Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019

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 001-31236

 

 

TSAKOS ENERGY NAVIGATION LIMITED

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

Bermuda

(Jurisdiction of incorporation or organization)

367 Syngrou Avenue

175 64 P. Faliro

Athens, Greece

011-30210-9407710

(Address of principal executive offices)

 

 

Paul Durham

367 Syngrou Avenue

175 64 P. Faliro

Athens, Greece

Telephone: 011-30210-9407710

E-mail: ten@tenn.gr

Facsimile: 011-30210-9407716

(Name, Address, Telephone Number, E-mail and Facsimile Number of Company Contact Person)

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

 

Title of each class

 

Trading Symbol(s)

 

 Name of each exchange on which registered 

Common Shares, par value $1.00 per share   TNP   New York Stock Exchange
Series C Cumulative Redeemable Perpetual Preferred Shares, par value $1.00 per share   TNP.PRC   New York Stock Exchange
Series D Cumulative Redeemable Perpetual Preferred Shares, par value $1.00 per share   TNP.PRD   New York Stock Exchange
Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Shares, par
value $1.00 per share
  TNP.PRE   New York Stock Exchange
Series F Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Shares, par
value $1.00 per share
  TNP.PRF   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

 

 

As of December 31, 2019, there were 95,078,607 of the registrant’s Common Shares, 2,000,000 Series C Preferred Shares, 3,424,803 Series D Preferred Shares, 4,600,000 Series E Preferred Shares, 6,000,000 Series F Preferred Shares and 2,625,000 Series G Redeemable Convertible Preferred Shares outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    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  ☒

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

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

Large accelerated filer  ☐    Accelerated filer   ☒    Non-accelerated filer  ☐    Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☒   International Financial Reporting Standards as issued by the International Accounting Standards Board  ☐   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    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  ☒

 

 

 


Table of Contents

TABLE OF CONTENTS

 

FORWARD-LOOKING INFORMATION      1  
PART I      2  

Item 1. Identity of Directors, Senior Management and Advisers

     2  

Item 2. Offer Statistics and Expected Timetable

     2  

Item 3. Key Information

     2  

Item 4. Information on the Company

     29  

Item 4A. Unresolved Staff Comments

     51  

Item 5. Operating and Financial Review and Prospects

     51  

Item 6. Directors, Senior Management and Employees

     82  

Item 7. Major Shareholders and Related Party Transactions

     91  

Item 8. Financial Information

     95  

Item 9. The Offer and Listing

     97  

Item 10. Additional Information

     97  

Item 11. Quantitative and Qualitative Disclosures About Market Risk

     118  

Item 12. Description of Securities Other than Equity Securities

     120  
PART II      121  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     121  

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     121  

Item 15. Controls and Procedures

     121  

Item 16A. Audit Committee Financial Expert

     122  

Item 16B. Code of Ethics

     122  

Item 16C. Principal Accountant Fees and Services

     122  

Item 16D. Exemptions from the Listing Standards for Audit Committees

     123  

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     123  

Item 16F. Change in Registrant’s Certifying Accountant

     123  

Item 16G. Corporate Governance

     124  

Item 16H. Mine Safety Disclosure

     124  
PART III      125  

Item 17. Financial Statements

     125  

Item 18. Financial Statements

     125  

Item 19. Exhibits

     125  

 

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FORWARD-LOOKING INFORMATION

All statements in this Annual Report on Form 20-F that are not statements of historical fact are “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. The disclosure and analysis set forth in this Annual Report on Form 20-F includes assumptions, expectations, projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as forward-looking statements. In some cases, predictive, future-tense or forward-looking words such as “believe,” “intend,” “anticipate,” “estimate,” “project,” “forecast,” “plan,” “potential,” “may,” “should” and “expect” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements include, but are not limited to, such matters as:

 

   

future operating or financial results and future revenues and expenses;

 

   

future, pending or recent business and vessel acquisitions, business strategy, areas of possible expansion and expected capital spending and our ability to fund such expenditures;

 

   

operating expenses including the availability of key employees, crew, length and number of off-hire days, dry-docking requirements and fuel and insurance costs;

 

   

general market conditions and shipping industry trends, including charter rates, vessel values and factors affecting supply and demand of crude oil, petroleum products and LNG, including the impact of the recent outbreak of the COVID-19 virus and the ongoing efforts throughout the world to contain it;

 

   

our financial condition and liquidity, including our ability to make required payments under our credit facilities, comply with our loan covenants and obtain additional financing in the future to fund capital expenditures, acquisitions and other corporate activities;

 

   

the overall health and condition of the U.S. and global financial markets, including the value of the U.S. dollar relative to other currencies and the impact of the COVID-19 pandemic;

 

   

the carrying value of our vessels and the potential for any asset impairments;

 

   

our expectations about the time that it may take to construct and deliver new vessels or the useful lives of our vessels;

 

   

our continued ability to enter into period time charters with our customers and secure profitable employment for our vessels in the spot market;

 

   

the ability and willingness of our counterparties, including our charterers and shipyards, to honor their contractual obligations;

 

   

our expectations relating to dividend payments and ability to make such payments;

 

   

our ability to leverage to our advantage the relationships and reputation of Tsakos Columbia Shipmanagement within the shipping industry;

 

   

our anticipated general and administrative expenses;

 

   

environmental and regulatory conditions, including changes in laws and regulations or actions taken by regulatory authorities;

 

   

risks inherent in vessel operation, including terrorism, piracy and discharge of pollutants;

 

   

potential liability from future litigation;

 

   

global and regional political conditions;

 

   

tanker, product carrier and LNG carrier supply and demand; and

 

   

other factors discussed in the “Risk Factors” described in Item 3 of this Annual Report on Form 20-F.

 

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We caution that the forward-looking statements included in this Annual Report on Form 20-F represent our estimates and assumptions only as of the date of this Annual Report on Form 20-F and are not intended to give any assurance as to future results. These forward-looking statements are not statements of historical fact and represent only our management’s belief as of the date hereof, and involve risks and uncertainties that could cause actual results to differ materially and inversely from expectations expressed in or indicated by the forward-looking statements. Assumptions, expectations, projections, intentions and beliefs about future events may, and often do, vary from actual results and these differences can be material. There are a variety of factors, many of which are beyond our control, which affect our operations, performance, business strategy and results and could cause actual reported results and performance to differ materially from the performance and expectations expressed in these forward-looking statements. These factors include, but are not limited to, supply and demand for crude oil carriers, product tankers and LNG carriers, charter rates and vessel values, supply and demand for crude oil and petroleum products and liquefied natural gas, accidents, collisions and spills, environmental and other government regulation, the availability of debt financing, fluctuation of currency exchange and interest rates and the other risks and uncertainties that are outlined in this Annual Report on Form 20-F. As a result, the forward-looking events discussed in this Annual Report on Form 20-F might not occur and our actual results may differ materially from those anticipated in the forward-looking statements. Accordingly, you should not unduly rely on any forward-looking statements.

We undertake no obligation to update or revise any forward-looking statements contained in this Annual Report on Form 20-F, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

PART I

Tsakos Energy Navigation Limited is a Bermuda company that is referred to in this Annual Report on Form 20-F, together with its subsidiaries, as “Tsakos Energy Navigation,” “the Company,” “we,” “us,” or “our.” This report should be read in conjunction with our consolidated financial statements and the accompanying notes thereto, which are included in Item 18 to this report.

 

Item 1.

Identity of Directors, Senior Management and Advisers

Not Applicable.

 

Item 2.

Offer Statistics and Expected Timetable

Not Applicable.

 

Item 3.

Key Information

Selected Consolidated Financial Data and Other Data

The following table presents selected consolidated financial and other data of Tsakos Energy Navigation Limited for each of the five years in the five-year period ended December 31, 2019. The table should be read together with “Item 5. Operating and Financial Review and Prospects.” The selected consolidated financial data of Tsakos Energy Navigation Limited is a summary of, is derived from and is qualified by reference to, our consolidated financial statements and notes thereto which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”).

Our audited consolidated statements of comprehensive income (loss), other comprehensive income (loss), stockholders’ equity and cash flows for the years ended December 31, 2019, 2018, and 2017, and the consolidated balance sheets at December 31, 2019 and 2018, together with the notes thereto, are included in “Item 18. Financial Statements” and should be read in their entirety.

 

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Selected Consolidated Financial and Other Data

(In thousands of U.S. dollars, except for share and per share amounts and fleet data)

 

     2019     2018     2017     2016     2015  

Income Statement Data

          

Voyage revenues

   $ 597,452     $ 529,879     $ 529,182     $ 481,790     $ 587,715  

Expenses

          

Voyage expenses

     125,802       125,350       113,403       106,403       131,878  

Charter hire expense

     10,822       10,822       311       —         —    

Vessel operating expenses(1)

     180,233       181,693       173,864       146,546       142,117  

Depreciation and amortization

     139,424       146,798       139,020       113,420       105,931  

General and administrative expenses

     27,696       27,032       26,324       25,611       21,787  

Net loss (gain) on sale of vessels

     —         364       3,860       —         (2,078

Impairment charges

     27,613       65,965       8,922       —         —    

Operating income (loss)

     85,862       (28,145     63,478       89,810       188,080  

Other expenses (income):

          

Interest and finance costs, net

     74,723       76,809       56,839       35,873       30,019  

Interest and investment income

     (3,694     (2,507     (1,082     (623     (234

Other, net

     825       (1,405     (1,464     (1,935     (128

Total other expenses, net

     71,854       72,897       54,293       33,315       29,657  

Net income (loss)

     14,008       (101,042     9,185       56,495       158,423  

Less: Net loss (income) attributable to non-controlling interest

     1,118       1,839       (1,573     (712     (206

Net income (loss) attributable to Tsakos Energy Navigation Limited

   $ 15,126     $ (99,203   $ 7,612     $ 55,783     $ 158,217  

Effect of preferred dividends

     (40,400     (33,763     (23,776     (15,875     (13,437

Deemed dividend on Series B preferred shares

     (2,750     —         —         —         —    

Net (loss) income attributable to Tsakos Energy Navigation Limited common stockholders

   $ (28,024   $ (132,966   $ (16,164   $ 39,908     $ 144,780  

Per Share Data

          

(Loss) Earnings per share, basic

   $ (0.32   $ (1.53   $ (0.19   $ 0.47     $ 1.69  

(Loss) Earnings per share, diluted

   $ (0.32   $ (1.53   $ (0.19   $ 0.47     $ 1.69  

Weighted average number of shares, basic

     88,757,923       87,111,636       84,713,572       84,905,078       85,827,597  

Weighted average number of shares, diluted

     88,757,923       87,111,636       84,713,572       84,905,078       85,827,597  

Dividends per common share, paid

   $ 0.10     $ 0.15     $ 0.20     $ 0.29     $ 0.24  

Cash Flow Data

          

Net cash provided by operating activities

     184,349       73,945       170,827       170,354       234,409  

Net cash used in investing activities

     (102,205     (179     (241,797     (576,075     (174,754

Net cash (used in) provided by financing activities

     (104,900     (55,913     75,870       298,488       30,910  

Balance Sheet Data (at year end)

          

Cash and cash equivalents

   $ 184,835     $ 204,763     $ 189,763     $ 187,777     $ 289,676  

Cash, restricted

     12,935       15,763       12,910       9,996       15,330  

Investments

     —         1,000       1,000       1,000       1,000  

Advances for vessels under construction

     61,475       16,161       1,650       216,531       371,238  

Vessels, net book value

     2,633,251       2,829,447       3,028,404       2,677,061       2,053,286  

Total assets

     3,154,103       3,205,058       3,373,636       3,277,575       2,893,166  

Long-term debt, including current portion

     1,534,296       1,595,601       1,751,869       1,753,855       1,392,563  

Total stockholders’ equity

     1,472,319       1,506,777       1,508,138       1,417,450       1,415,072  

Fleet Data

          

Average number of vessels

     64.2       64.3       62.6       52.6       49.2  

Number of vessels (at end of period)

     65.0       64.0       65.0       58.0       49.0  

Average age of fleet (in years)(2)

     9.1       8.2       7.7       7.9       8.5  

Earnings capacity days(3)

     23,432       23,460       22,850       19,244       17,970  

Off-hire days(4)

     890       887       755       674       376  

Net earnings days(5)

     22,542       22,573       22,095       18,570       17,594  

Percentage utilization(6)

     96.2     96.2     96.7     96.5     97.9

Average TCE per vessel per day(7)

   $ 21,378     $ 18,226     $ 18,931     $ 20,412     $ 25,940  

Vessel operating expenses per ship per day(8)

   $ 7,716     $ 7,745     $ 7,688     $ 7,763     $ 7,933  

Vessel overhead burden per ship per day(9)

   $ 1,182     $ 1,152     $ 1,152     $ 1,331     $ 1,212  

 

(1)   Vessel operating expenses are costs that vessel owners typically bear, including crew wages and expenses, vessel supplies and spares, insurance, tonnage tax, routine repairs and maintenance, quality and safety costs and other direct operating costs.
(2)   The average age of our fleet is the age of each vessel in each year from its delivery from the builder, weighted by the vessel’s deadweight tonnage (“dwt”) in proportion to the total dwt of the fleet for each respective year.
(3)   Earnings capacity days are the total number of days in a given period that we own or control vessels.

 

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(4)   Off-hire days are days related to repairs, dry-dockings and special surveys, vessel upgrades and initial positioning after delivery of new vessels.
(5)   Net earnings days are the total number of days in any given period that we own vessels less the total number of off-hire days for that period.
(6)   Percentage utilization represents the percentage of earnings capacity days that the vessels were actually employed, i.e., net earnings days as a percentage of earnings capacity days.
(7)   The shipping industry uses time charter equivalent, or TCE, to calculate revenues per vessel in dollars per day for vessels on voyage charters. The industry does this because it does not commonly express charter rates for vessels on voyage charters in dollars per day. TCE allows vessel operators to compare the revenues of vessels that are on voyage charters with those on time charters. TCE is a non-GAAP measure. For vessels on voyage charters, we calculate TCE by taking revenues earned on the voyage and deducting voyage expenses (bunker fuel, port expenses, canal dues, charter commissions) and dividing by the actual number of voyage days. For the year ended December 31, 2019 and 2018, TCE is calculated by taking voyage revenue less voyage costs divided by the number of revenue days less 446 days and 378 days, respectively, lost as a result of calculating revenue on a loading to discharge basis. For vessels on bareboat charter, for which we do not incur either voyage or operation costs, we calculate TCE by taking revenues earned on the charter and adding a representative amount for vessel operating expenses. TCE differs from average daily revenue earned in that TCE is based on revenues after voyage expenses and does not take into account off-hire days.

Derivation of time charter equivalent per day (amounts in thousands of U.S. dollars except for days and per day amounts):

 

     2019     2018     2017     2016     2015  

Voyage revenues

   $ 597,452     $ 529,879     $ 529,182     $ 481,790     $ 587,715  

Less: Voyage expenses

     (125,802     (125,350     (113,403     (106,403     (131,878

Add: Representative operating expenses for bareboat charter ($10,000 daily)

     720             2,500       3,660       560  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Time charter equivalent revenues

     472,370       404,529       418,279       379,047       456,397  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings days

     22,096       22,195       22,095       18,570       17,594  

Average TCE per vessel per day

   $ 21,378     $ 18,226     $ 18,931     $ 20,412     $ 25,940  

 

(8)

Vessel operating expenses per ship per day represents vessel operating expenses divided by the earnings capacity days of vessels incurring operating expenses. Earnings capacity days of vessels on bareboat charters have been excluded.

(9)

Vessel overhead burden per ship per day is the total of management fees, management incentive awards, stock compensation expense and general and administrative expenses divided by the total number of earnings capacity days.

Capitalization

The following table sets forth our (i) cash and cash equivalents, (ii) restricted cash and (iii) consolidated capitalization as of December 31, 2019 on:

 

   

an actual basis; and

 

   

an as adjusted basis giving effect to (i) debt repayments of $58.0 million, (ii) the drawdown of $39.8 million for the refinancing of the aframax tanker Marathon TS and prepayment of $31.9 million debt, (iii) the debt prepayment of $26.8 million of Archangel and Alaska and the receipt of $49.3 million net proceeds for the sale and leaseback transaction, (iv) the debt prepayment of $10.7 million for Silia T and $15.5 million gross proceeds from the sale of vessel, (v) the drawdown of $25.9 million and the payment of $31.3 million to the shipbuilding yard for the aframax tanker Caribbean Voyager, (vi) the payment of $9.3 million to the shipbuilding yard for the LNG carrier, Hull 3157, (vii) the payment of $9.2 million of preferred share dividends, (viii) the declaration of $4.8 million common share dividends and $0.4 million of dividends on Series G Redeemable Convertible Preferred Shares (the “Series G Convertible Preferred Shares”), (ix) the declaration of $4.7 million preferred share dividends, (x) the capital contribution of $4.0 million from non-controlling owners to subsidiary, (xi) the issuance of 561,136 common shares for net proceeds of $2.4 million, (xii) the conversion of 10,000 Series G Convertible Preferred Shares into 33,333 common shares.

all of which occurred after December 31, 2019 and on or before April 10, 2020.

Other than these adjustments, there has been no material change in our capitalization from debt or equity issuances, re-capitalization or special dividends between December 31, 2019 and April 10, 2020.

 

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This table should be read in conjunction with our consolidated financial statements and the notes thereto, and “Item 5. Operating and Financial Review and Prospects,” included elsewhere in this Annual Report.

 

     As of December 31, 2019  
In thousands of U.S. Dollars    Actual     Adjustments     Adjusted  
           (Unaudited)     (Unaudited)  

Cash

      

Cash and cash equivalents

   $ 184,835       (50,103     134,732  

Restricted cash

     12,935             12,935  
  

 

 

   

 

 

   

 

 

 

Total cash

     197,770       (50,103     147,667  
  

 

 

   

 

 

   

 

 

 

Capitalization

      

Debt:

      

Long-term secured debt obligations (including current portion)

   $ 1,544,551       (61,658     1,482,893  
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Preferred shares, $1.00 par value; 25,000,000 authorized, 2,000,000 Series C Preferred Shares, 3,424,803 Series D Preferred Shares, 4,600,000 Series E Preferred Shares, 6,000,000 Series F Preferred Shares and 2,625,000 Series G Convertible Preferred Shares issued and outstanding at December 31, 2019 on an actual basis and 2,000,000 Series C Preferred Shares, 3,424,803 Series D Preferred Shares, 4,600,000 Series E Preferred Shares, 6,000,000 Series F Preferred Shares and 2,615,000 Series G Convertible Preferred Shares issued and outstanding on an as adjusted basis.

     18,650       (10     18,640  

Common shares, $1.00 par value; 175,000,000 shares authorized at December 31, 2019; 95,078,607 shares issued and outstanding on an actual basis and 95,673,076 shares issued and outstanding on an as adjusted basis

     95,079       594       95,673  

Additional paid-in capital

     992,020       1,841       993,861  

Accumulated other comprehensive loss

     (18,353           (18,353

Retained earnings

     364,000       (19,096     344,904  

Non-controlling interest

     20,923       4,000       24,923  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     1,472,319       (12,671     1,459,648  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 3,016,870       (74,329     2,942,541  
  

 

 

   

 

 

   

 

 

 

Reasons For the Offer and Use of Proceeds

Not Applicable.

Risk Factors

Risks Related To Our Industry

The tanker industry is cyclical, resulting in charter rates that can be volatile. Poor charter markets for crude oil and product tankers may adversely affect our future revenues and earnings.

The tanker industry is historically cyclical, resulting in volatility in charter rates, and, in turn, our revenue and earnings. The typical cycle is partially the result of fluctuations in the number of tankers available in the market, which determines the overall supply of tankers competing for charters. The number of tankers in the market changes as a result of new deliveries to the market, offset by vessels demolished or converted due to

 

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technical obsolescence, as well as changes in the number of vessels occupied on long-distance travel or delayed by geopolitical events. The cycle is also impacted by demand for charter hires resulting from material changes in the supply of and demand for oil due primarily to fluctuations in the price of oil and to geopolitical factors. As of April 12, 2020, about half of the vessels owned by our subsidiary companies were employed under charters based upon prevailing market rates (including time charters with a profit share component), and the remaining vessels were employed on time charters which, if not extended, are scheduled to expire on various dates between April 2020 and June 2028. Tanker charter rates declined significantly in 2016 and 2017 and further declined through most 2018, which had an adverse effect on our revenues, profitability and cash flows. Freight rates improved significantly in the latter part of 2019 and continued strong entering the second quarter of 2020. The global economy and demand for oil and oil products, is, however, subject to substantial uncertainty due to the COVID-19 outbreak and related containment efforts through the world. If rates in the charter market were to revert to low levels for any significant period in 2020, it will have an adverse effect on our revenues, profitability and cash flows. Declines in prevailing charter rates also affect the value of our vessels, which are correlated to the trends of charter rates, and could affect our ability to comply with our loan covenants.

The current COVID-19 pandemic will have catastrophic consequences globally that will have a broad range of unavoidable consequences for the shipping industry, which could negatively affect our business, financial performance and our results of operations.

The impact of the current COVID-19 pandemic may have far-reaching repercussions on our business and industry that cannot be adequately determined at this stage. There will be many effects on the shipping industry, directly and indirectly, arising from the current pandemic. The most important issue to face the industry and our Company, given the dramatic number of fatalities since the beginning of the year, is the potential temporary or permanent loss of on-shore personnel and seafarers including individuals who have years of experience with the Company. Our suppliers, the yards that repair and build our vessels and the refineries that our vessels serve, may also suffer reductions in personnel, lost demand for their products and services and government-imposed restrictions on their operations.

The outbreak of the COVID-19 virus in early 2020 has led a number of countries, ports and organizations to take measures against its spread, such as quarantines and restrictions on travel. These measures have and will likely continue to cause severe trade disruptions due to, among other things, the unavailability of personnel, supply chain disruption, interruptions of production, delays in planned strategic projects and closure of businesses and facilities.

The recent COVID-19 virus outbreak has introduced uncertainty in a number of areas of our business, including our operational, commercial and financial activities. It has also negatively impacted, and may continue to impact negatively, global economic activity, which if it persists for an extended period of time may, in turn, eventually impact demand for energy including oil and oil products, as well as LNG, and funds flows and sentiment in the global financial markets. The global response to the outbreak, particularly if it persists, and the economic impact thereof, could also have a material adverse effect on our ability to secure charters at profitable rates, or at all, particularly for our vessels in the spot market or with charters expiring in 2020, as demand for additional charters could be significantly affected. These factors could also have a material adverse effect on the business of our charterers, which could adversely affect their ability and willingness to perform their obligations under our existing charters as well as decreasing demand for future charters. COVID-19 is also affecting oil major vetting processes, which could lead to the loss of oil major approvals to conduct business with us and in turn the loss of revenue under existing charters or future chartering opportunities.

Our business and the shipping industry as a whole is also likely to be impacted by a reduced workforce and delays of crew changes as a result of quarantines applicable in several countries and ports and delays of vessels as a result of port checks due to cases, or suspected cases, of the COVID-2019 amongst crew, as well as delays in the construction of newbuild vessels, scheduled drydockings, intermediate or special surveys of vessels and scheduled and unscheduled ship repairs and upgrades, including the installation of ballast water treatment equipment. In addition, the impact of COVID-19 on credit markets and financial institutions could result in

 

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increased interest rate spreads and other costs of, and difficulty in obtaining, bank financing, including to refinance balloon payments due upon maturity of existing credit facilities and to finance the purchase price of vessel acquisitions, which could limit our ability to grow our business in line with our strategy.

The lockdowns and commitment by world governments to provide financial support to their populations during the pandemic may have serious adverse long-term effects on the economies and budgetary resources of these nations, which in turn may result in a decline in oil demand and a reduction of vessel utilization. Government-imposed lock-downs, curfews and other restrictions on businesses and personal activity in many countries may even lead to changes in prevailing governmental practices and relationships between governments and their citizens that may in turn lead to political turmoil and strife.

Failure of the continued spread of the virus to be controlled could significantly impact economic activity, and in turn eventually demand for crude oil and oil products which is currently being supported by recent declines to historically low oil prices, which could further negatively affect our business, financial condition, results of operations and cash flows.

Disruptions in world financial markets and economic conditions, including due to the COVID-19 outbreak, and protectionist trade measures and other governmental action in the United States and in other parts of the world could have a material adverse impact on our results of operations, financial condition, cash flows and share price.

Global financial markets and economic conditions have been disrupted and volatile at times over the past decade, including in March and April 2020 as a result of the COVID-19 outbreak, and remain subject to significant vulnerabilities, such as the deterioration of fiscal balances and the rapid accumulation of public debt, continued deleveraging in the banking sector and a limited supply of credit in the shipping industry, all of which are likely to be exacerbated by COVID-19. While the global economy had improved, it remained subject to downside risk, and the recent outbreak of COVID-19 has dramatically disrupted the global economy and is expected to cause a recession, the duration of which is unpredictable. This may also prolong tight credit markets and potentially cause such conditions to become more severe.

