Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ___________________________________________________________
FORM 6-K
  ___________________________________________________________
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
Commission file number 1-33867
  ___________________________________________________________
TEEKAY TANKERS LTD.
(Exact name of Registrant as specified in its charter)
  ___________________________________________________________
4th Floor, Belvedere Building, 69 Pitts Bay Road, Hamilton, HM 08, Bermuda
(Address of principal executive offices)
  ___________________________________________________________
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F  ý            Form 40-F  ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1).
Yes  ¨            No   ý
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7).
Yes  ¨            No   ý








 


Table of Contents

TEEKAY TANKERS LTD.
REPORT ON FORM 6-K FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
INDEX
 
PAGE
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.



Table of Contents

PART I – FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
TEEKAY TANKERS LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF LOSS (notes 1 and 4)
(in thousands of U.S. dollars, except share and per share amounts)
 
 
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
 
 
 
$
 
$
 
$
 
$
 
REVENUES
 
 
 
 
 
 
 
Voyage charter revenues (notes 2 and 3)
 
152,047

 
25,397

 
432,017

 
94,881

 
Time-charter revenues (note 3)
 
12,326

 
24,681

 
51,820

 
85,102

 
Other revenues (notes 3 and 5)
 
11,542

 
12,914

 
32,202

 
41,994

 
Net pool revenues (notes 2, 3 and 13a)
 

 
28,246

 

 
108,535

 
Total revenues
 
175,915

 
91,238

 
516,039

 
330,512

 
 
 
 
 
 
 
 
 
 
Voyage expenses (notes 2, 3 and 13a)
 
(83,048
)
 
(18,303
)
 
(249,974
)
 
(61,488
)
 
Vessel operating expenses (note 13a)
 
(52,161
)
 
(40,958
)
 
(157,808
)
 
(131,949
)
 
Time-charter hire expense
 
(4,317
)
 
(5,835
)
 
(14,697
)
 
(27,459
)
 
Depreciation and amortization
 
(29,595
)
 
(24,328
)
 
(88,598
)
 
(73,652
)
 
General and administrative expenses (note 13a)
 
(8,747
)
 
(7,622
)
 
(27,939
)
 
(24,875
)
 
(Loss) gain on sale of vessels (note 14)
 

 
(7,926
)
 
170

 
(12,495
)
 
Restructuring charges
 
(213
)
 

 
(1,195
)
 

 
Loss from operations
 
(2,166
)
 
(13,734
)
 
(24,002
)
 
(1,406
)
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(15,006
)
 
(7,299
)
 
(41,666
)
 
(21,681
)
 
Interest income
 
250

 
305

 
568

 
744

 
Realized and unrealized gain (loss) on derivative instruments (note 9)
 
596

 
390

 
4,725

 
(709
)
 
Equity (loss) income (note 6)
 
(359
)
 
(274
)
 
265

 
(27,174
)
 
Other expense (note 10)
 
(799
)
 
(1,768
)
 
(3,940
)
 
(5,918
)
 
Net loss
 
(17,484
)
 
(22,380
)
 
(64,050
)
 
(56,144
)
 
 
 
 
 
 
 
 
 
 
 
Per common share amounts (note 15)
 
 
 
 
 
 
 
 
 
 - Basic loss per share
 
(0.07
)
 
(0.12
)
 
(0.24
)
 
(0.31
)
 
 - Diluted loss per share
 
(0.07
)
 
(0.12
)
 
(0.24
)
 
(0.31
)
 
 - Cash dividends declared
 

 
0.03

 
0.03

 
0.09

 
 
 
 
 
 
 
 
 
 
 
Weighted-average number of Class A and Class B common stock outstanding (note 15)
 
 
 
 
 
 
 
 
 
 - Basic and Diluted
 
268,558,556

 
179,224,094

 
268,470,804

 
178,853,698

 
 
 
 
 
 
 
 
 
 
 
Related party transactions (note 13)
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

1

Table of Contents

TEEKAY TANKERS LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (notes 1 and 4)
(in thousands of U.S. dollars)
 
 
As at
 
As at
 
 
September 30, 2018
 
December 31, 2017
 
 
$
 
$
ASSETS
 
 
Current
 
 
Cash and cash equivalents
 
54,361

 
71,439

Restricted cash – current
 
1,794

 
1,599

Pool receivable from affiliates, net (note 13b)
 
26,923

 
15,550

Accounts receivable, including affiliate balances of $0.2 million (2017 - $0.8 million) (note 2)
 
17,048

 
19,288

Due from affiliates (note 13b)
 
50,551

 
49,103

Current portion of derivative assets (note 9)
 
3,075

 
1,016

Prepaid expenses
 
22,662

 
18,690

Other current assets (note 2)
 
1,385

 

Total current assets
 
177,799

 
176,685

Restricted cash – long-term
 
2,672

 
2,672

Vessels and equipment
At cost, less accumulated depreciation of $550.1 million (2017 - $512.0 million)
 (note 7)
 
1,556,959

 
1,737,792

Vessels related to capital leases At cost, less accumulated depreciation of $38.7 million (2017 - $25.4 million) (note 8)
 
340,961

 
227,722

Investment in and advances to equity accounted investments (note 6)
 
24,811

 
25,460

Derivative assets (note 9)
 
5,531

 
4,226

Intangible assets
At cost, less accumulated amortization of $10.2 million (2017 - $8.2 million)
 
12,320

 
14,605

Other non-current assets
 
82

 
127

Goodwill
 
8,059

 
8,059

Total assets
 
2,129,194

 
2,197,348

LIABILITIES AND EQUITY
 
 
 
 
Current
 
 
 
 
Accounts payable
 
5,352

 
7,860

Accrued liabilities
 
35,717

 
34,608

Current portion of long-term debt (note 7)
 
103,843

 
166,745

Current obligation related to capital leases (note 8)
 
15,839

 
7,227

Deferred revenue
 
89

 
557

Due to affiliates (note 13b)
 
18,391

 
19,717

Total current liabilities
 
179,231

 
236,714

Long-term debt (note 7)
 
703,235

 
785,557

Long-term obligation related to capital leases (note 8)
 
280,871

 
141,681

Other long-term liabilities (note 10)
 
30,646

 
26,795

Total liabilities
 
1,193,983

 
1,190,747

Commitments and contingencies (notes 6, 7, 8 and 9)
 

 

Equity
 
 
 
 
Common stock and additional paid-in capital (585.0 million shares authorized, 231.6 million Class A and 37.0 million Class B shares issued and outstanding as of September 30, 2018 and 231.2 million Class A and 37.0 million Class B shares issued and outstanding as of December 31, 2017) (note 12)
 
1,295,709

 
1,294,998

Accumulated deficit
 
(360,498
)
 
(288,397
)
Total equity
 
935,211

 
1,006,601

Total liabilities and equity
 
2,129,194

 
2,197,348

The accompanying notes are an integral part of the unaudited consolidated financial statements.

2

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (notes 1 and 4)
(in thousands of U.S. dollars)
 
 
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
 
$
 
$
Cash, cash equivalents and restricted cash provided by (used for)
 
 
 
 
OPERATING ACTIVITIES
 
 
 
 
Net loss
 
(64,050
)
 
(56,144
)
Non-cash items:
 

 

Depreciation and amortization
 
88,598

 
73,652

(Gain) loss on sale of vessels (note 14)
 
(170
)
 
12,495

Unrealized (gain) loss on derivative instruments (note 9)
 
(3,287
)
 
1,268

Equity (income) loss
 
(265
)
 
27,174

Other
 
8,166

 
8,827

Change in operating assets and liabilities
 
(17,402
)
 
7,013

Expenditures for dry docking
 
(17,035
)
 
(6,448
)
Net operating cash flow
 
(5,445
)
 
67,837

 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Proceeds from long-term debt, net of issuance costs
 
46,128

 
14,919

Repayments of long-term debt
 
(92,380
)
 
(82,054
)
Prepayments of long-term debt
 
(102,717
)
 
(222,302
)
Proceeds from financing related to sales and leaseback of vessels (note 8)
 
156,644

 
153,000

Scheduled repayments of obligations related to capital leases (note 8)
 
(8,841
)
 
(2,312
)
Cash dividends paid
 
(8,052
)
 
(15,302
)
Proceeds from issuance of Class A common stock (note 12)
 

 
5,000

Proceeds from equity offerings, net of offering costs (note 12)
 

 
8,565

Other
 
(92
)
 
(241
)
Net financing cash flow
 
(9,310
)
 
(140,727
)
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Proceeds from sales of vessels (note 14)
 
589

 
45,859

Expenditures for vessels and equipment
 
(3,463
)
 
(3,503
)
Return of capital from equity-accounted investment
 
746

 

Loan repayments from equity-accounted investment
 

 
550

Net investing cash flow
 
(2,128
)
 
42,906

 
 
 
 
 
Decrease in cash, cash equivalents and restricted cash
 
(16,883
)
 
(29,984
)
Cash, cash equivalents and restricted cash, beginning of the period
 
75,710

 
94,907

Cash, cash equivalents and restricted cash, end of the period
 
58,827

 
64,923

Supplemental cash flow information (note 16)
The accompanying notes are an integral part of the unaudited consolidated financial statements.


