter with E.ON
Ruhrgas UK E&P Limited (or E.ON). On May 2, 2013, Teekay completed the acquisition of the Voyageur Spirit FPSO unit. The excess of the
price paid over the carrying value of the non-controlling interest acquired was $35.4 million and has been accounted for as a reduction to equity.
Immediately thereafter, the FPSO unit was sold by Teekay to Teekay Offshore for an initial purchase price of $540.0 million that was effectively
reduced to $509.4 million as at December 31, 2013 (see below). The Voyageur Spirit FPSO unit has been consolidated by the Company since
November 30, 2011, as the Voyageur Spirit FPSO unit was a variable interest entity (or VIE) and the Company was the primary beneficiary from
November 30, 2011 until its purchase in May 2013.
Upon commencing production on April 13, 2013, the Voyageur Spirit FPSO unit had a specified time period to receive final acceptance from the
charterer, E.ON, at which point the unit would commence full operations under the contract with E.ON. However, due to a defect encountered in
one of its two gas compressors, the FPSO unit was unable to achieve final acceptance within the allowable timeframe, resulting in the FPSO
unit being declared off-hire by the charterer retroactive to April 13, 2013. This resulted in $29.2 million of the charter rate being foregone from
April 13, 2013 to August 26, 2013.
On August 27, 2013, repairs to the defective gas compressor on the Voyageur Spirit FPSO were completed and the unit achieved full production
capacity. On September 30, 2013, Teekay Offshore entered into an interim agreement with E.ON whereby Teekay Offshore was compensated
for production beginning August 27, 2013 through until final acceptance by E.ON. Compensation was based on actual production relative to the
operating capacity of the FPSO unit; however, any restrictions on production as a result of the charterer were included in this compensation.
Teekay has indemnified Teekay Offshore for a further $2.1 million for the production shortfall from August 27, 2013 to December 31, 2013. In
addition, Teekay Offshore has been indemnified for a further $3.6 million associated with unrecovered repair costs to address the compressor
issues. Teekay’s indemnification to Teekay Offshore for loss of the charter rate under the charter agreement with E.ON and unrecovered vessel
operating expenses from the date of first oil on April 13, 2013 until receipt of the certificate of final acceptance from E.ON, is subject to a
maximum of $54 million.
In April 2014, Teekay Offshore received the certificate of final acceptance from the charterer, which declared the unit on-hire retroactive to
February 22, 2014.
Any amounts paid as indemnification from Teekay to Teekay Offshore are effectively treated for accounting purposes as a reduction in the
purchase price paid by Teekay Offshore for the FPSO unit. Any compensation received by Teekay Offshore from the charterer related to the
indemnification period reduces the amount of Teekay’s indemnification to Teekay Offshore. As at December 31, 2013, the $540 million original
purchase price of the Voyageur Spirit FPSO unit has effectively been reduced to $509.3 million ($279.3 million net of assumed debt of $230.0
F - 15
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
million) to reflect the $34.9 million indemnification amount for 2013, partially offset by the excess value of $4.3 million relating to the difference in
fair value of the 1.4 million Teekay Offshore common units issued to Teekay as partial consideration for the FPSO unit on the date of closing of
the transaction in May 2013 as compared to the fair value of the common units on the date Teekay offered to sell the FPSO unit to Teekay
Offshore.
Teekay’s expectations were that the 2011 transactions with Sevan would consolidate the industry in the harsh environment FPSO space,
broaden the Company’s FPSO offering to include both ship shape and cylindrical FPSO solutions and the transaction was concluded at an
attractive price. The Company recognized a total bargain purchase gain of $68.5 million related to the acquisition of the FPSO units and the 40%
equity investment in Sevan. The gain 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 Spirit 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 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 this business 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 purchase price
allocation was finalized in 2012. The operating results of the Hummingbird Spirit, Piranema Spirit and Voyageur Spirit are reflected in the
Company’s consolidated financial statements from November 30, 2011, the effective date of acquisition. During the year ended December 31,
2011, the Company recognized $14.5 million of revenue and $68.4 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 final purchase price allocation, which included the Voyageur Spirit VIE, 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
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
Final
$
50,230
29,209
892,352
3,307
37,100
659
1,012,857
41,376
158,968
220,497
6,036
144,600
571,477
441,380
(68,535)
372,845
b) Teekay LNG – Exmar LPG BVBA Joint Venture
In February 2013, the Company’s subsidiary Teekay LNG Partners L.P. (or Teekay LNG) entered into a joint venture agreement with Belgium-
based Exmar NV (or Exmar) to own and charter-in LPG carriers with a primary focus on the mid-size gas carrier segment. The joint venture
entity, called Exmar LPG BVBA, took economic effect as of November 1, 2012 and included 19 owned LPG carriers (including eight newbuilding
carriers scheduled for delivery between 2014 and 2016, and taking into effect the sale of the Donau LPG carrier in April 2013) and five
chartered-in LPG carriers. For its 50% ownership interest in the joint venture, including newbuilding payments made prior to the November 1,
2012 economic effective date of the joint venture, Teekay LNG invested $133.1 million in exchange for equity and a shareholder loan and
assumed approximately $108 million as its pro rata share of existing debt and lease obligations as of the economic effective date. These debt
and lease obligations are secured by certain vessels in the Exmar LPG BVBA fleet. The excess of the book value of net assets acquired over
Teekay LNG’s investment in Exmar LPG BVBA, which amounted to approximately $6.0 million, has been accounted for as an adjustment to the
value of the vessels, charter agreements and lease obligations of Exmar LPG BVBA and as recognition of goodwill, in accordance with the
finalized purchase price allocation. Control of Exmar LPG BVBA is shared jointly between Exmar and Teekay LNG. Consequently, Teekay LNG
accounts for its investment in Exmar LPG BVBA using the equity method. In July and October 2013, Exmar LPG BVBA exercised its options
F - 16
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
with Hanjin Heavy Industries and Construction Co., Ltd. to construct four additional LPG carrier newbuildings scheduled for delivery in 2017 and
2018 (see Note 16b).
c)
Teekay LNG – Marubeni Joint Venture
In February 2012, a joint venture between Teekay LNG and Marubeni Corporation (or the Teekay LNG-Marubeni Joint Venture) acquired a
100% interest in six liquefied natural gas (or LNG) carriers (or the MALT LNG Carriers) from Denmark-based A.P. Moller-Maersk A/S for
approximately $1.3 billion. Teekay LNG and Marubeni Corporation (or Marubeni) have 52% and 48% economic interests, respectively, but share
control of the Teekay LNG-Marubeni Joint Venture. Since control of the Teekay LNG-Marubeni Joint Venture is shared jointly between Marubeni
and Teekay LNG, Teekay LNG accounts for its investment in the Teekay LNG-Marubeni Joint Venture using the equity method. The Teekay
LNG-Marubeni Joint Venture financed this acquisition with $1.06 billion from short-term secured loan facilities and $266 million from equity
contributions from Teekay LNG and Marubeni. Teekay LNG has agreed to guarantee its 52% share of the secured loan facilities of the Teekay
LNG-Marubeni Joint Venture, and as a result, deposited $30 million in a restricted cash account as security for the debt within the Teekay LNG-
Marubeni Joint Venture and recorded a guarantee liability of $1.4 million. The carrying value of the guarantee liability as at December 31, 2013,
was nil (December 31, 2012 – $0.6 million) and was included as part of other long-term liabilities. Teekay LNG has a 52% economic interest in
the Teekay LNG-Marubeni Joint Venture and, consequently, its share of the $266 million equity contribution was $138.2 million. Teekay LNG
also contributed an additional $5.8 million for its share of legal and financing costs as part of the investment. Teekay LNG financed the equity
contributions by borrowing under its existing credit facilities. The excess of Teekay LNG’s investment in the Teekay LNG-Marubeni Joint Venture
over the book value of net assets acquired, which amounted to approximately $303 million, has been accounted for as an increase to the
carrying value of the vessels and out-of-the-money charters of the Teekay LNG-Marubeni Joint Venture, in accordance with the purchase price
allocation. During the period between June to July 2013, the Teekay-LNG Marubeni Joint Venture completed the refinancing of its short-term
loan facilities by entering into separate long-term debt facilities totaling approximately $963 million. These debt facilities mature between 2017
and 2030. As a result of the completed refinancing, Teekay LNG is no longer required to have $30 million in a restricted cash account as
security for the Teekay LNG-Marubeni Joint Venture. Teekay LNG has agreed to guarantee its 52% share of the secured loan facilities of the
Teekay LNG-Marubeni Joint Venture and, as a result, recorded a guarantee liability of $0.7 million. The carrying value of the guarantee liability
as at December 31, 2013, was $0.6 million and is included as part of other long-term liabilities in the Company’s consolidated balance sheets.
In July 2013, the Teekay LNG-Marubeni Joint Venture entered into an eight-year interest rate swap with a notional amount of $160.0 million,
amortizing quarterly over the term of the interest rate swap to $70.4 million at maturity. The interest rate swap exchanges the receipt of LIBOR-
based interest for the payment of a fixed rate of interest of 2.20% in the first two years and 2.36% in the last six years. This interest rate swap
has been designated as a qualifying cash flow hedging instrument for accounting purposes. The Teekay LNG-Marubeni Joint Venture uses the
same accounting policy for qualifying cash flow hedging instruments as Teekay LNG.
4.
Investment in Term Loans
In February 2011, Teekay made a $70 million term loan (or the TKC Loan) to a ship-owner of a 2011-built Very Large Crude Carrier (or VLCC),
based in Asia. The TKC Loan bears interest at 9% per annum, which is payable quarterly. The TKC Loan was repayable in full in February
2014. The TKC Loan is collateralized by a first-priority mortgage on the VLCC, together with other related collateral.
In July 2010, Teekay Tankers acquired two term loans, whose borrowers have the same ultimate parent company as the borrower under the
TKC Loan, with a total principal amount outstanding of $115.0 million for a total cost of $115.6 million (or the TNK Loans). The TNK Loans had
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 TNK Loans matured in July 2013. The TNK Loans are collateralized by first-priority mortgages on two 2010-built VLCCs,
together with other related security. The principal amount of the TNK Loans and repayment premium were payable in full at maturity in July
2013. The TKC Loan and TNK Loans are collectively referred to as the Loans.
The borrowers of the Loans have been in default on their interest payment obligations since the first quarter of 2013, and their loan principal
and repayment premium repayment obligations on the TNK Loans from their maturity date in July 2013. As of December 31, 2013, the VLCC
vessels that collateralize the Loans were trading in the spot tanker market under the Company’s management.
As at December 31, 2013 and December 31, 2012, the repayment premium included in the investment in term loans balances was $3.4 million
and $2.7 million, respectively. As at December 31, 2013 and December 31, 2012, accrued and unpaid interest on the Loans, including a portion
of default interest, was $10.7 million and $2.8 million, respectively. Such amounts are presented in investment in term loans on the
consolidated balance sheets as at December 31, 2013 and December 31, 2012. Interest income in respect of the Loans is included in revenues
in the consolidated statements of income (loss). As of December 31, 2013, $11.2 million of interest income due under the Loans, including
default interest, had not been recognized based on the Company‘s current estimates of amounts recoverable from future operating cash flows
of the vessels and the net proceeds from the sale of the three VLCCs. During March 2014, the Company assumed ownership of the three
VLCCs that collateralized the Loans.
5. Financing Transactions
Teekay LNG and Teekay Offshore are limited partnerships formed by the Company as part of its strategy to expand its operations primarily in
the LNG and LPG shipping sector (Teekay LNG) and to expand its operations in the offshore oil marine transportation, production, processing
and storage sectors (Teekay Offshore). Teekay Tankers is a corporation formed by the Company to provide international marine transportation
of crude oil and refined products. As of December 31, 2013, Teekay owned a 35.3% interest in Teekay LNG (37.5% - December 31, 2012),
including common units and its 2% general partner interest, a 29.3% interest in Teekay Offshore (29.4% - December 31, 2012), including
common units and its 2% general partner interest, and 25.1% of the capital stock of Teekay Tankers (25.1% - December 31, 2012), including
Teekay Tankers' outstanding shares of Class B common stock, which entitle the holders to five votes per share, subject to a 49% aggregate
F - 17
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Class B Common Stock voting power maximum. Teekay maintains control of Teekay LNG and Teekay Offshore by virtue of its control of the
general partner of each partnership, and maintains control of Teekay Tankers by virtue of its voting control through its ownership of Class B
shares, and thus consolidates these subsidiaries. Teekay has entered into an omnibus agreement with Teekay LNG and Teekay Offshore 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. In addition, Teekay has entered into a
non-competition agreement with Teekay Tankers, which provides 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 June 2012.