In addition, the process of the UK exiting the European Union, as well as continued turmoil and hostilities in the Middle East or potential hostilities elsewhere in the world and additional public health emergencies or natural disasters, could contribute to volatility in the global financial markets. These circumstances, along with the re-pricing of credit risk and the reduced participation of certain financial institutions from financing of the shipping industry, will likely continue to affect the availability, cost and terms of vessel financing. If financing is not available to us when it is needed, or is available only on unfavorable terms, our business may be adversely affected, with corresponding effects on our profitability, cash flows and ability to pay dividends.

Moreover, as a result of the slow recovery from the economic crisis in Greece and the related austerity measures implemented by the Greek government, our operations may be subjected to new regulations that may require us to incur new or additional compliance or other administrative costs and may require that we pay to the Greek government new taxes or other fees or that dividends we pay be subject to withholding taxes. Financial difficulties of the European Union resulting from the UK’s exit from the European Union and challenges confronted by member states in addressing the COVID-19 pandemic, particularly Italy, may place additional pressure on the Eurozone and limit the flexibility of its leadership and member states in lending to the Greek government. Furthermore, the commitments by the Greek government to the nations’ creditors and potential shift in its policies may potentially lead to Greece’s exit from the Eurozone if not satisfied, which could affect our technical and commercial managers’ operations located in Greece.

The implementation by the U.S. or other governments of protectionist trade measures, including tariffs or other trade restrictions such as those imposed by the U.S. and China, could also adversely affect the world oil and petroleum markets.

 

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The tanker industry is highly dependent upon the crude oil and petroleum products industries.

The employment of our subsidiaries’ vessels is driven by the availability of and demand for crude oil and petroleum products, the availability of modern tanker capacity and the scrapping, conversion or loss of older vessels. Historically, the world oil and petroleum markets have been volatile and cyclical as a result of the many conditions and events that affect the supply, price, production and transport of oil, including:

 

   

increases and decreases in the demand and price for crude oil and petroleum products;

 

   

availability of crude oil and petroleum products;

 

   

demand for crude oil and petroleum product substitutes, such as natural gas, coal, hydroelectric power and other alternate sources of energy that may, among other things, be affected by environmental regulation;

 

   

actions taken by OPEC and major oil producers and refiners;

 

   

political turmoil in or around oil producing nations;

 

   

global and regional political and economic conditions;

 

   

developments in international trade;

 

   

international trade sanctions;

 

   

environmental factors;

 

   

natural catastrophes;

 

   

terrorist acts;

 

   

weather; and

 

   

changes in seaborne and other transportation patterns.

Despite turbulence in the world economy at times in recent years, worldwide demand for oil and oil products has continued to rise; however, the COVID-19 pandemic, particularly if the related downturn in global economic activity is sustained, would be likely to reduce demand for oil and oil products offsetting demand support from lower oil prices. In the event that this trend falters, the production of and demand for crude oil and petroleum products will again encounter pressure which could lead to a decrease in shipments of these products and consequently this would have an adverse impact on the employment of our vessels and the charter rates that they command. Also, if oil prices remain at low uneconomic levels for producers, it may lead to declining output. As a result of any reduction in demand or output, the charter rates that we earn from our vessels employed on charters related to market rates may decline and possibly remain at low levels for a prolonged period of time.

Our operating results are subject to seasonal fluctuations.

The tankers owned by our subsidiary companies operate in markets that have historically exhibited seasonal variations in tanker demand, which may result in variability in our results of operations on a quarter-by-quarter basis. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere, but weaker in the summer months as a result of lower oil consumption in the northern hemisphere and refinery maintenance. As a result, revenues generated by the tankers in our fleet have historically been weaker during the fiscal quarters ended June 30 and September 30. However, there may be periods in the northern hemisphere when the expected seasonal strength does not materialize to the extent required to support sustainable profitable rates due to tanker overcapacity.

 

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An increase in the supply of vessels without an increase in demand for such vessels could cause charter rates to decline, which could have a material adverse effect on our revenues and profitability.

Historically, the marine transportation industry has been cyclical. The profitability and asset values of companies in the industry have fluctuated based on certain factors, including changes in the supply and demand of vessels. The supply of vessels generally increases with deliveries of new vessels and decreases with the scrapping of older vessels and/or the removal of vessels from the competitive fleet either for storage purposes or for utilization in offshore projects. The newbuilding order book equaled approximately 7% of the existing world tanker fleet at February 1, 2020, by number of vessels, with a significant amount of these newbuilding vessels scheduled to be delivered in 2020. No assurance can be given that the order book will not increase further in proportion to the existing fleet. If supply increases, and demand does not match that increase, the charter rates for our vessels could decline significantly. In addition, any decline of trade on specific long-haul trade routes will effectively increase available capacity with a detrimental impact on rates. A decline in, or prolonged period of, already weak charter rates could have a material adverse effect on our revenues and profitability.

The global tanker industry is highly competitive.

We operate our fleet in a highly competitive market. Our competitors include owners of VLCC, suezmax, aframax, panamax, handymax and handysize tankers, as well as owners in the shuttle tanker and LNG markets, which are other independent tanker companies, as well as national and independent oil companies, some of which have greater financial strength and capital resources than we do. Competition in the tanker industry is intense and depends on price, location, size, age, condition, and the acceptability of the available tankers and their operators to potential charterers.

Acts of piracy on ocean-going vessels, although recently declining in frequency, could still adversely affect our business.

Despite a decline in the frequency of pirate attacks on seagoing vessels in the western part of the Indian Ocean, such attacks remain prevalent off the west coast of Africa and between Malaysia and Indonesia. If piracy attacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones, as the Gulf of Aden has been, or Joint War Committee (JWC) “war and strikes” listed areas, premiums payable for such insurance coverage could increase significantly and such insurance coverage may be more difficult to obtain. Crew costs, including those due to employing onboard security guards, could increase in such circumstances. In addition, while we believe the charterer remains liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain number of days and it is therefore entitled to cancel the charter party, a claim that we would dispute. 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, results of operations and cash flows.

Terrorist attacks, international hostilities, economic and trade sanctions and the economic situation in the Eurozone can affect the tanker industry, which could adversely affect our business.

Major oil and gas producing countries in the Middle East have become involved militarily in conflicts in Iraq, Syria and Yemen. Armed conflicts with insurgents and others continue, as well, in Libya, and political unrest and instability have adversely affected the infrastructure and economic stability of Venezuela, each of which is a major oil exporting country. In addition, recent tension and instability in the Persian Gulf, including explosions on two oil tankers in June 2019 in the Strait of Hormuz, a vital passageway for international oil shipment, may adversely affect the future export of oil around the region. Any such hostility or instability could seriously disrupt the production of oil or LNG and endanger their export by vessel or pipeline, which could put our vessels at serious risk and impact our operations and our revenues, expenses, profitability and cash flows in varying ways that we cannot now project with any certainty.

 

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The increasing number of terrorist attacks throughout the world, longer-lasting wars, international incidents or international hostilities, such as in the Ukraine, Afghanistan, Iraq, Syria, Libya, Yemen and the Korean peninsula, could damage the world economy and adversely affect the availability of and demand for crude oil and petroleum products and negatively affect our investment and our customers’ investment decisions over an extended period of time. In addition, sanctions against oil exporting countries such as Iran, Sudan, Syria, Russia and Venezuela may also impact the availability of crude oil which would increase the availability of tankers, thereby negatively impacting charter rates. We conduct our vessel operations internationally and despite undertaking various security measures, our vessels may become subject to terrorist acts and other acts of hostility like piracy, either at port or at sea. Such actions could adversely impact our overall business, financial condition and results of operations. In addition, terrorist acts and regional hostilities around the world in recent years have led to increases in our insurance premium rates and the implementation of special “war risk” premiums for certain trading routes, although our charter party agreements provide for additional War Risks insurance costs to be for charterers’ account.

Our charterers may direct one of our vessels to call on ports located in countries that are subject to restrictions imposed by the U.S. government, the UN or the EU, which could negatively affect the trading price of our common shares.

On charterers’ instructions, our subsidiaries’ vessels may be requested to call on ports located in countries subject to sanctions and embargoes imposed by the U.S. government, the UN or the EU and countries identified by the U.S. government, the UN or the EU as state sponsors of terrorism. The U.S., UN- and EU- sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time.

On January 16, 2016, “Implementation Day” for the Iran Joint Comprehensive Plan of Action (JCPOA), the United States lifted its secondary sanctions against Iran which prohibited certain conduct by non-U.S. companies and individuals that occurred entirely outside of U.S. jurisdiction involving specified industry sectors in Iran, including the energy, petrochemical, automotive, financial, banking, mining, shipbuilding and shipping sectors. By lifting the secondary sanctions against Iran, the U.S. government effectively removed U.S. imposed restraints on dealings by non-U.S. companies, such as our Company, and individuals with these formerly targeted Iranian business sectors. Non-U.S. companies continued to be prohibited under U.S. sanctions from (i) knowingly engaging in conduct that seeks to evade U.S. restrictions on transactions or dealings with Iran or that causes the export of goods or services from the United States to Iran, (ii) exporting, reexporting or transferring to Iran any goods, technology, or services originally exported from the U.S. and / or subject to U.S. export jurisdiction and (iii) conducting transactions with the Iranian or Iran-related individuals and entities that remain or are placed in the future on OFAC’s list of Specially Designated Nationals and Blocked Persons (SDN List), notwithstanding the lifting of secondary sanctions.

However, on August 6, 2018, the U.S. re-imposed an initial round of secondary sanctions and as of November 5, 2018, virtually all of the secondary sanctions the U.S. had suspended under the JCPOA have been re-imposed.

The U.S. government’s primary Iran sanctions have remained in place throughout recent years and, as a consequence, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings in or with Iran or its government. In addition, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings with the Government of Iran and Iranian financial institutions, which effectively impacts the transfer of funds to, from, or through the U.S. financial system whether denominated in U.S. dollars or any other currency.

The U.S. also maintains embargoes on Cuba, North Korea and Syria. We can anticipate that some of our charterers may request our vessels to call on ports located in these countries. Although we believe that we are in

 

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compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. Additionally, some investors may decide to divest their interest, or not to invest, in us simply because we do business with companies that do lawful business in sanctioned countries. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. Investor perception of the value of our shares may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

Failure to comply with the U.S. Foreign Corrupt Practices Act and other anti-bribery legislation in other jurisdictions could result in fines, criminal penalties, contract terminations and an adverse effect on our business.

We operate in a number of countries throughout the world, including countries that may have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws and have adopted policies consistent and in full compliance with the U.S. Foreign Corrupt Practices Act of 1977, or the “FCPA” and anti-bribery legislation in other jurisdictions. Brazilian authorities have charged certain shipbrokers with various offenses, including bribery, in connection with charters entered into between Petrobras and various shipowners, including us, and we are subject to the risk that the actions taken by these brokers, or actions of other persons and entities whom we engage or their agents, are determined to constitute a violation of such anti-corruption laws, including the FCPA, applicable to the Company. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, or curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.

Efforts to take advantage of opportunities in pursuit of our growth strategy may result in financial or commercial difficulties.

A key strategy of management is to continue to renew and grow the fleet by pursuing the acquisition of additional vessels or fleets or companies that are complementary to our existing operations. If we seek to expand through acquisitions, we face numerous challenges, including:

 

   

difficulties in raising the required capital;

 

   

depletion of existing cash resources more quickly than anticipated;

 

   

assumption of potentially unknown material liabilities or contingent liabilities of acquired companies; and

 

   

competition from other potential acquirers, some of which have greater financial resources.

We cannot assure you that we will be able to integrate successfully the operations, personnel, services or vessels that we might acquire in the future, and our failure to do so could adversely affect our profitability.

We are subject to regulation and liability under environmental, health and safety laws that could require significant expenditures and affect our cash flows and net income.

Our business and the operation of our subsidiaries’ vessels are subject to extensive international, national and local environmental and health and safety laws and regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. In addition, major oil companies chartering our vessels impose, from time to time, their own environmental and health and safety requirements. To comply

 

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with these requirements and regulations, including the new MARPOL Annex VI sulfur emission requirements instituting a global 0.5% sulfur cap on marine fuels from January 1, 2020 and the IMO ballast water management (“BWM”) convention, which requires vessels to install expensive ballast water treatment systems (“BWTS”) before the first MARPOL renewal survey conducted after September 8, 2019, for newly constructed vessels after September 8, 2017 to have a BWTS installed by delivery and for all vessels to be certified in accordance with the BWM convention by September 8, 2024, we may be required to incur additional costs to meet new maintenance and inspection requirements, develop contingency plans for potential spills, and obtain insurance coverage.

These and future environmental regulations, which may become stricter, may limit our ability to do business, increase our operating costs and/or force the early retirement of our vessels, all of which could have a material adverse effect on our financial condition and results of operations.

International, national and local laws imposing liability for oil spills are also becoming increasingly stringent. Some impose joint, several, and in some cases, unlimited liability on owners, operators and charterers regardless of fault. We could be held liable as an owner, operator or charterer under these laws. In addition, under certain circumstances, we could also be held accountable under these laws for the acts or omissions of Tsakos Shipping & Trading S.A. (“Tsakos Shipping”), Tsakos Columbia Shipmanagement Ltd. (“TCM”) or Tsakos Energy Management Limited (“Tsakos Energy Management”), companies that provide technical and commercial management services for our subsidiaries’ vessels and us, or others in the management or operation of our subsidiaries’ vessels. Although we currently maintain, and plan to continue to maintain, for each of our subsidiaries’ vessels’ pollution liability coverage in the amount of $1 billion per incident (the maximum amount available), liability for a catastrophic spill could exceed the insurance coverage we have available and result in our having to liquidate assets to pay claims. In addition, we may be required to contribute to funds established by regulatory authorities for the compensation of oil pollution damage or provide financial assurances for oil spill liability to regulatory authorities.

Maritime disasters and other operational risks may adversely impact our reputation, financial condition and results of operations.

The operation of ocean-going vessels has an inherent risk of maritime disaster and/or accident, environmental mishaps, cargo and property losses or damage and business interruptions caused by, among others:

 

   

mechanical failure;

 

   

human error;

 

   

labor strikes;

 

   

adverse weather conditions;

 

   

vessel off hire periods;

 

   

regulatory delays; and

 

   

political action, civil conflicts, terrorism and piracy in countries where vessel operations are conducted, vessels are registered or from which spare parts and provisions are sourced and purchased.

Any of these circumstances could adversely affect our operations, result in loss of revenues or increased costs and adversely affect our profitability and our ability to perform our charters.

Our subsidiaries’ vessels could be arrested at the request of third parties.

Under general maritime law in many jurisdictions, crew members, tort claimants, vessel mortgagees, suppliers of goods and services and other claimants may lien a vessel for unsatisfied debts, claims or damages. In many jurisdictions a maritime lien holder may enforce its lien by arresting a vessel through court process. In

 

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some jurisdictions, under the extended sister ship theory of liability, a claimant may arrest not only the vessel with respect to which the claimant’s maritime lien has arisen, but also any associated vessel under common ownership or control. While in some jurisdictions which have adopted this doctrine, liability for damages is limited in scope and would only extend to a company and its ship-owning subsidiaries, we cannot assure you that liability for damages caused by some other vessel determined to be under common ownership or control with our subsidiaries’ vessels would not be asserted against us.

Risks Related To Our Business

Any significant future declines in the values of our vessels could affect our ability to comply with various covenants in our credit facilities unless waived or modified by our lenders.

Our credit facilities, which are secured by mortgages on our subsidiaries’ vessels, require us to maintain specified collateral coverage ratios and satisfy financial covenants, including requirements based on the market value of our vessels, such as maximum corporate leverage levels. The appraised value of a vessel fluctuates depending on a variety of factors including the age of the vessel, its hull configuration, prevailing charter market conditions, supply and demand balance for vessels and new and pending legislation. The oversupply of tankers and depressed tanker charter market adversely affected tanker values from the middle of 2008 to the middle of 2019, and despite the relatively young age of our subsidiaries’ fleet and extensive long-term charter employment on many of the vessels, resulted in a significant decline in the charter-free values of certain of our subsidiaries’ vessels. Vessel values recovered from the end of 2013, but again declined during 2016 and 2017 and remained at relatively low levels through 2018 due primarily to global fleet overcapacity and lack of financing for potential buyers to acquire second-hand, charter free vessels. Values recovered in 2019 and continued to improve into early 2020. However, they may remain at current levels for a prolonged period, again decline or rise. Low values may result in our inability to comply with the financial covenants under our credit facilities which relate to our consolidated leverage and loan-to-asset value collateral requirements. If we were unable to obtain waivers in case of non-compliance or post additional collateral or prepay principal in the case of loan-to-asset value requirements, our lenders could accelerate our indebtedness. We have paid all of our scheduled loan installments and related loan interest consistently without delay or omission.

Charters at attractive rates may not be available when our current time charters expire.

During 2019, we derived approximately 64% of our revenues from time charters, as compared to 65% in 2018. As our current period charters on 15 of the vessels owned by our subsidiary companies expire in the remainder of 2020, considering the volatile nature of the tanker market, it may not be possible to re-charter these vessels on a period basis at attractive rates. . If attractive period charter opportunities are not available, we may seek to charter the vessels owned by our subsidiary companies on the spot market, which is subject to significant fluctuations. In the event a vessel owned by one of our subsidiary companies may not find employment at economically viable rates, management may opt to lay up the vessel until such time that rates become attractive again (an action which our subsidiary companies have never undertaken). During the period of any layup, the vessel would continue to incur expenditures such as debt service, insurance, reduced crew wages and maintenance costs.

We are dependent on the ability and willingness of our charterers to honor their commitments to us for substantially all of our revenues and the failure of our counterparties to meet their obligations under our charter agreements could cause us to suffer losses or otherwise adversely affect our business.

We derive substantially all of our revenues from the payment of charter hire by our charterers. 44 of our 65 vessels are currently employed under time charters including time charters with profit sharing provisions above specified minimum rate levels. We could lose a charterer or the benefits of a time charter if:

 

   

the charterer fails to make charter payments to us because of its financial inability, liquidation, disagreements with us, defaults on a payment or otherwise;

 

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the charterer exercises certain specific limited rights to terminate the charter;

 

   

we do not take delivery of a newbuilding vessel we may contract for at the agreed time; or

 

   

the charterer terminates the charter because the vessel fails to meet certain guaranteed speed and fuel consumption requirements and we are unable to rectify the situation or otherwise reach a mutually acceptable settlement; or.

 

   

a serious accident or explosion occurs at a client refinery.

If we lose a time charter, we may be unable to re-deploy the related vessel on terms as favorable to us or at all. We would not receive any revenues from such a vessel while it remained unchartered, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition, insure it and service any indebtedness secured by such vessel.

If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, as part of a court-led restructuring or otherwise, we could sustain significant reductions in revenue and earnings which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends, if any, in the future, and comply with the covenants in our credit facilities.

If our exposure to the spot market increases, our revenues could suffer and our expenses could increase.

The spot market for crude oil and petroleum product tankers is highly competitive. Beginning in 2016, we modified our chartering strategy to place more of our subsidiaries’ vessels on time-charter. As of April 2, 2020, 21 of the vessels owned by our subsidiary companies were employed under spot charters. If we were to increase participation in the spot market, we may experience a lower overall utilization of our fleet through waiting time or ballast voyages, leading to a decline in operating revenue. Moreover, to the extent our vessels are employed in the spot market, both our revenue from vessels and our operating costs, specifically our voyage expenses, will be significantly impacted by adverse movements in the cost of bunkers (fuel), including the price of low sulfur fuel certain of our vessels may be required to use beginning in 2020. See “ —Fuel prices may adversely affect our profits.” Unlike time charters in which the charterer bears all of the bunker costs, in spot market voyages we bear the bunker charges as part of our voyage costs. As a result, while historical movements in bunker charges are factored into the prospective freight rates for spot market voyages periodically announced by World Scale Association (London) Limited and similar organizations, increases in bunker charges in any given period could have a material adverse effect on our cash flow and results of operations for the period in which the increase occurs. In addition, to the extent we employ our vessels pursuant to contracts of affreightment or under pooling arrangements, the rates that we earn from the charterers under those contracts may be subject to reduction based on market conditions, which could lead to a decline in our operating revenue.

We depend on Tsakos Energy Management, Tsakos Shipping and TCM to manage our business.

We do not have the employee infrastructure to manage our operations and have no physical assets. In common with industry practice, our subsidiaries own the vessels in the fleet and any contracts to construct newbuildings. We have engaged Tsakos Energy Management to perform all of our executive and management functions. Tsakos Energy Management employees directly provide us with financial, accounting and other back-office services, including acting as our liaison with the New York Stock Exchange and the Bermuda Monetary Authority. Tsakos Energy Management, in turn, oversees and subcontracts part of commercial management (including treasury, chartering and vessel purchase and sale functions) to Tsakos Shipping, and day-to-day fleet technical management, such as vessel operations, repairs, supplies and crewing, to TCM. As a result, we depend upon the continued services provided by Tsakos Energy Management and Tsakos Energy Management depends on the continued services provided by Tsakos Shipping and TCM.

We derive significant benefits from our relationship with Tsakos Energy Management and its affiliated companies, including purchasing discounts to which we otherwise would not have access. We would be

 

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materially adversely affected if any of Tsakos Energy Management, Tsakos Shipping or TCM becomes unable or unwilling to continue providing services for our benefit at the level of quality they have provided such services in the past and at comparable costs as they have charged in the past. If we were required to employ a ship management company other than Tsakos Energy Management, Tsakos Shipping or TCM, we cannot offer any assurances that the terms of such management agreements would be on terms as favorable to the Company in the long term.

Tsakos Energy Management, Tsakos Shipping and TCM are privately held companies and there is little or no publicly available information about them.

The ability of Tsakos Energy Management, Tsakos Shipping and TCM to continue providing services for our and our subsidiaries’ benefit will depend in part on their own financial strength. Circumstances beyond our control could impair their financial strength and, because each of these companies is privately held, it is unlikely that information about their financial strength would become public. Any such problems affecting these organizations could have a material adverse effect on us.

Tsakos Energy Management has the right to terminate its management agreement with us and Tsakos Shipping and TCM have the right to terminate their respective contracts with Tsakos Energy Management.

Tsakos Energy Management may terminate its management agreement with us at any time upon one year’s notice. In addition, if even one director were to be elected to our board without having been recommended by our existing board, Tsakos Energy Management would have the right to terminate the management agreement on 10 days’ notice. If Tsakos Energy Management terminates the agreement for this reason, we would be obligated to pay Tsakos Energy Management the present discounted value of all payments that would have otherwise become due under the management agreement until June 30 in the tenth year following the date of the termination plus the average of the incentive awards previously paid to Tsakos Energy Management multiplied by 10. A termination as of December 31, 2019 would have resulted in a payment of approximately $172.7 million. Tsakos Energy Management’s contracts with Tsakos Shipping and with TCM may be terminated by either party upon six months’ notice and would terminate automatically upon termination of our management agreement with Tsakos Energy Management.

Our ability to pursue legal remedies against Tsakos Energy Management, Tsakos Shipping and TCM is very limited.

In the event Tsakos Energy Management breaches its management agreement with us, we or our subsidiaries could bring a lawsuit against it. However, because neither we nor they are ourselves party to a contract with Tsakos Shipping or TCM, it may be difficult to sue Tsakos Shipping and TCM for breach of their obligations under their contracts with Tsakos Energy Management, and Tsakos Energy Management may have no incentive to sue Tsakos Shipping and TCM. Tsakos Energy Management is a company with no substantial assets and no income other than the income it derives under the management agreement with us. Therefore, it is unlikely that we or our subsidiaries would be able to obtain any meaningful recovery if we or they were to sue Tsakos Energy Management, Tsakos Shipping or TCM on contractual grounds.

Tsakos Shipping provides chartering services to other tankers and TCM manages other tankers and could experience conflicts of interests in performing obligations owed to us and the operators of other tankers.

In addition to the vessels that it manages for our fleet, TCM technically manages a fleet of privately owned vessels and wishes to acquire third-party clients. These vessels are operated by the same group of TCM employees that manage our vessels, and we are advised that its employees manage these vessels on an “ownership neutral” basis; that is, without regard to who owns them. It is not impossible that Tsakos Shipping, which provides chartering services for nearly all vessels technically managed by TCM, might allocate charter or spot opportunities to other TCM managed vessels when our subsidiaries’ vessels are unemployed. It is also possible that TCM could in the future agree to manage more tankers that might directly compete with the fleet.

 

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Clients of Tsakos Shipping have acquired and may acquire additional vessels that may compete with our fleet.

Tsakos Shipping and we have an arrangement whereby it affords us a right of first refusal on any opportunity to purchase a tanker which is 10 years of age or younger or contract to construct a tanker that is referred to or developed by Tsakos Shipping. Were we to decline any opportunity offered to us, or if we do not have the resources or desire to accept it, other clients of Tsakos Shipping might decide to accept the opportunity. In this context, Tsakos Shipping clients have in the past acquired modern tankers and have ordered the construction of vessels. They may acquire or order tankers in the future, which, if we decline to buy from them, could be entered into charters in competition with our vessels. These charters and future charters of tankers by Tsakos Shipping could result in conflicts of interest between their own interests and their obligations to us.