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TEEKAY TANKERS LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (notes 1 and 4)
(in thousands of U.S. dollars, except share amounts)
 
 
 
Common Stock and Additional
Paid-in Capital
 
 
 
 
 
 
Thousands
of Common
Stock
#
 
Class A
$
 
Class B
$
 
Accumulated
Deficit
$
 
Total
$
Balance as at December 31, 2017
 
268,202

 
1,206,466

 
88,532

 
(288,397
)
 
1,006,601

Net loss
 

 

 

 
(64,050
)
 
(64,050
)
Dividends declared
 

 

 

 
(8,052
)
 
(8,052
)
Equity-based compensation (note 12)
 
357

 
985

 

 

 
985

Other
 

 
(274
)
 

 
1

 
(273
)
Balance as at September 30, 2018
 
268,559

 
1,207,177

 
88,532

 
(360,498
)
 
935,211

The accompanying notes are an integral part of the unaudited consolidated financial statements.


4

Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)


1.
Basis of Presentation

The unaudited interim consolidated financial statements (or consolidated financial statements) have been prepared in conformity with United States generally accepted accounting principles (or GAAP). These consolidated financial statements include the accounts of Teekay Tankers Ltd., its wholly-owned subsidiaries, equity-accounted investments, the Entities under Common Control (as defined in note 4) and any variable interest entities (or VIEs) of which it is the primary beneficiary (collectively, the Company). The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted and, therefore, these consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2017, filed on Form 20-F with the U.S. Securities and Exchange Commission (or the SEC) on April 24, 2018. In the opinion of management, these consolidated financial statements reflect all adjustments, consisting solely of a normal recurring nature, necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of those for a full fiscal year. Significant intercompany balances and transactions have been eliminated upon consolidation.


2.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (or FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, (or ASU 2014-09). ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue as each performance obligation is satisfied. ASU 2014-09 became effective for the Company as of January 1, 2018 and may be applied, at the Company’s option, retrospectively to each period presented or as a cumulative-effect adjustment as of such date. The Company has elected to apply ASU 2014-09 only to those contracts that were not completed as of January 1, 2018. The Company has adopted ASU 2014-09 as a cumulative-effect adjustment as of the date of adoption. The Company has identified the following differences on adoption of ASU 2014-09:

The Company previously presented the net allocation for its vessels participating in revenue sharing arrangements (or RSAs) as net pool revenues. The Company has determined that it is the principal in voyages its vessels perform that are included in the RSAs. As such, the revenue from those voyages is presented in voyage charter revenues and the difference between this amount and the Company's net allocation from the RSA is presented as voyage expenses. This had the effect of increasing voyage charter revenues and voyage expenses for the three and nine months ended September 30, 2018 by $73.6 million and $202.4 million, respectively. There was no cumulative impact to opening equity as at January 1, 2018.

The Company previously presented all accrued revenue as a component of accounts receivable. The Company has determined that if the right to such consideration is conditioned upon something other than the passage of time, such accrued revenue should be presented apart from accounts receivable. This had the effect of increasing other current assets and decreasing accounts receivable by $1.4 million at September 30, 2018.

In February 2016, FASB issued Accounting Standards Update 2016-02, Leases (or ASU 2016-02). ASU 2016-02 establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. For lessees, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 requires lessors to classify leases as a sales-type, direct financing, or operating lease. A lease is a sales-type lease if any one of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating that the lessor has transferred substantially all of the risks and benefits of the underlying asset to the lessee and a third party, the lease is a direct financing lease. All leases that are not sales-type leases or direct financing leases are operating leases. ASU 2016-02 is effective January 1, 2019, with early adoption permitted. FASB issued an additional accounting standards update in July 2018 that made further amendments to accounting for leases, including allowing the use of a transition approach whereby a cumulative effect adjustment is made as of the effective date, with no retrospective effect. The Company has elected to use this new optional transition approach. The Company will adopt ASU 2016-02 on January 1, 2019. To determine the cumulative effect adjustment, the Company will not reassess lease classification, initial direct costs for any existing leases and whether any expired or existing contracts are or contain leases. The adoption of ASU 2016-02 will result in a change in accounting method for the lease portion of the daily charter hire for the Company’s chartered-in vessels accounted for as operating leases with firm periods of greater than one year. Under ASU 2016-02, the Company will recognize a right-of-use asset and a lease liability on the balance sheet for these charters based on the present value of future minimum lease payments, whereas currently no right-of-use asset or lease liability is recognized. This will have the result of increasing the Company’s assets and liabilities. The pattern of expense recognition of chartered-in vessels is expected to remain substantially unchanged, unless the right-of-use asset becomes impaired. The Company is expecting to disclose in its consolidated financial statements for the year ended December 31, 2018 the quantitative impact of adopting ASU 2016-02.


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Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. This update replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update is effective for the Company as of January 1, 2020, with a modified-retrospective approach. The Company is currently evaluating the effect of adopting this new guidance.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which, among other things, provides guidance on two acceptable approaches of classifying distributions received from equity method investees in the statement of cash flows. This update became effective for the Company as of January 1, 2018, with a retrospective approach. The Company has elected to classify distributions received from equity method investees in the statement of cash flows based on the nature of the distribution. The adoption of this update did not have a material impact on the Company.

In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows: Restricted Cash, (or ASU 2016-18). ASU 2016-18 requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities are also required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 became effective for the Company as of January 1, 2018.  Adoption of ASU 2016-18 resulted in the Company including in its statement of cash flows changes in cash, cash equivalents and restricted cash.

3.
Revenue
The Company’s primary source of revenue is from chartering its vessels (Aframax tankers, Suezmax tankers and Long Range 2 (or LR2) tankers) to its customers. The Company utilizes two primary forms of contracts, consisting of voyage charters and time-charters.

The extent to which the Company employs its vessels on voyage charters versus time charters is dependent upon the Company’s chartering strategy and the availability of time charters. Spot market rates for voyage charters, including conventional voyages and lightering voyages, are volatile from period to period, whereas time charters provide a stable source of monthly revenue. The Company also provides ship-to-ship support services, which includes managing the process of transferring cargo between seagoing ships positioned alongside each other, either stationary or underway, as well as commercial management services to third-party owners of vessels. Finally, the Company manages LNG terminals and procures LNG-related goods and services for terminal owners and other customers.

Voyage Charters

Voyage charters are charters for a specific voyage that are usually priced on a current or "spot" market rate and then adjusted for any pool participation based on predetermined criteria. Voyage charters for full service lightering voyages may also be priced based on pre-agreed terms. The performance obligations within a voyage charter contract, which will typically include the lease of the vessel to the charterer as well as the operation of the vessel, are satisfied as services are rendered over the duration of the voyage, as measured using the time that has elapsed from commencement of performance. In addition, any expenses that are unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions, are the responsibility of the vessel owner. The Company’s voyage charters will normally contain a lease; however, judgment is necessary to determine whether this is the case based upon the decision-making rights the charterer has under the contract. Such contracts are considered either fixed or variable, depending on certain conditions. Delays caused by the charterer result in additional consideration. Payment for the voyage is not due until the voyage is completed. The duration of a single voyage will typically be less than three months. The Company does not engage in any specific tactics to minimize vessel residual value risk due to the short-term nature of the contracts.

Time Charters

Pursuant to a time charter, the Company charters a vessel to a customer for a fixed period of time, generally one year or more. The performance obligations within a time-charter contract, which will include the lease of the vessel to the charterer as well as the operation of the vessel, are satisfied as services are rendered over the duration of such contract, as measured using the time that has elapsed from commencement of performance. In addition, any expenses that are unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions, are the responsibility of the customer, as long as the vessel is not off-hire. Hire is typically invoiced monthly in advance for time-charter contracts, based on a fixed daily hire amount. However, certain sources of variability exist, including off-hire and profit share revenue. If the vessel is off-hire due to mechanical breakdown or for any other reason, the charterer does not pay charter hire for this time. For contracts including a profit share component, the profit share consideration occurs when actual spot tanker rates earned by the vessel exceed certain thresholds for a period of time. During the three and nine months ended September 30, 2018, the Company’s share of the revenue from the vessel in the Company’s High-Q Investment Ltd. (or High-Q) joint venture was $0.7 million and $3.4 million, respectively (September 30, 2017 - $1.7 million and $5.1 million). Variable consideration of the Company’s contracts is typically recognized as incurred, as either such revenue is allocated and accounted for under lease accounting requirements or, alternatively, such consideration is allocated to distinct periods within a contract that such variable consideration was incurred in. The Company does not engage in any specific tactics to minimize vessel residual value risk.