During the years ended December 31, 2013, 2012, and 2011, the Company’s publicly traded subsidiaries, Teekay Tankers, Teekay Offshore
and Teekay LNG completed the following public offerings and equity placements:
Total Proceeds
Received
$
Less:
Teekay
Corporation
Portion
$(1)
Offering
Expenses
$
Net Proceeds
Received
$
2013
Teekay Offshore Direct Equity Placements
Teekay Offshore Preferred Units Offering
Teekay Offshore Continuous Offering Program
Teekay LNG Continuous Offering Program
Teekay LNG Direct Equity Placement
Teekay LNG Public Offering
2012
Teekay Offshore Public Offerings
Teekay Offshore Direct Equity Placement
Teekay Tankers Public Offerings
Teekay LNG Public Offering
2011
Teekay Tankers Public Offerings
Teekay Offshore Private Equity Placement
Teekay LNG Public Offerings
115,688
150,000
2,819
5,383
40,816
150,040
219,474
45,919
69,000
189,243
112,054
420,145
356,133
(2,314)
-
(59)
(107)
(816)
(3,001)
(4,389)
(919)
-
(3,784)
(188)
(5,200)
(449)
(457)
(40)
(5,222)
(8,164)
-
(3,229)
(6,927)
-
(230,144)
(7,123)
(4,820)
(279)
(14,909)
113,186
144,800
2,311
4,819
39,960
141,817
206,921
45,000
65,771
178,532
107,234
189,722
334,101
(1) Consists of the portion Teekay Corporation subscribed for in the public offering or equity placement.
In April 2013, the Voyageur Spirit FPSO unit began production and on May 2, 2013, Teekay completed the acquisition of the Voyageur Spirit
FPSO unit and, immediately thereafter, Teekay Offshore acquired the unit from Teekay for an original purchase price of $540.0 million (see
Note 3(a)). Teekay Offshore financed the acquisition with the assumption of the $230.0 million debt facility secured by the unit, $253.0 million in
cash and a $44.3 million equity private placement of common units to Teekay Corporation (including the general partner’s 2% proportionate
capital contribution), which had a value of $40.0 million at the time Teekay offered to sell the units to Teekay Offshore. Upon completion of the
private placement to Teekay, Teekay Offshore had 83.6 million common units outstanding.
As a result of the public offerings and equity placements of Teekay Tankers, Teekay Offshore and Teekay LNG, the Company recorded
increases to retained earnings of $36.7 million (2013), $88.7 million (2012) and $124.2 million (2011). These amounts represent Teekay’s
dilution gains from the issuance of units and shares in these consolidated subsidiaries.
6. Goodwill, Intangible Assets and In-Process Revenue Contracts
Goodwill
The carrying amount of goodwill for the years ended December 31, 2013 and 2012, for the Company’s reportable segments are as follows:
Balance as of December 31, 2012 and 2013
Shuttle Tanker and
FSO Segment
Liquefied Gas
Segment
$
130,908
$
35,631
Total
$
166,539
F - 18
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
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, estimated
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 was impacted by an oversupply of vessels relative to demand.
Intangible Assets
As at December 31, 2013, the Company’s intangible assets consisted of:
Customer contracts
Other intangible assets
Gross Carrying
Amount
$
316,684
1,280
317,964
As at December 31, 2012 the Company's intangible assets consisted of:
Customer contracts
Other intangible assets
Gross Carrying
Amount
$
316,684
1,280
317,964
Accumulated
Amortization
$
(209,786)
(280)
(210,066)
Accumulated
Amortization
$
(191,587)
(241)
(191,828)
Net Carrying Amount
$
106,898
1,000
107,898
Net Carrying Amount
$
125,097
1,039
126,136
Aggregate amortization expense of intangible assets for the year ended December 31, 2013, was $18.2 million (2012 - $17.2 million, 2011 -
$19.1 million), which is included in depreciation and amortization. Amortization of intangible assets for the five years following 2013 is expected
to be $13.0 million (2014), $11.9 million (2015), $10.9 million (2016), $9.9 million (2017), $8.9 million (2018) and $53.3 million (thereafter).
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), the Company assumed certain FPSO contracts and time charter-out contracts with terms that were less
favorable than the then prevailing market terms. At the time of the acquisitions, the Company 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.
Amortization of in-process revenue contracts for the year ended December 31, 2013 was $61.7 million (2012 - $72.9 million, 2011 - $46.4
million), which is included in revenues on the consolidated statements of income (loss). Amortization for the five years following 2013 is
expected to be $40.2 million (2014), $19.8 million (2015), $19.8 million (2016), $19.8 million (2017), $15.3 million (2018) and $65.0 million
(thereafter).
7. Accrued Liabilities
Voyage and vessel expenses
Interest
Payroll and benefits and other
Deferred revenue
Loan from affiliates
December 31, 2013
December 31, 2012
$
250,557
73,817
91,369
49,486
1,595
466,824
$
144,250
66,125
100,452
52,391
4,064
367,282
F - 19
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
8. Long-Term Debt
Revolving Credit Facilities
Senior Notes (8.5%) due January 15, 2020
Norwegian Kroner-denominated Bonds due through September 2018
U.S. Dollar-denominated Term Loans due through 2023
U.S. Dollar-denominated Term Loan Variable Interest Entity due October 2016
U.S. Dollar Bonds due through 2023
Euro-denominated Term Loans due through 2023
U.S. Dollar-denominated Unsecured Demand Loans due to Joint Venture Partners
Total
Less current portion
Long-term portion
December 31, 2013
$
1,919,086
447,430
691,778
2,523,523
-
174,150
340,221
13,282
6,109,470
996,425
5,113,045
December 31, 2012
$
1,627,979
447,115
467,223
2,432,374
230,359
-
341,382
13,282
5,559,714
797,411
4,762,303
As of December 31, 2013, the Company had 14 revolving credit facilities (or the Revolvers) available, which, as at such date, provided for
aggregate borrowings of up to $2.6 billion, of which $0.6 billion was undrawn. Interest payments are based on LIBOR plus margins. At
December 31, 2013 and December 31, 2012, the margins ranged between 0.45% and 4.5% and 0.45% and 3.25%, respectively. At December
31, 2013 and December 31, 2012, the three-month LIBOR was 0.25% and 0.31%, respectively. The total amount available under the Revolvers
reduces by $776.9 million (2014), $297.5 million (2015), $713.6 million (2016), $445.0 million (2017) and $321.0 million (2018). The Revolvers
are collateralized by first-priority mortgages granted on 54 of the Company’s vessels, together with other related security, and include a
guarantee from Teekay or its subsidiaries for all outstanding amounts.
The Company’s 8.5% senior unsecured notes (or the 8.5% Notes) are due January 15, 2020 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 through the maturity date of the notes 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.
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.
Teekay Offshore had 211.5 million (of the original 600 million issued) in Norwegian Kroner (or NOK) senior unsecured bonds that matured in
November 2013 in the Norwegian bond market, and as a result, the carrying amount of the bonds was nil at December 31, 2013. The bonds
were listed on the Oslo Stock Exchange. Interest payments on the bonds were based on NIBOR plus a margin of 4.75%. Teekay Offshore
entered into a cross currency swap to swap the interest payments from NIBOR plus a margin of 4.75% into LIBOR plus a margin of 5.04%, and
to fix the transfer of the principal amount at $34.7 million upon maturity in exchange for NOK 211.5 million. Teekay Offshore also entered into
an interest rate swap to swap the interest payments from LIBOR to a fixed rate of 1.12%. The floating LIBOR rate receivable from the interest
rate swap was capped at 3.5%, which effectively resulted in a fixed rate of 1.12% unless LIBOR exceeded 3.5%, in which case Teekay
Offshore’s related interest rate effectively floated at LIBOR, but was reduced by 2.38%. In January 2013, Teekay Offshore repurchased NOK
388.5 million of the above-mentioned NOK 600 million bond issue which matured in November 2013 at a premium in connection with the
issuance of NOK 1.3 billion in senior unsecured bonds. The Company recorded a $1.8 million loss on bond repurchase and $6.6 million of
realized losses included in foreign currency exchange (loss) gain in its consolidated statements of income (loss) for the year ended December
31, 2013. In connection with this bond repurchase, Teekay Offshore terminated a similar notional amount of the related cross currency swap and
recorded $6.8 million of realized gains included in foreign currency exchange (loss) gain in its consolidated statements of income (loss) for the
year ended December 31, 2013 (see Note 15).
During 2012, Teekay Offshore, Teekay LNG and Teekay issued in the Norwegian bond market a total of NOK 2 billion of senior unsecured
bonds that mature between October 2015 and May 2017. As at December 31, 2013, the total carrying amount of the bonds was $329.4 million.
The bonds are listed on the Oslo Stock Exchange. The interest payments on the bonds are based on NIBOR plus a margin, which ranges from
4.75% to 5.75%. The Company entered into cross currency rate swaps to swap all interest and principal payments of the bonds into U.S.
Dollars, with the interest payments fixed at rates ranging from 5.52% to 7.49%, and the transfer of principal fixed at $349.2 million upon maturity
in exchange for NOK 2 billion (see Note 15).
In January 2013, Teekay Offshore issued in the Norwegian bond market NOK 1.3 billion in senior unsecured bonds. The bonds were issued in
two tranches maturing in January 2016 (NOK 500 million) and January 2018 (NOK 800 million). As at December 31, 2013, the carrying amount
of the bonds was $214.1 million. The bonds are listed on the Oslo Stock Exchange. Interest payments on the tranche maturing in 2016 are
based on NIBOR plus a margin of 4.00%. Interest payments on the tranche maturing in 2018 are based on NIBOR plus a margin of 4.75%.
Teekay Offshore entered into cross currency rate swaps to swap all interest and principal payments into U.S. Dollars, with interest payments
fixed at a rate of 4.80% on the tranche maturing in 2016 and 5.93% on the tranche maturing in 2018 and the transfer of the principal amount
fixed at $89.7 million upon maturity in exchange for NOK 500 million on the tranche maturing in 2016 and fixed at $143.5 million upon maturity in
exchange for NOK 800 million on the tranche maturing in 2018 (see Note 15).
F - 20
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
In September 2013, Teekay LNG issued in the Norwegian bond market NOK 900 million in senior unsecured bonds that mature in September
2018. As at December 31, 2013, the carrying amount of the bonds was $148.2 million. The bonds are listed on the Oslo Stock Exchange. The
interest payments on the bonds are based on NIBOR plus a margin of 4.35%. Teekay LNG entered into a cross currency swap, to swap all
interest and principal payments into U.S. Dollars, with the interest payments fixed at a rate of 6.43% (see Note 15) and the transfer of principal
fixed at $150.0 million upon maturity in exchange for NOK 900 million.
As of December 31, 2013, the Company had 19 U.S. Dollar-denominated term loans outstanding, which totaled $2.5 billion (December 31, 2012
– $2.4 billion). Certain of the term loans with a total outstanding principal balance of $176.3 million as at December 31, 2013 (December 31,
2012 – $328.0 million) bear interest at a weighted-average fixed rate of 5.2% (December 31, 2012 – 5.3%). Interest payments on the remaining
term loans are based on LIBOR plus a margin. At December 31, 2013 and December 31, 2012, the margins ranged between 0.3% and 3.25%,
and 0.3% and 4.25%, respectively. At December 31, 2013 and December 31, 2012, the three-month LIBOR was 0.25% and 0.31%,
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 18 of the term loans have balloon or bullet repayments due at maturity. The term loans are
collateralized by first-priority mortgages on 35 (December 31, 2012 – 36) of the Company’s vessels, together with certain other security. In
addition, at December 31, 2013, all but $94.4 million (December 31, 2012 – $107.0 million) of the outstanding term loans were guaranteed by
Teekay or its subsidiaries.