Our chief executive officer has affiliations with Tsakos Energy Management, Tsakos Shipping and TCM which could create conflicts of interest.

Nikolas Tsakos is the president, chief executive officer and a director of our company and the director and sole shareholder of Tsakos Energy Management. Nikolas Tsakos is also the son of the founder of Tsakos Shipping. These responsibilities and relationships could create conflicts of interest that could result in losing revenue or business opportunities or increase our expenses.

Our commercial arrangements with Tsakos Energy Management and Argosy may not always remain on a competitive basis.

We pay Tsakos Energy Management a management fee for its services pursuant to our management agreement. We also place our hull and machinery insurance, increased value insurance and loss of hire insurance through Argosy Insurance Company, Guernsey, a captive insurance company affiliated with Tsakos interests. We believe that the management fees that we pay Tsakos Energy Management compare favorably with management compensation and related costs reported by other publicly traded shipping companies and that our arrangements with Argosy are structured at arm’s-length market rates. Our board reviews publicly available data periodically in order to confirm this. However, we cannot assure you that the fees charged to us are or will continue to be as favorable to us as those we could negotiate with third parties and our board could determine to continue transacting business with Tsakos Energy Management and Argosy even if less expensive alternatives were available from third parties.

We depend on our key personnel.

Our future success depends particularly on the continued service of Nikolas Tsakos, our president and chief executive officer and the sole shareholder of Tsakos Energy Management. The loss of Mr. Tsakos’s services or the services of any of our key personnel could have a material adverse effect on our business. We do not maintain key man life insurance on any of our executive officers.

Because the market value of our vessels may fluctuate significantly, we may incur impairment charges or losses when we sell vessels which may adversely affect our earnings.

The fair market value of tankers may increase or decrease depending on any of the following:

 

   

general economic and market conditions affecting the tanker industry;

 

   

supply and demand balance for ships within the tanker industry;

 

   

competition from other shipping companies;

 

   

types and sizes of vessels;

 

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other modes of transportation;

 

   

cost of newbuildings;

 

   

governmental or other regulations;

 

   

prevailing level of charter rates; and

 

   

technological advances.

The global economic downturn that commenced in 2008 and the consequences thereof, resulted in a decrease in vessel values. Since then valuations have fluctuated, falling whenever there was excess fleet capacity and falling freight rates, as in 2013, and recovering when tanker market conditions improved as in 2015. Valuations declined again in 2016 and remained low through 2017 and 2018 but recovered in 2019.Although our subsidiaries currently own a relatively modern fleet, with an average age of 9.0 years as of April 2, 2020, as vessels grow older, they generally decline in value.

We have a policy of considering the disposal of tankers periodically. If our subsidiaries’ tankers are sold at a time when tanker prices have fallen, the sale may be at less than the vessel’s carrying value on our financial statements, with the result that we will incur a loss.

In addition, accounting standards require that we periodically review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment charge for an asset held for use should be recognized when the estimate of undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount. Measurement of the impairment charge is based on the fair value of the asset as provided by third parties. Such reviews may from time to time result in asset write-downs, which could adversely affect our results of operations, such as we did in the fourth quarter of 2017, 2018 and 2019, with respect to two, five and seven of our subsidiaries’ tankers, respectively.

If TCM is unable to attract and retain skilled crew members, our reputation and ability to operate safely and efficiently may be harmed.

Our continued success depends in significant part on the continued services of the officers and seamen whom TCM provides to crew the vessels owned by our subsidiary companies. The market for qualified, experienced officers and seamen is extremely competitive and has grown more so in recent periods as a result of the growth in world economies and other employment opportunities. Although TCM has manning management arrangements with a number of accredited manning agencies in Philippines, Ukraine, Romania, Georgia, Latvia, Greece and Russia and sponsors various academies in the relevant regions, we cannot assure you that TCM will be successful in its efforts to recruit and retain properly skilled personnel at commercially reasonable salaries. Any failure to do so could adversely affect our ability to operate cost-effectively and our ability to increase the size of the fleet.

Labor interruptions could disrupt our operations.

Substantially all of the seafarers and land-based employees of TCM are covered by industry-wide collective bargaining agreements that set basic standards. We cannot assure you that these agreements will prevent labor interruptions. In addition, like many other vessels internationally, some of our subsidiaries’ vessels operate under so-called “flags of convenience” and may be vulnerable to unionization efforts by the International Transport Federation and other similar seafarer organizations which could be disruptive to our operations. Any labor interruption or unionization effort which is disruptive to our operations could harm our financial performance.

Contracts for newbuilding vessels present certain economic and other risks.

As of April 2, 2020, our subsidiaries have contracts for the construction of two suezmax crude carriers and one LNG carrier for delivery in 2020 and 2021. Our subsidiaries may also order additional newbuildings. During

 

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the course of construction of a vessel, we are typically required to make progress payments. While we typically have refund guarantees from banks to cover defaults by the shipyards and our construction contracts would be saleable in the event of our payment default, we can still incur economic losses in the event that we or the shipyards are unable to perform our respective obligations. Shipyards may periodically experience financial difficulties.

Delays in the delivery of these vessels, or any newbuilding or secondhand vessels our subsidiaries may agree to acquire, could delay our receipt of revenues generated by these vessels and, to the extent we have arranged charter employment for these vessels, could possibly result in the cancellation of those charters, and therefore adversely affect our anticipated results of operations. The delivery of newbuilding vessels could be delayed because of, among other things: work stoppages or other labor disturbances; bankruptcy or other financial crisis of the shipyard building the vessel; hostilities or political or economic disturbances in the countries where the vessels are being built, including any escalation of tensions involving North Korea; weather interference or catastrophic events, such as a major earthquake, tsunami or fire; our requests for changes to the original vessel specifications; requests from our customers, with whom our commercial managers arrange charters for such vessels, to delay construction and delivery of such vessels due to weak economic conditions and shipping demand or a dispute with the shipyard building the vessel.

Credit conditions internationally might impact our ability to raise debt financing.

Global financial markets and economic conditions have been disrupted and volatile for periods in recent years. At times, the credit markets as well as the debt and equity capital markets were distressed, and it was difficult for many shipping companies to obtain adequate financing. The cost of available financing also increased significantly, but for leading shipping companies has since declined. The global financial markets and economic conditions could again experience volatility and disruption in the future.

We have traditionally financed our vessel acquisitions or constructions with our own cash (equity) and bank debt from various reputable national and international commercial banks. In relation to newbuilding contracts, the equity portion usually covers all or part of the pre-delivery obligations while the debt portion covers the outstanding amount due to the shipyard on delivery. More recently, however, we have arranged pre-delivery bank financing to cover much of the installments due before delivery, and, therefore, we would be required to provide the remainder of our equity investment at delivery. In addition, several of our existing loans will mature over the next few years, including one in the current year. In the event that the related vessels are not sold, or we do not wish to use existing cash for paying the final balloon payments, then re-financing of the loans for an extended period beyond the maturity date will be necessary. Current and future terms and conditions of available debt financing, especially for older vessels without time charter could be different from terms obtained in the past and could result in a higher cost of capital, if available at all. Any adverse development in the credit markets could materially alter our current and future financial and corporate planning and growth and have a negative impact on our balance sheet.

The future performance of our subsidiaries’ LNG carriers depends on continued growth in LNG production and demand for LNG and LNG shipping.

The future performance of our subsidiaries’ LNG carriers will depend on continued growth in LNG production and the demand for LNG and LNG shipping. A complete LNG project includes production, liquefaction, storage, re-gasification and distribution facilities, in addition to the marine transportation of LNG. Increased infrastructure investment has led to an expansion of LNG production capacity in recent years, but material delays in the construction of new liquefaction facilities could constrain the amount of LNG available for shipping, reducing ship utilization. The rate of growth in global LNG demand has fluctuated due to several factors, including global economic conditions and economic uncertainty, fluctuations in the price of natural gas and other sources of energy, growth in natural gas production from unconventional sources in regions such as

 

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North America and the highly complex and capital intensive nature of new or expanded LNG projects, including liquefaction projects. Growth in LNG production and demand for LNG and LNG shipping could be negatively affected by a number of factors, including:

 

   

increases in the cost of natural gas derived from LNG relative to the cost of natural gas generally;

 

   

increases in the production levels of low-cost natural gas in domestic natural gas consuming markets, which could further depress prices for natural gas in those markets and make LNG uneconomical;

 

   

increases in the production of natural gas 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-natural gas pipelines to natural gas pipelines in those markets;

 

   

decreases in the consumption of natural gas due to increases in its price, decreases in the price of alternative energy sources or other factors making consumption of natural gas less attractive;

 

   

any significant explosion, spill or other incident involving an LNG facility or carrier;

 

   

infrastructure constraints such as delays in the construction of liquefaction facilities, the inability of project owners or operators to obtain financing or governmental approvals to construct or operate LNG facilities, as well as community or political action group resistance to new LNG infrastructure due to concerns about the environment, safety and terrorism;

 

   

labor or political unrest or military conflicts affecting existing or proposed areas of LNG production or re-gasification;

 

   

decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG projects;

 

   

technological advances render existing LNG carriers obsolete or non-viable; or •negative global or regional economic or political conditions, particularly in LNG consuming regions, which could reduce energy consumption or its growth.

Reduced demand for LNG or LNG shipping, or any reduction or limitation in LNG production capacity, could have a material adverse effect on our ability to secure future multi-year time charters for the LNG carriers, or for any new LNG carriers our subsidiaries may acquire, which could harm our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Demand for LNG shipping could be significantly affected by volatile natural gas prices and the overall demand for natural gas.

Gas prices are volatile and are affected by numerous factors beyond our control, including but not limited to the following:

 

   

the supply and cost of crude oil and petroleum products;

 

   

worldwide demand for natural gas;

 

   

the cost of exploration, development, production, transportation and distribution of natural gas;

 

   

expectations regarding future energy prices for both natural gas and other sources of energy;

 

   

the level of worldwide LNG production and exports;

 

   

government laws and regulations, including but not limited to environmental protection laws and regulations;

 

   

local and international political, economic and weather conditions;

 

   

political and military conflicts; and

 

   

the availability and cost of alternative energy sources, including alternate sources of natural gas in gas importing and consuming countries.

 

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Any decline in oil prices, which can be very volatile and have recently declined to very low levels, can depress natural gas prices and lead to a narrowing of the gap in pricing in different geographic regions, which can adversely affect the length of voyages in the spot LNG shipping market and the spot rates and medium-term charter rates for charters which commence in the near future. Any continued period of low oil prices could adversely affect both the competitiveness of gas as a fuel for power generation and the market price of gas, to the extent that gas prices are benchmarked to the price of crude oil. Some production companies have announced delays or cancellations of certain previously announced LNG projects, which, unless offset by new projects coming on stream, could adversely affect demand for LNG charters over the next few years, while the amount of tonnage available for charter is expected to increase. The recent dramatic decline in the price of oil, in part due to the COVID-19 outbreak and production increases by Saudi Arabia and other oil producing countries, could make LNG a less attractive alternative for some uses and generally lead to reduced production of LNG. Reduced demand for LNG and LNG shipping could have an adverse effect on our future growth and would harm our business, results of operations and financial condition.

An oversupply of LNG carriers may lead to a reduction in the charter hire rates we are able to obtain when seeking charters in the future.

Driven in part by an increase in LNG production capacity and the expectation of further future capacity, the construction and delivery of new LNG carriers has been increasing. Any future expansion of the global LNG carrier fleet that cannot be absorbed by existing or future LNG projects may have a negative impact on charter rates, vessel utilization and vessel values. Such impact could be amplified if the expansion of LNG production capacity does not keep pace with fleet growth.

Hire rates for LNG carriers may fluctuate substantially and if rates are low, as is currently the case, when we are seeking a new charter, our revenues and cash flows may decline.

The COVID-19 outbreak and the significant fall in oil prices since early March 2020 has contributed to substantial declines in the price of LNG, as it did in 2014 and subsequent years as well, which coupled with delays in the completion of liquefaction and regasification facilities around the world and a high order book, particularly with vessels ordered on speculation, have led to significant declines in average rates for new spot and shorter-term LNG charters, which may persist for an extended period. If LNG charter market conditions remain weak or decline over the next eighteen months, we may have difficulty in securing new charters at attractive rates and durations for our two LNG carriers when their current charters expire and our newbuilding LNG carrier, for which we have not yet arranged employment, is delivered in 2021.

We depend upon Hyundai Ocean Services to manage our subsidiaries’ LNG carriers.

Tsakos Energy Management has subcontracted all technical management of our LNG operations to Hyundai Ocean Services Co., Ltd (“HOS”) for a fee. Neither Tsakos Energy Management nor TCM has the dedicated personnel for running LNG operations nor can we guarantee that they will employ an adequate number of employees to conduct LNG operations in the future. As such, we are currently dependent on the reliability and effectiveness of third-party managers for whom we cannot guarantee that their employees, both onshore and at-sea are sufficient in number or capability for their assigned role. We also cannot assure you that we will be able to continue to receive such services from HOS on a long-term basis on acceptable terms or at all.

Our growth in shuttle tankers depends partly on continued growth in demand for offshore oil transportation, processing and storage services.

Our growth strategy includes expansion in the shuttle tanker sector. Growth in this sector depends on continued growth in world and regional demand for these offshore services, which could be negatively affected by a number of factors, such as:

 

   

decreases in the actual or projected price of oil, which could lead to a reduction in or termination of production of oil at certain offshore fields our shuttle tankers will service or a reduction in exploration for or development of new offshore oil fields;

 

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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;

 

   

negative global or regional economic or political conditions, particularly in oil consuming regions, which could reduce energy consumption or its growth; and

 

   

fall in the price of oil leading to cut-backs in the offshore industry.

Oil prices declined substantially in the second half of 2014, which resulted in oil companies announcing reductions in oil production and exploration activities, including in offshore fields. Oil prices recovered since that time, before declining dramatically in March 2020 due in large part to production increases by Saudi Arabia and other oil producing countries. Oil prices may continue to decline including due to any demand effects resulting from the consequences of the COVID-19 outbreak. Continued volatility in oil prices may exist depending on the policies of oil production countries and cartels.

Fuel prices may adversely affect our profits.

While we do not bear the cost of fuel (bunkers) under time and bareboat charters, fuel is the largest expense in our shipping operations when vessels are under spot charters. Increases in the price of fuel may, as a result, adversely affect our profitability. The marine fuel with low sulfur content required to comply with the 0.5% sulfur cap on marine fuels became effective on January 1, 2020, for vessels without scrubbers. Initially, low sulfur fuel was substantially more expensive compared to the existing widely used marine fuel. If this price differential continues, it could increase our fuel costs for vessels employed in the spot market. In addition, the price of fuel is an important factor in negotiating charters with customers, and rising costs of fuel could make older and less fuel efficient vessels less competitive compared to the more fuel efficient newer vessels or compared with vessels which can utilize less expensive fuel. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments.

If our counterparties were to fail to meet their obligations under a charter agreement, we could suffer losses or our business could be otherwise adversely affected.

As of April 2, 2020, 44 of our subsidiaries’ vessels were employed under time charters and time charters with profit share. The ability and willingness of each of the counterparties to perform their obligations under their charters will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the oil and energy industries and of the oil and oil products shipping industry as well as the overall financial condition of the counterparties and prevailing charter rates. There can be no assurance that some of our subsidiaries’ customers would not fail to pay charter hire or attempt to renegotiate charter rates and, if the charterers fail to meet their obligations or attempt to renegotiate charter agreements, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends in the future.

The shipping industry has inherent operational risks that may not be adequately covered by our insurance.

We believe that we maintain as much insurance on the vessels in the fleet, through insurance companies, including Argosy, a related party company, and P&I clubs, as is appropriate and consistent with industry practice. While we endeavor to be adequately insured against all known risks related to the operation of our subsidiaries’ vessels, there remains the possibility that a liability may not be adequately covered and we may not

 

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be able to obtain adequate insurance coverage for the fleet in the future. The insurers may also not pay particular claims. Even if our insurance coverage is adequate, we may not be able to obtain a replacement vessel in a timely manner in the event of a loss. Our insurance policies contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs or lower our revenue. In addition, some 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 make an excessive impact on association reserves. The Company’s P&I renewals as of February 20, 2020 saw an increase in costs of 4.96% partly due to the International Group of P&I Clubs‘ need to increase their income after several years of premium reductions and partly due to the claim on the Group reinsurance contract resulting from the collision between the tanker “Sola TS” and the Norwegian frigate “HELGE INGSTAD“ in November 2018. The International Group of P&I Clubs continues to provide its members with $1 billion of oil pollution liability coverage and more than $4 billion of coverage for other liabilities. P&I, Hull and Machinery and War Risk insurance premiums are accounted for as part of operating expenses in our consolidated financial statements; accordingly, any changes in insurance premiums directly impact our operating results.

Failure to protect our information systems against security breaches could adversely affect our business and financial results. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.

The efficient operation of our business is dependent on computer hardware and software systems. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. We rely on industry-accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent cybersecurity breaches, the access, capture or alteration of information by criminals, the exposure or exploitation of potential security vulnerabilities, the installation of malware or ransomware, acts of vandalism, computer viruses, misplaced data or data loss. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased operating costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and financial results, as well as our cash flows available for distribution to our shareholders

Our degree of leverage and certain restrictions in our financing agreements impose constraints on us.

We incur substantial debt to finance the acquisition of our vessels. At December 31, 2019, our debt to capital ratio was 51.2% (debt / debt plus equity), with $1.5 billion in debt outstanding. We are required to apply a substantial portion of our cash flow from operations to the payment of principal and interest on this debt. In 2019, a substantial portion of our cash flow derived from operations was dedicated to debt service, voluntary early debt prepayments and balloon payments to be refinanced. This limits the funds available for working capital, capital expenditures, dividends and other purposes. Our degree of leverage could have important consequences for us, including the following:

 

   

a substantial decrease in our net operating cash flows or an increase in our expenses could make it difficult for us to meet our debt service requirements and force us to modify our operations;

 

   

we may be more highly leveraged than our competitors, which may make it more difficult for us to expand our fleet; and

 

   

any significant amount of leverage exposes us to increased interest rate risk and makes us vulnerable to a downturn in our business or the economy in general.

 

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In addition, our financing arrangements, which we secured by mortgages on our vessels, impose operating and financial restrictions on us that restrict our ability to:

 

   

incur additional indebtedness;

 

   

create liens;

 

   

sell the capital of our subsidiaries or other assets;

 

   

make investments;

 

   

engage in mergers and acquisitions;

 

   

make capital expenditures;

 

   

repurchase or redeem common or preferred shares; and

 

   

pay cash dividends.

We have a holding company structure which depends on dividends from our subsidiaries and interest income to pay our overhead expenses and otherwise fund expenditures. As a result, restrictions contained in our financing arrangements and those of our subsidiaries, including any preferred shares issued by our subsidiary upon any exchange of our Series G Convertible Preferred Shares, on the payment of dividends may restrict our ability to fund our various activities.

We are exposed to volatility in LIBOR and selectively enter into derivative contracts, which can result in higher than market interest rates and charges against our income.

Over the past 15 years we have selectively entered into derivative contracts both for investment purposes and to hedge our overall interest expense and, more recently, our bunker expenses. Our board of directors monitors the status of our derivatives in order to assess whether such derivatives are within reasonable limits and reasonable in light of our particular investment strategy at the time we entered into the derivative contracts.

Loans advanced under our secured credit facilities are, generally, advanced at a floating rate based on the London interbank offered rate (“LIBOR”), which increased in recent years after a long period of stability at historically low levels, and has been volatile in past years, which can affect the amount of interest payable on our debt, and which, in turn, could have an adverse effect on our earnings and cash flow. LIBOR rates were at historically low levels for an extended period of time and may continue to increase from these low levels. Our financial condition could be materially adversely affected at any time that we have not entered into interest rate hedging arrangements to hedge our interest rate exposure and the interest rates applicable to our credit facilities and any other financing arrangements we may enter into in the future, including those we enter into to finance a portion of the amounts payable with respect to newbuildings, increase. Moreover, even if we have entered into interest rate swaps or other derivative instruments for purposes of managing our interest rate or bunker cost exposure, our hedging strategies may not be effective, and we may incur substantial loss.

We have a risk management policy and the Audit Committee oversees all our derivative transactions. It is our policy to monitor our exposure to business risk, and to manage the impact of changes in interest rates, foreign exchange rate movements and bunker prices on earnings and cash flows through derivatives. Derivative contracts are executed when management believes that the action is not likely to significantly increase overall risk. Entering into swaps and derivatives transactions is inherently risky and presents various possibilities for incurring significant expenses. The derivatives strategies that we employ in the future may not be successful or effective, and we could, as a result, incur substantial additional interest costs. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a description of our current interest rate swap arrangements.

 

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Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the amounts payable under our credit facilities and our preferred shares.

On July 27, 2017, the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021 (“FCA Announcement”). The FCA Announcement indicates that the continuation of LIBOR on the current basis is not guaranteed after 2021.

Our credit facilities bear interest costs at a floating rate based on LIBOR. Uncertainties surrounding changes to the basis of which LIBOR is calculated or the phase-out of LIBOR, which may cause a sudden and prolonged increase or decrease in LIBOR, could adversely affect our operating results and financial condition, as well as our cash flows, including cash available for dividends to our shareholders. While we use interest rate swaps to reduce our exposure to interest rate risk and to hedge a portion of our outstanding indebtedness, there is no assurance that our derivative contracts will provide adequate protection against adverse changes in interest rates or that our bank counter parties will be able to perform their obligations.

If a three-month LIBOR rate is not available, the terms of our various credit facilities, and to the extent applicable, our preferred shares will require alternative determination procedures which may result in an interest and/or a dividend rate differing from expectations and could materially affect the value of the such instruments.

Our subsidiaries’ vessels may suffer damage and we may face unexpected dry-docking costs which could affect our cash flow and financial condition.

If our vessels suffer damage, they may need to be repaired at a dry-docking facility. The costs of dry-dock repairs can be both substantial and unpredictable. We may have to pay dry-docking costs that our insurance does not cover. This would result in decreased earnings.

If we were to be subject to corporate income tax in jurisdictions in which we operate, our financial results would be adversely affected.

Under current Bermuda law, there is no income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax, estate or inheritance tax payable by us or our shareholders, other than shareholders ordinarily resident in Bermuda, if any. We have received from the Minister of Finance under The Exempted Undertaking Tax Protection Act 1966, as amended of Bermuda, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to us or to any of our operations or shares, debentures or other obligations, until March 23, 2035. We believe that we should not be subject to tax under the laws of various countries, other than the United States, in which our subsidiaries’ vessels conduct activities or in which our subsidiaries’ customers are located. However, our belief is based on our understanding of the tax laws of those countries, and our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law or interpretation. We cannot determine in advance the extent to which certain jurisdictions may require us to pay corporate income tax or to make payments in lieu of such tax. In addition, payments due to us from our subsidiaries’ customers may be subject to tax claims. As a result of the continuing economic crisis in Greece, our operations in Greece may be subjected to new regulations that may require us to incur new or additional compliance or other administrative costs, which may include requirements that we pay to the Greek government new taxes or other fees. In addition, China has enacted a new tax for non-resident international transportation enterprises engaged in the provision of services of passengers or cargo, among other items, in and out of China using their own, chartered or leased vessels, including any stevedore, warehousing and other services connected with the transportation. The new regulation broadens the range of international transportation companies which may find themselves liable for Chinese enterprise income tax on profits generated from international transportation services passing through Chinese ports.

 

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If we or our subsidiaries are not entitled to exemption under Section 883 of the United States Internal Revenue Code of 1986, as amended, for any taxable year, we or our subsidiaries would be subject for those years to a 4% United States federal income tax on our gross U.S.-source shipping revenue, without allowance for deductions, under Section 887 of the Internal Revenue Code. The imposition of such tax could have a negative effect on our business and would result in decreased earnings and cash flows available for distribution to our shareholders.

See “Item 10. Additional Information—Tax Considerations—United States federal income tax considerations” for additional information about the requirements of this exemption.

If we were treated as a passive foreign investment company, a U.S. investor in our shares would be subject to disadvantageous rules under the U.S. tax laws.

If we were treated as a passive foreign investment company (a “PFIC”) in any year, our U.S. shareholders would be subject to unfavorable U.S. federal income tax treatment. We do not believe that we will be a PFIC in 2019 or in any future year. However, PFIC classification is a factual determination made annually and we could become a PFIC if the portion of our income derived from bareboat charters or other passive sources were to increase substantially or if the portion of our assets that produce or are held for the production of passive income were to increase substantially. Moreover, the IRS may disagree with our position that time and voyage charters do not give rise to passive income for purposes of the PFIC rules. Accordingly, we can provide no assurance that we will not be treated as a PFIC for 2019 or for any future year. Please see “Tax Considerations—United States federal income tax considerations—Passive Foreign Investment Company Considerations” herein for a description of the PFIC rules.