As at September 30, 2018, six of the Company’s vessels operated under time-charter contracts with the Company’s customers, of which four contracts are scheduled to expire in in the fourth quarter of 2018, and two contracts are scheduled to expire in 2019. One of the Company’s vessels is employed on a time-charter contract whereby the charterer has the option to extend the charter by one period of 12 months. As at September 30, 2018, the future hire payments to be received by the Company under time charters then in place were

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

approximately $14.4 million, comprised of $8.1 million (remaining 2018) and $6.3 million (2019). The hire payments should not be construed to reflect a forecast of total charter hire revenues for any of the periods. Future hire payments do not include hire payments generated from new contracts entered into after September 30, 2018, from unexercised option periods of contracts that existed on September 30, 2018 or from variable consideration, if any. In addition, future hire payments presented above have been reduced by estimated off-hire time for required period maintenance. Actual amounts may vary given future events such as unplanned vessel maintenance.

The carrying amount of the Company's owned vessels employed on time charters as at September 30, 2018, was $196.8 million (December 31, 2017 - $517.9 million). The cost and accumulated depreciation of the vessels employed on these time charters as at September 30, 2018 were $303.8 million (December 31, 2017 - $754.2 million) and $107.0 million (December 31, 2017 - $236.3 million), respectively. As at September 30, 2018, the Company had $0.1 million (December 31, 2017 - $0.5 million) of advanced payments recognized as contract liabilities that are expected to be recognized as time-charter revenues in the following period and are included in deferred revenue on the Company's consolidated balance sheets.

Other Revenues

Ship-to-ship support services include managing the process of transferring cargo between seagoing ships positioned alongside each other. Each operation is typically completed in less than 48 hours. The performance obligations within a commercial management contract are satisfied as services are rendered over the duration of such contracts. The management fee, consisting of a fixed component based on the number of days a vessel was under management and a variable component based on the vessel’s monthly earnings, is invoiced monthly in arrears for commercial management contracts. The performance obligations within an LNG terminal contract are satisfied as services are rendered over the duration of such contracts. The management fee, consisting of a fixed amount, subject to contingent annual inflationary adjustments, is typically invoiced monthly in arrears. Substantially all of the Company’s performance obligations are satisfied over the duration of the associated contract, and the Company uses the proportion of elapsed time as its method to recognize revenue over the contract duration. The variable consideration of the Company’s contracts is typically recognized as incurred as such consideration is allocated to distinct periods within a contract that such variable consideration was incurred in.

Revenue Table

The following table contains a breakdown of the Company's revenue by contract type for the three and nine months ended September 30, 2018 and September 30, 2017. All revenue is part of the Company's conventional tanker segment, except for revenue for ship-to-ship support services and LNG terminal management, consultancy, procurement and other related services, which is part of the Company's ship-to-ship transfer segment.


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Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
Voyage charters (1)
 
 
 
 
 
 
 
     Suezmax
90,267

 
271

 
243,771

 
12,905

     Aframax
29,210

 
4,869

 
76,952

 
13,900

     LR2
16,712

 

 
40,312

 

     Full service lightering
15,858

 
20,257

 
70,982

 
68,076

     Total
152,047

 
25,397

 
432,017

 
94,881

 
 
 
 
 
 
 
 
Time-charters
 
 
 
 
 
 
 
     Aframax
7,784

 
12,318

 
31,608

 
36,975

     Suezmax
2,909

 
9,167

 
13,063

 
35,918

     LR2
1,633

 
3,196

 
7,149

 
12,209

     Total
12,326

 
24,681

 
51,820

 
85,102

 
 
 
 
 
 
 
 
Other revenue
 
 
 
 
 
 
 
     Ship-to-ship support services
8,217

 
7,980

 
22,452

 
28,210

     Commercial management
2,050

 
3,112

 
6,246

 
9,448

     LNG terminal management, consultancy and other
1,275

 
1,822

 
3,504

 
4,336

     Total
11,542

 
12,914

 
32,202

 
41,994

 
 
 
 
 
 
 
 
Net pool revenues (1)
 
 
 
 
 
 
 
     Suezmax

 
18,820

 

 
66,261

     Aframax

 
4,832

 

 
23,195

     LR2

 
4,598

 

 
19,067

     MR

 
(4
)
 

 
12

     Total

 
28,246

 

 
108,535

Total revenues
175,915

 
91,238

 
516,039

 
330,512


(1)
Prior to the January 1, 2018 adoption of ASU 2014-09, the Company presented the net allocation for its vessels participating in RSAs as net pool revenues. The Company has determined that it is the principal in voyages its vessels perform that are included in the RSAs. As such, the revenue from those voyages is presented in voyage charter revenues and the difference between this amount and the Company's net allocation from the RSA is presented as voyage expenses. The adoption of ASU 2014-09 had the impact of increasing voyage charter revenues and voyage expenses for the three and nine months ended September 30, 2018 by $73.6 million and $202.4 million, respectively.

4.
Acquisition of Entities under Common Control
On May 31, 2017, the Company acquired from Teekay Holdings Ltd., a wholly-owned subsidiary of Teekay Corporation (or Teekay), the remaining 50% interest in Teekay Tanker Operations Ltd. (or TTOL) (see also note 6c) for $39.0 million, which included $13.1 million for working capital assumed. The Company issued approximately 13.8 million shares of the Company's Class B common stock to Teekay as consideration in addition to the working capital consideration of $13.1 million. As a result of the acquisition of a controlling interest in TTOL, the Company's consolidated financial statements prior to the date the Company acquired a controlling interest in TTOL are retroactively adjusted to eliminate the equity method of accounting previously used for the original 50% interest owned and to include 100% of the assets and liabilities and results of TTOL on a consolidated basis during the periods TTOL and the Company were under common control of Teekay and had begun operations. The effect of adjusting such information to accounts in periods prior to the Company's acquisition of the remaining 50% thereof is referred to as the "Entities under Common Control." All intercorporate transactions between the Company and TTOL that occurred prior to the acquisition by the Company have been eliminated upon consolidation.

Assets and liabilities of TTOL are reflected on the Company’s consolidated balance sheets at TTOL’s historical carrying values. The amount of the net consideration of $39.0 million that was in excess of TTOL’s historical carrying value of the net assets acquired of $13.3 million has been accounted for as a $25.7 million return of capital to Teekay.


8

Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

The effect of adjusting the Company’s consolidated financial statements for the TTOL common control transaction decreased the Company's net loss for the nine months ended September 30, 2017 by $1.3 million and increased the Company's revenues for the nine months ended September 30, 2017 by $8.6 million.

5.
Segment Reporting
The Company has two reportable segments, its conventional tanker segment and its ship-to-ship transfer segment. The Company’s conventional tanker segment consists of the operation of all of its tankers, including the operations of TTOL and Tanker Investments Ltd. (or TIL), which were acquired in 2017 (notes 4, 6 and 18), and those tankers employed on full service lightering contracts. The Company’s ship-to-ship transfer segment consists of the Company’s lightering support services, including those provided to the Company’s conventional tanker segment as part of full service lightering operations and LNG terminal management, consultancy, procurement and other related services. Segment results are evaluated based on income from 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 include results for the Company’s revenues and (loss) income from operations by segment for the three and nine months ended September 30, 2018 and September 30, 2017.
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conventional Tanker Segment
 
Ship-to-Ship
Transfer Segment (2)
 
Inter-segment Adjustment (1)
 
Total
 
 
$
 
 
$
 
 
$
 
 
$
 
Revenues (3)
 
166,423

 
 
12,019

 
 
(2,527
)
 
 
175,915

 
Voyage expenses (3)
 
(85,575
)
 
 

 
 
2,527

 
 
(83,048
)
 
Vessel operating expenses
 
(43,432
)
 
 
(8,729
)
 
 

 
 
(52,161
)
 
Time-charter hire expense
 
(2,935
)
 
 
(1,382
)
 
 

 
 
(4,317
)
 
Depreciation and amortization
 
(28,532
)
 
 
(1,063
)
 
 

 
 
(29,595
)
 
General and administrative expenses (4)
 
(7,985
)
 
 
(762
)
 
 

 
 
(8,747
)
 
Restructuring charges
 

 
 
(213
)
 
 

 
 
(213
)
 
Loss from operations
 
(2,036
)
 
 
(130
)
 
 

 
 
(2,166
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity loss
 
(359
)
 
 

 
 

 
 
(359
)
 

Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conventional Tanker Segment
 
Ship-to-Ship Transfer Segment (2)
 
Inter-segment Adjustment (1)
 
Total
 
 
$
 
 
$
 
 
$
 
 
$
 
Revenues (3)
 
81,758

 
 
11,902

 
 
(2,422
)
 
 
91,238

 
Voyage expenses (3)
 
(20,725
)
 
 

 
 
2,422

 
 
(18,303
)
 
Vessel operating expenses
 
(32,227
)
 
 
(8,731
)
 
 

 
 
(40,958
)
 
Time-charter hire expense
 
(4,629
)
 
 
(1,206
)
 
 

 
 
(5,835
)
 
Depreciation and amortization
 
(23,071
)
 
 
(1,257
)
 
 

 
 
(24,328
)
 
General and administrative expenses (4)
 
(6,823
)
 
 
(799
)
 
 

 
 
(7,622
)
 
(Loss) gain on sale of vessels
 
(7,968
)
 
 
42

 
 

 
 
(7,926
)
 
Loss from operations
 
(13,685
)
 
 
(49
)
 
 

 
 
(13,734
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity loss
 
(274
)
 