As of December 31, 2013, the Company had one U.S. Dollar-denominated term loan outstanding of $164.6 million, which is classified separately
within current liabilities and is associated with assets held for sale on the Company’s consolidated balance sheets. A portion of the term loan,
with a total outstanding principal balance of $107.0 million as at December 31, 2013, bears interest at a weighted-average fixed rate of 5.4%.
Interest payments on the remaining portion of the term loan are based on LIBOR plus a margin of 0.5%. The term loan payments are made in
semi-annual payments commencing six months after delivery of each newbuilding vessel financed thereby, and the term loan has balloon
repayments due at maturity. The term loans are collateralized by first-priority mortgages on 4 of the Company’s vessels, together with certain
other security.
In September and November 2013, Teekay Offshore issued in the U.S. private placement market $174.2 million ten-year senior secured bonds
to finance the Bossa Nova Spirit and Sertanejo Spirit BG shuttle tanker newbuildings. The bonds mature in December 2023 and interest
payments are fixed at 4.96%. As at December 31, 2013, the carrying amount of the bonds were $174.2 million. The bonds are collateralized by
first-priority mortgages on the Bossa Nova Spirit and Sertanejo Spirit, together with other related security.
The Company has two Euro-denominated term loans outstanding, which, as at December 31, 2013, totaled 247.6 million Euros ($340.2 million)
(December 31, 2012 – 258.8 million Euros ($341.4 million)). The Company is repaying the loans with funds generated by two Euro-
denominated, long-term time-charter contracts. Interest payments on the loans are based on EURIBOR plus margins. At December 31, 2013
and December 31, 2012, the margins ranged between 0.60% and 2.25% and the one-month EURIBOR at December 31, 2013 was 0.2%
(December 31, 2012 – 0.1%). 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 and the NOK-denominated bonds are revalued at the end of each period using the then-prevailing U.S.
Dollar exchange rate. Due primarily to the revaluation of the Company’s NOK-denominated bonds, the Company’s Euro-denominated term
loans, capital leases and restricted cash, and the change in the valuation of the Company’s cross currency swaps, the recognized foreign
exchange loss of $13.3 million (2012 – $12.9 million loss, 2011 – $12.7 million gain).
The Company has one U.S. Dollar-denominated loan outstanding owing to a joint venture partner, which, as at December 31, 2013, totaled
$13.3 million (2012 – $13.3 million). Interest payments on the loan are based on a fixed interest rate of 4.84%. This loan is repayable on
demand.
The weighted-average effective interest rate on the Company’s aggregate long-term debt as at December 31, 2013 was 3.0% (December 31,
2012 – 2.9%). This rate does not include the effect of the Company’s interest rate swap agreements (see Note 15).
Among other matters, the Company’s long-term debt agreements generally provide for maintenance of minimum consolidated financial
covenants and five loan agreements require the maintenance of vessel market value to loan ratios. As at December 31, 2013, these ratios
ranged from 122.9% to 388.9% compared to their minimum required ratios of 105% to 120%, respectively. The vessel values used in these
ratios are the appraised values prepared by the Company based on second-hand sale and purchase market data. A further delay in the recovery
of the conventional tanker market and a weakening of the LNG/LPG carrier market could negatively affect the ratios. Certain loan agreements
require that a minimum level of free cash be maintained and, as at December 31, 2013 and December 31, 2012, this amount was $100.0 million.
Most of the loan agreements also require that the Company maintain an aggregate minimum level of free liquidity and undrawn revolving credit
lines with at least six months to maturity, in amounts ranging from 5% to 7.5% of total debt. As at December 31, 2013, this aggregate amount
was $332.6 million (December 31, 2012 - $319.1 million). As at December 31, 2013, the Company was in compliance with all covenants
required by its credit facilities and other long-term debt. Certain of the Company’s long-term debt agreements restrict Teekay’s ability to access
the net assets of certain of its subsidiaries, through restrictions on the distribution of cash and through financial covenants that require Teekay
LNG to not exceed a maximum level of leverage. As at December 31, 2013, Teekay’s share of the restricted net assets of its consolidated
subsidiaries was approximately $175.0 million.
The aggregate annual long-term debt principal repayments required to be made by the Company subsequent to December 31, 2013 are $1.3
billion (2014), $535.6 million (2015), $811.0 million (2016), $977.2 million (2017), $1.2 billion (2018) and $1.4 billion (thereafter).
9. Operating and Direct Financing Leases
F - 21
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Charters-in
As at December 31, 2013, minimum commitments to be incurred by the Company under vessel operating leases by which the Company
charters-in vessels were approximately $78.7 million, comprised of $43.7 million (2014), $16.4 million (2015), $9.1 million (2016), $9.1 million
(2017), and $0.4 million (2018). 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,
2013, minimum scheduled future revenues to be received by the Company on time-charters and bareboat charters then in place were
approximately $9.6 billion, comprised of $1.2 billion (2014), $1.2 billion (2015), $1.2 billion (2016), $1.2 billion (2017), $1.0 billion (2018) and
$3.8 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, 2013,
revenue from unexercised option periods of contracts that existed on December 31, 2013 or variable or contingent revenues. In addition,
minimum scheduled future revenues presented in this paragraph have been reduced by estimated off-hire time for scheduled periodic
maintenance. The amounts may vary given future events such as unscheduled vessel maintenance.
The carrying amount of the vessels accounted for as operating leases at December 31, 2013, was $6.4 billion (2012 - $6.1 billion). The cost
and accumulated depreciation of the vessels employed on operating leases as at December 31, 2013 were $8.2 billion (2012 - $7.8 billion) and
$1.8 billion (2012 - $1.7 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 Teekay LNG a 69% interest in the Teekay Tangguh Subsidiary. As at December 31, 2013, the Teekay Tangguh Subsidiary
was a party to operating leases whereby it 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
lease payments are increased or decreased under the Sublease to maintain the agreed after-tax margin. The Teekay Tangguh Subsidiary’s
carrying amount of this tax indemnification as at December 31, 2013 and December 31, 2012 was $8.9 million and $9.4 million, respectively,
and is included as part of other long-term liabilities in the 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 the two Tangguh LNG Carriers commenced in November 2008 and March 2009,
respectively.
As at December 31, 2013, the total estimated future minimum rental payments to be received and paid under the lease contracts are as follows:
Year
2014
2015
2016
2017
2018
Thereafter
Total
Head Lease
Receipts (1)
28,828
22,188
21,242
21,242
21,242
217,821
$332,563
Sublease
Payments(1)(2)
24,779
24,779
24,779
24,779
24,779
254,105
$378,000
(1) The Head Leases are fixed-rate operating leases while the Subleases have a small variable-rate component. As at December 31, 2013, the Teekay Tangguh
Subsidiary had received $177.8 million of aggregate Head Lease receipts and had paid $115.4 million of aggregate Sublease payments. The portion of the
Head Lease receipts that haven’t been recognized into earnings are deferred and amortized on a straight line basis over the lease terms and as at December
31, 2013, $43.0 million of Head Lease receipts had been deferred and included in other long-term liabilities in the Company’s consolidated balance sheets.
(2) The amount of payments under the Subleases are updated annually to reflect any changes in the lease payments due to changes in tax law.
Net Investment in Direct Financing Leases
F - 22
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
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. In addition, in September and November 2013, Teekay LNG acquired two
155,900-cubic meter LNG carriers (or Awilco LNG Carriers) from Norway-based Awilco LNG ASA (or Awilco) and chartered them back to
Awilco on a five- and four-year fixed-rate bareboat charter contract (plus a one year extension option), respectively, with Awilco holding a fixed-
price purchase obligation at the end of the charter. The bareboat charters with Awilco are accounted for as direct financing leases. The
purchase price of each vessel was $205 million less a $51.0 million upfront prepayment of charter hire by Awilco (inclusive of a $1.0 million
upfront fee), which is in addition to the daily bareboat charter rate. 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,
2013
$
December 31,
2012
$
1,024,187
203,465
1,379
(501,769)
727,262
21,545
705,717
675,013
203,465
1,409
(443,286)
436,601
12,303
424,298
As at December 31, 2013, minimum lease payments to be received by the Company in each of the next five years following 2013 were $81.5
million (2014), $83.6 million (2015), $83.9 million (2016), $207.9 million (2017), and $173.7 million (2018). The VOC equipment leases are
scheduled to expire in 2014, the FSO contract is scheduled to expire in 2017, the LNG time-charters are both scheduled to expire in 2029 and
the two LNG carriers under the Awilco LNG carrier leases expire in 2017 and 2018.
10. Capital Lease Obligations and Restricted Cash
Capital Lease Obligations
RasGas II LNG Carriers
Suezmax Tankers
Total
Less current portion
Long-term portion
December 31,
2013
$
472,806
125,523
598,329
31,668
566,661
December 31,
2012
$
472,085
165,489
637,574
70,272
567,302
RasGas II LNG Carriers. As at December 31, 2013, Teekay LNG 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 Company Limited
(II) (or RasGas II), a joint venture between Qatar Petroleum and ExxonMobil RasGas Inc., a subsidiary of Exxon Mobil Corporation. Teekay LNG
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, 2013 and 2012 was $15.0 million and $15.5 million, respectively, 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 (see Note 16c).
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, 2013, the commitments under these capital leases approximated $953.1 million, including imputed interest of $480.3 million,
repayable as follows:
F - 23
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Year
2014
2015
2016
2017
2018
Thereafter
Commitment
$24,000
$24,000
$24,000
$24,000
$24,000
$833,128
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.
Suezmax Tankers. During 2013, the Company was a party to capital leases on five Suezmax tankers. Under these capital leases, the owner
has the option to require the Company to purchase the five vessels. The charterer, who is also the owner, also has the option to cancel the
charter contracts. For two of the five Suezmax tankers, the cancellation options were first exercisable in August 2013 and November 2013,
respectively. In July 2013, the Company received notification of termination from the owner for these two vessels. The owner reached an
agreement to sell both vessels, the Tenerife Spirit and the Algeciras Spirit, to a third party. The Tenerife Spirit was sold in December 2013 and
the Algeciras Spirit was sold in February 2014. Upon sale of the vessels, the Company was not required to pay the balance of the capital lease
obligations, as the vessels under capital leases were returned to the owner and the capital lease obligations were concurrently extinguished.
The amounts in the table above assume the owner will not exercise its options to require the Company to purchase any of the three remaining
vessels from the owner, but rather it assumes the owner will cancel the charter contracts when the cancellation right is first exercisable (April
2014, October 2017 and July 2018, respectively), which is the 13th year anniversary of each respective contract and sell the vessel to a third
party, upon which the lease obligation will be extinguished. 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.
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, 2013 and 2012, the amount of restricted cash on deposit for the three RasGas II LNG Carriers was $475.6 million and
$475.5 million, respectively. As at December 31, 2013 and 2012, 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 Company also maintains restricted cash deposits relating to certain term loans and other obligations, which totaled $27.1 million and $58.3
million as at December 31, 2013 and 2012, 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 and equipment and assets held for sale – The estimated fair value of the Company’s vessels and equipment and vessels held for
sale is determined based on discounted cash flows or appraised values. In cases where an active second hand sale and purchase market
does not exist, the Company uses a discounted cash flow approach to estimate the fair value of an impaired vessel. In cases where an active
second hand sale and purchase market exists, an appraised value is generally the amount the Company would expect to receive if it were to
sell the vessel. Such appraisal is normally completed by the Company. Other assets held for sale include working capital balances and the fair
value of such amounts generally approximate their carrying value.
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 joint venture partners – The fair value of the Company’s loans to joint ventures and joint venture
partners approximates their carrying amounts reported in the accompanying consolidated balance sheets.