Distributions on shares of non-U.S. companies that are treated as dividends for U.S. federal income tax purposes and are received by individuals generally will be eligible for taxation at capital gain rates if the shares with respect to which the dividends are paid are readily tradable on an established securities market in the United States. This treatment will not be available to dividends we pay, however, if we qualify as a PFIC for the taxable year of the dividend or the preceding taxable year, or to the extent that (i) the shareholder does not satisfy a holding period requirement that generally requires that the shareholder hold the shares on which the dividend is paid for more than 60 days during the 121-day period that begins 60 days before the date on which the shares become ex-dividend with respect to such dividend, (ii) the shareholder is under an obligation to make related payments with respect to substantially similar or related property or (iii) such dividend is taken into account as investment income under Section 163(d)(4)(B) of the Internal Revenue Code. We do not believe that we qualified as a PFIC for our last taxable year and, as described above, we do not expect to qualify as a PFIC for our current or future taxable years.

Because some of our subsidiaries’ vessels’ expenses are incurred in foreign currencies, we are exposed to exchange rate risks.

The charterers of the vessels owned by our subsidiary companies pay in U.S. dollars. While most of the expenses incurred by our managers or by us on our subsidiaries’ behalf are paid in U.S. dollars, certain of these expenses are in other currencies, most notably the Euro. In 2019, Euro expenses accounted for approximately 32% of our total operating expenses, including dry dockings. Declines in the value of the U.S. dollar relative to the Euro, or the other currencies in which we incur expenses, would increase the U.S. dollar cost of paying these expenses and thus would adversely affect our results of operations.

The Tsakos Holdings Foundation and the Tsakos family can exert considerable control over us, which may limit your ability to influence our actions.

As of April 2, 2020, companies controlled by the Tsakos Holdings Foundation or affiliated with the Tsakos Group own approximately 33.3% of our outstanding common shares. The Tsakos Holdings Foundation is a

 

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Liechtenstein foundation whose beneficiaries include persons and entities affiliated with the Tsakos family, charitable institutions and other unaffiliated persons and entities. The council which controls the Tsakos Holdings Foundation consists of five members, two of whom are members of the Tsakos family. As long as the Tsakos Holdings Foundation and the Tsakos family beneficially own a significant percentage of our common shares, each will have the power to influence the election of the members of our board of directors and the vote on substantially all other matters, including significant corporate actions.

Risks Related To Our Common and Preferred Shares

Future sales of our common shares could cause the market price of our common shares to decline.

Sales of a substantial number of our common shares in the public market, or the perception that these sales could occur, may depress the market price for our common shares. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future. We may issue additional common shares in the future, including upon conversion of our currently outstanding Series G Convertible Preferred Shares, which are convertible into an aggregate of 8,716,667 of our common shares, and our shareholders may elect to sell large numbers of shares held by them from time to time.

The market price of our common shares and preferred shares may be unpredictable and volatile.

The market price of our common shares and Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares may fluctuate due to factors such as actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry, mergers and strategic alliances in the tanker industry, market conditions in the tanker industry, changes in government regulation, shortfalls in our operating results from levels forecast by securities analysts, announcements concerning us or our competitors, our sales of our common shares or of additional preferred shares, changes in prevailing interest rates and the general state of the securities market. The tanker industry has been highly unpredictable and volatile. The market for common stock and preferred stock in this industry may be equally volatile. Therefore, we cannot assure you that you will be able to sell any of our common shares and preferred shares you may have purchased, or will purchase in the future, at a price greater than or equal to the original purchase price.

If the market price of our common shares remains below $5.00 per share, under stock exchange rules, our shareholders will not be able to use such shares as collateral for borrowing in margin accounts. This inability to use common shares as collateral may depress demand and certain institutional investors are restricted from investing in or holding shares priced below $5.00, which could lead to sales of such shares creating further downward pressure on and increased volatility in the market price of our common shares.

We may not be able to pay cash dividends on our common shares or preferred shares as intended if market conditions change.

During 2019, we paid dividends on our common shares totaling $0.10 per common share, or $8.9 million. On March 24, 2020, the Company announced a common share dividend of $0.05 per common share to be paid in June 2020. In addition, during 2019, the Company redeemed all of its Series B Preferred Shares, amounting to $50.0 million, and paid dividends on preferred shares totaling $40.4 million and in 2020 we have paid $9.2 million in dividends on preferred shares, between January 1 and April 1. A further $4.8 million in common share dividends, and $0.4 million payable on Series G Convertible Preferred Shares, have been declared for payment in June 2020 and $4.7 million in preferred share dividends have been declared for payment on April 30, 2020. Subject to the limitations discussed below, we currently intend to continue to pay cash dividends on our common shares and preferred shares. However, there can be no assurance that we will pay dividends or as to the amount of any dividend. The payment and the amount will be subject to the discretion of our board of directors and will depend, among other things, on restrictions in the Companies Act of 1981 of Bermuda, as amended, or

 

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the Companies Act, on our available cash balances, anticipated cash needs, our results of operations, our financial condition, and any loan agreement restrictions binding us or our subsidiaries, including a prohibition of dividend distribution should there be an event of default in existence relating to any loan, as well as other relevant factors. In addition, dividends on our common shares are subject to the priority of our dividend obligations relating to our Series C, Series D, Series E and Series F Preferred Shares and Series G Convertible Preferred Shares. We may have insufficient cash to pay dividends on or redeem our Series C, Series D, Series E, Series F and Series G Convertible Preferred Shares or pay dividends on our common shares. Depending on our operating performance for a particular year, this could result in no dividend at all despite the existence of net income, or a dividend that represents a lower percentage of our net income.

Because we are a holding company with no material assets other than the stock of our subsidiaries, our ability to pay dividends will depend on the earnings and cash flow of our subsidiaries and their ability to pay us dividends. In addition, the financing arrangements for indebtedness we incur in connection with our newbuilding program may further restrict our ability to pay dividends. In the event of any insolvency, bankruptcy or similar proceedings of a subsidiary, creditors of, and holders of preferred shares issued by, such subsidiary would generally be entitled to priority over us with respect to assets of the affected subsidiary. Investors in our common shares, Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares, Series F Preferred Shares or Series G Convertible Preferred Shares may be adversely affected if we are unable to or do not pay dividends as intended.

Market interest rates may adversely affect the value of our Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares.

One of the factors that influences the price of our Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares is the dividend yield on these preferred shares (as a percentage of the price thereof) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates and have recently been increasing, may lead to lower prices for our shares when valued using their dividend yields. Higher interest rates would likely increase our borrowing costs and potentially decrease funds available for dividends. Accordingly, higher interest rates could cause the market prices of our preferred shares to decrease.

Our Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares represent perpetual equity interests and holders of such shares will have no right to receive any greater payment than the liquidation preference regardless of the circumstances.

The preferred shares represent perpetual equity interests in us and, unlike our indebtedness, will not give rise to a claim for payment of a principal amount at a particular date. As a result, holders of the preferred shares may be required to bear the financial risks of an investment in the preferred shares for an indefinite period of time.

The payment due to a holder of our Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares upon a liquidation is fixed at the redemption preference of $25.00 per share plus accumulated and unpaid dividends to the date of liquidation. If, in the case of our liquidation, there are remaining assets to be distributed after payment of this amount, you will have no right to receive or to participate in these amounts. Furthermore, if the market price for your preferred stock is greater than the liquidation preference, you will have no right to receive the market price from us upon our liquidation.

Holders of our Preferred Shares have extremely limited voting rights.

The voting rights of holders of Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares are extremely limited. The holders of the Series G Convertible Preferred Shares generally do not have voting rights. Our common shares are the only class or series of our shares carrying

 

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full voting rights. The voting rights of holders of our Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares are limited to the ability, subject to certain exceptions, to elect, voting together as a class with all other classes or series of parity securities upon which like voting rights have been conferred and are exercisable, one director if dividends for six quarterly dividend periods (whether or not consecutive) payable thereon are in arrears and certain other limited protective voting rights described in “Item 10. Additional Information—Description of Share Capital—Preferred Shares.”

Provisions in our Bye-laws and our management agreement with Tsakos Energy Management would make it difficult for a third party to acquire us, even if such a transaction is beneficial to our shareholders.

Our Bye-laws provide for a staggered board of directors, blank check preferred stock, super majority voting requirements and other anti-takeover provisions, including restrictions on business combinations with interested persons and limitations on the voting rights of shareholders who acquire more than 15% of our common shares. In addition, Tsakos Energy Management would have the right to terminate our management agreement and seek liquidated damages if a board member were elected without having been approved by the current board. These provisions could deter a third party from tendering for the purchase of some or all of our shares. These provisions may have the effect of delaying or preventing changes of control of the ownership and management of our company.

Because we are a foreign corporation, you may not have the same rights as a shareholder in a U.S. corporation.

We are a Bermuda company. Our Memorandum of Association and Bye-laws and the Companies Act govern our affairs. While many provisions of the Companies Act resemble provisions of the corporation laws of a number of states in the United States, Bermuda law may not as clearly establish your rights and the fiduciary responsibilities of our directors as do statutes and judicial precedent in some U.S. jurisdictions. In addition, apart from three non-executive directors, our directors and officers are not resident in the United States and all or substantially all of our assets are located outside of the United States. As a result, investors may have more difficulty in protecting their interests and enforcing judgments in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a U.S. jurisdiction.

In addition, you should not assume that courts in the country in which we are incorporated or where our assets are located would enforce judgments of U.S. courts obtained in actions against us based upon the civil liability provisions of applicable U.S. federal and state securities laws or would enforce, in original actions, liabilities against us based on those laws.

We are a “foreign private issuer” under NYSE rules, and as such we are entitled to exemption from certain NYSE corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

We are a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under the securities laws of the United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting requirements. Under the NYSE rules, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of the NYSE permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements of the NYSE, including (i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that the nominating/corporate governance committees be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, (iii) the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, and (iv) the requirement of an annual performance evaluation of the nominating/corporate governance and compensation committees.

 

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Nonetheless, a majority of our directors are independent, all of the members of our compensation, nominating and corporate governance committee are independent directors, and all of our board committees have written charters addressing their respective purposes and responsibilities.

 

Item 4.

Information on the Company

Tsakos Energy Navigation Limited is a leading provider of international seaborne crude oil and petroleum product transportation services. In 2007, it also started to transport liquefied natural gas. It was incorporated in 1993 as an exempted company under the laws of Bermuda under the name Maritime Investment Fund Limited and in 1996 was renamed MIF Limited. Our common shares were listed in 1993 on the Oslo Stock Exchange (OSE) and the Bermuda Stock Exchange, although we de-listed from the OSE in March 2005 due to limited trading. The Company’s shares are no longer actively traded on the Bermuda exchange. In July 2001, the Company’s name was changed to Tsakos Energy Navigation Limited to enhance our brand recognition in the tanker industry, particularly among charterers. In March 2002, we completed an initial public offering of our common shares in the United States and our common shares began trading on the New York Stock Exchange under the ticker symbol “TNP.” Since incorporation, the Company has owned and operated 99 vessels and has sold 37 vessels (of which five had been chartered back and three of these eventually repurchased at the end of their charters; all three have since been sold again).

Our principal offices are located at 367 Syngrou Avenue, 175 64 P. Faliro, Athens, Greece. Our telephone number at this address is 011 30 210 9407710. Our website address is http://www.tenn.gr.

For additional information on the Company, see “Item 5. Operating and Financial Review and Prospects.”

Business Overview

As of April 2, 2020, we operated a fleet of 60 modern crude oil and petroleum product tankers (including four vessels chartered-in) that provide world-wide marine transportation services for national, major and other independent oil companies and refiners under long, medium and short-term charters. Our fleet also includes two LNG carriers and three suezmax shuttle tankers with advanced dynamic positioning technology (DP2), bringing our total operating fleet to 65 vessels representing approximately 7.0 million dwt.

We believe that we have established a reputation as a safe, high quality, cost efficient operator of modern and well-maintained tankers. We also believe that these attributes, together with our strategy of proactively working towards meeting our customers’ chartering needs, has contributed to our ability to attract world-class energy producers as customers and to our success in obtaining charter renewals generating strong fleet utilization.

Our fleet is managed by Tsakos Energy Management, a company owned by our chief executive officer. Tsakos Energy Management provides us with strategic advisory, financial, accounting and administrative services, while subcontracting the commercial management of our business to Tsakos Shipping. In its capacity as commercial manager, Tsakos Shipping provides various services for our vessels, including charterer relations, obtaining insurance and vessel sale and purchase, supervising newbuilding construction and vessel financing. Tsakos Energy Management subcontracts the technical and operational management of our fleet to Tsakos Columbia Management (“TCM”). TCM was formed in February 2010 by Tsakos family interests and a German private company, the owner of the ship management company Columbia Shipmanagement Ltd., or CSM, as a joint-venture ship management company on an equal partnership basis to provide technical and operational management services to owners of vessels, primarily within the Greece-based market. TCM, which formally commenced operations on July 1, 2010, now manages the technical and operational activities of all of our operating vessels apart from the LNG carriers Neo Energy and Maria Energy, the VLCCs Ulysses and Hercules I, the suezmax tanker Eurochampion 2004 and the aframax tankers Maria Princess and Sapporo Princess which are technically managed by a non-affiliated ship manager. TCM is based in Athens, Greece. TCM and CSM

 

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cooperate in the purchase of certain supplies and services on a combined basis. By leveraging the purchasing power of CSM, which currently provides full technical management services for 298 vessels and crewing services for an additional 64 vessels, we believe TCM is able to procure services and supplies at lower prices than Tsakos Shipping could alone, thereby reducing overall operating expenses for us. In its capacity as technical manager, TCM manages our day-to-day vessel operations, including provision of supplies, maintenance and repair, and crewing. Members of the Tsakos family are involved in the decision-making processes of Tsakos Energy Management, Tsakos Shipping and TCM.

As of April 2, 2020, our operational fleet consisted of the following 65 vessels:

 

Number of Vessels

  

Vessel Type

2

   VLCC

12

   Suezmax

19

   Aframax

3

   Aframax LR2

11

   Panamax LR1

6

   Handymax MR2

7

   Handysize MR1

2

   LNG carrier

3

   Shuttle DP2

Total 65

  

Twenty-five of the operating vessels are of ice-class specification. This fleet diversity, which includes a number of sister ships, provides us with the capability to be one of the more versatile operators in the market. The current operating fleet totals 7.0 million dwt, all of which are double-hulled. As of April 2, 2020, the average age of the tankers in our current operating fleet was 9.0 years, compared with the industry average of 11.1 years.

We believe the following factors distinguish us from other public tanker companies:

 

   

Modern, high-quality, fleet. We own a fleet of modern, versatile, high-quality tankers that are designed for enhanced safety and low operating costs. Since inception, we have committed to investments of approximately $5.2 billion, including investments of approximately $4.2 billion in newbuilding constructions, in order to maintain and improve the quality of our fleet. We believe that increasingly stringent environmental regulations and heightened concerns about liability for oil pollution have contributed to a significant demand for our vessels by leading oil companies, oil traders and major government oil entities. TCM, the technical manager of our fleet, has ISO 14001 environmental certification and ISO 9001 quality certification, ISO 45001 occupational health & safety certification and ISO 50001 energy management system certification, based in part upon audits conducted on our vessels and on technical manager’s management system.

 

   

Diversified fleet. Our diversified fleet, which includes VLCC, suezmax, aframax, panamax, handysize, and handymax tankers, LNG carriers and DP2 shuttle tankers, allows us to better serve our customers’ international petroleum product and crude oil transportation needs. 25 of our tankers are ice-class, so may access ice-bound ports depending on accumulation of brash ice. We entered the LNG market with the delivery of our first LNG carrier in 2007 and took delivery of a second LNG carrier in 2016. We entered the shuttle tanker market with two DP2 suezmax shuttle tankers Rio 2016 and Brasil 2014 delivered in March and April 2013, respectively, each of which immediately entered into a 15-year time charter with Petrobras. A third DP2 suezmax shuttle tanker, Lisboa, was delivered on May 4, 2017 for charter to a European state-owned oil major.

 

   

Stability throughout industry cycles. Historically, we have employed a high percentage of our fleet on long and medium-term employment with fixed rates or minimum rates plus profit sharing agreements. We believe this approach has resulted in high utilization rates for our vessels, reflecting our industrial

 

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shipping model. At the same time, we maintain flexibility in our chartering policy to allow us to take advantage of favorable rate trends through spot market employment and contract of affreightment charters with periodic adjustments. Over the last five years, our overall average fleet utilization rate was 96.7%.

 

   

High-Quality, sophisticated clientele. For 50 years, Tsakos entities have maintained relationships with and achieved acceptance by national, major and other independent oil companies and refiners. Several of the world’s major oil companies and traders, including Equinor (formerly Statoil), BP, ExxonMobil, Flopec Petrolera Ecuatoriana (“Flopec”), Hyundai Merchant Marine, Petrobras, Chevron, Shell and Vitol are among the regular customers of Tsakos Energy Navigation.

 

   

Developing LNG and offshore shuttle tanker platform. We believe we are well positioned to capitalize on demand for LNG sea transport as well as offshore shuttle tanker transport because of our extensive relationships with existing customers, strong safety track record, superior technical management capabilities and financial flexibility. We already operate two LNG carriers (with a further one on order) and three DP2 suezmax shuttle tankers, in these high-end markets.

 

   

Significant leverage from our relationship with Tsakos Shipping and TCM. We believe the expertise, scale and scope of TCM, which spreads costs over a vessel base much larger than our fleet, are key components in maintaining low operating costs, efficiency, quality and safety. We leverage Tsakos Shipping’s reputation and longstanding relationships with leading charterers to foster charter renewals.

As of April 2, 2020, our fleet consisted of the following 65 vessels:

 

Vessel

   Year
Built
     Deadweight
Tons
     Year
Acquired
     Charter
Type(1)
   Expiration of
Charter
  Hull Type(2)
(all double  hull)
   Cargoes

VLCC

                   

1. Hercules

     2017        300,000        2017      time charter    November 2021      Crude

2. Ulysses

     2016        300,000        2016      spot         Crude

SUEZMAX

                   

1. Eurovision(3)

     2013        158,000        2014      time charter    September 2020      Crude

2. Euro(3)

     2012        158,000        2014      time charter    August 2021      Crude

3. Decathlon(3)

     2012        162,710        2016      time charter    April 2020      Crude

4. Spyros K(4)

     2011        157,648        2011      time charter    May 2022      Crude

5. Dimitris P(4)

     2011        157,740        2011      time charter    August 2023      Crude

6. Pentathlon

     2009        158,475        2015      time charter    October 2020      Crude

7. Arctic(3)

     2007        163,216        2007      time charter    March 2021   ice-class 1A    Crude

8. Antarctic(3)

     2007        163,216        2007      time charter    April 2020   ice-class 1A    Crude

9. Archangel(3)(10)

     2006        163,216        2006      time charter    May 2020   ice-class 1A    Crude

10. Alaska(3)(10)

     2006        163,250        2006      time charter    September 2020   ice-class 1A    Crude

11. Eurochampion 2004)(10)

     2005        164,608        2005      spot      ice-class 1C    Crude

12. Euronike(10)

     2005        164,565        2005      spot      ice-class 1C    Crude

SUEZMAX DP2 SHUTTLE

 

             

1. Lisboa

     2017        157,000        2017      time charter    May 2025      Crude/Products

2. Rio 2016

     2013        155,709        2013      time charter    May 2028      Crude/Products

3. Brasil 2014

     2013        155,721        2013      time charter    June 2028      Crude/Products

AFRAMAX

                   

1. Caribbean Voyager

     2020        115,000        2020      bareboat
charter
   January 2025(7)      Crude

2. Mediterranean Voyager

     2019        115,000        2019      bareboat
charter
   October 2024(7)      Crude

3. Bergen TS

     2017        112,108        2017      time charter    October 2022(7)   ice-class 1B    Crude

4. Stavanger TS

     2017        113,004        2017      time charter    July 2022(7)   ice-class 1B    Crude

5. Oslo TS

     2017        112,949        2017      time charter    May 2022(7)   ice-class 1B    Crude

6. Marathon TS

     2017        113,651        2017      time charter    February 2022(7)   ice-class 1B    Crude

7. Sola TS

     2017        112,700        2017      time charter    April 2022(7)      Crude

8. Elias Tsakos

     2016        113,737        2016      time charter    June 2023(8)      Crude

9. Thomas Zafiras

     2016        113,691        2016      time charter    August 2023(8)      Crude

10. Leontios H

     2016        113,611        2016      time charter    October 2023(8)      Crude

 

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Vessel

   Year
Built
     Deadweight
Tons
     Year
Acquired
     Charter
Type(1)
     Expiration of
Charter
    Hull Type(2)
(all  double hull)
     Cargoes  

11. Parthenon TS

     2016        113,554        2016        time charter        November 2021(7)          Crude  

12. Sapporo Princess

     2010        105,354        2010        spot              DNA        Crude  

13. Uraga Princess

     2010        105,344        2010        CoA              DNA        Crude  

14. Ise Princess

     2009        105,361        2009        spot              DNA        Crude  

15. Asahi Princess

     2009        105,372        2009        time charter        April 2020       DNA        Crude  

16. Maria Princess

     2008        105,346        2008        spot              DNA        Crude  

17. Nippon Princess

     2008        105,392        2008        spot              DNA        Crude  

18. Izumo Princess

     2007        105,374        2007        time charter        August 2020       DNA        Crude  

19. Sakura Princess

     2007        105,365        2007        spot              DNA        Crude  

20. Proteas

     2006        117,055        2006        spot              ice-class 1A        Crude/Products  

21. Promitheas

     2006        117,055        2006        spot              ice-class 1A        Crude/Products  

22. Propontis

     2006        117,055        2006        spot              ice-class 1A        Crude  

PANAMAX

                   

1. Sunray(3)

     2016        74,039        2016        time charter        February 2021(9)          Crude/Products  

2. Sunrise(3)

     2016        74,043        2016        time charter        March 2021(9)          Crude/Products  

3. World Harmony(4)

     2009        74,200        2010        time charter        March 2021(5)          Crude/Products  

4. Chantal(4)

     2009        74,329        2010        time charter        May 2021(5)          Crude/Products  

5. Selini(4)(6)

     2009        74,296        2010        time charter        February 2022          Crude/Products  

6. Salamina(4)(6)

     2009        74,251        2010        time charter        April 2022          Crude/Products  

7. Selecao(4)

     2008        74,296        2008        time charter        June 2021          Crude/Products  

8. Socrates(4)

     2008        74,327        2008        time charter        June 2021          Crude/Products  

9. Andes

     2003        68,439        2003        time charter        April 2020          Crude/Products  

10. Maya(6)

     2003        68,439        2003        time charter        May 2020          Crude/Products  

11. Inca(6)

     2003        68,439        2003        spot                 Crude/Products  

HANDYMAX

                   

1. Artemis

     2005        53,039        2006        time charter        April 2020       ice-class 1A        Products  

2. Afrodite

     2005        53,082        2006        time charter        August 2020       ice-class 1A        Products  

3. Ariadne

     2005        53,021        2006        time charter        June 2020       ice-class 1A        Products  

4. Aris

     2005        53,107        2006        time charter        May 2020       ice-class 1A        Products  

5. Apollon

     2005        53,149        2006        spot              ice-class 1A        Products  

6. Ajax

     2005        53,095        2006        time charter        September 2020       ice-class 1A        Products  

HANDYSIZE

                   

1. Andromeda

     2007        37,061        2007        spot              ice-class 1A        Products  

2. Aegeas

     2007        37,061        2007        spot              ice-class 1A        Products  

3. Byzantion

     2007        37,275        2007        spot              ice-class 1B        Products  

4. Bosporos

     2007        37,275        2007        spot              ice-class 1B        Products  

5. Arion

     2006        37,061        2006        spot              ice-class 1A        Products  

6. Amphitrite

     2006        37,061        2006        spot              ice-class 1A        Products  

7. Didimon

     2005        37,432        2005        spot                 Products  

LNG

                   

1. Maria Energy

     2016        93,301        2016        time charter        March 2021      


Membrane

(161,870
cbm)

 


 

     LNG  

2. Neo Energy

     2007        85,602        2007        time charter        March 2021      


Membrane

(150,000
cbm)

 


 

     LNG  

Total Vessels

     65        7,002,872                

 

 

(1)   Certain of the vessels are operating in the spot market under contracts of affreightment (“CoA”).
(2)   Ice-class classifications are based on ship resistance in brash ice channels with a minimum speed of 5 knots for the following conditions ice-1A: 1m brash ice, ice-1B: 0.8m brash ice, ice-1C: 0.6m brash ice. DNA- design new aframax with shorter length overall allowing greater flexibility in the Caribbean and the United States.
(3)   The charter rate for these vessels is based on a fixed minimum rate for the Company plus different levels of profit sharing above the minimum rate, determined and settled on a calendar month basis.
(4)   These vessels are chartered under fixed and variable hire rates. The variable portion of hire is recognized to the extent the amount becomes fixed and determinable at the reporting date. Determination is every six months.
(5)   Charterers have the option to terminate the charter party after at least 12 months with three months’ notice.
(6)   49% of the holding company of these vessels is held by a third party.
(7)   The charterer of each of these vessels has options to extend the term of the charter for up to seven additional years.
(8)   The charterer of each of these vessels has the option to extend the term of the charter for up to five additional years.
(9)   The charterer of each of these vessels has the option to extend the term of the charter for up to two additional years.
(10)   Vessels are chartered-in on a bare-boat basis by a subsidiary company. Vessel’s Eurochampion 2004 and Euronike until 2022, Archangel and Alaska until 2025.