 

 
 

 
 
(274
)
 


9

Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conventional Tanker Segment
 
Ship-to-Ship Transfer Segment (2)
 
Inter-segment
Adjustment (1)
 
Total
 
 
 
$
 
 
$
 
 
$
 
 
$
 
Revenues (3)
 
490,083

 
 
35,061

 
 
(9,105
)
 
 
516,039

 
Voyage expenses (3)
 
(259,079
)
 
 

 
 
9,105

 
 
(249,974
)
 
Vessel operating expenses
 
(131,886
)
 
 
(25,922
)
 
 

 
 
(157,808
)
 
Time-charter hire expense
 
(10,326
)
 
 
(4,371
)
 
 

 
 
(14,697
)
 
Depreciation and amortization
 
(85,171
)
 
 
(3,427
)
 
 

 
 
(88,598
)
 
General and administrative expenses (4)
 
(25,385
)
 
 
(2,554
)
 
 

 
 
(27,939
)
 
Gain on sale of vessels
 

 
 
170

 
 

 
 
170

 
Restructuring charges
 
(152
)
 
 
(1,043
)
 
 

 
 
(1,195
)
 
Loss from operations
 
(21,916
)
 
 
(2,086
)
 
 

 
 
(24,002
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity income
 
265

 
 

 
 

 
 
265

 
Nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conventional Tanker Segment
 
Ship-to-Ship Transfer Segment (2)
 
Inter-segment
Adjustment (1)
 
Total

 
 
 
$
 
 
$
 
 
$
 
 
$
 
Revenues (3)
 
299,154

 
 
39,387

 
 
(8,029
)
 
 
330,512

 
Voyage expenses (3)
 
(69,517
)
 
 

 
 
8,029

 
 
(61,488
)
 
Vessel operating expenses
 
(100,586
)
 
 
(31,363
)
 
 

 
 
(131,949
)
 
Time-charter hire expense
 
(23,698
)
 
 
(3,761
)
 
 

 
 
(27,459
)
 
Depreciation and amortization
 
(69,857
)
 
 
(3,795
)
 
 

 
 
(73,652
)
 
General and administrative expenses (4)
 
(22,258
)
 
 
(2,617
)
 
 

 
 
(24,875
)
 
(Loss) gain on sale of vessels
 
(12,545
)
 
 
50

 
 

 
 
(12,495
)
 
Income (loss) from operations
 
693

 
 
(2,099
)
 
 

 
 
(1,406
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity loss
 
(27,174
)
 
 

 
 

 
 
(27,174
)
 

(1)
The ship-to-ship transfer segment provides lightering support services to the conventional tanker segment for full service lightering operations and the pricing for such services was based on actual costs incurred.
(2)
Revenues, net of the inter-segment adjustment, earned from the ship-to-ship transfer segment are reflected in Other Revenues in the Company's consolidated statements of loss.
(3)
The comparative periods do not include the impact of the January 1, 2018 adoption of ASU 2014-09 (see note 2).
(4)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of corporate resources).












10

Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

A reconciliation of total segment assets to total assets presented in the accompanying consolidated balance sheets is as follows:
 
As at
 
As at
 
September 30, 2018
 
December 31, 2017
 
$
 
$
Conventional Tanker Segment
2,036,698

 
2,089,099

Ship-to-Ship Transfer Segment
38,135

 
36,810

Cash and cash equivalents
54,361

 
71,439

Consolidated total assets
2,129,194

 
2,197,348


6.
Investments in and Advances to Equity-Accounted Investments
 
 
As at September 30, 2018
 
As at December 31, 2017
 
 
$
 
$
High-Q Joint Venture
 
24,811

 
24,546

Gemini Tankers L.L.C.
 

 
914

Total
 
24,811

 
25,460


a.
The Company has a joint venture arrangement with Wah Kwong Maritime Transport Holdings Limited (or Wah Kwong), whereby the Company has a 50% economic interest in the High-Q joint venture, which is jointly controlled by the Company and Wah Kwong. The High-Q joint venture owns one Very Large Crude Carrier (or VLCC), which traded on a fixed time charter-out contract that expired in May 2018. Under the fixed contract, the vessel earned a daily rate and an additional amount if the daily rate of sub-charters exceeded a certain threshold. The VLCC completed its dry dock in July 2018 and subsequently began trading on spot voyage charters in a pooling arrangement managed by a third party.

As at September 30, 2018, the High-Q joint venture has a loan outstanding with a financial institution with a balance of $38.7 million (December 31, 2017 – $42.7 million). The loan is secured by a first-priority mortgage on the VLCC owned by the High-Q joint venture and 50% of the outstanding loan balance is guaranteed by the Company. The High-Q joint venture also had an interest rate swap agreement that expired in June 2018. The interest rate swap exchanged a receipt of floating interest based on 3-months LIBOR for a payment of a fixed rate of 1.47% every three months.

b.
In January 2014, the Company and Teekay formed TIL, which owned and operated conventional tankers. The Company purchased 2.5 million shares of TIL common stock for $25.0 million and received a stock purchase warrant entitling it to purchase up to 750,000 additional shares of common stock of TIL (note 9). The Company also received one preferred share which entitled the Company to elect one board member of TIL. The preferred share did not give the Company a right to any dividends or distributions of TIL.

On May 31, 2017, the Company entered into a Merger Agreement to acquire the remaining 27.0 million issued and outstanding common shares of TIL, by way of a share-for-share exchange of 3.3 shares of Class A common stock of the Company for each outstanding share of TIL common stock not owned by the Company. Prior to the completion of the merger, the Company accounted for its 11.3% investment in TIL using the equity method. As the Company then accounted for its investment in TIL under the equity method, the Company was required to remeasure its previously held equity investment to fair value at the acquisition date. Based on the then pending transaction, the Company recognized an other than temporary impairment and remeasured its investment in TIL to fair value during the second quarter of 2017 based on the TIL share price at June 30, 2017, resulting in a write-down of $28.1 million presented in equity (loss) income on the consolidated statements of loss. On November 27, 2017, the Company completed the merger with TIL and the Company remeasured its equity investment in TIL to fair value based on the relative share exchange value at the date of the acquisition, which resulted in the recognition of a gain of $1.4 million presented in equity (loss) income on the consolidated statements of loss.

c.
On May 31, 2017, the Company purchased from Teekay the remaining 50% interest in TTOL, which owns conventional tanker commercial management and technical management operations and directly administers four commercially managed RSAs, for $39.0 million, which included $13.1 million for assumed working capital (note 4). Prior to the May 31, 2017 purchase, the Company equity-accounted for its initial 50% interest in TTOL.



11

Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

7.
Long-Term Debt
 
As at
 
As at
 
September 30, 2018
 
December 31, 2017
 
$
 
$
Revolving Credit Facilities due through 2022
465,763

 
539,735

Term Loans due through 2021
348,946

 
423,512

Total principal
814,709

 
963,247

Less: unamortized discount and debt issuance costs
(7,631
)
 
(10,945
)
Total debt
807,078

 
952,302

Less: current portion
(103,843
)
 
(166,745
)
Non-current portion of long-term debt
703,235

 
785,557


As at September 30, 2018, the Company had three revolving credit facilities (or the Revolvers), which, as at such date, provided for aggregate borrowings of up to $500.6 million, of which $34.8 million was undrawn (December 31, 2017 - $628.3 million, of which $88.6 million was undrawn). Interest payments are based on LIBOR plus margins. As at September 30, 2018, such margins ranged between 2.00% and 2.75% (December 31, 2017: 0.45% and 2.75%). The total amount available under the Revolvers reduces by $51.4 million (remainder of 2018), $19.2 million (2019), $19.2 million (2020), $311.9 million (2021) and $98.9 million (2022). As at September 30, 2018, the Company also had three term loans outstanding, which totaled $348.9 million (December 31, 2017 - $423.5 million). Interest payments on the term loans are based on a combination of a fixed rate of 5.4% (December 31, 2017 - 5.4%) and variable rates based on LIBOR plus margins. As at September 30, 2018, the margins ranged from 0.30% to 2.00% (December 31, 2017 - 0.30% to 2.00%). The term loan repayments are made in quarterly or semi-annual payments. Two of the term loans also have a balloon or bullet repayment due at maturity in 2021. These revolving credit facilities and term loans are further described below.

In December 2017, the Company entered into a $270.0 million long-term debt facility (or the 2017 Revolver), which is scheduled to mature in December 2022. In December 2017, $215.8 million of the 2017 Revolver was used to refinance two of the Company's debt facilities that were assumed in the merger with TIL (note 18). These debt facilities were scheduled to mature in April 2019 and June 2020. As at September 30, 2018, the 2017 Revolver is collateralized by 8 of the Company's vessels, together with other related security. The 2017 Revolver also requires that the Company maintain a minimum hull coverage ratio of 125% of the total outstanding drawn balance for the facility period. Such requirement is assessed on a semi-annual basis with reference to vessel valuations compiled by two or more agreed upon third parties. Should the ratio drop below the required amount, the lender may request that the Company either prepay a portion of the loan in the amount of the shortfall or provide additional collateral in the amount of the shortfall, at the Company's option. As of September 30, 2018, the hull coverage ratio was 174% (December 31, 2017 - 191%). The vessel values used in this ratio are appraised values provided by third parties where available or prepared by the Company based on second-hand sale and purchase market data. A decline in the tanker market could negatively affect the ratio. In addition, the Company is required to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $35.0 million and at least 5% of the Company's total consolidated debt.