Long-term debt and liabilities associated with assets held for sale – 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 rates currently available for debt with
similar terms and remaining maturities and the current credit worthiness of the Company. Alternatively, if the fixed-rate and variable-rate long-
term debt is held for sale the fair value is based on the estimated sales price. Other liabilities held for sale include working capital balances and
the fair value of such amounts generally approximate their carrying value.
F - 24
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
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. 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.
The following table includes the estimated fair value and carrying value of those assets and liabilities that are measured at fair value on a
recurring and non-recurring basis, as well as the estimated fair value of the Company’s financial instruments that are not accounted for at a fair
value on a recurring basis.
Fair
Value
Hierarchy
Level
December 31, 2013
Fair
Value
Asset
(Liability)
Carrying
Amount
Asset
(Liability)
December 31, 2012
Fair
Value
Asset
(Liability)
Carrying
Amount
Asset
(Liability)
$
$
$
$
Level 1
1,119,966
1,119,966
1,178,118
1,178,118
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
91,415
(410,470)
(52,219)
(1,480)
17,250
176,247
91,415
(410,470)
(52,219)
(1,480)
165,688
(667,825)
13,886
2,885
165,688
(667,825)
13,886
2,885
17,250
176,247
287,983
22,364
287,983
22,364
Level 3
211,579
209,570
188,756
186,048
Recurring
Cash and cash equivalents, restricted
cash, and marketable securities
Derivative instruments
(note 15)
Interest rate swap agreements - assets (1)
Interest rate swap agreements - liabilities (1)
Cross currency interest swap agreement
Foreign currency contracts
Non-recurring
(note 18b)
Vessels and equipment
Assets held for sale (2) (note 18b)
Other
Investment in term loans
Loans to equity accounted investees
and joint venture partners - Current
Level 3
37,019
37,019
139,183
139,183
Loans to equity accounted investees
and joint venture partners - Long-term
Liabilities associated with assets held for sale (2) (note 8)
(note 8)
Long-term debt - public
Long-term debt - non-public
(note 8)
(3)
Level 2
Level 1
Level 2
132,229
(168,007)
(1,313,358)
(4,796,112)
(3)
(168,007)
(1,376,829)
67,720
-
(914,338)
(3)
-
(949,326)
(4,582,274)
(4,645,376)
(4,329,117)
(1) The fair value of the Company’s interest rate swap agreements at December 31, 2013 includes $22.0 million (December 31, 2012- $21.6 million) of net
accrued interest which is recorded in accrued liabilities and accounts receivable on the consolidated balance sheets.
(2) The fair value of the Company’s assets held for sale and liabilities associated with assets held for sale include vessels held for sale, long-term debt and other
working capital balances.
(3)
In these consolidated financial statements, the Company's loans to and equity investments in equity accounted investees form the aggregate carrying value
of the Company's interests in entities accounted for by the equity method. In addition, the loans to joint venture partners together with the joint venture
partner's equity investment in joint venture form the net aggregate carrying value of the joint venture partner's interest in the joint venture. The fair value of
the individual components of such aggregate interests is not determinable.
12. Capital Stock
The authorized capital stock of Teekay at December 31, 2013 and 2012, 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 2013, the Company issued 1.3 million common
shares upon the exercise of stock options and restricted stock units and awards, and had share repurchases of 0.3 million common shares.
During 2012, the Company issued 1.0 million common shares upon the exercise of stock options and restricted stock units and awards, and
had no share repurchases of common shares. As at December 31, 2013, Teekay had issued 71,528,599 shares of Common Stock (2012 –
F - 25
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
70,203,388) and no shares of Preferred Stock issued. As at December 31, 2013, Teekay had 70,729,399 shares of Common Stock outstanding
(2012 – 69,704,188).
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, 2013, 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, 2013, was $37.7 million. The shares of Common Stock repurchased during 2013 were under a separate
authorization.
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 amended 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
In March 2013, the Company adopted the 2013 Equity Incentive Plan (or the 2013 Plan) and suspended the 1995 Stock Option Plan and the
2003 Equity Incentive Plan (collectively referred to as the Plans). As at December 31, 2013, the Company had reserved pursuant to its 2013
Plan 4,133,987 shares of Common Stock, and at December 31, 2012, the Company had reserved pursuant to its Plans 8,924,470 shares of
Common Stock, for issuance upon exercise of options or equity awards granted or to be granted.
During the year ended December 31, 2013, the Company granted options under the 2013 Plan to acquire up to 72,810 shares of Common
Stock, and during the years ended December 31, 2012 and 2011, the Company granted options under the Plans to acquire up to 432,971 and
95,604 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, 2013, expire
between March 12, 2014 and March 12, 2023, 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, 2013, 2012, and 2011, are as
follows:
December 31, 2013
December 31, 2012
December 31, 2011
Options
(000’s)
#
Weighted-
Average
Exercise
Price
$
Options
(000’s)
#
Weighted-
Average
Exercise
Price
$
Options
(000’s)
#
Weighted-
Average
Exercise
Price
$
Outstanding - beginning of year
Granted
Exercised
Forfeited / expired
Outstanding - end of year
5,285
73
(1,039)
(82)
4,237
34.40
34.07
26.21
38.46
36.33
5,713
433
(733)
(128)
5,285
32.47
27.69
15.85
31.81
34.40
6,123
96
(363)
(143)
5,713
31.54
34.93
16.14
33.11
32.47
Exercisable - end of year
3,848
37.03
4,561
35.54
4,656
35.40
F - 26
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
A summary of the Company's non-vested stock option activity and related information for the years ended December 31, 2013, 2012 and
2011, are as follows:
December 31, 2013
December 31, 2012
December 31, 2011
Options
(000’s)
#
Weighted-
Average
Grant
Date Fair
Value
$
Options
(000’s)
#
Weighted-
Average
Grant
Date Fair
Value
$
Options
(000’s)
#
Weighted-
Average
Grant
Date Fair
Value
$
Outstanding non-vested stock options -
beginning of year
Granted
Vested
Forfeited
Outstanding non-vested stock options - end of
year
723
73
(401)
(6)
8.74
10.54
8.57
9.46
1,057
433
(747)
(20)
6.40
8.72
5.44
8.24
2,160
96
(1,071)
(128)
6.36
11.27
6.18
11.47
389
9.24
723
8.74
1,057
6.40
The weighted average grant date fair value for non-vested options forfeited in 2013 was $0.1 million (2012 - $0.8 million).
As of December 31, 2013, there was $1.2 million of total unrecognized compensation cost related to non-vested stock options granted under
the Plans. Recognition of this compensation is expected to be $1.0 million (2014), and $0.2 million (2015). During the years ended December
31, 2013, 2012, and 2011, the Company recognized $1.8 million, $2.9 million and $5.3 million, respectively, of compensation cost relating to
stock options granted under the Plans. The intrinsic value of options exercised during 2013 was $22.6 million (2012 - $11.9 million; 2011 - $3.8
million).
As at December 31, 2013, the intrinsic value of the outstanding in–the-money stock options was $51.7 million (2012 - $22.0 million) and
exercisable stock options was $44.5 million (2012 - $18.3 million). As at December 31, 2013, the weighted-average remaining life of options
vested and expected to vest was 4.2 years (2012 – 5.0 years).
Further details regarding the Company’s outstanding and exercisable stock options at December 31, 2013 are as follows:
Options
(000’s)
Outstanding Options
Weighted-
Average
Remaining
Life
Weighted-
Average
Exercise
Price
$
Options
(000’s)
Exercisable Options
Weighted-
Average
Remaining
Life
Weighted-
Average
Exercise
Price
$
Range of Exercise Prices
#
(Years)
#
(Years)
$10.00 – $19.99
$20.00 – $24.99
$25.00 – $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
435
440
400
188
639
1,150
334
648
3
4,237
5.2
6.2
8.2
6.1
2.3
4.2
1.2
3.2
3.3
4.3
11.84
24.42
27.69
34.26
38.98
40.41
46.80
51.40
60.96
36.33
435
440
111
88
639
1,150
334
648
3
3,848
5.2
6.2
8.2
3.3
2.3
4.2
1.2
3.2
3.3
3.9
11.84
24.42
27.69
34.20
38.98
40.41
46.80
51.40
60.96
37.03
The weighted-average grant-date fair value of options granted during 2013 was $10.54 per option (2012 - $8.72, 2011 - $11.27). 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 53.7% in 2013, 54.8% in 2012 and 53.6% in
2011; expected life of four years; dividend yield of 4.8% in 2013, 4.4% in 2012 and 3.8% in 2011; risk-free interest rate of 0.8% in 2013, 2.1% in
2012, and 2.1% in 2011; and estimated forfeiture rate of 12% in 2013, 12% in 2012 and 11.2% in 2011. 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
F - 27
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
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. For performance share units granted prior to 2013, 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. For performance
share units granted beginning 2013, there is no cap on the number of performance share units vesting.
During 2013, the Company granted 158,957 restricted stock units with a fair value of $5.4 million and 54,773 performance share units with a fair
value of $2.3 million, based on the quoted market price and a Monte Carlo valuation model, to certain of the Company’s employees and
directors. During 2013, 296,798 restricted stock units with a market value of $8.8 million vested and that amount was paid to grantees by
issuing 175,206 shares of common stock, net of withholding taxes. During 2012, the Company granted 268,595 restricted stock units with a fair
value of $7.4 million and 67,870 performance share units with a fair value of $2.5 million, based on the quoted market price and a Monte Carlo
valuation model, to certain of the Company’s employees and directors. During 2012, 334,256 restricted stock units with a market value of $9.0
million vested and that amount was paid to grantees by issuing 200,024 shares of common stock, net of withholding taxes. During 2011, the
Company granted 358,180 restricted stock units with a fair value of $12.5 million and 73,349 performance share 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. For the year ended December 31, 2013, the Company recorded an expense of $8.1 million (2012 -
$7.7 million, 2011 - $12.5 million) related to the restricted stock units.
During 2013, the Company also granted 26,412 (2012 – 23,563 and 2011 – 29,663) shares of restricted stock awards with a fair value of $0.9
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.
13. Related Party Transactions
As at December 31, 2013, Resolute Investments, Ltd. (or Resolute) owned 35.7% (2012 – 44.9%, 2011 – 45.5%) 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
Gain on sale of other assets
Volatile organic compound emission plant lease income
Impairment and (loss) gain on sale of marketable securities
Miscellaneous income (loss)
Loss on bond repurchase
Other income
15. Derivative Instruments and Hedging Activities
Year Ended
December 31,
Year Ended
December 31,
Year Ended
December 31,
2013
$
-
238
(2,062)
9,229
(1,759)
5,646
2012
$
2,217
1,220
(2,560)
(511)
-
366
2011
$
-
2,900
3,372
6,088
-
12,360
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.
As at December 31, 2013, the Company was committed to the following foreign currency forward contracts:
Contract Amount
in Foreign
Average Forward
Rate (1)
Fair Value /
Carrying Amount
Expected Maturity
F - 28
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Currency
Norwegian Kroner
Canadian Dollar
641,100
10,000
6.03
1.06
of Asset (Liability)
$
(1,424)
(56)
(1,480)
2014
$
92,772
9,457
102,229
2015
$
13,541
-
13,541
(1) Average contractual exchange rate represents the contracted amount of foreign currency one U.S. Dollar will buy.