 

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Our newbuildings under construction, as of April 2, 2020, consisted of the following:

 

Vessel Type

   Expected
Delivery
     Shipyard      Deadweight Tons      Purchase Price(1)
(in millions
of U.S. dollars)
 

Suezmaxes

 

        

1. HN 8041

    
Q3
2020
 
 
    
Hyundai
Samho

 
     158,000        71.22  

2. HN 8042

    
Q4
2020
 
 
    
Hyundai
Samho

 
     158,000        68.75  

LNG

 

        

1. HN 3157

    
Q4
2021
 
 
    

Hyundai
Heavy
Industries
 
 
 
     81,500        190.04  

Total

 

     397,500        330.01  

 

(1)

Including any extra costs agreed as of April 2, 2020

We have arranged charters from the delivery of our two suezmax tanker newbuildings for periods from five to eleven years, including charterer options for extension. The newbuildings have a double hull design compliant with all classification requirements and prevailing environmental laws and regulations. Tsakos Shipping works closely with the shipyards in the design of the newbuildings and TCM provides supervisory personnel present during the construction.

Fleet Deployment

Depending on management’s view of the state of the current spot market and future prospects for the market, we aim to optimize the financial performance of our fleet by deploying at least two-thirds of our vessels on either time charters or period employment with variable rates, as we take proactive steps to meet any potential negative impact of the expanding world fleet on freight rates. As at April 2, 2020, the percentage of the fleet that is in employment at fixed rates (including time charters with a profit share component) was approximately 68%. In the event that the prospects for the spot market appear to management to generate sustainable positive returns, management may decide to deploy immediately to the spot market vessels coming off time-charter. We believe that our fleet deployment strategy and flexibility provide us with the ability to benefit from increases in tanker rates while at the same time maintaining a measure of stability through cycles in the industry. The following table details the respective employment basis of our fleet during 2019, 2018 and 2017 as a percentage of operating days.

 

     Year Ended December 31,  

Employment Basis

   2019      2018      2017  

Time Charter—fixed rate

     43%        43%        41%  

Time Charter—variable rate

     29%        29%        29%  

Period Employment at variable rates

     4%        5%        5%  

Spot Voyage

     24%        23%        25%  

Total Net Earnings Days

     22,542        22,573        22,095  

Tankers operating on time charters may be chartered for several months or years whereas tankers operating in the spot market typically are chartered for a single voyage that may last up to several weeks. Vessels on period employment at variable rates related to the market are operating under contract of affreightment for a specific charterer. Tankers operating in the spot market may generate increased profit margins during improvements in tanker rates, while tankers operating on time charters generally provide more predictable cash flows. Accordingly, we actively monitor macroeconomic trends and governmental rules and regulations that may affect tanker rates in an attempt to optimize the deployment of our fleet. Our fleet has 21 tankers currently operating on spot voyages.

 

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We have also secured charters from the delivery of our two suezmax tanker newbuildings for periods from five to eleven years, including charterer options for extension.

Operations and Ship Management

Our operations

Management policies regarding our fleet that are formulated by our Board of Directors are executed by Tsakos Energy Management under a management contract. Tsakos Energy Management’s duties, which are performed exclusively for our benefit, include overseeing the purchase, sale and chartering of vessels, supervising day-to-day technical management of our vessels and providing strategic, financial, accounting and other services, including investor relations. Our tanker fleet’s technical management, including crewing, maintenance and repair, and voyage operations, have been subcontracted by Tsakos Energy Management to TCM. Tsakos Energy Management also engages Tsakos Shipping to arrange chartering of our vessels, provide sales and purchase brokerage services, procure vessel insurance and arrange bank financing. The technical management of seven vessels was sub-contracted to third-party ship managers during 2019.

The following chart illustrates the management of our fleet as of April 2, 2020:

 

LOGO

Technical management of the LNG carriers Neo Energy and Maria Energy, the VLCCs Hercules I and Ulysses, the suezmax Eurochampion 2004 and the aframaxes Maria Princess and Sapporo Princess, is subtracted to unaffiliated third-party ship managers.

Management Contract

Executive and Commercial Management

Pursuant to our management agreement with Tsakos Energy Management, our subsidiaries’ operations are executed and supervised by Tsakos Energy Management, based on the strategy devised by our Board of Directors and subject to the approval of our Board of Directors as described below. In accordance with the management agreement, we pay Tsakos Energy Management monthly management fees for its management of our subsidiaries’ vessels.

The monthly fee may be adjusted annually in accordance with the terms of the agreement with Tsakos Energy Management, if both parties agree. There has not been an adjustment to fees relating to the conventional oil tankers payable to Tsakos Energy Management since 2012. In 2019 and 2018, the monthly fees for operating

 

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conventional vessels were $27,500 and $20,400 for vessels chartered in or chartered out on a bare-boat basis or for vessels under construction and $35,000 for the DP2 shuttle tankers. In 2019 and 2018, the monthly fees for LNG carriers amounted to $36,877. From the above fees, fees are also paid to third-party managers for the LNG carriers, Maria Energy and Neo Energy, the suezmax Eurochampion 2004, the aframaxes Maria Princess and Sapporo Princess, and the VLCCs Ulysses and Hercules I and VLCC Millennium until April 11, 2018, the date of vessel’s sale.

The management fee starts to accrue for a vessel at the point a newbuilding contract is executed. To help ensure that these fees are competitive with industry standards, our management has periodically made presentations to our Board of Directors in which the fees paid to Tsakos Energy Management are compared against the publicly available financial information of other listed tanker companies. We paid Tsakos Energy Management aggregate management fees of $20.1 million in 2019, $20.2 million in 2018 and $19.5 million in 2017. From these amounts, Tsakos Energy Management paid a technical management fee to Tsakos Columbia Shipmanagement. For additional information about the management agreement, including the calculation of management fees, see “Item 7. Major Shareholders and Related Party Transactions” and our consolidated financial statements which are included as Item 18 to this Annual Report.

Chartering. Our board of directors formulates with management our overall chartering strategy for our subsidiaries’ vessels and Tsakos Shipping, under the supervision of Tsakos Energy Management, implements the strategy by:

 

   

evaluating the short, medium, and long-term opportunities available for each type of vessel;

 

   

balancing short, medium, and long-term charters in an effort to achieve optimal results for our fleet; and

 

   

positioning such vessels so that, when possible, re-delivery occurs at times when Tsakos Shipping expects advantageous charter rates to be available for future employment.

Tsakos Shipping utilizes the services of various charter brokers to solicit, research, and propose charters for our vessels. The charter brokers’ role involves researching and negotiating with different charterers and proposing charters to Tsakos Shipping for cargoes to be shipped in our subsidiaries’ vessels. Tsakos Shipping negotiates the exact terms and conditions of charters, such as delivery and re-delivery dates and arranges cargo and country exclusions, bunkers, loading and discharging conditions and demurrage. Tsakos Energy Management is required to obtain our approval for charters in excess of six months and is required to obtain the written consent of the administrative agents for the lenders under our secured credit facilities for charters in excess of thirteen months. There are frequently two or more brokers involved in fixing a vessel on a charter. Brokerage fees typically amount to 2.5% of the value of the freight revenue or time charter hire derived from the charters. A chartering commission of 1.25% is paid to Tsakos Shipping for every charter involving the vessels in the fleet. In addition, Tsakos Shipping may charge a brokerage commission on the sale of a vessel. In 2018, the Company sold the VLCC tanker Millennium and for this service, Tsakos Shipping charged a brokerage commission 0.5% of the sale price of the vessel. In 2019 and 2017 there was no such commission. The total amount paid for these chartering and acquisition brokerage commissions was $7.4 million in 2019, $6.7 million in 2018 and $6.5 million in 2017. Tsakos Shipping may also charge a fee of $200,000 (or such other sum as may be agreed) on delivery of each newbuilding vessel in payment for the cost of design and supervision of the newbuilding by Tsakos Shipping. In 2017, $3.1 million in aggregate was charged for supervision fees on fifteen vessels which were delivered in the five months to October 2017. No such fee was paid in 2019 or 2018.

Tsakos Shipping supervises the post fixture business of our vessels, including:

 

   

monitoring the daily geographic position of such vessels in order to ensure that the terms and conditions of the charters are fulfilled by us and our charterers;

 

   

collection of monies payable to us; and

 

   

resolution of disputes through arbitration and legal proceedings.

 

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In addition, Tsakos Shipping appoints superintendents to supervise the construction of newbuildings and the loading and discharging of cargoes when necessary. Tsakos Shipping also participates in the monitoring of vessels’ operations that are under TCM management and TCM’s performance under the management contract.

General Administration. Tsakos Energy Management provides us with general administrative, office and support services necessary for our operations and the fleet, including technical and clerical personnel, communication, accounting, and data processing services.

Sale and Purchase of Vessels. Tsakos Energy Management advises our Board of Directors when opportunities arise to purchase, including through newbuildings, or to sell any vessels. All decisions to purchase or sell vessels require the approval of our Board of Directors.

Any purchases or sales of vessels approved by our Board of Directors are arranged and completed by Tsakos Energy Management. This involves the appointment of superintendents to inspect and take delivery of vessels and to monitor compliance with the terms and conditions of the purchase or newbuilding contracts.

In the case of a purchase of a vessel, each broker involved will receive commissions from the seller generally at the industry standard rate of one percent of the purchase price, but subject to negotiation. In the case of a sale of a vessel, each broker involved will receive a commission generally at the industry standard rate of one percent of the sale price, but subject to negotiation. In accordance with the management agreement, Tsakos Energy Management is entitled to charge for sale and purchase brokerage commission, but to date has not done so.

Technical Management

Pursuant to a technical management agreement, Tsakos Energy Management employs TCM to manage the day-to-day aspects of vessel operations, including maintenance and repair, provisioning and crewing of the vessels in the fleet. We benefit from the economies of scale of having our subsidiaries’ vessels managed as part of the TCM managed fleet. On occasion, TCM subcontracts the technical management and manning responsibilities of our subsidiaries’ vessels to third parties. The executive and commercial management of our subsidiaries’ vessels, however, is not subcontracted to third parties. TCM, which is privately held, is one of the largest independent tanker managers with a total of 66 operating vessels under management (including 58 of our subsidiaries’ vessels) at April 2, 2020, totaling approximately 6.3 million dwt. TCM employs full-time superintendents, technical experts and marine engineers and has expertise in inspecting second-hand vessels for purchase and sale, and in fleet maintenance and repair. They have approximately 179 employees engaged in ship management and approximately 3,668 seafaring employees, of whom approximately 2,016 are employed at sea and the remainder is on leave at any given time. Their principal office is in Athens, Greece. The fleet managed by TCM consists of tankers.

Tsakos Energy Management pays TCM a fee per vessel per month for technical management of operating vessels and vessels under construction. This fee was determined by comparison to the rates charged by other major independent vessel managers. We generally pay all monthly operating requirements of our fleet in advance.

TCM performs the technical management of the vessels under the supervision of Tsakos Energy Management. Tsakos Energy Management approves the appointment of fleet supervisors and oversees the establishment of operating budgets and the review of actual operating expenses against budgeted amounts. Technical management of the LNG carriers Neo Energy and Maria Energy, the VLCCs Hercules I and Ulysses, the suezmax Eurochampion 2004 and the aframaxes Maria Princess and Sapporo Princess, is subcontracted to unaffiliated third-party ship managers.

 

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Maintenance and Repair. Each of the vessels is dry-docked once every five years in connection with special surveys and, after the vessel is fifteen years old, the vessel is dry-docked every two and one-half years after a special survey (referred to as an intermediate survey), or as necessary to ensure the safe and efficient operation of such vessels and their compliance with applicable regulations. TCM arranges dry-dockings and repairs under instructions and supervision from Tsakos Energy Management. We believe that the continuous maintenance program we conduct results in a reduction of the time periods during which our vessels are in dry-dock.

TCM routinely employs on each vessel additional crew members whose primary responsibility is the performance of maintenance while the vessel is in operation. Tsakos Energy Management awards and, directly or through TCM, negotiates contracts with shipyards to conduct such maintenance and repair work. They seek competitive tender bids in order to minimize charges to us, subject to the location of our vessels and any time constraints imposed by a vessel’s charter commitments. In addition to dry-dockings, TCM, where necessary, utilizes superintendents to conduct periodic physical inspections of our vessels.

Crewing and Employees

We do not employ personnel to run our business on a day-to-day basis. We outsource substantially all of our executive, commercial and technical management functions.

TCM arranges employment of captains, officers, engineers and other crew who serve on the vessels. TCM ensures that all seamen have the qualifications and licenses required to comply with international regulations and shipping conventions and that experienced and competent personnel are employed for the vessels.

Customers

Several of the world’s major oil companies are among our regular customers. The table below shows the approximate percentage of revenues we earned from some of our customers in 2019.

 

Customer

   Year Ended
December 31, 2019
 

Equinor (ex-Statoil)

     13.0

Petrobras

     11.5

Koch

     9.8

Shell

     8.5

Flopec

     7.0

Litasco

     6.3

Vitol

     5.0

Seariver

     4.0

Cheniere

     3.8

CSSA

     3.4

HMM

     3.3

Sinopec

     3.1

Glovis

     2.9

BP Shipping

     2.3

Chevron

     2.1

ST Shipping

     1.5

Trafigura

     1.3

ENI

     1.3

Prime

     1.1

PMI

     0.8

 

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Regulation

Our business and the operation of our vessels are materially affected by government regulation in the form of international conventions and national, state and local laws and regulations in force 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 are often revised, we cannot predict the ultimate cost of complying with them or their impact on the resale price and/or the useful lives of our vessels. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may have a material adverse effect on our operations. Various governmental and quasi-governmental agencies require us to obtain permits, licenses, certificates, and financial assurances with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits, licenses, certificates and financial assurances required for the operation of our vessels will depend upon a number of factors, we believe that we have been and will be able to obtain all permits, licenses, certificates and financial assurances material to the conduct of our operations.

The heightened environmental and quality concerns of classification societies, insurance underwriters, regulators and charterers has led to the imposition of increased inspection and safety requirements on all vessels in the tanker market and the scrapping of older vessels throughout the industry has been accelerated.

IMO. The International Maritime Organization (“IMO”) has adopted international conventions that impose liability for oil pollution in international waters and in a signatory’s territorial waters, including amendments to Annex I of the 1973 International Convention for the Prevention of Pollution from Ships (“MARPOL”) which set forth upgraded requirements for oil pollution prevention for tankers. These regulations are effective in relation to tankers in many of the jurisdictions in which our tanker fleet operates. They provide that: (1) tankers 25 years old and older must be of double-hull construction and (2) all tankers will be subject to enhanced inspections. All of the vessels in our fleet are of double hull construction. The regulations are intended to reduce the likelihood of oil pollution in international waters. These amendments became effective on April 5, 2005.

On January 1, 2007, Annex I of MARPOL was revised to incorporate all amendments since the MARPOL Convention entered into force in 1983 and to clarify the requirements for new and existing tankers.

Regulation 12A of MARPOL Annex I came into force on August 1, 2007 and governs oil fuel tank protection. The requirements apply to oil fuel tanks on all ships with an aggregate capacity of 600 cubic meters and above which are delivered on or after August 1, 2010, and all ships for which shipbuilding contracts were placed on or after August 1, 2007. Since March 1, 2018, Form B of the Supplement to the International Oil Pollution Prevention Certificate contained in MARPOL Annex I has been amended to simplify its completion with respect to segregated ballast tanks. Segregated ballast tanks use ballast water that is completely separate from the cargo oil and oil fuel system. Segregated ballast tanks are currently required by the IMO on crude oil tankers of 20,000 tons deadweight or more constructed after 1982.

MARPOL Annex IV entered into force on September 27, 2003, and requires ships engaged in international voyages and certified to carry more than 15 persons to have systems and controls in place to deal with human sewage, for governments to have port reception facilities and a requirement for survey and certification. Annex IV prohibits the discharge of sewage into the sea, except when the ship has an approved sewage treatment plant in operation or when the ship is discharging comminuted and disinfected sewage using an approved system at a distance of three nautical miles from the nearest land.

In September 1997, the IMO adopted Annex VI to MARPOL to address air pollution from ships. Annex VI came into force on May 19, 2005. It set limits on sulfur oxide and nitrogen oxide (“NOx”) emissions from ship exhausts and prohibited deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also included a global cap on the sulfur content of fuel oil and allowed for the designation of special areas known as Emission Control Areas (“ECAs”) where more stringent controls on sulfur emissions would apply. Annex VI has been ratified by some, but not all IMO member states. All vessels subject to Annex VI and built

 

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after May 19, 2005 must carry an International Air Pollution Prevention Certificate evidencing compliance with Annex VI. In October 2008, the Marine Environment Protection Committee (“MEPC”) of the IMO adopted amendments to Annex VI regarding particulate matter, NOx and sulfur oxide emissions standards. These amendments, which entered into force in July 2010, seek to reduce air pollution from vessels by establishing a series of progressive standards to further limit the sulfur content in fuel oil, which were fully phased in at the beginning of 2020, and by establishing three tiers of NOx emission standards for new marine diesel engines, depending on their date of installation. Additionally, more stringent emission standards could apply in ECAs. The U.S. ratified the amendments in October 2008. Annex VI was implemented in the U.S. through the Act to Prevent Pollution from Ships (“APPS”). Annex VI, APPS and implementing regulations promulgated by the U.S. Environmental Protection Agency (“EPA”) under the Clean Air Act (“CAA”) impose engine-based and fuel-based standards that apply to U.S. flagged ships wherever located, and to non-U.S. flagged ships operating in U.S. waters, as well as ships operating within the 200 nautical mile border around the U.S., including the North American ECA and the U.S. Caribbean ECA, which encompasses waters around Puerto Rico and the U.S. Virgin Islands. The APPS statute requires engine manufacturers, owners and operators of vessels, and other persons to comply with Annex VI of MARPOL. The EPA and the U.S. Coast Guard (the “USCG”) enforce these requirements pursuant to authority under APPS, the CAA and a 2011 Memorandum of Understanding between the EPA and the USCG setting forth the terms by which the EPA and the USCG mutually cooperate in enforcement and implementation.

Amendments to Annex VI to address greenhouse gas (“GHG”) emissions from shipping came into force on January 1, 2013. New vessels of 400 tons or greater are required to meet minimum energy efficiency levels per capacity mile (the Energy Efficient Design Index (“EEDI”)), while existing vessels were required to implement Ship Energy Efficiency Management Plans (“SEEMPs”). All our vessels have SEEMPs. The EEDI requirements do not apply to a liquefied natural gas (“LNG”) carrier unless the construction contract for the carrier was placed on or after September 1, 2015. Our LNG carriers comply with EEDI requirements.

We have obtained International Air Pollution Prevention certificates for all of our vessels. Implementing the requirements of Annex VI may require modifications to vessel engines or the addition of post combustion emission controls, or both, as well as the use of lower sulfur fuels. In April 2016, the IMO adopted an amendment to Annex VI regarding requirements for recording operational compliance with NOx Tier III emission control areas (discussed in further detail below) and a further amendment to the NOx Technical Code 2008 to facilitate the testing of gas and dual fuel engines. This amendment entered into force on September 1, 2017. We believe that maintaining compliance with Annex VI will not have a significantly adverse financial impact on the operation of our vessels.

Further amendments to Annex VI of MARPOL were adopted by the MEPC in October 2016. Beginning on January 1, 2019, the new Regulation 22A of chapter 4 of Annex VI added a requirement for ships of 5,000 gross tons and above to collect consumption data for each type of fuel oil used as well as other specified data. The collection method should be set out in the SEEMP and this information must have been submitted to the flag state no later than March 31, 2020. The flag state in turn must submit data to an IMO Ship Fuel Oil Consumption Database. Other regulations were amended to cater to this new requirement, including those related to certificates, surveys and port state control. The MEPC also adopted amendments to Annex VI setting the global limit for sulfur content of ships’ fuel oil to 0.5% mass by mass (“m/m”) as opposed to the current global limit of 3.5% m/m. The new sulfur limit entered into effect on January 1, 2020. From March 1, 2020, ships are not permitted to transport fuels containing more than 0.5% m/m sulfur content for use on board, unless the ship has an approved exhaust cleaning system or “scrubber” fitted. We do not believe compliance with such regulations will have a material effect on the operation or financial viability of our business.

In April 2016, a revised annex to the Convention on Facilitation of International Maritime Traffic (“FAL”) was adopted by the IMO. It contains revised mandatory requirements for the electronic exchange of information on cargo and crew. This electronic exchange of information was mandatory beginning April 9, 2019, with a transition period of no less than 12 months. Other revised standards cover discrimination in respect to shore leave and access to shore-side facilities and updates to recommended practice in relation to stowaways. The revised annex entered into force on January 1, 2018. We comply with these regulations.

 

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In 2001, the IMO adopted the International Convention on the Control of Harmful Anti-fouling Systems on Ships (the “Anti-fouling Convention”) which prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels. The Anti-fouling Convention came into force on September 17, 2008 and applies to vessels constructed prior to January 1, 2003 that have not been in dry-dock since that date. Since January 1, 2008, under the Anti-fouling Convention, exteriors of vessels have had to be either free of the prohibited compounds or have had coatings that act as a barrier to the leaching of the prohibited compounds applied. Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and must undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. We have obtained International Anti-fouling System Certificates for all of our vessels that are subject to the Anti-fouling Convention and do not believe that maintaining such certificates will have an adverse financial impact on the operation of our vessels.

In addition, our LNG carriers meet IMO requirements for liquefied gas carriers, including those contained in the International Code for the Construction and Equipment of Ships carrying Liquefied Gases in Bulk (“ICG Code”), the Existing Ships Carrying Liquefied Gases in Bulk (“EGC Code”) and the Code of the Construction and Equipment of Ships Carrying Liquefied Gases in Bulk (“GC Code”). In order to operate in the navigable waters of the IMO’s member states, liquefied gas carriers must have an IMO Certificate of Fitness demonstrating compliance with construction codes for liquefied gas carriers. These codes, and similar regulations in individual member states, address fire and explosion risks posed by the transport of liquefied gases. Collectively, these standards and regulations impose detailed requirements relating to the design and arrangement of cargo tanks, vents, and pipes; construction materials and compatibility; cargo pressure; and temperature control. Liquefied gas carriers are also subject to international conventions that regulate pollution in international waters and a signatory’s territorial waters. Under the IMO regulations, gas carriers that comply with the IMO construction certification requirements are deemed to satisfy the requirements of Annex II of MARPOL applicable to transportation of chemicals at sea, which would otherwise apply to certain liquefied gases. With effect from January 1, 2007, the IMO revised the Annex II regulations that restrict discharges of “noxious liquid substances” during cleaning or de-ballasting operations. The revisions include significantly lower permitted discharge levels of noxious liquid substances for vessels constructed on or after the effective date, made possible by improvements in vessel technology. These discharge requirements apply to the Company’s LNG carriers. With effect from January 1, 2021, Annex II MARPOL will impose stricter controls on the discharge of noxious liquid substances residues in specified areas (North West European waters, Baltic Sea area, Western European waters and the Norwegian Sea). In these areas prewash and discharge to a port reception facility will be required for cargo residues and tank washings containing persistent floating products (for example, certain vegetable oils and paraffin-like cargoes).

On January 1, 2013, MARPOL Annex V regulations came into force with regard to the disposal of garbage from ships at sea. These regulations prohibit the disposal of garbage at sea other than certain defined permitted discharges or when outside one of the MARPOL Annex V “special areas” in which, for reasons relating to their oceanographical and ecological condition and/or their sea traffic, the adoption of special mandatory methods for the prevention of sea pollution is required. Under MARPOL, these special areas are provided with a higher level of protection than other areas of the sea. These areas are the: (i) Mediterranean Sea; (ii) Baltic Sea; (iii) Black Sea; (iv) Red Sea; (v) Gulfs area; (vi) North Sea; (vii) Antarctic sea; and (viii) Wider Caribbean region including the Gulf of Mexico and the Caribbean Sea. The regulations do not only impact the disposal of “traditional garbage” but also the disposal of harmful hold washing water and cargo residues. Products considered suitable for discharge are those not defined as harmful by the criteria set out in MARPOL Annex III and which do not contain carcinogenic, mutagenic or reprotoxic components. We have a protocol in place to ensure that (i) garbage is disposed of in accordance with the Annex V regulations and that the vessels in our fleet maintain records showing that any cleaning agent or additive used was not harmful to the marine environment and (ii) the supplier provides a signed and dated statement to this effect, either as part of a Material Safety Data Sheet (“MSDS”) or as a stand-alone document. Our protocol addresses the Annex V special areas and we do not consider them likely to adversely affect our ability to operate our vessels.