The Company entered into a $894.4 million long-term debt facility (or the 2016 Debt Facility), consisting of both a term loan and a revolving credit component, which are scheduled to mature in January 2021. The 2016 Debt Facility is collateralized by 29 of the Company’s vessels, together with other related security. The 2016 Debt Facility also requires that the Company maintain a minimum hull coverage ratio of 125% of the total outstanding drawn balance for the facility period. Such requirement is assessed on a semi-annual basis with reference to vessel valuations compiled by one or more agreed upon third parties. Should the ratio drop below the required amount, the lender may request that the Company either prepay a portion of the loan in the amount of the shortfall or provide additional collateral in the amount of the shortfall, at the Company’s option. As at September 30, 2018, the hull coverage ratio was 134% (December 31, 2017 - 145%). The vessel values used in this ratio are appraised values provided by third parties where available or prepared by the Company based on second-hand sale and purchase market data. A decline in the tanker market could negatively affect the ratio. In addition, the Company is required to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $35.0 million and at least 5.0% of the Company’s total consolidated debt.

As at September 30, 2018, the Company’s remaining revolver had an outstanding balance of $47.6 million (December 31, 2017 - $65.6 million) and was scheduled to mature in November 2018. The revolver is collateralized by three of the Company’s vessels, together with other related security, and requires that the Company's applicable subsidiary maintain a minimum hull coverage ratio of 105% of the total outstanding drawn balance for the facility period. Such requirement is assessed on an annual basis, with reference to vessel valuations compiled by one or more agreed upon third parties. Should the ratio drop below the required amount, the lender may request the Company to either prepay a portion of the loan in the amount of the shortfall or provide additional collateral in the amount of the shortfall, at the Company’s option. As at September 30, 2018, such revolver, with a minimum hull coverage ratio requirement, had a hull coverage ratio of 150% (December 31, 2017 - 118%). The vessel values used in this ratio are appraised values provided by third parties where available or prepared by the Company based on second-hand sale and purchase market data. A decline in the tanker market could negatively affect the ratio. The revolver is also guaranteed by Teekay and contains covenants that require Teekay (excluding the Company and Teekay LNG

12

Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

Partners L.P. (or TGP)) to maintain the greater of free liquidity (cash and cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $50.0 million and at least 5.0% of Teekay’s total consolidated debt which has recourse to Teekay.

The Company’s remaining two term loans are guaranteed by Teekay and are collateralized by six of the Company’s vessels, together with other related security. One of the term loans contains covenants that require Teekay and the Company collectively to maintain the greater of (a) free cash (cash and cash equivalents) of at least $50.0 million and (b) an aggregate of free cash and undrawn committed revolving credit lines with at least six months to maturity of at least 5.0% of Teekay’s total consolidated debt (excluding the debt of TGP). The other term loan requires Teekay and the Company collectively to maintain the greater of (a) free cash (cash and cash equivalents) of at least $100.0 million and (b) an aggregate of free cash and undrawn committed revolving credit lines with at least six months to maturity of at least 7.5% of Teekay's total consolidated debt (excluding the debt of TGP).

As at September 30, 2018, the Company was in compliance with all covenants in respect of the Revolvers and term loans. Teekay has also advised the Company that Teekay is in compliance with all covenants relating to the revolving credit facilities and term loans to which the Company is a party.
The weighted-average interest rate on the Company’s long-term debt as at September 30, 2018 was 4.3% (December 31, 2017 - 3.5%). This rate does not reflect the effect of the Company’s interest rate swap agreements (note 9).
The aggregate annual long-term principal repayments required to be made by the Company under the Revolvers and term loans subsequent to September 30, 2018, including the effect of the sale-leaseback transaction described in note 20, are $25.9 million (remaining 2018), $104.6 million (2019), $120.9 million (2020), $426.8 million (2021), $102.5 million (2022) and $34.0 million (thereafter).

8.
Leases
Obligations Related to Capital Leases
 
As at
 
As at
 
September 30, 2018
 
December 31, 2017
 
$
 
$
Aframax tankers
153,140

 

Suezmax tankers
143,570

 
148,908

Total obligations related to capital leases
296,710

 
148,908

Less: current portion
(15,839
)
 
(7,227
)
Long-term obligations related to capital leases
280,871

 
141,681

In September 2018, the Company completed a $156.6 million sale-leaseback financing transaction with a financial institution relating to six of the Company's Aframax tankers, the Blackcomb Spirit, Emerald Spirit, Garibaldi Spirit, Peak Spirit, Tarbet Spirit and Whistler Spirit.
In July 2017, the Company also completed a $153.0 million sale-leaseback financing transaction with a financial institution relating to four of the Company's Suezmax tankers, the Athens Spirit, Beijing Spirit, Moscow Spirit and Sydney Spirit.
Under these arrangements, the Company transferred the vessels to subsidiaries of the financial institutions (or collectively, the Lessors) and leased the vessels back from the Lessors on bareboat charters ranging from nine to 12-year terms. The Company has the option to purchase each of the four Suezmax tankers at any point between July 2020 and July 2029. The Company also has the option to purchase each of the six Aframax tankers at any point between September 2020 and the end of its respective term and is obligated to purchase the vessels on maturity of the bareboat charters.
The Company understands that these vessels and lease operations are the only assets and operations of the Lessors. The Company operates the vessels during the lease term, and as a result, is considered to be the Lessors' primary beneficiary and therefore the Company consolidates the Lessors for financial reporting purposes.
The liabilities of the Lessors are loans and are non-recourse to the Company. The amounts funded to the Lessors in order to purchase the vessels materially match the funding to be paid by the Company's subsidiaries under these lease-back transactions. As a result, the amounts due by the Company's subsidiaries to the Lessors have been included in obligations related to capital leases as representing the Lessors' loans.
The bareboat charters related to these vessels require that the Company maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) of $35.0 million and at least 5.0% of the Company's consolidated debt and obligations related to capital leases (excluding applicable security deposits reflected in restricted cash - long-term on the Company's consolidated balance sheets).
The Company is required for each of the four Suezmax tankers to maintain a hull coverage ratio of 90% of the total outstanding principal balance during the first three years of the lease period and 100% of the total outstanding principal balance thereafter. In addition, the Company is required for each of the six Aframax tankers to maintain a hull coverage ratio of 75% of the total outstanding principal balance during the first year of the lease period, 78% for the second year, 80% for the following two years and 90% of the total outstanding principal balance thereafter.

13

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

Such requirement is assessed annually with reference to vessel valuations compiled by one or more agreed upon third parties. As at September 30, 2018, this ratio for the Suezmax and Aframax tankers was approximately 100% and 89%, respectively (December 31, 2017 - 105% and nil). As at September 30, 2018, the Company was in compliance with all covenants in respect of the obligations related to capital leases.
As at September 30, 2018, the Company's remaining commitments under the 10 capital leases for the Suezmax and Aframax tankers was approximately $445.3 million, including imputed interest of $148.6 million, repayable from 2018 through 2029, as indicated below, excluding the sale-leaseback transaction described in note 20:
Year
 
Commitment
Remaining 2018
 
$
9,574

2019
 
$
37,954

2020
 
$
38,052

2021
 
$
37,943

2022
 
$
37,936

Thereafter
 
$
283,836


9.
Derivative Instruments
Interest rate swap agreements

The Company uses derivatives in accordance with its overall risk management policies. 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. The Company has not designated, for accounting purposes, its interest rate swaps as cash flow hedges of its U.S. Dollar LIBOR-denominated borrowings.

As at September 30, 2018, the Company was committed to the following interest rate swap agreements:
 
 
Interest Rate
 
Notional Amount
 
Fair Value / Carrying Amount of Asset
 
Remaining Term
 
Fixed Interest Rate
 
 Index
 
$
 
$
 
(years)
 
(%) (1)
LIBOR-Based Debt:
 
 
 
 
 
 
 
 
 
 
 
U.S. Dollar-denominated interest rate swaps (2)
LIBOR
 
104,133

 
 
1,770

 
 
2.3
 
1.46
U.S. Dollar-denominated interest rate swaps
LIBOR
 
150,000

 
 
4,720

 
 
2.3
 
1.55
U.S. Dollar-denominated interest rate swaps
LIBOR
 
50,000

 
 
2,014

 
 
2.3
 
1.16
 
(1)
Excludes the margin the Company pays on its variable-rate debt, which, as of September 30, 2018, ranged from 0.30% to 2.75%.
(2)
Notional amount reduces quarterly.