The Company enters into cross currency swaps, and pursuant to these swaps the Company receives the principal amount in NOK on the
maturity date of the swap, in exchange for payment of a fixed U.S. Dollar amount. In addition, the cross currency swaps exchange a receipt of
floating interest in NOK based on NIBOR plus a margin for a payment of U.S. Dollar fixed interest. The purpose of the cross currency swaps is
to economically hedge the foreign currency exposure on the payment of interest and principal at maturity of the Company’s NOK-denominated
bonds due in 2015 through 2018. In addition, the cross currency swaps economically hedge the interest rate exposure on the NOK bonds due
in 2015 through 2018. The Company has not designated, for accounting purposes, these cross currency swaps as cash flow hedges of its
NOK-denominated bonds due in 2015 through 2018. As at December 31, 2013, the Company was committed to the following cross currency
swaps:
Notional
Amount
NOK
700,000
500,000
600,000
700,000
800,000
900,000
Notional
Amount
USD
122,800
89,710
101,351
125,000
143,536
150,000
Floating Rate Receivable
Reference
Rate
NIBOR
NIBOR
NIBOR
NIBOR
NIBOR
NIBOR
Margin
4.75%
4.00%
5.75%
5.25%
4.75%
4.35%
Fixed Rate
Payable
5.52%
4.80%
7.49%
6.88%
5.93%
6.43%
Fair Value /
Carrying
Amount of
Asset /
Liability
(8,550)
(8,185)
(5,503)
(13,247)
(11,744)
(4,990)
(52,219)
Remaining
Term
(years)
1.8
2.1
3.1
3.3
4.1
4.7
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 any of its interest rate swap agreements in its consolidated
entities as cash flow hedges for accounting purposes.
As at December 31, 2013, 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:
Fair Value /
Carrying
Amount of
Asset /
(Liability)
$
(66,829)
(306,428)
4,735
Principal
Amount
$
404,464
3,217,495
300,000
Weighted-
Average
Remaining
Term
(years)
Fixed
Interest
Rate
(%) (1)
23.1
6.5
0.2
4.9
3.8
1.7
4.8
3.1
LIBOR-Based Debt:
U.S. Dollar-denominated interest rate swaps (2)
U.S. Dollar-denominated interest rate swaps (3)
U.S. Dollar-denominated interest rate swaps (4)
LIBOR-Based Restricted Cash Deposit:
U.S. Dollar-denominated interest rate swaps (2)
EURIBOR-Based Debt:
Interest
Rate Index
LIBOR
LIBOR
LIBOR
LIBOR
469,011
81,118
23.1
Euro-denominated interest rate swaps (5) (6)
EURIBOR
340,221
(31,651)
(319,055)
7.0
(1)
Excludes the margins the Company pays on its variable-rate debt, which, as of December 31, 2013, ranged from 0.3% to 4.5%.
(2)
Principal amount reduces quarterly.
(3)
Principal amount of $200 million is fixed at 2.14%, unless LIBOR exceeds 6%, in which case the Company pays a floating rate of interest.
F - 29
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
(4)
Inception date of swap is March 2014 ($300.0 million).
(5)
Principal amount reduces monthly to 70.1 million Euros ($96.3 million) by the maturity dates of the swap agreements.
(6)
Principal amount is the U.S. Dollar equivalent of 247.6 million Euros.
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, 2013
Derivatives not designated as a cash flow hedge:
Foreign currency contracts
Interest rate swap agreements
Cross currency swap agreements
As at December 31, 2012
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 agreements
Current
Portion of
Derivative
Assets
Derivative
Assets
Accrued
Liabilities
Current
Portion of
Derivative
Liabilities
Derivative
Liabilities
482
21,779
779
23,040
12
69,785
-
69,797
-
(22,025)
3
(22,022)
(1,819)
(140,503)
(1,677)
(143,999)
(155)
(248,091)
(51,324)
(299,570)
441
2,506
16,927
11,795
31,669
-
-
(1)
-
-
144,247
4,334
148,581
-
(22,312)
719
(21,593)
(60)
(115,774)
-
(115,835)
-
(525,225)
(2,962)
(528,187)
As at December 31, 2013, the Company had multiple interest rate swaps and cross currency swaps with the same counterparty that are subject
to the same master agreement. Each of these master agreements provides for the net settlement of all swaps subject to that master agreement
through a single payment in the event of default or termination of any one swap. The fair value of these interest rate swaps and cross currency
swaps are presented on a gross basis in the Company’s consolidated balance sheets. As at December 31, 2013, these interest rate swaps and
cross currency swaps had an aggregate fair value asset amount of $85.2 million and an aggregate fair value liability amount of $361.1 million.
Realized and unrealized gains (losses) from derivative instruments that are not designated for accounting purposes as cash flow hedges, are
recognized in earnings and reported in realized and unrealized gains (losses) on non-designated derivatives in the consolidated statements of
income (loss). The effect of the gain (loss) 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 agreement amendments and terminations
Foreign currency forward contracts
Forward freight agreements and bunker fuel swap contracts
Foinaven embedded derivative
Unrealized gains (losses) relating to:
Interest rate swap agreements
Foreign currency forward contracts
Foinaven embedded derivative
Year Ended
December 31,
2013
$
Year Ended
December 31,
2012
$
Year Ended
December 31,
2011
$
(122,439)
(35,985)
(2,027)
-
-
(160,451)
182,800
(3,935)
-
178,865
(123,277)
-
1,155
-
11,452
(110,670)
26,770
6,933
(3,385)
30,318
(132,931)
(149,666)
9,965
36
-
(272,596)
(58,405)
(11,399)
(322)
(70,126)
Total realized and unrealized gains (losses) on derivative instruments
18,414
(80,352)
(342,722)
Realized and unrealized (losses) gains of the cross currency swaps are recognized in earnings and reported in foreign currency exchange
(loss) gain in the consolidated statements of income (loss). The effect of the (loss) gain on cross currency swaps on the consolidated
statements of income (loss) is as follows:
F - 30
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Realized gain on partial termination of cross currency swap
Realized gains
Unrealized (losses) gains
Total realized and unrealized (losses) gains
on cross currency swaps
2013
$
6,800
2,089
(65,387)
(56,498)
Year Ended December 31,
2012
$
-
3,628
10,715
14,343
2010
$
-
2,881
(1,583)
1,298
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.
16. Commitments and Contingencies
a) Vessels under Construction
As at December 31, 2013, the Company was committed to the construction of five LNG carriers, two floating, storage and offloading (or FSO)
conversions and one FPSO unit for a total cost of approximately $2.2 billion, excluding capitalized interest and other miscellaneous construction
costs. Two LNG carriers are scheduled for delivery in 2016, and three LNG carriers are scheduled for delivery in 2017, the two FSO
conversions are scheduled for completion in the third quarter of 2014 and 2016, respectively, and the FPSO unit is scheduled for delivery in
mid-2014. As at December 31, 2013, payments made towards these commitments totaled $696.8 million (excluding $49.0 million of capitalized
interest and other miscellaneous construction costs). As at December 31, 2013, the estimated remaining payments required to be made under
these newbuilding and conversion contracts were $482.2 million (2014), $154.2 million (2015), $425.4 million (2016) and $399.0 million (2017).
b) Joint Ventures
As at December 31, 2013, Exmar LPG BVBA, in which Teekay LNG has a 50% ownership interest, was committed to the construction of 12
LPG newbuilding carriers for a total cost of $537.4 million, excluding capitalized interest and other miscellaneous construction costs. The 12
newbuildings are scheduled for delivery between 2014 and 2018. As at December 31, 2013, payments made by Exmar LPG BVBA towards
these commitments totaled $68.6 million. As at December 31, 2013, the remaining payments required to be made by Exmar LPG BVBA under
these newbuilding contracts was $130.5 million in 2014, $76.6 million in 2015, $113.4 million in 2016, $78.5 million in 2017 and $69.8 million in
2018. Teekay LNG owns a 50% interest in Exmar LPG BVBA.
c) 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, one of Teekay Offshore’s shuttle tankers, 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 Teekay Offshore. The
Navion Hispania and the Njord Bravo both incurred damage as a result of the collision. In November 2007, Navion Offshore Loading AS (or
NOL) and Teekay Navion Offshore Loading Pte Ltd. (or TNOL), subsidiaries of Teekay Offshore, and Teekay Shipping Norway AS (or TSN), a
subsidiary of Teekay, were named as co-defendants in a legal action filed by Norwegian Hull Club (the hull and machinery insurers of the Njord
Bravo), several other insurance underwriters and various licensees in the Njord field. The plaintiffs 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 $35.1 million).
In December 2011, the Stavanger District Court ruling in the first instance found that NOL was liable for damages except for damages related to
certain indirect or consequential losses. The court also found that Statoil ASA was liable to NOL for the same amount of damages to NOL. As a
result of this ruling, as at December 31, 2012, Teekay Offshore reported a liability in the total amount of NOK 76,000,000 (approximately $12.5
million) to the plaintiffs and a corresponding receivable from Statoil ASA recorded in other long-term liabilities and other assets, respectively.
The plaintiffs appealed the decision and the appellate court in June 2013 held that NOL, TNOL and TSN are jointly and severally responsible
towards the plaintiffs for all the losses as a result of the collision, plus interest accrued on the amount of damages. In addition, Statoil ASA was
held not to be under an obligation to indemnify NOL, TNOL and TSN for the losses. NOL, TNOL and TSN were also held liable for legal costs
associated with court proceedings. As a result of this judgment, in the second quarter of 2013, Teekay Offshore recognized a liability in the
amount of NOK 213,000,000 in respect of damages, NOK 66,000,000 in respect of interest and NOK 11,000,000 in respect of legal costs,
totaling NOK 290,000,000 (approximately $47.8 million), to the plaintiffs recorded in accrued liabilities. The receivable from Statoil ASA
previously recorded in other assets was reversed in the second quarter of 2013. In the fourth quarter of 2013, Teekay Offshore recognized an
additional liability of NOK 4,000,000 in respect of interest, bringing the total liability to NOK 294,000,000 (approximately $48.4 million). The
judgment rendered deals with liability only and the ultimate amount of damages may be reduced compared to the NOK 213,000,000 claimed by
the plaintiffs.
F - 31
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Teekay Offshore and Teekay maintain protection and indemnity insurance for damages to the Navion Hispania and insurance for collision-
related costs and claims. These insurance policies are expected to cover the costs related to this incident, including any costs not indemnified by
Statoil, and thus a receivable of NOK 294,000,000 (approximately $48.4 million) was concurrently recorded in accounts receivable, which equals
the total cost of the claim. In addition, Teekay has agreed to indemnify Teekay Offshore for any losses it may incur in connection with this
incident.
In 2013, the insurer made payments directly to the plaintiffs in full settlement of interest and partial settlement of legal costs and thus Teekay
Offshore, as at December 31, 2013, reduced its liability and related receivable to NOK 213,000,000 in respect of damages and approximately
NOK 3,400,000 in respect of legal costs, totaling approximately NOK 216,400,000 (approximately $35.6 million).
Teekay Nakilat Corporation (or Teekay Nakilat), a subsidiary of Teekay LNG, is the lessee under 30-year capital lease arrangements with a third
party for the three LNG carriers (or the RasGas II Leases). The UK taxing authority (or HMRC) has been urging the 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 the
Teekay Nakilat enter into negotiations to terminate the RasGas II Leases. The Teekay Nakilat has declined this request as it does not believe
that HMRC 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 by the First Tribunal, regarding a similar financial lease of an LNG carrier that ruled in favor of the
taxpayer as well as a 2013 decision from the Upper Tribunal which upheld the 2012 verdict. HMRC has been granted leave to further appeal the
2013 decision to the Court of Appeal. If the HMRC were able to successfully challenge the RasGas II Leases, the 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. Teekay LNG estimates its 70% share of the potential exposure to be approximately $34 million, exclusive of potential financing costs
and interest rate swap termination costs.
The lessor for the three RasGas II LNG Carriers has communicated to Teekay Nakilat that the credit rating of the bank (or LC Bank) that is
providing the letter of credit to Teekay Nakilat’s lease has been downgraded. As a result, in January 2014, the lessor notified Teekay Nakilat of
an increase in the lease payments over the remaining term of the RasGas II Leases of approximately $12.3 million on a net present value basis
effective April 2014. Teekay LNG's 70% share of the present value of the lease payment increase claim is approximately $8.6 million. Teekay
Nakilat is looking at alternatives to mitigate the impact of the downgrade to the LC Bank’s credit rating to avoid a prolonged increase to lease
payments.
On December 7, 2011, the Petrojarl Banff FPSO unit (or Banff), which operates on the Banff field in the U.K. sector of the North Sea, suffered 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 the damage, the Company declared force majeure under the customer contract on December 8, 2011 and the Banff FPSO unit
commenced a period of off-hire which is currently expected to continue until the second quarter of 2014 while the necessary repairs and
upgrades are completed and the weather permits re-installation of the unit on the Banff field. The Company does not have off-hire insurance
covering the Banff FPSO. After the repairs and upgrades are completed, 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.