 

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In October 2016, the IMO adopted amendments to Annex V which place responsibility on shippers to determine whether or not their cargo is hazardous to the marine environment (with such categorization to be carried out in accordance with the UN Globally Harmonized System of Classification and Labelling of Chemicals) and introduced a two-part garbage record book which splits cargo residues from garbage other than cargo residues. These amendments entered into force on March 1, 2018. We have policies and procedures in place to ensure compliance with these amendments to Annex V.

Tsakos Columbia Shipmanagement S.A., or TCM, our technical manager, is ISO 14001 compliant. ISO 14001 requires companies to commit to the prevention of pollution as part of the normal management cycle. Additional or new conventions, laws and regulations may be adopted that could adversely affect our ability to manage our vessels.

In addition, the European Union and countries elsewhere have considered stricter technical and operational requirements for tankers and legislation that would affect the liability of tanker owners and operators for oil pollution. Any additional laws and regulations that are adopted could limit our ability to do business or increase our costs. The results of these or other potential future regulations could have a material adverse effect on our operations.

Under the current regulations, the vessels of our existing fleet will be able to operate for substantially all of their respective economic lives. However, compliance with the regulations regarding inspections of all vessels may adversely affect our operations. We cannot at the present time evaluate the likelihood or magnitude of any such adverse effect on our operations due to uncertainty of interpretation of the IMO regulations.

The operation of our vessels is also affected by the requirements set forth in the IMO’s International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention (“ISM Code”) which came into effect in relation to oil tankers in July 1998 and which was further amended on July 1, 2010. The ISM Code requires ship owners, ship managers and bareboat (or demise) charterers to develop and maintain an extensive “safety management system” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a shipowner, ship manager or bareboat charterer to comply with the ISM Code may subject that party to increased liability, may decrease available insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, some ports. All of our vessels are ISM Code certified.

The International Convention for the Safety of Life at Sea (“SOLAS”) was amended in November 2012 to incorporate mandatory maximum noise level limits for machinery spaces, control rooms, accommodation and other spaces on board vessels. The amendments came into force on July 1, 2014 and require ships of 1,600 gross tons or more, for which the building contract was placed on or after July 1, 2014 or were constructed on or after January 1, 2015 or will be delivered on or after July 1, 2018 to be constructed to reduce on-board noise and to protect personnel from noise on board ships. All of our vessels comply with existing guidelines, and our new buildings will meet the applicable requirements.

SOLAS Regulations II-2/4.5 and II-2/11.6 have been amended to clarify the provisions relating to the secondary means of venting cargo tanks in order to ensure adequate safety against over and under pressurization. SOLAS Regulation II-2/20 relating to the performance of ventilation systems was also amended. These changes apply to all tankers constructed on or after January 1, 2017. All of our tankers constructed on or after January 1, 2017 comply with, and our new buildings will meet, these requirements.

SOLAS Regulation II-2 10.10.1 and 10.10.3 have been amended and require ships constructed on or after July 1, 2014 to be fitted with the following by July 1, 2019: a) compressed air breathing apparatus fitted with an audible alarm and a visual or other device which will alert the user before the volume of the air in the cylinder has been reduced to no less than 200 liters; b) a minimum of two two-way portable radiotelephone apparatus for each fire party for fire-fighter’s communication. The two-way portable radiotelephone apparatus must be explosion-proof or intrinsically safe. Fire parties are individuals or groups listed on the muster list.

 

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Performance standards for Enhanced Group Call (“EGC”) and NAVTEX Equipment have also been amended. Such equipment installed after July 1, 2019 must comply with SOLAS IV/7 and SOLAS IV/14.

SOLAS Regulations III/3 and III/20 were amended effective January 1, 2020. From this time all ships must comply with requirements for maintenance, thorough examination, operational testing, overhaul and repair of lifeboats and rescue boats, launching appliances and release gear contained in SOLAS Chapter III.

The International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (“STCW Convention”) and its associated Code was amended in June 2010 (the “Manila Amendments”) with such amendments entering into force on January 1, 2012, with a five-year transitional period until January 1, 2017. As of 2018 all seafarers are required to meet the STCW standards and be fully certified in accordance with the revised STCW amendments. Flag states that have ratified SOLAS and STCW generally employ the classification societies, which have incorporated SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance. From January 1, 2017, all of our crew STCW Convention certificates have been issued, renewed and revalidated in accordance with the provisions of the Manila Amendments.

The Nairobi Wreck Removal Convention 2007 (“Wreck Convention”) entered into force on April 14, 2015. The Wreck Convention provides a legal basis for sovereign states to remove, or have removed, shipwrecks that may have the potential to affect adversely the safety of lives, goods and property at sea, as well as the marine and coastal environment. Further, the Wreck Convention makes ship owners financially liable for wreck removal and requires them to take out insurance or provide other financial security to cover the costs of wreck removal. All of our fleet has complied with the certification requirements stipulated by the Wreck Convention with regards to financial security.

OPA 90. The U.S. Oil Pollution Act of 1990 (“OPA 90”) established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA 90 affects all owners and operators whose vessels trade to the U.S. or its territories or possessions or whose vessels operate in U.S. waters, which include the U.S.’s territorial sea and its two hundred nautical mile exclusive economic zone. The USCG is the lead federal agency that enforces OPA 90.

Under OPA 90, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. Tsakos Shipping and Tsakos Energy Management would not qualify as “third parties” because they perform under contracts with us. OPA 90 follows a “polluter pays” principle, and as such, the responsible party is liable for damages under OPA 90 up to statutory liability limits. OPA 90 does allow the responsible party to recover against a third party based on contractual indemnity or via contribution.

OPA 90 allows for the recovery of a broad category of damages, which are defined broadly to include (1) natural resources damages and the costs of assessing them, (2) real and personal property damages, (3) net loss of taxes, royalties, rents, fees and other lost revenues, (4) lost profits or impairment of earning capacity due to property or natural resources damage, (5) net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and (6) loss of subsistence use of natural resources. OPA 90 also expressly excludes the economic loss rule that would normally require a proprietary interest in property before allowing for recovery of economic losses.

OPA 90 incorporates limits on the liability of responsible parties for a spill. OPA 90 adjusts the limits of liability, based on increases in the Consumer Price Index (“CPI”) at least every three years. The limits of liability for a double-hulled tanker over 3,000 gross tons are currently the greater of $2,300 per gross ton or $19,943,400.

These limits of liability would not apply if the incident was proximately caused by violation of applicable U.S. federal safety, construction or operating regulations or by the responsible party (or its agents or employees

 

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or any person acting pursuant to a contractual relationship with the responsible party) or by 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. We continue to maintain, for each of our vessels, pollution liability coverage in the amount of $1 billion per incident. A catastrophic spill could exceed the insurance coverage available, in which case there could be a material adverse effect on us.

Under OPA 90, with some limited exceptions, all newly built or converted tankers operating in U.S. waters must be built with double-hulls, and existing vessels which do not comply with the double-hull requirement should have been phased out by December 31, 2014. All of our fleet is of double-hull construction.

OPA 90 requires owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, letter of credit, self-insurance, guaranty or other satisfactory evidence. Under the self-insurance provisions, the ship owner or operator must have a net worth and working capital, measured in assets located in the U.S. against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. OPA 90 requires an owner or operator of a fleet of tankers only to demonstrate evidence of financial responsibility in an amount sufficient to cover the tanker in the fleet having the greatest maximum liability under OPA 90.

OPA 90 specifically permits individual U.S. coastal states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills.

Owners or operators of tankers operating in U.S. waters are required to file vessel response plans with the USCG for approval, and their tankers are required to operate in compliance with such approved plans. These response plans must, among other things, (1) 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,” (2) describe crew training and drills, and (3) identify a qualified individual with full authority to implement removal actions. All our vessels have approved vessel response plans.

We intend to comply with all applicable USCG and state regulations in the ports where our vessels call.

Environmental Regulation

The U.S. Comprehensive Environmental Response, Compensation, and Liability Act. The U.S. Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) applies to spills or releases of hazardous substances other than petroleum or petroleum products, whether on land or at sea. CERCLA imposes joint and several liability, without regard to fault, on the owner or operator of a ship, vehicle or facility from which there has been a release, and on other specified parties. Liability under CERCLA is generally limited to the greater of $300 per gross ton or $500,000 per vessel carrying non-hazardous substances ($5.0 million for vessels carrying hazardous substances), unless the incident is caused by gross negligence, willful misconduct or a violation of certain regulations, in which case liability is unlimited.

U.S. Clean Water Act. The U.S. Clean Water Act of 1972 (“CWA”) prohibits the discharge of oil or hazardous substances in navigable waters and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90. Additionally, the CWA provides for the potential application of civil or criminal penalties for a pollution incident. Under EPA regulations, vessels must obtain CWA permits for the discharge of ballast water and other substances incidental to normal operation in U.S. territorial or inland waters. Commercial vessels greater than 79 feet in length are required to obtain coverage under the National Pollutant Discharge Elimination System (“NPDES”) Vessel General Permit (the “VGP”) to discharge ballast water and other wastewater into U.S. waters by submitting a Notice of Intent (a “NOI”). The

 

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most recent VGP (the “2013 VGP”) became effective in December 2013 and then expired on December 18, 2018, although its provisions remain in force, as described below. The 2013 VGP requires vessel owners and operators to comply with a range of best management practices, reporting, record keeping and other requirements for a number of incidental discharge types and incorporates current USCG requirements for ballast water management, as well as supplemental ballast water requirements. The 2013 VGP included ballast water numeric discharge limits and best management practices for certain discharges. On June 11, 2012 the USCG and the EPA published a memorandum of understanding which provides for collaboration on the enforcement of the VGP requirements, and the USCG routinely includes the VGP as part of its normal Port State Control inspections.

On December 4, 2018, the Vessel Incident Discharge Act (“VIDA”) was signed into law establishing a new framework for the regulation of vessel incidental discharges under the CWA. VIDA requires the EPA to develop performance standards for those discharges within two years of enactment and requires the USCG to develop implementation, compliance, and enforcement regulations within two years of EPA’s promulgation of standards. Under VIDA, all provisions of the 2013 VGP will remain in force and effect until the USCG regulations are finalized, which the regulators advise are expected to be issued in 2022.

We intend to comply with the VGP and the record keeping requirements and we do not believe that the costs associated with obtaining such permits and complying with the associated obligations will have a material impact on our operations.

The Clean Air Act. The CAA requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to CAA vapor control and recovery standards for cleaning fuel tanks and conducting other operations in regulated port areas and emissions standards for so-called “Category 3” marine diesel engines operating in U.S. waters. On December 22, 2009, the EPA adopted final emission standards for Category 3 marine diesel engines equivalent to those adopted in the amendments to Annex VI to MARPOL. As a result, the most stringent engine emissions and marine fuel sulfur requirements of Annex VI will apply to all vessels regardless of flag entering U.S. ports or operating in U.S. waters, and to all U.S. flagged vessels regardless of location. The emission standards apply in two stages: near-term standards for newly-built engines, which have applied since the beginning of 2011, and long-term standards requiring an 80% reduction in NOx by 2030, which has applied from the beginning of 2016, requiring the use of emission control technology.

IMO Emission Control Areas. All vessels operating in the North American and Caribbean ECAs discussed above must use fuel with a sulfur content of 0.1%. Since January 1, 2016, NOx after-treatment requirements have also applied. California implemented a 24 nautical mile zone within which fuel must have a sulfur content of 0.1% or less on January 1, 2014. Currently, the California regulations run in parallel with the emissions requirements in the North American and Caribbean ECAs. Compliance with the North American and Caribbean ECA emission requirements, as well as the possibility that more stringent emissions requirements for marine diesel engines or port operations by vessels will be adopted by the EPA or the states where we operate, could entail significant capital expenditures or otherwise increase the costs of our operations. Similarly, the EU has ECAs in place in the Baltic Sea and the North Sea and English Channel, within which fuel with a sulfur content in excess of 0.1% has not been permitted since January 1, 2015. The EU Commission is currently investigating the possibility of placing ECAs in the Mediterranean Sea and Black Sea. In addition, the EU Sulphur directive has since January 1, 2010 banned inland waterway vessels and ships berthing in EU ports from using marine fuels with a sulfur content exceeding 0.1% by mass. The prohibition applies to use in all equipment including main and auxiliary engines and boilers. Some EU Member States also require vessels to record the times of any fuel-changeover operations in the ship’s logbook.

The MEPC in May 2013 voted to postpone the implementation of MARPOL Annex VI Tier III standards until 2021. However, as the MEPC subsequently agreed that Tier III standards shall apply to marine diesel engines that are installed on a ship constructed on or after January 1, 2016 which operate in the North American ECA or the Caribbean ECA, Tier III standards do apply now. In July 2017, the IMO adopted additional

 

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amendments to MARPOL Annex VI to introduce the Baltic Sea and the North Sea as ECAs in respect of the sulfur content of fuels. Both ECAs will be enforced for ships constructed on or after January 1, 2021, or existing ships which replace an engine with “non-identical” engines or install an “additional” engine. On January 1, 2019, the Baltic Sea and North Sea ECAs were extended to cover NOx. Regulation 13 of MARPOL Annex VI requires engines with a power output of more than 130 kilowatts installed or replaced on or after January 1, 2021 to be Tier III certified if operated in the Baltic Sea and North Sea NOx ECAs. There is an exemption to the Tier III requirement to allow ships fitted with dual-fuel engines or only Tier II engines to be built, converted, repaired or maintained at shipyards located inside NOx ECAs if there is not an available, feasible Tier III engine and retrofitting the Tier II engine is not feasible. Regulation 18.5 of MARPOL Annex VI requires ships of 400 gross tons and above to have on board a Bunker Delivery Note (“BDN”) which records details (as set forth in Appendix V) of fuel oil delivered and used on board for combustion purposes. The BDN also provides the designation requirements for refiners, importers and distributors. The BDN now includes a selection box obliging the purchaser to obtain a notification from the fuel supplier’s representative that fuel is intended to be used in compliance with MARPOL, if the fuel supplied exceeds the 0.5% sulfur limit.

HNS Convention. Our vessels also may become subject to the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, created in 1996 and as amended by the Protocol adopted in April 2010 (as amended, the “HNS Convention”) if enters into force. The HNS Convention would create a regime of liability and compensation for damage from hazardous and noxious substances (“HNS”), including a two-tier system of compensation composed of compulsory insurance taken out by shipowners and an HNS fund which comes into play when the insurance is insufficient to satisfy a claim or does not cover an incident. To date, the HNS Convention has not been ratified by a sufficient number of countries to enter into force. In March 2020, EU ministers signed a declaration highlighting the importance of the ratification of international maritime conventions, including the 2010 HNS Convention. This may hasten the HNS Convention’s entry into force.

The Maritime Labour Convention. The International Labour Organization’s Maritime Labour Convention was adopted in 2006 (“MLC 2006”). The basic aims of the MLC 2006 are to ensure comprehensive worldwide protection of the rights of seafarers (the MLC 2006 is sometimes called the Seafarers’ Bill of Rights) and to establish a level playing field for countries and ship owners committed to providing decent working and living conditions for seafarers, protecting them from unfair competition on the part of substandard ships. The MLC 2006 was ratified on August 20, 2012, and all our vessels were certified by August 2013, as required. Since January 18, 2017, all ships which are subject to the MLC have been required to carry and display on board two certificates confirming that financial security is in place for a) shipowners’ liabilities in the event of abandonment and b) contractual payments for death or long-term disability, as set out in relevant the employment agreement. As of December 26, 2020, shipowners will be obliged to pay wages and other entitlements to seafarers where the seafarer is held captive as a result of piracy or armed robbery. The MLC 2006 requirements have not had, and we do not expect that the MLC 2006 requirements will have, a material effect on our operations.

European Union Initiatives. In September 2005, the European Union adopted legislation to incorporate international standards for ship-source pollution into European Community law and to establish penalties for discharge of polluting substances from ships (irrespective of flag). Since April 1, 2007, Member States of the European Union have had to ensure that illegal discharges of polluting substances, participation in and incitement to carry out such discharges are penalized as criminal offences and that sanctions can be applied against any person, including the master, owner and/or operator of the polluting ship, found to have caused or contributed to ship-source pollution “with intent, recklessly or with serious negligence” (this is a lower threshold for liability than that applied by MARPOL, upon which the ship-source pollution legislation is partly based). In the most serious cases, infringements will be regarded as criminal offences (where sanctions include imprisonment) and will carry fines of up to Euro 1.5 million. On November 23, 2005 the European Commission published its Third Maritime Safety Package, commonly referred to as the Erika III proposals, and two bills (dealing with the obligation of Member States to exchange information among themselves and to check that vessels comply with

 

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international rules, and with the allocation of responsibility in the case of accident) were adopted in March 2007. The Treaty of Lisbon entered into force on December 1, 2009 following ratification by all 27 European Union member states and identifies protection and improvement of the environment as an explicit objective of the European Union. The European Union adopted its Charter of Fundamental Rights at the same time, declaring high levels of environmental protection as a fundamental right of European Union citizens. Additionally, the sinking of the Prestige in 2002 has led to the adoption of other environmental regulations by certain European Union Member States. It is impossible to predict what legislation or additional regulations, if any, may be promulgated by the European Union or any other country or authority.

The EU has also adopted legislation that (1) requires member states to refuse access to their ports by certain substandard vessels, according to vessel type, flag and number of previous detentions; (2) obliges member states to inspect at least 25.0% of vessels using their ports annually and increase surveillance of vessels posing a high risk to maritime safety or the marine environment; (3) 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; and (4) requires member states to impose criminal sanctions for certain pollution events, such as the unauthorized discharge of tank washings. It is also considering legislation that will affect the operation of vessels and the liability of owners for oil pollution.

The Council of the EU has approved the implementation of its 2013 strategy for integrating maritime transport emissions into the EU’s GHG reduction policies, and Regulation (EU) 2015/757 of the European Parliament and of the Council on the monitoring, reporting and verification of carbon dioxide (“CO2”) emissions from maritime transport was adopted on April 29, 2015. It obliges owners of vessels over 5,000 gross tons to monitor emissions for each ship on a per voyage and annual basis, from January 1, 2018. There are provisions for monitoring, reporting and verifying (“MRV”) of CO2 emissions from vessels using EU ports, to apply from January 1, 2018. From 2019, by April 30 each year all ships above 5,000 gross tons, regardless of flag, calling at EU ports must submit a verified emissions report annually to the European Commission and the vessel’s flag state. From 2019, by June 30 each year vessels must carry a valid Document of Compliance (“DOC”) confirming compliance with Regulation (EU) 2015/757 for the prior reporting period. This DOC must be made available for inspection at EU ports. Individual Member States have started to introduce CO2 emissions legislation for vessels. The French Transport Code has required vessel operators to record and disclose the level of CO2 emitted during the performance of voyages to or from a destination in France since October 1, 2013. The European Green Deal, details of which were issued in December 2019, included proposals to include emissions from the shipping sector into the EU Emissions Trading Scheme (“ETS”). In March 2020 the European Commission proposed a draft European Climate Law which sets out a proposed framework to implement the EU’s aim of being climate neutral by 2050. Although the situation is still developing, proposals include extending emissions trading to the maritime sector.

Vessel Recycling Regulations. The EU has introduced the European Ship Recycling Regulation, aimed at minimizing adverse effects on health and the environment caused by ship recycling, as well as enhancing safety, protecting the marine environment and ensuring the sound management of hazardous waste. The Regulation entered into force on November 20, 2013, and anticipates the international ratification of the IMO’s Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships 2009 (“Hong Kong Convention”). The Hong Kong Convention will enter into force 24 months after the following conditions are met: (1) not less than 15 IMO member states have become signatories, (2) the signatories represent at least 40% of the gross tonnage of the world’s merchant shipping, and (3) the combined maximum annual ship recycling volume of the signatories during the preceding 10 years constitutes at least 3% of the gross tonnage of the combined merchant shipping of the signatories. The Hong Kong Convention has not yet been adopted by the necessary number of member states, but after India’s recent adoption, the current member states represent approximately 29.42% of the gross tonnage of the world’s merchant tonnage.

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restricted or prohibited. This obligation is extended to all non-EU flagged vessels calling at a port or anchorage in an EU Member State. A certified inventory of hazardous materials (“IHM”) first requires a survey carried out by the shipowner or a hazardous materials experts, and then the relevant flag state administration will issue a statement of compliance to the vessel after verifying the IHM. The IHM will be subject to periodic checks during renewal surveys every five years and during port state control inspections. The European Ship Recycling Regulation also requires EU-flagged vessels to be scrapped only in approved recycling facilities and grants an EU Member State the right to detain, dismiss or exclude non-compliant vessels from their ports or offshore terminals.

Other Environmental Initiatives. Many countries have ratified and follow the liability scheme adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (“CLC”), and the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage of 1971, as amended (“Fund Convention”). The U.S. is not a party to these conventions. Under these conventions, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain complete defenses. The liability regime was increased (in limit and scope) in 1992 by the adoption of Protocols to the CLC and Fund Convention which became effective in 1996. The Fund Convention was terminated in 2002, but the Supplementary Fund Protocol was adopted in 2003 and entered into force in March 2005. The liability limit in the countries that have ratified the 1992 CLC Protocol is tied to a unit of account which varies according to a basket of currencies. Under an amendment to the 1992 CLC Protocol that became effective on November 1, 2003, for vessels of 5,000 to 140,000 gross tons, liability is limited to approximately $6,155,248 plus approximately $861 for each additional gross ton over 5,000. For vessels of over 140,000 gross tons, liability is limited to approximately $122,518,096. As the Convention calculates liability in terms of IMF Special Drawing Rights, these figures are based on currency exchange rates on March 31, 2020. From May 1998, parties to the 1992 CLC Protocol ceased to be parties to the CLC due to a mechanism established in the 1992 CLC Protocol for compulsory denunciation of the “old” regime; however, the two regimes will co-exist until the 1992 CLC Protocol has been ratified by all original parties to the CLC. The right to limit liability is forfeited under the CLC where the spill is caused by the owner’s actual fault and under the 1992 CLC Protocol where the spill is caused by the owner’s intentional or reckless conduct. The 1992 CLC Protocol channels more of the liability to the owner by exempting other groups from this exposure. Vessels trading to states that are parties to these conventions must provide evidence of insurance covering the liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. We believe that our protection and indemnity insurance will cover the liability under the plan adopted by IMO.

The U.S. National Invasive Species Act (“NISA”) was enacted in 1996 in response to growing reports of harmful organisms being released into U.S. ports through ballast water taken on by ships in foreign ports. Under NISA, the USCG adopted regulations in July 2004 establishing a national mandatory ballast water management program for all vessels equipped with ballast water tanks that enter or operate in U.S. waters. These regulations require vessels to maintain a specific ballast water management plan. The requirements can be met by performing mid-ocean ballast exchange, by retaining ballast water on board the ship, or by using environmentally sound alternative ballast water management methods approved by the USCG. However, mid-ocean ballast exchange is mandatory for ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope crude oil. Mid-ocean ballast exchange is the primary method for compliance with the USCG regulations, since holding ballast water can prevent ships from performing cargo operations upon arrival in the U.S., and alternative methods are still under development. Vessels that are unable to conduct mid-ocean ballast exchange due to voyage or safety concerns may discharge minimum amounts of ballast water (in areas other than the Great Lakes and the Hudson River), provided that they comply with record keeping requirements and document the reasons they could not follow the required ballast water management requirements. The USCG adopted allowable concentration limits for living organisms in ballast water discharges in U.S. waters, effective June 21, 2012. All newly constructed vessels must be compliant on delivery. All existing vessels must be compliant at their first scheduled drydock after January 1, 2016 or, in the case of vessels with

 

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ballast water capacity of 1,500 – 5,000 cubic meters , their first scheduled drydock after January 1, 2014. The USCG must approve any ballast water management technology before it can be placed on a vessel, and a list of approved equipment can be found on the Coast Guard Maritime Information Exchange (“CGMIX”) web page. As of April 2020, there are 29 approved treatment systems which have obtained USCG type approval and 10 are under review. Several U.S. states, such as California, have also adopted more stringent legislation or regulations relating to the permitting and management of ballast water discharges compared to EPA regulations.