The Company is potentially exposed to credit loss in the event of non-performance by the counterparty to the interest rate swap agreements in the event that the fair value results in an asset being recorded. In order to minimize counterparty risk, the Company only enters into interest rate swap agreements with counterparties that are rated A– or better by Standard & Poor’s or A3 or better by Moody’s at the time transactions are entered into.
Stock purchase warrant
During 2017, the Company had one stock purchase warrant, which had entitled it to purchase up to 750,000 shares of common stock of TIL at certain conditions at pre-determined prices. The stock purchase warrant was not exercised and was canceled upon completion of the TIL merger in November 2017 (notes 6 and 18).

Time-charter swap agreement
Effective June 1, 2016, the Company entered into a time-charter swap agreement for 55% of two Aframax equivalent vessels. Under such agreement, the Company received $27,776 per day, less a 1.25% brokerage commission, and paid 55% of the net revenue distribution of two Aframax equivalent vessels employed in the Company’s Aframax RSA, less $500 per day, for a period of 11 months plus an additional two months at the counterparty’s option. The purpose of the agreement was to reduce the Company’s exposure to spot tanker market rate

14

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

variability for certain of its vessels that are employed in the Aframax RSA. The Company did not designate, for accounting purposes, the time-charter swap as a cash flow hedge. As of May 1, 2017, the time-charter swap counter-party did not exercise the two-month option and as such, the agreement was completed as of June 30, 2017.
Forward freight agreements
The Company uses forward freight agreements (or FFAs) in non-hedge-related transactions to increase or decrease its exposure to spot market rates, within defined limits. Net gains and losses from FFAs are recorded within realized and unrealized gain (loss) on derivative instruments in the Company's consolidated statements of loss.
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.
 
Current portion of derivative assets
 
Derivative assets
 
Accounts receivables (Accrued liabilities)
 
$
 
$
 
$
As at September 30, 2018

 

 

     Interest rate swap agreements
2,973

 
5,531

 
394

     Forward freight agreements
102

 

 
(4
)
 
3,075

 
5,531

 
390

 
 
 
 
 
 
As at December 31, 2017
 
 
 
 
 
     Interest rate swap agreements
1,016

 
4,226

 
(39
)
 
1,016

 
4,226

 
(39
)

Realized and unrealized gains (losses) relating to the interest rate swaps, stock purchase warrant, time-charter swap and forward freight agreements are recognized in earnings and reported in realized and unrealized gain (loss) on derivative instruments in the Company’s consolidated statements of loss as follows:
 
Three Months Ended
 
Three Months Ended
 
September 30, 2018
 
September 30, 2017
 
Realized gains (losses)
Unrealized gains (losses)
Total
 
Realized (losses) gains
Unrealized
gains (losses)
Total
 
$
$
$
 
$
$
$
Interest rate swap agreements
711

13

724

 
(154
)
401

247

Forward freight agreements
(119
)
(9
)
(128
)
 
234

(91
)
143

 
592

4

596

 
80

310

390

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
Realized gains (losses)
Unrealized gains
Total
 
Realized (losses) gains
Unrealized gains (losses)
Total
 
$
$
$
 
$
$
$
Interest rate swap agreements
1,575

3,262

4,837

 
(894
)
2

(892
)
Stock purchase warrant



 

(287
)
(287
)
Time-charter swap agreement



 
1,106

(875
)
231

Forward freight agreements
(137
)
25

(112
)
 
347

(108
)
239

 
1,438

3,287

4,725

 
559

(1,268
)
(709
)


15

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

10.
Other Expense
The components of other expense are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
$
 
$
 
$
 
$
Freight tax provision
(2,050
)
 
 
(1,864
)
 
 
(10,014
)
 
 
(6,296
)
 
Foreign exchange gain
1,251

 
 
81

 
 
6,025

 
 
151

 
Other income

 
 
15

 
 
49

 
 
227

 
Total
(799
)
 
 
(1,768
)
 
 
(3,940
)
 
 
(5,918
)
 

The following reflects the changes in the Company’s potential tax on freight income, recorded in other long-term liabilities, from January 1, 2018 to September 30, 2018:
 
2018
 
$
Balance of unrecognized tax benefits as at January 1
26,054

 
    Increases for positions related to the current period
2,099

 
    Changes for positions taken in prior periods
1,852

 
    Decreases related to statute of limitations
(93
)
 
Balance of unrecognized tax benefits as at September 30
29,912

 

The Company does not presently anticipate its uncertain tax positions will significantly increase or decrease in the next 12 months; however, actual developments could differ from those currently expected.

11.
Financial Instruments
a.
Fair Value Measurements
 
For a description of how the Company estimates fair value and for a description of the fair value hierarchy levels, see note 12 to the Company’s audited consolidated financial statements filed with its Annual Report on Form 20-F for the year ended December 31, 2017.

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 the fair value on a recurring basis. 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
 
Fair
Value
Hierarchy
Level
 
Carrying
Amount
Asset /
(Liability)
$
 
Fair
Value
Asset /
(Liability)
$
 
Carrying
Amount
Asset /
(Liability)
$
 
Fair
Value
Asset /
(Liability)
$
Recurring:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash
 
Level 1
 
58,827

 
58,827

 
75,710

 
75,710

Derivative instruments (note 9)
 
 
 
 
 
 
 
 
 
 
     Interest rate swap agreements (1)
 
Level 2
 
8,504

 
8,504

 
5,242

 
5,242

     Forward freight agreements (1)
 
Level 2
 
102

 
102

 

 

 
 
 
 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
 
 
 
Advances to equity accounted investments
 
Note (2)
 
9,930

 
 Note (2)

 
9,930

 
 Note (2)

Long-term debt, including current portion
 
Level 2
 
(807,078
)
 
(793,851
)
 
(952,302
)
 
(946,105
)
Obligations related to capital leases, including current portion
 
Level 2
 
(296,710
)
 
(290,849
)
 
(148,908
)
 
(147,401
)
 
(1)
The fair value of the Company’s interest rate swap agreements and FFAs at September 30, 2018 and December 31, 2017 excludes accrued interest income and expenses which are recorded in accounts receivables and accrued liabilities, respectively, on the unaudited consolidated balance sheets.

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

(2)
The advances to equity-accounted investments together with the Company’s investments in the equity-accounted investments form the net aggregate carrying value of the Company’s interests in the equity-accounted investments in these consolidated financial statements. The fair values of the individual components of such aggregate interests as at September 30, 2018 and December 31, 2017 were not determinable.
b.
Financing Receivables
The following table contains a summary of the Company’s financing receivables by type and the method by which the Company monitors the credit quality of its financing receivables on a quarterly basis.
 
 
 
 
September 30, 2018
 
December 31, 2017
Class of Financing Receivable
Credit Quality Indicator
 
Grade
$
 
$
Advances to equity accounted investments
Other internal metrics
 
Performing
9,930

 
9,930

Total
 
 
 
9,930

 
9,930


12.
Capital Stock and Stock-Based Compensation
The authorized capital stock of the Company at September 30, 2018 was 100,000,000 shares of preferred stock (December 31, 2017 - 100,000,000), with a par value of $0.01 per share, 485,000,000 shares of Class A common stock (December 31, 2017 - 285,000,000), with a par value of $0.01 per share, and 100,000,000 shares of Class B common stock (December 31, 2017 - 100,000,000), with a par value of $0.01 per share. A share of Class A common stock entitles the holder to one vote per share while a share of Class B common stock entitles the holder to five votes per share, subject to a 49% aggregate Class B common stock voting power maximum. As of September 30, 2018, the Company had 231.6 million shares of Class A common stock (December 31, 2017 – 231.2 million), 37.0 million shares of Class B common stock (December 31, 2017 – 37.0 million) and no shares of preferred stock (December 31, 2017 – nil) issued and outstanding.

During March 2018, a total of 168,029 shares of Class A common stock with an aggregate value of $0.2 million and 0.5 million stock options with an exercise price of $1.22 per share were granted to the Company’s non-management directors as part of their annual compensation for 2017. These stock options have a ten-year term and vest immediately. These shares of Class A common stock and stock options were issued under the Teekay Tankers Ltd. 2007 Long-Term Incentive Plan and distributed to the directors. During March 2017, 0.4 million stock options with an exercise price of $2.23 per share were granted to non-management directors of the Company. For the nine months ended September 30, 2018 and September 30, 2017, the compensation relating to the granting of such stock and stock options has been included in general administrative expenses in the amount of $0.4 million and $0.3 million, respectively.