The Company expects that repair costs to the Banff FPSO unit and equipment and costs associated with the emergency response to prevent
loss or further damage during the December 7, 2011 storm event will be primarily reimbursed through its insurance coverage, subject to a $0.8
million deductible and the other terms and conditions of the applicable policies. In addition, the Company will also incur certain capital upgrade
costs for the Banff FPSO unit and the Apollo Spirit related to upgrades to the mooring system required by the relevant regulatory authorities due
to the extreme weather and sea states experienced during the December 7, 2011 storm. The Apollo Spirit was operating on the Banff field as a
storage tanker and is expected to return to the Banff field at the same time as the Banff FPSO unit. The total of these capital upgrade costs is
expected to be approximately $155 million. The recovery of the capital upgrade costs from the charterer is subject to commercial negotiations or,
failing agreement, the responsibility for these costs will be determined by an expedited arbitration procedure already agreed to by the parties.
Any capital upgrade costs not recovered from the charterer will be capitalized to the vessel cost.
d) Redeemable Non-Controlling Interest
During 2010, an unrelated party contributed a shuttle tanker with a value of $35.0 million to a subsidiary of Teekay Offshore for a 33% equity
interest in the subsidiary. The non-controlling interest owner of Teekay Offshore’s 67% owned subsidiary holds a put option which, if exercised,
would obligate Teekay 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, 2013.
e) 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, 2013, 2012, and 2011, are as follows:
F - 32
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued and other liabilities
Year Ended December 31,
2013
(77,837)
(2,386)
(10,877)
155,284
64,184
2012
(132,873)
19,741
18,408
(20,485)
(115,209)
2011
(68,914)
(8,225)
12,216
(19,424)
(84,347)
b) Cash interest paid, including realized interest rate swap settlements, during the years ended December 31, 2013, 2012, and 2011, totaled
$282.4 million, $274.2 million and $279.1 million, respectively. In addition, during the years ended December 31, 2013, 2012, and 2011,
cash interest paid relating to interest rate swap amendments and terminations totaled $36.0, $nil and $149.7 million, respectively.
c) During 2013, Teekay LNG acquired two LNG carriers from Awilco for a purchase price of $205.0 million per vessel. The upfront
prepayment of charter hire of $51.0 million (inclusive of a $1.0 million upfront fee) per vessel was used to offset the purchase price and
was treated as a non-cash transaction in the consolidated statements of cash flows.
d) As described in Note 10, the sale of the Tenerife Spirit resulted in the vessel under capital lease being returned to the owner and the
capital lease obligation concurrently extinguished. Therefore, the sale of the vessel under capital lease of $29.7 million and the concurrent
extinguishment of the corresponding capital lease obligation of $29.7 million was treated as a non-cash transaction in the consolidated
statements of cash flows.
18. Vessel Sales, Asset Impairments and Provisions
a) Vessel Sales
During 2013, the Company sold a 1992-built shuttle tanker, a 1992-built conventional tanker, two 1995-built conventional tankers and a 1998-
built conventional tanker that were part of the Company’s shuttle tanker and conventional tanker segments. The Company realized a net gain of
$0.7 million from the sale of these vessels. Three of these vessels were classified as held for sale on the consolidated balance sheet as at
December 31, 2012, with their net book values written down to their sale proceeds net of cash outlays to complete the sales. All of the vessels
were older vessels that the Company disposed of in the ordinary course of business. During 2013, the Company sold sub-sea equipment from
the Petrojarl I FPSO unit that is part of the Company’s FPSO segment. The Company realized a gain of $1.3 million from the sale of the
equipment.
During 2012, the Company sold two shuttle tankers and three conventional tankers, resulting in a loss on sale of $1.1 million (shuttle tanker
segment) and $5.9 million (conventional tanker segment). In addition, the Company sold its joint venture interest in the Ikdam FPSO unit and
realized a gain of $10.8 million, which has been recorded in equity income (loss) on the Company’s consolidated statements of income (loss)
for the year ended December 31, 2012. During 2011, the Company sold one FSO unit and one conventional tanker, resulting in a loss on sale
of $0.2 million (shuttle tanker and FSO segment).
b) Asset Impairments and Provisions
During December 2013, the Company commenced a process to dispose of four vessel owning companies (or LLCs), each of which owns one
2009-built Suezmax tanker, through the sale to a new entity. This new entity, Tanker Investments Ltd. (or TIL), was ultimately incorporated on
January 10, 2014. On January 23, 2014, TIL completed a $250 million equity private placement which Teekay Tankers and Teekay co-invested
$25 million each for a combined 20% ownership interest in the new company. Concurrent with this equity private placement, Teekay entered
into an agreement to sell the four Suezmax tankers to TIL for $163.2 million plus working capital less outstanding debt of the LLCs on closing,
which occurred on February 28, 2014. The Company has presented the assets and liabilities of the LLCs as assets held for sale and liabilities
held for sale on the Company’s December 31, 2013 balance sheet as follows:
Assets Held for Sale
Accounts receivable
Prepaid expenses
Vessels and equipment
Other long-term assets
Total assets
Liabilities Associated with Assets Held for Sale
Accounts payable
Accrued liabilities
Current portion of long-term debt(note 8)
Long-term debt(note 8)
Total liabilities
$
11,179
1,220
163,200
648
176,247
37
3,362
11,698
152,910
168,007
The Company wrote down the four Suezmax tankers to their estimated fair value of $163.2 million, which consists of their sale price, resulting in
the recognition of an asset impairment of $90.8 million in the Company’s consolidated statement of income (loss) for the year ended December
31, 2013. The vessels were part of the Company’s conventional tanker segment.
F - 33
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
In 2013, the carrying value of six of the Company’s 1990s-built shuttle tankers were written down to their estimated fair values, using an
appraised value. The Company’s consolidated statement of income (loss) for the year ended December 31, 2013, includes a $76.8 million
write-down related to these six vessels, of which $56.5 million relates to four shuttle tankers which Teekay Offshore owns through subsidiaries
with ownership interests ranging from 50% to 67%. During the third quarter of 2013, four of these six shuttle tankers were written down as the
result of the re-contracting of one of the vessels at lower rates than expected during the third quarter of 2013, the cancellation of a short-term
contract which occurred in September 2013 and a change in expectations for the contract renewal for two of the shuttle tankers. In the fourth
quarter of 2013, the remaining two of the six shuttle tankers were written down due to a cancellation in their contract renewal. The $76.8 million
write-down is included within the Company’s shuttle tanker segment.
During 2013, the Company increased the net carrying amount of the investments in term loans, which includes accrued interest income, by
$1.9 million as the estimated future cash flows, which primarily reflects the estimated value of the underlying collateral, increased during 2013.
The investments in term loans are part of the Company’s conventional tanker segment. The net carrying amount of the loans consists of the
present value of estimated future cash flows at December 31, 2013, and will be adjusted each subsequent reporting period to reflect any
changes in the present value of estimated future cash flows (see Note 4). However, as at December 31, 2013, $11.2 million of interest
receivable under the term loans, including default interest, was not recorded in respect of its investments in the three term loans based on the
Company’s estimates of amounts receivable from its collateral.
During 2013, the Company recorded a $2.6 million of loss provision relating to a receivable for an FPSO front-end engineering and design
study which was completed during the year.
In 2012, 19 conventional tankers were written down to their estimated fair value using an appraised value, resulting in a total write down of
$405.3 million within the conventional tanker segment. The appraised values were determined based on second-hand sale and purchase
market data. This write-down includes ten Suezmax tankers ($335.0 million), seven Aframax tankers ($66.0 million), and two other conventional
tankers ($4.3 million). When comparing seven of the ten Suezmax tankers to each other and when comparing four of the seven Aframax
tankers to each other, the vessels have a similar age, had a similar carrying value before the impairment and a similar estimated fair value, and
are all being employed in the spot market or on short term time-charters. The total write down of $405.3 million includes $350.2 million from
these eleven vessels. The primary factors that occurred in during the fourth quarter of 2012 that caused the write downs were the effects on
our estimated future cash flows from negative changes in the outlook for the crude tanker market, delays in the recovery of the crude tanker
market as well as the expected discrimination impact from more fuel efficient vessels being constructed. One of the seven Aframax tankers was
held for sale at December 31, 2012 and was subsequently sold in January 2013.
In 2012, four older shuttle tankers and one FSO unit were written down to their estimated fair value, resulting in a total write down of $28.8
million within the shuttle tanker and FSO segment. The write-downs were the result of the Company entering into agreements in the fourth
quarter of 2012 to sell two shuttle tankers and a change in the operating plans for the remaining vessels. Excluding one shuttle tanker, the
estimated fair value for all five vessels was determined using an appraised value, based on second hand sale and purchase market data. The
estimated fair value for the remaining vessel was determined using a discounted cash flow approach. Such a technique used estimates of
future operating life (2.2 years based on the estimated remaining trading life of this vessel), future revenues ($37.2 million based on field
production forecasts and the availability of contracts of affreightment suitable for the vessel), operating and dry-dock expenditures ($20.5
million), a residual value ($6.5 million based on the vessel’s light weight tonnage and the price of steel), and a discount rate (7.9%) that
approximates the weighted average cost of capital of a market participant.
In 2011, eight older conventional tankers were written down to their estimated fair value using an appraised value, resulting in a total write down
of $112.1 million within the conventional tanker segment. The write downs were the result of a change in the operating plans for certain vessels,
escalating dry dock costs, a general decline in the future outlook for shipping and the global economy combined with delayed optimism on
when economic recovery may occur.
In 2011, three older shuttle tankers and one FSO unit were written down to their estimated fair value using an appraised value, resulting in a
total write down of $43.2 million within the shuttle tanker and FSO segment. The write downs were the result of the age of the vessels, the
requirements of operating in the North Sea and Brazil, a change in the operating plans for certain vessels, and escalating dry dock costs.
During the year ended December 31, 2011, the Company incurred a $19.4 million write-down of its investment in Petrotrans Holdings Ltd. (or
PTH), a 50% joint venture which provides ship-to-ship lightering services. The write-down was recorded in equity income (loss) on the
Company’s consolidated statements of income (loss) for the year ended December 31, 2011. 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 PTH. The recognition of this write-down was driven by the continuing weak tanker market.
See Note 2 – Segment Reporting for the total write down of vessels by segment for 2013, 2012 and 2011.
F - 34
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
19. Loss Per Share
2013
$
Year Ended December 31,
2012
$
2011
$
Net loss attributable to stockholders’ of Teekay Corporation
(114,738)
(160,180)
(358,616)
Weighted average number of common shares
Dilutive effect of stock-based compensation
Common stock and common stock equivalents
70,457,968
-
70,457,968
69,263,369
-
69,263,369
70,234,817
-
70,234,817
Loss per common share:
- Basic
- Diluted
(1.63)
(1.63)
(2.31)
(2.31)
(5.11)
(5.11)
The anti-dilutive effect attributable to outstanding stock-based compensation excluded from the calculation of diluted loss per common share,
for the years ended December 31, 2013, 2012, and 2011 was 1.0 million, 3.9 million and 5.7 million shares, respectively.
20. Restructuring Charges
During 2013, the Company recorded restructuring charges of $6.9 million ($7.6 million – 2012, $5.5 million - 2011).
A portion of the restructuring charges in 2013 relate to the termination of the employment of certain seafarers from the sale of two vessels and
the reflagging of one shuttle tanker. The restructuring charges in 2012 and a portion of the restructuring charges in 2013 primarily relate to the
reorganization of the Company’s marine operations and certain of its commercial and administrative functions. The purpose of this
restructuring is to create better alignment between certain of the Company’s business units and its three publicly-listed subsidiaries, as well as
a lower cost organization. The Company does not expect to incur further restructuring charges associated with this reorganization. The
restructuring charges in 2011 were primarily related to the sale of an FSO unit, the Karratha Spirit, and the termination of the time-charter for
the shuttle tanker, Basker Spirit, resulting in the termination of the employment of certain seafarers of the two vessels.