At the international level, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments in February 2004 (the “BWM Convention”). The BWM Convention entered into force on September 8, 2017. Under the BWM Convention, all ships in international traffic are required to manage their ballast water on every voyage by either exchanging it or treating it using an approved ballast water treatment system. All ships have to carry an approved Ballast Water Management Plan and a Ballast Water Record Book, and all ships of 400 gross tons and above have to be surveyed and issued with an International Ballast Water Management Certificate. The BWM Convention sets out two standards of compliance, D1 and D2. The D1 standard requires ships to exchange ballast water in open seas away from coastal areas. The D2 standard in Regulation D-2 of the BWM Convention outlines the standard that ballast water treatment systems must meet. The standards involve maximum levels of certain microorganisms, such as plankton and intestinal enterococci, for given amounts of ballast water. All ships must maintain the D1 standard until required to comply with the D2 standard. All ships constructed after entry into force of the BWM Convention (September 8, 2017) will have to be compliant on delivery with the D2 standard. Existing ships are required to be compliant with the D2 standard by their first International Oil Pollution Prevention (“IOPP”) renewal survey on or after September 8, 2017. Ships constructed before September 8, 2017 are required to comply with the D2 standard at the first IOPP renewal survey on or after September 8, 2019. All ships must have installed a ballast water treatment system which is compliant with the D2 standard by September 8, 2024. The IOPP renewal survey refers to the renewal survey associated with the IOPP Certificate required under MARPOL Annex I. The BWM Convention does not apply to ships not carrying ballast water, domestic ships, ships that only operate in waters under the jurisdiction of one party to the BWM Convention and on the high seas, warships, naval auxiliary or other ships owned or operated by a state, or permanent ballast water in sealed tanks on ships. Furthermore, flag administrators may issue exemptions from the BWM Convention for ships engaged on occasional or one-off voyages between specified ports or locations, or ships that operate exclusively between specified ports or locations, such as ferries.

Our vessels will comply with the BWM Convention in accordance with its terms, though the cost of compliance may result in us incurring costs to install approved ballast water treatment systems on our vessels.

Polar Regulations. In November 2014 the IMO adopted the International Code for Ships Operating in Polar Waters (the “Polar Code”) and related amendments to SOLAS to make it mandatory. The Polar Code comprises of detailed requirements relating to safety, design, construction, operations, training and the prevention of environmental pollution. The Polar Code applies to all shipping and maritime operations, apart from fishing boats, ships under 500 tons and fixed structures. The Polar Code entered into force on January 1, 2017 and applies to new ships constructed after that date. Ships constructed before January 1, 2017 are required to meet the relevant requirements of the Polar Code by their first intermediate or renewal survey, whichever occurs first, after January 1, 2018. The Polar Code brings with it numerous requirements and necessities for all ships trading in the polar regions and therefore a great deal of investment will be needed to operate in this region. It is our intention to comply with the Polar Code as implemented through MARPOL and SOLAS and with the applicable training requirements of the STCW Convention.

MARPOL Annex I regulation 43 concerning special requirements for the use or carriage of oils in the Antarctic area to prohibit ships from carrying heavy grade oil on board as ballast, came into force on March 1, 2016. Our vessels comply with it.

Greenhouse Gases. In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into force. Although the Kyoto Protocol requires adopting countries to implement

 

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national programs to reduce emissions of GHGs, emissions of GHGs from international shipping are not subject to the Kyoto Protocol. No new treaty was adopted at the United Nations’ climate change conference in Cancun in December 2010. The Kyoto Protocol was extended to 2020 at the 2012 United Nations Climate Change Conference, with the hope that a new treaty would be adopted in 2015 to come into effect in 2020. There is pressure to include shipping in any new treaty. We refer to the discussion above of the regulation of GHG emissions from ocean-going vessels under the CAA and EU GHG emissions regulations. The IMO, the EU or individual countries in which we operate could pass climate control legislation or implement other regulatory initiatives to control GHG emissions from vessels that could require us to make significant financial expenditures or otherwise limit our operations. Even in the absence of climate control legislation and regulations, our business may be materially affected to the extent that climate change may result in sea level changes or more intense weather events.

The Hong Kong Air Pollution Control (Marine Light Diesel) Regulations, which entered into force on April 1, 2014, provide that the sulfur content of marine light diesel supplied to vessels in Hong Kong must contain 0.05% sulfur content or less. From January 1, 2019, the Hong Kong Air Pollution Control (Fuel for Vessels) Regulation has required all vessels, irrespective of whether they are sailing or berthing, to use fuel containing 0.5% sulfur content or less or any other fuel approved by the Director of Environment Protection. Vessels equipped with scrubbers may apply for an exemption.

From January 1, 2019, vessels must switch to fuel with a sulfur content not exceeding 0.5% prior to entering China’s territorial sea. From March 1, 2020 vessels in Chinese waters must not carry fuel oil with a sulfur content exceeding 0.5%. From July 1, 2019, vessels other than tankers capable of receiving shore power must use shore power whilst in China’s coastal and inland ECAs (the Yangtze and Xi Jiang Rivers) if berthing for more than 3 hours and 2 hours, respectively. While in China’s coastal and inland ECAs, vessels may not discharge effluent from open loop exhaust gas cleaning systems. From January 1, 2020, vessels entering China’s inland ECAs must use fuel with a sulfur content not exceeding 0.1% while operating within the inland ECA. From January 1, 2022, vessels must use fuel with a sulfur content not exceeding 0.1% while operating within the Hainan Coastal ECA. Ships of over 400 gross tons or more or powered by engines of 750 kilowatts or more calling at a port in China must report the energy consumption data of their last voyage to the China Maritime Safety Administration before leaving port.

From January 1, 2019, ships not fitted with scrubbers are required to burn fuel with a sulfur content not exceeding 0.5% when entering Taiwan’s international commercial port areas.

In December 2015, representatives of 195 countries met at the Paris Climate Conference (“COP 21”) and adopted a universal and legally binding climate deal commonly known as the Paris Agreement. The Paris Agreement contemplates commitments from each nation party thereto to take action to reduce GHG emissions and limit increases in global temperatures but did not include any restrictions or other measures specific to shipping emissions. The governments agreed to the goal of keeping the increase in global average temperature to below 2 degrees Celsius and to aim, if possible, to limit the increase to 1.5 degrees Celsius. Governments also agreed to reconvene every 5 years to reassess the targets. Governments will be required to report to each other on their progress and the steps they have taken to reach their targets. The Paris Agreement came into force on November 4, 2016, and as of April 2, 2020, 189 of the 197 countries who were party to the Paris Agreement have ratified it. On June 1, 2017, the U.S. President announced that the U.S. intended to withdraw from the Paris Agreement. On November 4, 2019, the U.S. submitted formal notification of its withdrawal from the Paris Agreement, which will take effect on November 4, 2020. The shipping industry was not included in emissions controls; however, with growing pressure being placed on the IMO to implement measures to aid the objectives agreed at the COP 21, it is possible that the shipping industry may be subject to further regulation as a result of COP 21.

In April 2018 the IMO’s MEPC adopted an initial strategy on the reduction of GHG emissions from ships. The initial strategy aims to reduce the total GHG emissions from ships, based upon emissions in 2008, by at least 50% by 2050, while at the same time pursuing efforts towards phasing them out entirely. A follow up program

 

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approved by the MEPC in October 2018 is intended to act as a three-stage planning tool in meeting the timelines identified in the initial strategy. The January 1, 2019 amendments to Regulation 22A of chapter 4 of MARPOL Annex VI, discussed above, requiring ships of 5,000 gross tons and above to collect consumption data for each type of fuel oil they use is part of these initiatives.

On June 29, 2017, the Global Industry Alliance (the “GIA”) was officially inaugurated. The GIA is a program, under the Global Environmental Facility-United Nations Development Program-IMO project, which supports shipping, and related industries, as they move towards a low carbon future. The GIA includes 18 members including, but not limited to, shipowners, operators, classification societies, and oil companies. The GIA has been extended until 2023.

In June 2017, the IMO’s Maritime Safety Committee adopted requirements for cyber-risk management systems to be incorporated by ship owners and managers by 2021. U.S. agencies have indicated that cybersecurity regulations for the maritime industry are likely to be further developed in the near future in an attempt to combat cybersecurity threats. Compliance might require companies to cultivate additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures. However, the impact of such IMO requirements or potential regulations is hard to predict at this time.

Trading Restrictions. The Company is aware of the restrictions applicable to it on trading with Crimea, Cuba, Iran, North Korea, Syria, Venezuela and, in prior periods, Sudan and it has complied with those restrictions and intends to continue to so comply in all respects. The Company has not, nor does it intend to, provide any goods, fees or services to the referenced countries and has had no contacts with governmental entities in these countries nor does it intend to have any in the future.

Its vessels are not chartered to any Crimean, Cuban, Iranian, North Korean, Sudanese, Syrian or Venezuelan companies. The voyage charter parties and all but the oldest time-charter agreements relating to the vessels in the fleet generally preclude Iran from the vessels’ trading unless agreed between owner and charterer after taking into account all relevant sanctions legislation.

Between January 1, 2019 and April 2, 2020, the Company’s vessels made 2,886 port calls around the world, none of which were to those countries.

None of the vessels the Company owns, operates or charters have provided, or are anticipated to provide, any U.S.-origin goods to these countries, or involve employees who are U.S. nationals in operations associated with these countries. No U.S. companies or U.S. dollar payments are involved in any operations associated with these countries. The Company has no relationships with governmental entities in those countries, nor does it charter its vessels to companies based in those countries. The Company derives its revenue directly from the charterers.

The Company is also aware of the less onerous restrictions on trading with other countries, including but not limited to Libya and Russia. It has complied with those restrictions and intends to continue to so comply in all respects.

Competition

We operate in markets that are highly competitive and where no owner controlled more than 5% of the world tanker fleet as of April 2, 2020. Ownership of tankers is divided among independent tanker owners and national and independent oil companies. Many oil companies and other oil trading companies, the principal charterers of our fleet, also operate their own vessels and transport oil for themselves and third-party charterers in direct competition with independent owners and operators. We compete for charters based on price, vessel location, size, age, condition and acceptability of the vessel, as well as our reputation as a tanker operator and our managers reputation for meeting the standards required by charterers and port authorities. Currently we compete

 

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primarily with owners of tankers in the ULCCs, VLCCs, suezmax, suezmax shuttle tankers, aframax, panamax, handymax and handysize class sizes, and we also compete with owners of LNG carriers.

Although we do not actively trade to a significant extent in Middle East trade routes, disruptions in those routes as a result of international hostilities, including those in Syria and Iraq, economic sanctions, including those with respect to Iran, and terrorist attacks such as those made in various international locations (Somalia, Kenya, Yemen, Nigeria) and pirate attacks repeatedly made upon shipping in the Indian Ocean, off West Africa and in South East Asia, may affect our business. We may face increased competition if tanker companies that trade in Middle East trade routes seek to employ their vessels in other trade routes in which we actively trade. Other significant operators of multiple aframax and suezmax tankers in the Atlantic basin that compete with us include Euronav, Teekay Shipping Corporation, Frontline, International Seaways, Inc., DHT, Ardmore and Nordic American Tankers. There are also numerous smaller tanker operators in the Atlantic basin.

Employees

We have no salaried employees. See “—Management Contract—Crewing and Employees.”

Properties

We operate out of Tsakos Energy Management offices in the building also occupied by Tsakos Shipping at Megaron Makedonia, 367 Syngrou Avenue, Athens, Greece.

Legal proceedings

We are involved in litigation from time to time in the ordinary course of business. In our opinion, the litigation in which we were involved as of April 2, 2020, individually and in the aggregate, was not material to us.

 

Item 4A.

Unresolved Staff Comments

None.

 

Item 5.

Operating and Financial Review and Prospects

Company Overview

As of April 2, 2020, the fleet consisted of 65 double-hull vessels with an average age of 9.0 years, comprised of 60 conventional tankers, two LNG carriers and three suezmax DP2 shuttle tankers providing world-wide marine transportation services for national, major and other independent oil companies and refiners under long, medium and short-term charters. We also had two suezmax tankers and one LNG carrier under construction with expected deliveries in 2020 and 2021. The current operational fleet consists of two VLCCs, fifteen suezmaxes (including three DP2 shuttle tankers), seventeen aframaxes, three aframax LR2s, eleven panamax LR1s, six handymax tankers, seven handysize tankers and two LNG carriers. All vessels are owned by our subsidiaries, other than four suezmax tankers which are bareboat chartered-in by our subsidiaries. The charter rates that we obtain for these services are determined in a highly competitive global tanker charter market. The tankers operate in markets that have historically exhibited both cyclical and seasonal variations in demand and corresponding fluctuations in charter rates. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere. In addition, unpredictable weather conditions in the winter months in various regions around the world tend to disrupt vessel scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities. Changes in available vessel supply are also a contributing factor in affecting the cyclicality and overall volatility present in the tanker sector which is reflected both in charter rates and asset values.

 

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Results from Operations—2019

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Annual Report our actual results may differ materially from those anticipated in these forward-looking statements.

A slowdown in global economic growth in 2019 contributed to certain countries and industrial sectors, already enfeebled by poor economic direction, suffering more stress than they could afford. This was the backdrop as to how the tanker sector would fare throughout the year. An important exception was the United States which enjoyed a particularly strong economy during this period; however, even the U.S. was subject to vulnerabilities and downside risks that have occurred in early 2020 as a result of the COVID-19 pandemic and related policy decisions.

For a large part of 2019, apart from a slight recovery in the middle, there remained uncertainty largely caused by actual and threatened trade wars between two of the largest world economies, China and the United States. In this environment a slowdown in investments in capital goods and spending on consumer goods resulted. While this hurt dry ships more than tankers, owners of tankers were embroiled in their own dilemma of how to renew their fleet in light of looming environmental regulations and in particular whether to invest in upgrading their vessels to install sulphur exhaust gas cleaning systems or to accept the risk of dependency on available low sulphur fuel.

Fortunately, lower interest rates, brought about by the determination by central banks, including the US Federal Reserve, to boost consumer expenditure and maintain employment levels, also helped ship owners to secure the financing that they sought to make such investments, made easier if the owner had a strong reputation and a charter in place with a renowned oil major. While lower interest rates were a welcome blessing to cash starved shipping companies, especially those companies that had adopted a chartering policy based on spot voyages, the continuous threat of trade wars and actual imposition of higher tariffs also had a damaging effect on the shipping sector albeit less so for tanker companies with fixed lucrative time-charters.

The crude oil tanker market became more difficult by mid-2Q19 as production cuts by OPEC continued and exports from Venezuela and Iran were hampered by US sanctions. Refinery maintenance started earlier than expected in anticipation of forthcoming regulations in the new year, but some recovery occurred later in the year, first as a result of growing U.S.oil exports, with Brazil also contributing, then with U.S. sanctions against Cosco, and finally with completion of refinery maintenance.

After a strong end to 2018 and a relatively strong beginning to 2019, LNG carrier spot rates weakened, due to a restart of nuclear facilities in Japan and warmer weather than expected, though strengthening moderately later in the year before softening in the latter part of 2019. In the longer run, new liquefaction projects are expected to start up that should give a lift to the sector in terms of long-haul voyages and ultimately to rates. However, to date this year there has not been a significant recovery. On the contrary, a sharp increase in newbuildings and delays in completion of LNG projects, as well as pandemic and oil price concerns, has put a damper on rate expectations for the near future.

Before the possibility of a pandemic in 2020 had even been taken into consideration in 2020 forecasts, most predictions relating to the world economy and, more specifically, the shipping sector, and for tankers in particular, focused on the major concerns and uncertainties related to how the new IMO regulations would impact the sector. However, most market observers and tanker company managements felt confident that 2020 would mark a significant turnaround in fortunes, a sentiment that was given considerable support by the results of the fourth quarter and by the relative smoothness of the implementation of the regulations, and by faith in the strong fundaments that continued to exist; adequate oil supply, fewer vessels entering the arena and reasonable growing demand.    

 

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However, growth prospects in leading economies were still a cause for concern, the lingering impact of trade barriers still giving rise to uncertainty. The German economy, heavily dependent on exports, remains lethargic, with GDP expectations low, albeit higher than most other major economies. India’s GDP growth forecasts have also seen a significant reduction, after a strong 2019, with more reforms still needed in several key sectors, but remaining a star within the rankings of leading economies and important to the shipping sector. The other BRIC countries also suffered slower activity and continue to do so. The one nation that was showing real strength through most of 2019 and entering 2020 has been the United States with determined efforts to ensure that the financial system is healthy enough to withstand any major disruption, by reducing interest rates and purchasing government debt.

Looking forward, it appears clear that the U.S. will continue to dominate growth of oil supply in the coming years ahead, due to the tremendous availability of supply from shale oil, to the extent that in a number of years it is expected that U.S. oil exports will surpass Russia and possibly Saudi Arabia. This growth of oil supply will be supplemented from other, non-OPEC, sources including Brazil and Canada, pushed by demand from China and India, although it remains to be seen as to what extent the COVID-19 pandemic and its consequences may stymie demand growth in the near future.

In addition, from the beginning of 2020, tankers are obliged to adhere to the new environmental regulations imposed by the IMO. Expectations that this would result in major disruptions would appear not to have occurred, while both crude and product carriage trades have benefitted due to heavier throughput at the refineries producing available compliant fuels and the need to ensure that appropriate fuel is made available world-wide. To date it would appear that serious absence of compliant fuel has not occurred and that instances of supply of damaging contaminated fuel have been limited.

The global fleet overcapacity that has contributed so much to suppressing freight rates over the past two years now appears to have largely dissipated, starting from late 2018 with rates beginning to improve as Asian demand increased, fed by U.S. exports, and as the orderbook has shrunk to levels well under 10% of the existing fleet, while those newbuildings that have been delivered in recent months appear to have been comfortably absorbed by the fleet without causing significant negative impact. As far as future ordering is concerned, it appears that many owners are hesitant to make significant commitments in new tonnage without having a clearer picture of the impact of further environmental regulations and what new technology will be required or available.

The impact of the pandemic has negatively impacted demand for oil within the first quarter of 2020, but has since been overshadowed by the lack of ability for OPEC and Russia to agree on significant oil production cuts, leading Saudi Arabia to cut prices and increase production. This in turn has given rise to on-shore storage facilities becoming full, resulting in a significant increase in off-shore storage and in longer-haul voyages, reducing the number of vessels available for trade. As a consequence, freight rates and charter hire on renewal of time-charters have increased to historically high levels. This is likely to last throughout the remainder of 2020, unless the major producers decide to implement production cuts, or, extensive de-stocking takes place, or the pandemic impacts demand to an even greater extent as a result of the stringent measures around the world to contain the spread of the virus. Such efforts are likely to deter energy consumption, leading to a significant drop in demand for oil in mid-2020, which will potentially impact second and third quarter results negatively. In the longer run, however, the lack of orders for tanker newbuildings, the expectation of increased scrapping of tankers as the global fleet, now at an average age of about 11 years, continues to age, and the fact that about 7% of the fleet is over 20 years, suggests that prospects for the tanker market are likely to remain positive for the foreseeable future with the possibility of a positive rebound once the pandemic is under control and expires.

Our fleet achieved voyage revenues of $597.5 million in 2019, an increase of 12.8% from $529.9 million in 2018. The average size of our fleet decreased slightly in 2019 to 64.2 vessels from 64.3 vessels in 2018, and fleet utilization was 96.2% during 2019 and during 2018. The market remained strong in the first quarter of 2019, followed by a reasonable decline in the second and third quarter mainly due to seasonality and improved significantly in the fourth quarter of the year due to higher oil production. Our average daily time charter rate per

 

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vessel, after deducting voyage expenses, increased to $21,378 in 2019 from $18,226 in 2018, mainly due to the strong freight market. Operating expenses decreased by 0.8% to $180.2 million in 2019 from $181.7 million in 2018 with almost the same average number of vessels between respective periods.

Depreciation and amortization totaled $139.4 million in 2019 compared to $146.8 million in 2018 due to the classification of three vessels as held for sale in April 2019. General and administrative expenses, which include management fees and incentive awards were $27.7 million in 2019 and $27.0 million in 2018, the increase mainly due to increased consultant fees and new project costs.

In 2019, the review of the carrying amounts in connection with the estimated recoverable amount and the probability of sale for certain of the Company’s vessels and vessels under construction as of December 31, 2019 indicated the need for a $26.6 million impairment charge. Management performed a qualitative assessment considering impairment indicators and evaluated the need of $1.0 million impairment on its investment in 2019.

There was operating income of $85.9 million in 2019 compared to an operating loss of $28.1 million in 2018. Interest and finance costs, net, decreased by 2.7% in 2019 to $74.7 million, mainly due to decreased level of average debt during the year. Net income attributable to the Company was $15.1 million in 2019 compared to a net loss of $99.2 million in 2018. The effect of preferred dividends in 2019 was $43.2 million compared to $33.8 million in 2018. Net loss per share (basic and diluted) was $0.32 in 2019, including the effect of preferred dividends, based on 88.8 million weighted average shares outstanding (basic and diluted), compared to a net loss of $1.53 per share in 2018 based on 87.1 million weighted average shares outstanding (basic and diluted).

Some of the more significant developments for the Company during 2019 were:

 

   

the redemption of all of its 2,000,000 Series B Preferred Shares, at $25.00 per share;

 

   

the private placement of 3,500,000 Series G Convertible Perpetual Preferred Shares, at $10.00 per share;

 

   

the dry-docking of Selini, Salamina, Pentathlon, World Harmony, Chantal, Ise Princess and Asahi Princess for their mandatory special or intermediate survey;

 

   

the delivery of the Mediterranean Voyager;

 

   

the payment to holders of Series B preferred shares of dividends totaling $3.0 million in aggregate;

 

   

the payment to holders of Series C preferred shares of dividends totaling $4.4 million in aggregate;

 

   

the payment to holders of Series D preferred shares of dividends totaling $7.5 million in aggregate;

 

   

the payment to holders of Series E preferred shares of dividends totaling $10.6 million in aggregate;

 

   

the payment to holders of Series F preferred shares of dividends totaling $14.3 million in aggregate;

 

   

the payment to holders of Series G Convertible Preferred Shares of dividends totaling $0.6 million in aggregate; and

 

   

dividends to holders of common shares totaling $0.10 per share with total cash paid out amounting to $8.9 million.

The Company operated the following types of vessels during and at the end of 2019:

 

Vessel Type

  LNG
carrier
    VLCC     Suezmax     Suezmax DP2
shuttle
    Aframax     Panamax     Handymax
MR2
    Handysize
MR1
    Total
Fleet
 

Average number of vessels

    2.0       2.0       13.0       3.0       20.2       11.0       6.0       7.0       64.2  

Number of vessels at end of year

    2.0       2.0       13.0       3.0       21.0       11.0       6.0       7.0       65.0  

Dwt at end of year (in thousands)

    178.9       600.0       2,098       468.4       2,328       799.1       318.5       260.2       7,051  

Percentage of total fleet (by dwt at year end)

    2.5     8.5     29.8     6.6     33     11.3     4.6     3.7     100.0

Average age, in years, at end of year

    7.9       3.3       11.6       5.4       7.3       11.1       13.2       14.6       9.1  

 

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We believe that the key factors which determined our financial performance in 2019, within the given freight rate environment in which we operated, were:

 

   

the diversified aspect of the fleet, including purpose-built vessels to access ice-bound ports, carry LNG and operate shuttle tankers between offshore installations and on-shore terminals, which allowed us to take advantage of all tanker sectors;

 

   

the benefits of the new vessels acquired in recent years in terms of operating efficiencies and desirability on the part of charterers;

 

   

our balanced chartering strategy (discussed further below), which ensured a stable cash flow while allowing us to take advantage of the upside in the freight market;

 

   

the long-established relationships with our chartering clients and the development of new relationships with renowned oil-majors;

 

   

a high level of utilization for our vessels;

 

   

the continued control over costs by our technical managers despite pressures caused by rising operating costs;

 

   

our ability to mitigate financial costs by negotiating competitive terms with reputable banks;

 

   

our ability to manage leverage levels through cash generation and repayment/prepayment of debt;

 

   

our ability to comply with the terms of our financing arrangements, including addressing loan-to-value requirements;

 

   

our ability to reward our shareholders through cash dividends;

 

   

our ability to raise new financing through bank debt at competitive terms despite a generally tight credit environment;

 

   

our ability to access the capital markets and raise new financing on competitive terms; and

 

   

the sale of vessels when attractive opportunities arise.

We believe that the above factors will also influence our future financial performance and will play a significant role in the current world economic climate as we proceed through 2020 and into 2021. To these may be added:

 

   

any recovery of the product and crude oil tanker charter markets during the year;

 

   

any additional vessel acquisitions or newbuildings;

 

   

the appetite of oil majors to fix vessels on medium to long term charters at attractive rates; and

 

   

our ability to build our cash reserves through operations, vessel sales and capital market products.

Chartering Strategy

We typically charter our subsidiaries’ vessels to third parties in any of five basic types of charter. First are “voyage charters” or “spot voyages,” under which a shipowner is paid freight on the basis of moving cargo from a loading port to a discharging port at a given rate per ton or other unit of cargo. Port charges, bunkers and other voyage expenses (in addition to normal vessel operating expenses) are the responsibility of the shipowner.

Second are “time charters,” under which a shipowner is paid hire on a per day basis for a given period of time. Normal vessel operating expenses, such as stores, spares, repair and maintenance, crew wages and insurance premiums, are incurred by the shipowner, while voyage expenses, including charter commissions, bunkers and port charges, are the responsibility of the charterer. The time charterer decides the destination and types of cargoes to be transported, subject to the terms of the charter. Time charters can be for periods of time

 

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ranging from one or two months to more than three years. The agreed hire may be for a fixed daily rate throughout the period or may be at a guaranteed minimum fixed daily rate plus a share of a determined daily rate above the minimum, based on a given variable charter index or on a decision by an independent brokers’ panel for a defined period. Many of our charters have been renewed on this time charter with profit share basis over the past three years. Time charters can also be “evergreen,” which means that they automatically renew for successive terms unless the shipowner or the charterer gives notice to the other party to terminate the charter.