The Company also grants stock options and restricted stock units as incentive-based compensation under the Teekay Tankers Ltd. 2007 Long-Term Incentive Plan to the officers of the Company and certain employees of Teekay subsidiaries that provide services to the Company. 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. The requisite service period consists of the period from the grant date of the award to the earlier of the date of vesting or the date the recipient becomes eligible for retirement. 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 requisite service period. The compensation cost of the Company's stock-based compensation awards is reflected in general and administrative expenses in the Company’s consolidated statements of loss.
During March 2018, the Company granted 0.7 million stock options with an exercise price of $1.22 per share to the officers of the Company and certain employees of Teekay subsidiaries that provide services to the Company. During March 2017, the Company granted 0.5 million stock options with an exercise price of $2.23 per share to an officer of the Company. Each stock option has a ten-year term and vests equally over three years from the grant date.
The weighted-average fair value of the stock options granted in 2018 to non-management directors and to officers was $0.35 (2017 - $0.67) per option, estimated on the grant date using the Black-Scholes option pricing model. The following assumptions were used in computing the fair value of the stock options granted: expected volatility of 48.7% (2017 - 50.2%); expected life of five years (2017 - five years); dividend yield of 5.5% (2017 - 5.0%); and risk-free interest rate of 2.6% (2017 - 2.1%). The expected life of the stock options granted was estimated using the historical exercise behavior of employees of Teekay that receive stock options from Teekay. The expected volatility was based on historical volatility as calculated using historical data during the five years prior to the grant date.
During March 2018, the Company also granted 0.8 million (2017 - 0.4 million) restricted stock units to the officers of the Company and certain employees of Teekay subsidiaries that provide services to the Company with an aggregate fair value of $0.9 million (2017 - $0.8 million). Each restricted stock unit is equal to one share of the Company’s common stock plus reinvested distributions from the grant date to the vesting date. The restricted stock units vest equally over three years from the grant date. Any portion of a restricted stock unit award that is not vested on the date of the recipient’s termination of service is cancelled, unless their termination arises as a result of the recipient’s retirement and, in this case, the restricted stock unit award will continue to vest in accordance with the vesting schedule. Upon vesting, the value of the restricted stock unit awards, net of withholding taxes, is paid to each recipient in the form of common stock.

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

During the three and nine months ended September 30, 2018, the Company recorded $0.2 million and $0.8 million (September 30, 2017 - $0.2 million and $0.8 million), respectively, of expenses related to the restricted stock units and stock options. During the nine months ended September 30, 2018, a total of 0.3 million restricted stock units (2017 - 0.3 million) with a market value of $0.3 million (2017 - $0.6 million) vested and was paid to the grantees by issuing 0.2 million shares (2017 - 0.2 million shares) of Class A common stock, net of withholding taxes.

13.
Related Party Transactions
Management Fee - Related and Other

a.
Teekay, and its wholly-owned subsidiary and the Company's manager, Teekay Tankers Management Services Ltd. (or the Manager), provide commercial, technical, strategic and administrative services to the Company pursuant to a long-term management agreement (the Management Agreement). In addition, the Manager has subcontracted with TTOL and its affiliates to provide certain commercial and technical services to the Company, except for certain vessels acquired in the merger with TIL, which are technically managed by a third party. Certain of the Company’s vessels participate in RSAs managed by TTOL. Amounts received and paid by the Company for such related party transactions for the periods indicated were as follows:
 
 
Three Months Ended
Nine Months Ended
 
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
 
$
$
$
$
RSA pool management fees and commissions (i)



(2,799
)
Commercial management fees (ii)



(1,187
)
Vessel operating expenses - technical management fee (iii)
(2,800
)
(2,020
)
(8,900
)
(6,442
)
Strategic and administrative service fees (iv)
(7,875
)
(6,761
)
(25,204
)
(13,678
)
Secondment fees (v)
(189
)
(148
)
(548
)
(188
)
LNG service revenues (vi)
72

84

344

252

Technical management fee revenue (vii)
3,490

3,828

9,819

5,048

Service revenues (viii)
343

1,003

758

1,280

Entities under Common Control (note 4)
 
 
 
 
   RSA pool management fees and commissions (i)



2,799

   Commercial management fees (ii)



1,187

   Strategic and administrative service fees (iv)



(7,026
)
   Technical management fee revenue (vii)



4,890

   Service revenues (viii)



1,772


(i)
Prior to 2018, the Company’s share of TTOL’s fees for RSAs are reflected as a reduction to net pool revenues on the Company’s consolidated statements of loss. The Company acquired the remaining 50% interest in TTOL on May 31, 2017 (notes 4 and 6(c)). Subsequent to the acquisition, the Company's share of TTOL's fees has been eliminated.
(ii)
The Manager’s commercial management fees for vessels on time-charter out contracts and spot-traded vessels that are not included in the RSAs are reflected in voyage expenses on the Company’s consolidated statements of loss. Subsequent to the Company's acquisition of the remaining 50% interest in TTOL, the Company's share of the Manager's commercial management fees has been eliminated.
(iii)
The cost of ship management services provided by the Manager has been presented as vessel operating expenses on the Company's consolidated statements of loss.
(iv)
The Manager's strategic and administrative service fees have been presented in general and administrative expenses on the Company's consolidated statements of loss. The Company's executive officers are employees of Teekay or subsidiaries thereof, and their compensation (other than any awards under the Company's long-term incentive plan described in note 12) is set and paid by Teekay or such other subsidiaries. The Company reimburses Teekay for time spent by its executive officers on the Company's management matters through the strategic portion of the management fee.
(v)
The Company pays secondment fees for services provided by some employees of Teekay. Secondment fees have been presented in general and administrative expenses on the Company's consolidated statements of loss.
(vi)
The Company's ship-to-ship transfer business has an operational and maintenance subcontract with Teekay LNG Bahrain Operations L.L.C., an entity wholly-owned by TGP (which is controlled by Teekay), for the Bahrain LNG Import Terminal (or the Terminal). The Terminal is owned by Bahrain LNG W.I.L., a joint venture for which Teekay LNG Operating L.L.C., an entity wholly-owned by TGP, has a 30% interest. The Company's ship-to-ship transfer business also has a services agreement with Teekay Shipping Ltd., an entity wholly-owned by Teekay, to provide certain LNG services.

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

(vii)
The Company receives reimbursements from Teekay who subcontracts technical management services from the Manager. These reimbursements have been presented in general and administrative expenses on the Company's consolidated statements of loss.
(viii)
The Company recorded revenue relating to TTOL's administration of certain RSAs and provision of certain commercial services to participants in the arrangements. The Company also recorded revenues of $1.8 million for the nine months ended September 30, 2017 associated with the Entities under Common Control.
b.
The Manager and other subsidiaries of Teekay collect revenues and remit payments for expenses incurred by the Company’s vessels. Such amounts, which are presented on the Company’s consolidated balance sheets in "due from affiliates" or "due to affiliates," as applicable, are without interest or stated terms of repayment. The amounts owing from the RSAs for monthly distributions are reflected in the consolidated balance sheets as pool receivable from affiliates, are without interest and are repayable upon the terms contained within the applicable pool agreement. The Company had advanced $48.3 million and $45.1 million as at September 30, 2018 and December 31, 2017, respectively, to the RSAs for working capital purposes. These amounts, which are reflected in the consolidated balance sheets in due from affiliates, are without interest and are repayable when applicable vessels leave the RSAs.

c.
Pursuant to a service agreement with the Teekay Aframax RSA, from time to time, the Company may hire vessels to perform full service lightering services. In the three and nine months ended September 30, 2018, the Company recognized $3.3 million and $19.1 million (September 30, 2017 - $2.9 million and $10.3 million), respectively, related to vessels which were chartered-in from the RSA to assist with full service lightering operations. These amounts have been presented in voyage expenses on the Company's consolidated statements of loss.

14.
Sales of Vessels
The Company's consolidated statements of loss for the nine months ended September 30, 2018 include a net gain on sale of vessels of $0.2 million relating to one lightering support vessel which was sold and delivered to its buyer in the second quarter of 2018.

In September 2018, the Company completed a $156.6 million sale-leaseback financing transaction relating to six of the Company's Aframax tankers (see note 8).

In November 2018, the Company completed a $84.7 million sale-leaseback financing transaction relating to four of the Company's vessels including two Aframax tankers, one Suezmax tanker and one LR2 product tanker (see note 20).

The Company’s consolidated statements of loss for the three and nine months ended September 30, 2017 include a net loss on sale of vessels of $7.9 million and $12.5 million, respectively, relating to three Aframax tankers and one lightering support vessel, which were sold and delivered to their respective buyers in the second, third and fourth quarters of 2017, and two Suezmax tankers, which were sold in the first quarter of 2017.

In July 2017, the Company completed a $153.0 million sale-leaseback financing transaction relating to four of the Company's Suezmax
tankers (see note 8).


15.
Loss Per Share
The net loss available for common shareholders and loss per common share presented in the table below includes the results of operations of the Entities under Common Control which were not purchased solely with cash (note 4):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
$
 
$
 
$
 
$
Net loss
(17,484
)
 
(22,380
)
 
(64,050
)
 
(56,144
)
 
 
 
 
 
 
 
 
Weighted average number of common shares – basic (1)
268,558,556

 
179,224,094

 
268,470,804

 
178,853,698

Dilutive effect of stock-based awards

 

 

 

Weighted average number of common shares – diluted (1)
268,558,556

 
179,224,094

 
268,470,804

 
178,853,698

 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
– Basic
(0.07
)
 
(0.12
)
 
(0.24
)
 
(0.31
)
– Diluted
(0.07
)
 
(0.12
)
 
(0.24
)
 
(0.31
)
(1)
The weighted-average number of common shares outstanding for periods prior to May 2017 has been retroactively adjusted to include approximately 13.8 million shares of the Company's Class B common stock issued to Teekay as consideration for the acquisition of 50% of TTOL in May 2017.
Stock-based awards that have an anti-dilutive effect on the calculation of diluted earnings per common share, are excluded from this calculation. In the periods where a loss attributable to shareholders has been incurred, all stock-based awards are anti-dilutive. For the three and nine months ended September 30, 2018, 0.3 million and 0.3 million restricted stock units (September 30, 2017 - 0.6 million and

19

Table of Contents
TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

0.3 million), respectively, had an anti-dilutive effect on the calculation of diluted earnings per common share. For the three and nine months ended September 30, 2018, options to acquire 2.9 million and 2.9 million (September 30, 2017 - 1.7 million and 1.6 million) shares, respectively, of the Company’s Class A common stock had an anti-dilutive effect on the calculation of diluted earnings per common share.