At December 31, 2013 and 2012, $4.9 million and $3.4 million, respectively, of restructuring liabilities were 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:
December 31,
December 31,
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
2013
$
73,750
427,656
32,012
533,418
19,555
22,008
30,519
72,082
461,336
(442,504)
18,832
2012
$
58,825
427,443
64,194
550,462
26,503
33,764
40,117
100,384
450,078
(421,343)
28,735
Net deferred tax assets are presented in other non-current assets in the accompanying consolidated balance sheets.
F - 35
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) Substantially all of the Company’s net operating loss carryforwards of $1.74 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 Company also has $20.8 million in disallowed finance costs that relate to its Spanish subsidiaries and are available to offset future finance
costs and can be carried forward for 18 years.
The components of the provision for income taxes are as follows:
Current
Deferred
Income tax (expense) recovery
Year Ended
December 31,
Year Ended
December 31,
Year Ended
December 31,
2013
$
2,742
(5,614)
(2,872)
2012
$
9,167
5,239
14,406
2011
$
(6,768)
2,478
(4,290)
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:
Net income (loss) before taxes
Net loss not subject to taxes
Net income (loss) subject to taxes
Year Ended
December 31,
2013
$
38,352
(267,665)
306,017
Year Ended
December 31,
2012
$
(325,522)
(129,307)
(196,215)
Year Ended
December 31,
2011
$
(372,131)
(341,473)
(30,658)
At applicable statutory tax rates
Permanent and currency differences, adjustments to
valuation allowances and uncertain tax positions
Other
Income tax expense (recovery) related to the current year
12,719
(15,808)
(8,987)
(8,173)
(1,675)
2,872
(2,817)
4,218
(14,406)
7,307
5,970
4,290
The following is a roll-forward of the Company’s unrecognized tax benefits, recorded in other long-term liabilities, from January 1, 2011 to
December 31, 2013:
Balance of unrecognized tax benefits - beginning of the year
Increases for positions related to the current year
Changes for positions taken in prior years
Decreases related to statute of limitations
Balance of unrecognized tax benefits - end of the year
Year ended
December 31,
2013
$
Year ended
December 31,
2012
$
Year ended
December 31,
2011
$
29,364
1,141
(1,284)
(8,917)
20,304
39,804
4,560
(5,085)
(9,915)
29,364
45,302
3,308
83
(8,889)
39,804
The majority of the net decrease for positions for the year ended December 31, 2013 relates to potential tax on freight income becoming statute
barred.
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 2009 through 2013 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 a reduction of $7.2 million in 2013, net of
statute barred liabilities, and $0.8 million in 2012 and $1.8 million in 2011.
F - 36
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
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 percentage 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, 2013, 2012, and 2011, the amount of cost recognized for the Company's defined contribution pension
plans was $14.8 million, $14.5 million and $18.3 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, 2013, approximately 71% of the defined benefit pension assets were held by the Norwegian plans
and approximately 29% are held by the Australian 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.
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:
Year Ended
December 31, 2013
$
Year Ended
December 31, 2012
$
Change in benefit obligation:
Beginning balance
Service cost
Interest cost
Contributions by plan participants
Actuarial (gain) loss
Benefits paid
Plan settlements and amendments
Benefit obligations assumed on acquisition
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
Plan settlements and amendments
Plan assets assumed on acquisition
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:
Net actuarial losses
148,490
9,768
4,974
481
3,396
(9,501)
(3,126)
3,125
(6,515)
(96)
150,996
134,408
4,453
14,609
481
(9,470)
(2,118)
2,502
(5,564)
(425)
138,876
(12,120)
12,120
(20,922)
137,172
10,004
4,436
692
(12,059)
(3,216)
6,549
-
7,962
(3,050)
148,490
110,698
2,094
13,404
692
(3,166)
4,328
-
6,848
(490)
134,408
(14,082)
14,082
(19,449)
(1) As at December 31, 2013, the estimated amount that will be amortized from accumulated other comprehensive (loss) income into net periodic benefit cost in
2014 is $(1.0) million.
F - 37
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
As of December 31, 2013 and 2012, the accumulated benefit obligation for the Benefit Plans was $116.1 million and $115.0 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, 2013
$
December 31, 2012
$
88,140
71,955
1,319
689
125,945
106,616
4,350
2,795
The components of net periodic pension cost relating to the Benefit Plans for the years ended December 31, 2013, 2012 and 2011 consisted
of the following:
Net periodic pension cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Plan settlement
Other
Net cost
Year Ended
December 31,
2013
$
Year Ended
December 31,
2012
$
Year Ended
December 31,
2011
$
9,768
4,974
(5,688)
1,484
973
425
11,936
9,921
4,392
(5,270)
1,980
-
577
11,600
8,978
5,250
(5,805)
371
-
421
9,215
The components of other comprehensive loss relating to the Plans for the years ended December 31, 2013, 2012 and 2011 consisted of the
following:
Other comprehensive income (loss):
Net (loss) gain arising during the period
Amortization of net actuarial loss (gain)
Plan settlement
Total (loss) income before income taxes
Year Ended
December 31,
2013
$
Year Ended
December 31,
2012
$
Year Ended
December 31,
2011
$
(3,930)
1,484
973
(1,473)
6,143
1,979
-
8,122
(12,052)
319
-
(11,733)
The Company estimates that it will make contributions into the Benefit Plans of $11.2 million during 2014. The following table provides the
estimated future benefit payments, which reflect expected future service, to be paid by the Benefit Plans:
Year
2014
2015
2016
2017
2018
2019 – 2023
Total
F - 38
Pension
Benefit
Payments
$
9,542
7,561
6,855
8,363
6,666
40,429
79,416
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
The fair value of the plan assets, by category, as of December 31, 2013 and 2012 were as follows:
Pooled Funds (1)
Mutual Funds (2)
Equity investments
Debt securities
Real estate
Cash and money market
Other
Total
December 31,
2013
December 31,
2012
98,338
18,080
3,811
2,108
8,796
7,743
138,876
94,981
19,907
4,298
3,843
672
10,707
134,408
(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 classes, 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 Company’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.
The weighted average assumptions used to determine benefit obligations at December 31, 2013 and 2012 were as follows:
Discount rates
Rate of compensation increase
December 31, 2013
December 31, 2012
3.9%
4.7%
3.0%
5.5%
The weighted average assumptions used to determine net pension expense for the years ended December 31, 2013, 2012 and 2011
were as follows:
Discount rates
Rate of compensation increase
Expected long-term rates of return (1)
Year Ended
December 31,
2013
$
Year Ended
December 31,
2012
$
Year Ended
December 31,
2011
$
3.9%
4.7%
4.8%
3.0%
5.5%
4.8%
3.2%
4.4%
5.0%
(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.
F - 39
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
23. Equity Accounted Investments
In June 2013, Teekay Offshore completed the acquisition from Teekay of its 50% interest in a FPSO unit, the Cidade de Itajai (or Itajai), The
Itajai FPSO has been operating on the Baúna and Piracaba (previously named Tiro and Sidon) fields in the Santos Basin offshore Brazil since
February 2013 under a nine-year fixed-rate time-charter contract, plus extension options, with Petrobras. The remaining 50% interest in the
Itajai FPSO unit is owned by Brazilian-based Odebrecht Oil & Gas S.A. (a member of the Odebrecht group) (or Odebrecht).
In February 2013, Teekay LNG entered into a joint venture agreement with Exmar to own and charter-in LPG carriers with a primary focus on
the mid-size gas carrier segment. Exmar LPG BVBA, took economic effect as of November 1, 2012 and, as of December 31, 2013, included 23
owned LPG carriers (including 12 newbuilding carriers scheduled for delivery between 2014 and 2018) and five chartered-in LPG carriers.
Teekay LNG and Exmar each have a 50% economic interest in Exmar LPG BVBA. Since control of the Exmar LPG BVBA is shared jointly
between Exmar and Teekay LNG, Teekay LNG accounts for its investment in the Exmar LPG BVBA using the equity method (see note 3b).
In February 2012, the Teekay LNG-Marubeni Joint Venture acquired a 100% interest in the six LNG Carriers from Denmark-based A.P. Moller-
Maersk A/S for approximately $1.3 billion. Teekay LNG and Marubeni Corporation (or Marubeni) have 52% and 48% economic interests,
respectively, but share control of Teekay LNG-Marubeni Joint Venture. Since control of the Teekay LNG-Marubeni Joint Venture is shared
jointly between Marubeni and Teekay LNG, Teekay LNG accounts for its investment in the Teekay LNG-Marubeni Joint Venture using the
equity method (see note 3c).
Teekay LNG has a 33% ownership interest in four newbuilding 160,400-cubic meter LNG carriers (or the Angola LNG Carriers). The Angola
LNG Carriers are chartered at fixed rates to the Angola LNG Project. The Wah Kwong Joint Venture is a joint venture arrangement between
Teekay Tankers and Wah Kwong whereby Teekay Tankers holds a 50% interest. SkaugenPetrotrans Joint Venture is a joint venture
arrangement between Teekay and I.M. Skaugen Marine Services Pte Ltd. whereby Teekay holds a 50% interest. Teekay has a joint venture
interest of 49% in Remora AS (or Remora) a Norway-based offshore marine technology company, from which Teekay Offshore acquired a
2010-built HiLoad Dynamic Positioning (or DP) unit. 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. Teekay LNG has a 50% interest in a joint venture with Exmar (or the
Excalibur and Excelsior Joint Ventures) which owns two LNG carriers that are chartered out under long term contracts.
In November 2011, Teekay acquired a 40% interest in a recapitalized Sevan for approximately $25 million (see Note 3a). Sevan owns (i) two
partially-completed hulls 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 $37.1 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 December 31, 2013, the aggregate value of the Company’s 43% interest (43% interest - December 31,
2012) in Sevan, based on the quoted market price of Sevan’s common stock on the Oslo Stock Exchange was $94.3 million ($83.1 million –
December 31, 2012).
A condensed summary of the Company's investments in and advances to equity accounted investments are as follows (in thousands of U.S.
dollars, except percentages):
As at December 31,
Investments in Equity Accounted Investments
Teekay LNG-Marubeni Joint Venture (note 3b)
RasGas 3 Joint Venture
Exmar Joint Venture
Exmar LPG Joint Venture
Angola Joint Venture (note 3a)
Tiro and Sidon Joint Venture
Sevan Marine Equity Investment
Other
Total
Loans to Equity Accounted Investees
Sevan Marine Equity Investment
Exmar LPG Joint Venture
Tiro and Sidon Joint Venture
SkaugenPetroTrans Joint Venture
Other
Total(1)
Ownership
Percentage
52%
40%
50%
50%
33%
50%
43%
33% - 50%
Ownership
Percentage
43%
50%
50%
50%
33% - 52%
2013
$
228,183
125,648
86,387
82,576
54,168
52,118
40,740
20,489
690,309
2012
$
183,724
107,386
82,737
-
28,699
30,024
39,223
8,250
480,043
As at December 31,
2013
-
82,068
12,781
16,079
29,844
140,772
2012
133,000
-
18,121
9,500
22,233
182,854
(1) The Company also has loans to joint venture partners of $28.5 million as at December 31, 2013 (2012 - $24.0 million).
F - 40
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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 52% owned) shown on a 100%
basis are as follows:
Cash and restricted cash
Other assets- current
Vessels and equipment
Net investment in direct financing leases
Other assets - non-current
Current portion of long-term debt
Other liabilities - current
Long-term debt
Other liabilities - non-current
As at December 31,
2013(1)
323,065
168,537
2,598,690
1,907,458
310,649
500,831
217,511
2,807,153
422,482
2012(2)(3)
229,963
125,152
2,114,435
1,938,011
228,887
1,106,706
193,785
1,911,419
469,220
2011(3)
303,607
118,408
(127,230)
(48,996)
Revenues
Income from vessel operations
Realized and unrealized loss on derivative instruments
Net income (loss)
2013(1)
940,187
327,748
16,334
287,628
Year ended December 31,
2012(2)(3)
659,030
241,702
(56,307)
120,395
(1) The results included for the Exmar LPG BVBA are from the date of acquisition in February 2013.
(2) The results included for the Teekay LNG-Marubeni Joint Venture are from the date of acquisition of the MALT LNG Carriers which were acquired in February
2012.
(3) The results included for the Angola Joint Venture are from the time the vessels were delivered in August, September, October 2011 and January 2012,
respectively.
For the year ended December 31, 2013, the Company recorded equity income (loss) of $136.5 million (2012 – $79.2 million and 2011 - $(35.3)
million). The income or loss was primarily comprised of the Company’s share of net income (loss) from the Teekay LNG-Marubeni Joint
Venture, Angola LNG Project, the RasGas 3 Joint Venture, Sevan, Exmar Joint Venture, Exmar LPG BVBA, and from the interest in the Itajai.
For the year ended December 31, 2013, $31.2 million of the equity gain related to the Company’s share of unrealized gain (loss) on interest
rate swaps associated with these projects (2012 – $5.3 million and 2011 - $(35.2) million).
24. Change in Accounting Estimate
Effective January 1, 2012, the Company reduced the estimated useful life of six of its older shuttle tankers from 25 years to 20 years. As a
result of the change in useful life, the Company increased its estimate of the residual value of these vessels to reflect the more recent average
scrap prices. As a result, depreciation and amortization expense has increased by $14.9 million for the year ended December 31, 2012, and net
income attributable to the stockholders of Teekay has decreased by $4.4 million, or $0.06 per share, for the year ended December 31, 2012.
25. Subsequent Events
a)
b)
In January 2014, Teekay Offshore issued in the Norwegian bond market NOK 1,000 million in senior unsecured bonds, maturing in
January 2019. The aggregate principal amount of the bonds was equivalent to $162.2 million and all interest and principal payments have
been swapped into U.S. dollars at fixed rates of 6.28%. The proceeds from the bonds are to be used for general partnership purposes.
Teekay Offshore is applying to list the bonds on the Oslo Stock Exchange.
In January 2014, Teekay and Teekay Tankers formed TIL. The Company purchased 5.0 million shares of common stock, representing a
20% interest in TIL, as part of a $250 million private placement by TIL, which represents a total investment of $50.0 million. In addition, the
Company received stock purchase warrants entitling it to purchase up to 1,500,000 shares of common stock of TIL at a fixed price of $10
per share. The stock purchase warrants expire on January 23, 2019. For purposes of vesting, the stock purchase warrants are divided into
four equally sized tranches. Each tranche will vest and become exercisable when and if the fair market value of a share of the Common
Stock equals or exceeds $12.50, $15.00, $17.50 and $20.00, respectively (or equivalent amounts in NOK converted using an exchange
rate of 6.17) for such tranche for any ten consecutive trading days. The Company also received one Series A-1 preferred share and one
Series A-2 preferred share, each of which entitles the holder to elect one board member of TIL. The preferred shares do not give the
holder a right any dividends or distributions of TIL. In March 2014, TIL issued additional common shares and listed its shares on the Oslo
Stock Exchange. As of March 31, 2014, the combined interest of Teekay Tankers and Teekay in TIL was 13.0%. TIL will seek to
opportunistically acquire, operate and sell modern second hand tankers to benefit from an expected recovery in the current cyclical low of
the tanker market. A portion of the net proceeds from the equity issuances by TIL was used to acquire four modern Suezmax crude oil
tankers from Teekay and will be used to acquire five modern Aframax crude oil tankers from third parties. TIL shares were listed on the
Oslo Stock Exchange effective March 25, 2014.
F - 41
TEEKAY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share data)
c)
In March 2014, Teekay Offshore acquired 100% of the shares of ALP Maritime Services B.V. (or ALP), a Netherlands-based provider of
long-haul ocean towage and offshore installation services to the global offshore oil and gas industry. Concurrent with this transaction,
Teekay Offshore and ALP entered into an agreement with Niigata Shipbuilding & Repair of Japan for the construction of four state-of-the-
art SX-157 Ulstein Design ultra-long distance towing and anchor handling vessel newbuildings. These vessels will be equipped with
dynamic positioning capability and are scheduled for delivery in 2015 and 2016. Teekay Offshore is committed to acquire these
newbuildings for a total cost of approximately $258 million. Teekay Offshore acquired ALP for a purchase price of $6.1 million, of which
$2.6 million was paid in cash on closing and a further $3.5 million representing the fair value of contingent consideration. The contingent
consideration consists of $2.4 million which is contingently payable upon the delivery and employment of ALP’s four newbuildings. In
addition, the contingent consideration includes a further amount of up to $2.6 million, based on ALP’s annual operating results from 2017
to 2021. Teekay Offshore has the option to pay up to one half of the contingent consideration through the issuance of common units of
Teekay Offshore. Teekay Offshore also incurred $1.0 million of acquisition-related costs which have been recognized in general and
administrative expenses in March 2014. Teekay Offshore financed the ALP acquisition and initial newbuilding payments through its
existing liquidity and expects to secure long-term debt financing for the newbuildings prior to their deliveries. This acquisition represents
Teekay Offshore’s entrance into the long-haul ocean towage and offshore installation services business. This acquisition allows Teekay
Offshore to combine its infrastructure and access to capital with ALP’s experienced management team to further grow this niche business
that is in an adjacent sector to Teekay Offshore’s FPSO and shuttle tanker businesses.
F - 42
The following is a list of the Company’s significant subsidiaries as at March 31, 2014.
LISTING OF SUBSIDIARIES
EXHIBIT 8.1
Name of Subsidiary
Teekay Chartering Limited
Teekay Holdings Limited
Iliad International Inc.
Iliad International AS
Krepanor AS
VLCC C Investment LLC
Teekay Finance Limited
Orkney Spirit L.L.C.
Polarc L.L.C.
Taurus Tankers L.L.C.
Taurus Tankers Ltd.
Teekay Holdings Australia Pty Ltd.
Teekay Marine Pty Ltd.
Teekay Shipping (Australia) Pty Ltd
Australian Tankships Agency Pty Ltd
Teekay Shipping Limited
Teekay Norway (Marine HR) AS
Teekay Shipping (Barbados) Ltd.
Teekay Shipping (Canada) Ltd.
Teekay Shipping (Glasgow) Ltd.
Teekay Shipping (Japan) Ltd.
Teekay Shipping Norway AS
Ugland Stena Storage AS
TPO Investments Inc.
Teekay Petrojarl Holding AS
Teekay Petrojarl Production AS
Golar Nor (UK) Limited
Teekay Petrojarl Floating Production UK Ltd.
Petrojarl 4 DA
Knarr L.L.C.
Teekay Petrojarl Offshore L.L.C.
Teekay Petrojarl Offshore Crew AS
Teekay Knarr AS
Banff L.L.C.
Teekay Hummingbird General Partnership
Teekay Hummingbird Production Limited
Petrojarl I LLC
Teekay Petrojarl Crewing Services Pte. Ltd.
Teekay LNG Partners L.P.
Single Asset Limited Liability Companies
Teekay LNG Operating L.L.C.
Teekay Luxembourg S.A.R.L.
Teekay Spain, S.L.
Teekay Shipping Spain, S.L.
Naviera Teekay Gas, S.L.
Naviera Teekay Gas II, S.L.
Naviera Teekay Gas III, S.L.
Naviera Teekay Gas IV, S.L.
Teekay Nakilat Holdings Corporation
Teekay Nakilat Corporation
Al Areesh Inc.
Al Daayen Inc.
Al Marrouna Inc.
Teekay Nakilat (II) Limited
Teekay LNG Holdings L.P.
Teekay LNG Holdco L.L.C.
State or
Jurisdiction of
Incorporation
Marshall Islands
Bermuda
Marshall Islands
Norway
Norway
Marshall Islands
Bermuda
Marshall Islands
Marshall Islands
Marshall Islands
United Kingdom
Australia
Australia
Australia
Australia
Bermuda
Norway
Barbados
Canada
United Kingdom
Japan
Norway
Norway
Marshall Islands
Norway
Norway
United Kingdom
United Kingdom
Norway
Marshall Islands
Marshall Islands
Norway
Norway
Marshall Islands
Singapore
United Kingdom
Marshall Islands
Singapore
Marshall Islands
Marshall Islands
Luxembourg
Luxembourg
Spain
Spain
Spain
Spain
Spain
Spain
Marshall Islands
Marshall Islands
Marshall Islands
Marshall Islands
Marshall Islands
United Kingdom
United States
Marshall Islands
Proportion of
Ownership
Interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.25%
100%
100%
100%
100%
100%
100%
100%
100%
100%
35.30% (1)
35.30%
35.30%
35.30%
35.30%
35.30%
35.30%
35.30%
35.30%
35.30%
35.30%
24.71%
24.71%
24.71%
24.71%
24.71%
36.30%
36.30%
Teekay Tangguh Borrower L.L.C.
Teekay Tangguh Holdings Corporation
Teekay BLT Corporation
Tangguh Hiri Finance Limited
Tangguh Sago Finance Limited
Teekay Nakilat (III) Holdings Corporation
Teekay Offshore Partners L.P.
Single Asset Limited Liability Companies
Varg Production AS
Petrojarl Producao Petrolifera Do Brasil LTDA.
Piranema Production AS
Teekay Offshore Holdings L.L.C.
Tiro Sidon L.L.C.
Tiro Sidon UK L.L.P.
Teekay Voyageur Production Ltd
Teekay Offshore Operating L.P.
Norsk Teekay Holdings Ltd.
Teekay European Holdings, S.A.R.L.
Teekay Netherlands European Holdings B.V.
Norsk Teekay AS
Teekay Norway AS
Navion Offshore Loading AS
Teekay Navion Offshore Loading Pte. Ltd.
Ugland Nordic Shipping AS
Stena Ugland Shuttle Tankers DA I
Stena Ugland Shuttletankers DA II
Teekay Nordic Holdings Inc.
Teekay Shipping Partners DA
Teekay Shipping Partners Holding AS
Teekay Tankers Ltd.
Single Asset Limited Liability Companies
Marshall Islands
Marshall Islands
Marshall Islands
United Kingdom
United Kingdom
Marshall Islands
Marshall Islands
Marshall Islands
Norway
Brazil
Norway
Marshall Islands
Marshall Islands
United Kingdom
United Kingdom
Marshall Islands
Marshall Islands
Luxembourg
Netherlands
Norway
Norway
Norway
Singapore
Norway
Norway
Norway
Marshall Islands
Norway
Norway
Marshall Islands
Marshall Islands
36.30%
36.30%
25.41%
25.41%
25.41%
35.30%
29.31% (1)
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
29.31%
14.66%
14.66%
29.31%
19.54%
29.31%
25.09% (2)
25.09%
(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 53.1%.
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 (the “company”);
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 financial
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 28, 2014
By: /s/ Peter Evensen
Peter Evensen
President and Chief Executive Officer
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 (the “company”);
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 financial
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 28, 2014
By: /s/ Vincent Lok
Vincent Lok
Executive Vice President and Chief Financial Officer
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, 2013, 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 28, 2014
By: /s/ Peter Evensen
Peter Evensen
President and Chief Executive Officer
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, 2013, 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 28, 2014
By: /s/ Vincent Lok
Vincent Lok
Executive Vice President and Chief Financial Officer
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. 333-97746 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,
(5) No. 333-166523 on Form S-8 pertaining to the 2003 Equity Incentive Plan of Teekay;
(6) No. 333-187142 on Form S-8 pertaining to the 2013 Equity Incentive Plan of Teekay; and
(7) No. 333-192753 on Form F-3ASR and related Prospectus for the registration of 5,700,000 shares of common stock.
of our reports dated April 28, 2014, with respect to the consolidated financial statements as at December 31, 2013 and 2012 and for each of the
years in the three-year period ended December 31, 2013 and the effectiveness of internal control over financial reporting as of December 31, 2013,
which reports appear in the December 31, 2013 Annual Report on Form 20-F of Teekay Corporation.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
April 28, 2014