16.
Supplemental Cash Flow Information
Total cash, cash equivalents and restricted cash is as follows:
 
As at
 
As at
 
As at
 
As at
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
December 31, 2016
 
$
 
$
 
$
 
$
Cash and cash equivalents
54,361

 
71,439

 
60,606

 
94,157

Restricted cash – current
1,794

 
1,599

 
1,645

 
750

Restricted cash – long-term
2,672

 
2,672

 
2,672

 

 
58,827

 
75,710

 
64,923

 
94,907


The Company maintains restricted cash deposits relating to certain forward freight agreements (note 9), LNG terminal management and leasing arrangements (see note 8).

17.
Liquidity
Management is required to assess if the Company will have sufficient liquidity to continue as a going concern for the one-year period following the issuance of its financial statements. The Company has a loan facility, with an outstanding balance of $47.6 million, that matured in the fourth quarter of 2018.

During the fourth quarter of 2018, the Company completed an additional sale-leaseback financing transaction for four vessels (see note 20), some of the net proceeds of which were used to refinance the loan facility, which was scheduled to mature in November 2018, and to prepay a portion of the Company's 2016 Debt Facility. The Company also completed a loan to finance working capital for the Company's RSA commercial management pool operations (see note 20).

Based on the Company’s liquidity at the date these consolidated financial statements were issued, including the fourth quarter financing transactions described above and the liquidity it expects to generate from operations over the following year based on an expected tanker market recovery, the Company estimates that it will have sufficient liquidity to continue as a going concern for at least the one-year period following the issuance of these consolidated financial statements.

18.
Acquisition of Tanker Investments Ltd.
On May 31, 2017, the Company entered into a merger agreement to acquire the remaining 27.0 million issued and outstanding common shares of TIL, by way of a share-for-share exchange of 3.3 shares of Class A common stock of the Company for each outstanding share of TIL common stock not owned by the Company. On November 17, 2017, the Company's shareholders voted in favor of increasing the authorized number of its Class A common shares to permit the issuance of Class A common shares as consideration for the merger with TIL. Concurrently, the merger was approved by the shareholders of TIL. The Company amended its amended and restated articles of incorporation and completed the merger on November 27, 2017, as a result of which, TIL became a wholly-owned subsidiary of the Company. As consideration for the merger, the Company issued 88,977,544 Class A common shares to the TIL shareholders (other than the Company and its subsidiaries) for $151.3 million, or $1.70 per share.

Pursuant to this acquisition, the Company acquired a modern fleet of 10 Suezmax tankers, six Aframax tankers and two LR2 product tankers with an average age of 7.3 years, assumed $47.1 million of net working capital and long-term liabilities and assumed long-term debt with a principal balance outstanding of $338.9 million. The merger with TIL was accounted for as an acquisition of assets. The purchase price of the acquisition consisted of the fair value of the Company's shares issued on the merger date ($151.3 million), the transaction costs associated with the merger ($6.9 million) and the fair value of the Company's 11.3% pre-existing ownership in TIL at the close of the merger ($19.2 million), for a total acquisition cost of $177.4 million. Net working capital and long-term liabilities of $47.1 million and $337.1 million of long-term debt assumed were recognized at their fair values on November 27, 2017. The remaining amount of the purchase price was allocated to vessels ($467.2 million) and existing time-charter contracts ($0.2 million), on a relative fair value basis.



20

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TEEKAY TANKERS LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)

19.
Shipbuilding Contracts
In April 2013, four special purpose subsidiary companies of the Company entered into agreements with STX Offshore & Shipbuilding Co., Ltd (or STX) of South Korea to construct four, fuel-efficient 113,000 dead-weight tonne Long Range 2 (or LR2) product tanker newbuildings. At the same time, the Company entered an Option Agreement with STX allowing the Company to order up to an additional 12 vessels. In February and March 2014, the Company and its subsidiaries commenced legal proceedings against STX for having repudiated the four firm shipbuilding contracts and the Option Agreement in London, U.K. In the same year, STX have issued proceedings in Korea.

On February 15, 2016, each of the Company’s four subsidiaries had successfully obtained an English Court Order requiring STX to pay a total of $8.9 million, per subsidiary, in respect of the four firm shipbuilding contracts.

STX filed for bankruptcy protection and as of December 31, 2016, all Korean enforcement actions were stayed. STX has had that protection recognized in England and Wales. The Company was not in a position to take any further action on enforcement and recognition of its award in the U.K. or Korea while the bankruptcy protection remained in place.

In March 2017, the Korean courts upheld the Company's subsidiaries' claims for the firm contracts in the bankruptcy proceedings. In November 2017, STX underwent a rehabilitation plan which resulted in the Company's subsidiaries being entitled to receive 7% of the award in cash to be paid over the next eight years until 2026, and 93% of the award in equity of STX.

In June 2018, the Company's subsidiaries, under their entitlement as part of the STX rehabilitation plan, received a total of 315,856 shares of STX, representing a minor percentage ownership interest. As at September 30, 2018, the STX shares had been de-listed. No amounts have been recorded due to uncertainty of their value. In addition, the Company has not recognized a receivable in respect to the non-interest-bearing cash award due to uncertainty of collection.

20.
Subsequent Events
a.
In November 2018, the Company completed an $84.7 million sale-leaseback financing transaction relating to four of the Company's vessels including two Aframax tankers, one Suezmax tanker and one LR2 product tanker. Each vessel is leased on a bareboat charter with terms ranging from 10 to 12 years, with fixed daily rates on the charters ranging between $5,000 and $7,800, and with purchase options for all four vessels throughout the remaining lease term beginning in October 2021. The Company also has options to purchase each vessel upon maturity of the bareboat charters. Proceeds from the sale-leaseback transaction were used to refinance one of the Company's corporate revolvers, which had an outstanding balance of $47.6 million as at September 30, 2018 and was scheduled to mature in November 2018, and to prepay a portion of the Company's 2016 Debt Facility.

b.
In November 2018, the Company entered into a working capital loan facility agreement which provides available aggregate borrowings of up to $40.0 million and is expected to increase the Company's liquidity by approximately $20.0 million.



21


ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying notes contained in Item 1 – Financial Statements of this Report on Form 6-K and with our audited consolidated financial statements contained in Item 18 – Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 5 – Operating and Financial Review and Prospects of our Annual Report on Form 20-F for the year ended December 31, 2017.

OVERVIEW
Our business is to own and operate crude oil and product tankers and we employ a chartering strategy that seeks to capture upside opportunities in the tanker spot market while using fixed-rate time charters to reduce downside risks. As an adjacency to these core competencies, we also provide full service lightering and lightering support services in our ship-to-ship (or STS) transfer business. As at September 30, 2018, our fleet consisted of 64 vessels, including four in-chartered vessels, three STS support vessels and one 50%-owned Very Large Crude Carrier (or VLCC). The following table summarizes our fleet as at September 30, 2018:

 
 
 
Owned and Capital Lease Vessels
Chartered-in Vessels
Total
 
 
Fixed-rate:
 
 
 
 
Suezmax Tankers
2
2
 
Aframax Tankers
3
3
 
LR2 Product Tanker (1)
1
1
 
Total Fixed-Rate Fleet (2)
6
6
 
 
 
 
 
 
Spot-rate:
 
 
 
 
Suezmax Tankers
28
28
 
Aframax Tankers (3)
14
1
15
 
LR2 Product Tankers (1) 
8
8
 
VLCC Tanker (4)
1
1
 
Total Spot Fleet (5)
51
1
52
 
STS Support Vessels
3
3
6
 
Total Teekay Tankers Fleet
60
4
64

1.
Long Range 2 (or LR2) product tankers.
2.
Four time charter-out contracts are scheduled to expire in 2018 and two in 2019.
3.
One Aframax tanker is currently time-chartered in for a period of 60 months expiring in 2021.
4.
VLCC owned through a 50/50 joint venture. As at September 30, 2018, the VLCC was trading on spot voyage charters in a pooling arrangement managed by a third party.
5.
A total of 46 of our owned vessels and vessels related to capital leases operated in the spot market in revenue sharing arrangements (or RSAs) at September 30, 2018. As at September 30, 2018, the three vessel-class RSAs in which we participate were comprised of a total of 31 Suezmax tankers, 34 Aframax tankers and nine LR2 product tankers (of which seven LR2 product tankers are cross-trading in the Aframax RSA). Each RSA that we participate in also includes vessels owned by other revenue sharing members.