Third are “bareboat charters” under which the shipowner is paid a fixed amount of hire for a given period of time. The charterer is responsible for substantially all the costs of operating the vessel including voyage expenses, vessel operating expenses, dry-docking costs and technical and commercial management. Longer-term time charters and bareboat charters are sometimes known as “period charters.”

Fourth are “contracts of affreightment” which are contracts for multiple employments that provide for periodic market related adjustments, sometimes within prescribed ranges, to the charter rates.

Fifth are “pools”. Where one of our subsidiaries’ vessel may also operate within a pool of similar vessels for part of the year whereby all income (less voyage expenses) is earned on a market basis and shared between pool participants on the basis of a formula which takes into account the vessel’s age, size and technical features. During 2019, 2018 and 2017, none of our subsidiaries had vessels operating in a pool.

Our chartering strategy continues to be one of fixing the greater portion of our fleet on medium to long-term employment in order to secure a stable income flow, but one which also ensures a satisfactory return. This strategy has enabled us to smooth the effects of the cyclical nature of the tanker industry, achieving almost optimal utilization of the fleet. In order to capitalize on possible upturns in rates, we have chartered out several of our vessels at a fixed minimum rate plus an extra agreed percentage of an amount based on market spot or time-charter rates (“profit-share”).

Our Board of Directors, through its Business Development and Capital Markets Committee, formulates our chartering strategy and our commercial manager Tsakos Energy Management implements this strategy through the Chartering Department of Tsakos Shipping. They evaluate the opportunities for each type of vessel, taking into account the strategic preference for medium and long-term charters and ensure optimal positioning to take account of redelivery opportunities at advantageous rates.

The cooperation with Tsakos Shipping, which provides the fleet with chartering services, enables us to take advantage of the long-established relationships Tsakos Shipping has built with many of the world’s major oil companies and refiners over 49 years of existence and high quality commercial and technical service.

Since July 1, 2010, through our cooperation with TCM, our technical managers, we are able to take advantage of the inherent economies of scale associated with two large fleet operators working together and its commitment to contain running costs without jeopardizing the vessels’ operations. TCM provides top grade officers and crew for our vessels and first-class superintendent engineers and port captains to ensure that the vessels are in prime condition.

Critical Accounting Estimates

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Significant accounting policies are described in Note 1 of the consolidated financial statements included elsewhere in this annual report. The application of such policies may require management to make estimates and assumptions. We believe that the following are the more critical accounting estimates used in the preparation of our consolidated financial statements that involve a higher degree of judgment and could have a significant impact on our future consolidated results of operations and financial position:

Accounting for Leases. On January 1, 2019 we adopted ASC 842 – Leases, using the optional transition method, along with the package of practical expedients that allows companies not to reassess whether any

 

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expired or expiring contracts are or contain leases, lease classification for any expired or expiring leases and initial direct costs for any expired or expiring leases. Following the adoption and based on our analysis, there was no cumulative effect adjustment to the opening balance of retained earnings. The adoption of ASC 842 resulted in a change in the accounting method for the lease portion of the daily charter hire for our chartered-in vessels accounted for as operating leases with firm periods of greater than one year.

Sale and Leaseback Transactions. We have entered into two sale and leaseback transactions accounted for as operating leases. As a result of adopting ASC 842, as at January 1, 2019, we recognized on our balance sheet a right-of-use asset of $29.4 million based on the present value of the future minimum lease payments and an obligation under operating leases of $29.4 million. According to the provisions of ASC 842-20-30-1, at the commencement date, a lessee shall measure both of the following: a) The lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement and b) The right-of-use asset, which shall consist of all of the following: i) The amount of the initial measurement of the lease liability, ii) Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and iii) Any initial direct costs incurred by the lessee.

Revenue from Contracts with Customers. On January 1, 2018, the Company adopted ASC 606 – Revenue from Contracts with Customers, using the modified retrospective method. The effect of the adoption of the new accounting standard resulted in a cumulative adjustment of $1.3 million in the opening balance of the retained earnings for the fiscal year 2018, as a result of the change in the recognition method of revenues related to voyage charters and their fulfillment costs. The prior period comparative information has not been restated and continues to be reported under the accounting guidance in effect for those periods. The adoption of the new standard has changed the method of recognizing revenue over time for voyage charters from the discharge-to-discharge method to the loading-to-discharge method. The Company has decided to apply the optional exemption not to disclose the value of the undelivered performance obligations for contracts with an original expected length of one year or less.

Accounting for Revenue and Related Expenses. The Company’s subsidiaries’ vessels are employed under a variety of charter contracts, including time, bareboat and voyage charters and contracts of affreightment. Time and bareboat charter revenues are recorded over the term of the charter as the service is provided. Revenues generated under voyage charter agreements are recognized ratably from the date of loading (Notice of Readiness to the charterer, that the vessel is available for loading) to discharge of cargo (loading-to-discharge). Voyage expenses that qualify as contract fulfillment costs and are incurred by the Company from the latter of the end of the previous vessel employment, provided that the vessel is fixed, or from the date of inception of a voyage charter contract until the arrival at the loading port, are capitalized and amortized ratably over the total transit time of the voyage (loading-to-discharge). We have made an accounting policy election to not recognize contract fulfillment costs for time charters. Vessel voyage expenses that do not qualify as contract fulfillment costs, operating expenses and charter hire expense are expensed when incurred. Revenues from profit sharing arrangements are recognized to the extent the variable amounts earned beyond an agreed fixed minimum hire at the reporting date and all other revenue recognition criteria are met.

Depreciation. The Company’s subsidiaries’ vessels are depreciated on a straight-line basis over their estimated useful lives, after considering their estimated residual values, based on the assumed value of the scrap steel available for recycling after demolition, calculated at $390 per lightweight ton since October 1, 2012. Our estimate was based on the average demolition prices prevailing in the market during the previous ten years for which historical data were available. Since then, management has monitored scrap values, which have risen to $500 per lwt and fallen to as low as $250 per lwt in 2016 and climbed again to $390 per lwt in 2019. Given the historical volatility of scrap prices, management will continue to monitor prices going forward and where a distinctive trend is observed over a given length of time, management may consider revising the scrap price accordingly. In assessing the useful lives of vessels, we have adopted the industry-wide accepted practice of assuming a vessel has a useful life of 25 years (40 years for the LNG carriers), given that all classification society rules have been adhered to concerning survey certification and statutory regulations are followed.

 

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Assets held for sale. It is Company’s policy to dispose of vessels when suitable opportunities occur and not necessarily to keep them until the end of their useful life. Long-lived assets are classified as held for sale when all applicable criteria enumerated under ASC 360 “Property, Plant, and Equipment” are met and are measured at the lower of their carrying amount or fair value less cost to sell. These assets are not depreciated once they meet the criteria to be held for sale. An impairment charge for an asset held for sale is recognized when its fair value less cost to sell is lower that its carrying value at the date it meets the held for sale criteria and upon subsequent measurement. At December 31, 2019, we considered that the suezmax tankers Archangel, Alaska, Silia T and the aframax tanker Izumo Princess met the criteria to be classified as held for sale, all expected to be sold within a year. An impairment charge of $7.9 million was recognized in 2019 ($3.4 million was required based on Level 1 inputs, determined by the sale price less cost to sell at the measurement date and $4.5 million was required based on Level 2 inputs at the measurement date, for the year ended December 31, 2019). At December 31, 2018, there were no vessels held for sale.

Impairment. The carrying value of the Company’s vessels includes the original cost of the vessels plus capitalized expenses since acquisition relating to improvements and upgrading of the vessel, less accumulated depreciation. Carrying value also includes the unamortized portion of deferred special survey and dry-docking costs. The carrying value of vessels usually differs from the fair market value applicable to any vessel, as market values fluctuate continuously depending on the market supply and demand conditions for vessels, as determined primarily by prevailing freight rates and newbuilding costs.

The Company reviews and tests all vessels and vessels under construction for impairment at each quarter-end and at any time that specific vessels may be affected by events or changes in circumstances indicate that the carrying amount of the vessel may not be recoverable, such as during severe disruptions in global economic and market conditions, and unexpected changes in employment. A vessel to be held and used is tested for recoverability by comparing the estimate of future undiscounted net operating cash flows expected to be generated by the use of the vessel over its remaining useful life and its eventual disposition to its carrying amount. The average age of our vessels is approximately 9.0 years as of April 2, 2020. The average remaining operational life is, therefore, 16.0 years, excluding the LNG carriers. Given the extensive remaining lives, we do not believe that there is a significant risk of not generating future undiscounted net operating cash flows in excess of carrying values, other than for the four vessels with respect to which the Company recorded an impairment charge in 2019. However, as indicated above, circumstances may change at any time which would oblige us to reconsider the extent of risk of impairment.

Future undiscounted net operating cash flows are determined by applying various assumptions regarding future revenues net of commissions, operating expenses, scheduled dry-dockings and expected off-hire and scrap values. Our projections for charter revenues are based on existing charter agreements for the fixed fleet days and an estimated daily average hire rate per vessel category for the unfixed days based on the most recent ten year historical averages publicly provided by major brokers, which, given the wide spread of annual rates between the peaks and troughs over the decade, we believe provides as fair as any other assumption that could be used in determining a rate for a long-term forecast. In addition, we apply a 2% annual escalation in rates to take account of published long-term growth and inflation expectations in the developed world. Future operating costs are based on the 2019 average per individual vessel and vessel type to which we also apply a 2% annual escalation. Residual or scrap value is based on the same scrap price used for depreciation purposes as described above. All such estimations are inevitably subjective. In addition, the Company performs sensitivity analyses on the key parameters of the exercise by making use of publicly available market forecasts. Actual freight rates, industry costs and scrap prices may be volatile. As a consequence, estimations may differ considerably from actual results.

Where a vessel is deemed to be a risk, we also take into account the age, condition, specifications, marketability and likely trading pattern of each such vessel, and apply various possible scenarios for employment of the vessel during its remaining life. We prepare cash flows for each scenario and apply a percentage possibility to each scenario to calculate a weighted average expected cash flow for the vessel for assessing whether an impairment charge is required. The estimations also take into account regulations regarding the permissible trading of tankers depending on their structure and age.

 

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While management, therefore, is of the opinion that the assumptions it has used in assessing whether there are grounds for impairment are justifiable and reasonable, the possibility remains that conditions in future periods may vary significantly from current assumptions, which may result in a material impairment loss. If current economic conditions stall worsen or if the upward trend in oil prices continues rise for an extended period, oil demand over an extended period of time could be negatively impacted. This would exacerbate the consequences of overcapacity in the tanker sector. In such circumstances, the possibility will increase that both the market value of the older vessels of our fleet and the future cash flow they are likely to earn over their remaining lives will be less than their carrying value and an impairment loss will occur.

Should the carrying value of the vessel exceed its estimated undiscounted cash flows, impairment is measured based on the excess of the carrying amount over the fair value of the asset. The fair values are determined based principally from or by corroborated observable market data. Inputs considered by management in determining the fair value include independent brokers’ valuations. As vessel values are also volatile, the actual market value of a vessel may differ significantly from estimated values within a short period of time.

The Company would not record an impairment charge for any of the vessels for which the fair market value is below its carrying value unless and until the Company either determines to sell the vessel for a loss or determines that the vessel’s carrying amount is not recoverable. Carrying values of three out of four vessels determined to be sold, indicated a loss and an impairment charge was recognized.

As noted above, we determine projected cash flows for unfixed days using an estimated daily time charter rate based on the most recent ten-year historical average rates, inflated annually by a 2.0% growth rate. We consider this approach to be reasonable and appropriate. However, charter rates are subject to change based on a variety of factors that we cannot control and we note that charter rates over the last few years have been, on average, below their historical ten year average. If as at December 31, 2019 and 2018, we were to utilize an estimated daily time charter equivalent for our vessels’ unfixed days based on the most recent five year, three year or one year historical average rates for one-year time charters, the impairment results would be the following:

 

     As of December 31, 2019      As of December 31, 2018  
     Number of
Vessels(*)
     Amount (U.S.$
millions)(**)
     Number of
Vessels(*)
     Amount (U.S.$
millions)(**)
 

5-year historical average rate

     0        0        0        0  

3-year historical average rate

     4        64.3        1        14.5  

1-year historical average rate

     0        0        23        371.8  

 

(*)

Number of vessels the carrying value of which would not have been recovered, other than the four vessels for which we recorded an impairment as of December 31, 2019.

(**)

Aggregate carrying value that would not have been recovered.

Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. There can be no assurance as to how long charter rates and vessel values will remain at their current levels or whether they will again decline or improve by any significant degree. Charter rates remained relatively low during most of 2018 and 2019. However, charter rates markedly increased in late 2019, and remained historically strong through March 2020 and are likely to remain at relatively strong levels through the first half of 2020, which may have a positive effect on our revenue and profitability, and future assessments of vessel impairment.

At December 31, 2019, our review of the carrying amounts of the vessels, including advances for vessels under construction in connection with the estimated recoverable amount did not indicate an impairment of their carrying values, apart from four handysize. two suezmaxes and one aframax vessels. For those vessels the Company concluded that an impairment charge of $18.7 million was required based on Level 2 inputs of the fair value hierarchy, as determined by management taking into consideration valuations from independent marine valuers. An impairment loss of $66.0 million was recorded in 2018 for five vessels.

 

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At December 31, 2019, the market value of the fleet owned by our subsidiary companies, as determined based on management estimates and assumptions and by making use of available market data and taking into consideration third party valuations, was $2.3 billion, compared to a total carrying value of $2.8 billion, following the impairment charge. While the future undiscounted net operating cash flows expected to be generated by each of the vessels in the fleet was comfortably in excess of its respective carrying value, there were 49 vessels in our fleet, whose carrying values exceeded their market values. As determined at December 31, 2019, the aggregate carrying value of these vessels was $2.3 billion, and the aggregate market value of these vessels was $1.8 billion. These vessels were:

 

   

LNG: Neo Energy, Maria Energy

 

   

VLCC: Ulysses, Hercules I

 

   

Suezmax: Antarctic, Arctic, Spyros K, Dimitris P, Eurovision, Euro, Pentathlon, Decathlon

 

   

Aframax: Proteas, Promitheas, Propontis, Sakura Princess, Maria Princess, Nippon Princess, Ise Princess, Asahi Princess, Sapporo Princess, Uraga Princess, Elias Tsakos, Thomas Zafiras, Leontios H, Parthenon TS, Marathon TS, Oslo TS, Sola TS, Stavanger TS, Bergen TS

 

   

Panamax: Selecao, Socrates, Andes, Maya, Inca, World Harmony, Chantal, Selini, Salamina, Sunray, Sunrise

 

   

Handymax: Artemis, Afrodite, Ariadne, Aris, Apollon, Ajax

 

   

Handysize: Didimon

Allowance for doubtful accounts. Revenue is based on contracted charter parties and although our business is with customers whom we believe to be of the highest standard, there is always the possibility of dispute over terms and payment of freight and demurrage. In particular, disagreements may arise as to the responsibility for lost time and demurrage revenue due to the Company as a result. As such, we periodically assess the recoverability of amounts outstanding and we estimate a provision if there is a possibility of non-recoverability, primarily based on the aging of such balances and any amounts in dispute. Although we believe any provision that we might record to be based on fair judgment at the time of its creation, it is possible that an amount under dispute is not ultimately recovered and the estimated provision for doubtful recoverability is inadequate.

Amortization of deferred charges. In accordance with Classification Society requirements, a special survey is performed on our vessels every five years. A special survey requires a dry-docking. In between special surveys, a further intermediate survey takes place, for which a dry-docking is obligatory for vessels over fifteen years. During a dry-docking, work is undertaken to bring the vessel up to the condition required for the vessel to be given its classification certificate. The costs include the yard charges for labor, materials and services, possible new equipment and parts where required, plus part of the participating crew costs incurred during the survey period. We defer these charges and amortize them over the period up to the vessel’s next scheduled dry-docking.

Fair value of financial instruments. Management reviews the fair values of financial assets and liabilities included in the balance sheet on a quarterly basis as part of the process of preparing financial statements. The carrying amounts of financial assets and accounts payable are considered to approximate their respective fair values due to the short maturity of these instruments. The fair values of long-term bank loans with variable interest rates approximate the recorded values, generally due to their variable interest rates. The Company performs relevant enquiries on a periodic basis to assess the recoverability of the long-term investment and the long-term receivable estimates that the carrying value approximates the amount that is expected to be received by the Company in the event of sale of that investment and the end of the non-cancellable lease period, respectively. The fair value of the investments equates to the amounts that would be received by the Company in the event of sale of those investments, and any shortfall from carrying value is treated as an impairment of the value of that investment. The fair value of the interest rate swap, bunker swap agreements, and bunker call options held by the

 

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Company are determined through Level 2 of the fair value hierarchy as defined in FASB guidance and are derived principally from or corroborated by observable market data, interest rates, yield curves and other items that allow value to be determined. The fair values of impaired vessels are determined by management through Level 2 of the fair value hierarchy based on available market data and taking into consideration third party valuations.

Basis of Presentation and General Information

Voyage revenues. Revenues are generated from freight billings and time charters. Time and bareboat charter revenues are recorded over the term of the charter as the service is provided. Revenues from voyage charters on the spot market or under contracts of affreightment are recognized from the date of loading (Notice of Readiness to the charterer, that the vessel is available for loading) to discharge date of cargo (loading-to-discharge). The operating revenues of vessels operating under a tanker pool are pooled and are allocated to the pool participants on a time charter equivalent basis according to an agreed upon formula. Revenues from profit sharing arrangements are accounted for as a variable consideration and included in the transaction price to the extent that variable amounts earned beyond an agreed fixed minimum hire are determinable at the reporting date and when there is no uncertainty associated with the variable consideration. Profit sharing revenues are calculated at an agreed percentage of the excess of the charter’s average daily income over an agreed amount. Unearned revenue represents cash received prior to the year-end for which related service has not been provided, primarily relating to charter hire paid in advance to be earned over the applicable charter period.

Time Charter Equivalent (“TCE”) allows vessel operators to compare the revenues of vessels that are on voyage charters with those on time charters. For vessels on voyage charters, we calculate TCE by taking revenues earned on the voyage (on a loading to discharge basis) and deducting the voyage costs and dividing by the actual number of net earning days, which does not take into account off-hire days. For vessels on bareboat charters, for which we do not incur either voyage or operating costs, we calculate TCE by taking revenues earned on the charter and adding a representative amount for the vessels’ operating expenses. TCE differs from average daily revenue earned in that TCE is based on revenues after commissions less voyage expenses and does not take into account off-hire days.

Commissions. We pay commissions on all chartering arrangements to Tsakos Shipping, as our broker, and to any other broker we employ. Each of these commissions generally amounts to around 1.25%, although there can be some limited variance, particularly for charters involving multiple brokers, of the daily charter hire or lump sum amount payable under the charter. In addition, on some trade routes, certain charterers may include in the charter agreement an address commission which is a payment due to the charterer, usually ranging from 1.25% to 3.75% of the daily charter hire or freight payable under the relevant charter. These commissions, as well as changes in prevailing charter rates, will cause our commission expenses to fluctuate from period to period. Commissions are expensed as incurred.

Voyage expenses. Voyage expenses include all our costs, other than vessel operating expenses, that are related to a voyage, including charter commissions, port charges, canal dues and bunker fuel costs. Voyage expenses that qualify as contract fulfillment costs and are incurred from the latter of the end of the previous vessel employment, provided that the vessel is fixed, or from the date of inception of a voyage charter contract until the arrival at the loading port, are capitalized and amortized ratably over the total transit time of the voyage (loading-to-discharge) when the relevant criteria under ASC 340-40 are met.

Charter hire expense. We hire certain vessels from third-party owners or operators for a contracted period and rate in order to charter the vessels to our customers. These vessels may be hired when an appropriate market opportunity arises or as part of a sale and lease back transaction or on a short-term basis to cover the time-charter obligations of one of our vessels in dry-dock. Since December 31, 2010, the Company had not had any vessels under hire from a third-party, until December 2017, when two vessels were sold and chartered back to the Company for five years. In January 2020, two additional vessels were sold and chartered back to the Company

 

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for five years. Following adoption of ASC 842 and the package of practical expedients, the Company continues to account for the transaction as an operating lease.

Vessel operating expenses. These expenses consist primarily of manning, hull and machinery insurance, P&I and other vessel insurance, repairs and maintenance, spares, stores and lubricant costs. All vessel operating expenses are expensed as incurred.

Depreciation and Amortization of deferred charges. We depreciate our vessels on a straight-line basis over their estimated useful lives, after considering their estimated scrap values. Useful life is ultimately dependent on customer demand and if customers were to reject our vessels, either because of new regulations or internal specifications, then the useful life of the vessel will require revision.

We amortize the costs of dry-docking and special surveys of each of our ships over the period up to the ship’s next scheduled dry-docking (generally every 5 years for vessels aged up to 15 years and every 2.5 years thereafter). These charges are part of the normal costs we incur in connection with the operation of our fleet

Impairment loss. An impairment loss for an asset held for use and for advances for vessels under construction should be recognized when indicators of impairment exist and when the estimate of undiscounted cash flows expected to be generated by the use of the asset is less than its carrying amount (the vessel’s net book value plus any unamortized deferred dry-docking charges). Measurement of the impairment loss is based on the fair value of the asset as determined by reference to available market data and considering valuations provided by third parties. An impairment loss for an asset held for sale is recognized when its fair value less cost to sell is lower than its carrying value at the date it meets the held for sale criteria. In this respect, management reviews regularly the carrying amount of the vessels in connection with the estimated recoverable amount for each of the Company’s vessels. As a result of such reviews, it was determined that an impairment charge was required in 2019 for seven vessels Amphitrite, Arion, Andromeda, Aegeas, Izumo Princess, Archangel, Alaska. In 2018 there was an impairment charge for five vessels, Byzantion, Bosporos, Selini, Salamina, Silia T and for an advance for construction (later abandoned) and in 2017 for the two oldest vessels in the fleet, Millennium and Silia T.

General and administrative expenses. These expenses consist primarily of professional fees, office supplies, investor relations, advertising costs, directors’ and officers’ liability insurance, directors’ fees, reimbursement of our directors’ and officers’ travel-related expenses and incentive awards and management fees. Management fees are the fixed fees we pay to Tsakos Energy Management under our management agreement with them. Since 2012, there has been no increase in such fees. For 2020, no increase has been agreed by April 2, 2020 and monthly vessel management fees remain the same as in 2019, 2018 and 2017. Accordingly, monthly fees for operating vessels will be $27,500 per owned vessel and $20,400 for chartered-in vessels or vessels chartered out on a bareboat basis or under construction. The monthly fee for the LNG carriers will be $37,280 and for the suezmax DP2 shuttle tankers will be $35,000. The fees are recorded under “General and Administrative Expenses.”

Insurance claim proceeds. In the event of an incident involving one of our vessels, where the repair costs or loss of hire is insurable, we immediately initiate an insurance claim and account for such claim when it is determined that recovery of such costs or loss of hire is probable and collectability is reasonably assured within the terms of the relevant policy. Depending on the complexity of the claim, we would generally expect to receive the proceeds from claims within a twelve-month period. During the 2019 /20 policy year, we received approximately $0.5 million in net proceeds from hull and machinery and loss of hire claims arising from incidents where damage was incurred by one of our vessels in a previous policy year. Such settlements were generally received as credit-notes from our insurer, Argosy Insurance Company Limited, and set off against insurance premiums due to that company. Therefore, within the consolidated statements of cash flows, these proceeds are included in decreases in receivables and in decreases in accounts payable. There is no material impact on reported earnings arising from these settlements.

 

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The Company’s P&I renewals as of February 20, 2020 saw an increase in costs of 4.96% partly due to the International Group of P&I Clubs‘ need to increase their income after several years of premium reductions and partly due to the claim on the Group reinsurance contract resulting from the collision between the tanker “Sola TS” and the Norwegian frigate “HELGE INGSTAD“ in November 2018.

Financial Analysis

(Percentage calculations are based on the actual amounts shown in the accompanying consolidated financial statements)

Year ended December 31, 2019 versus year ended December 31, 2018

Voyage revenues

Voyage revenues earned in 2019 and 2018 per charter category were as follows:

 

     2019     2018  
     U.S. $ million      % of total     U.S. $ million      % of total  

Time charter-bareboat

     1.0        1     —          0

Time charter-fixed rate

     254.2        42     236.6        45

Time charter-variable rate (profit share)

     127.0        21     108.5        20

Voyage charter-contract of affreightment

     32.0        5     40.7        8

Voyage charter-spot market

     183.3        31     144.1        27
  

 

 

    

 

 

   

 

 

    

 

 

 

Total voyage revenue

     597.5        100     529.9        100
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenue from vessels amounted to $597.5 million during the year ended December 31, 2019, compared to $529.9 million during 2018, a notable 12.8% increase mainly due to the upturn of the market during the first and fourth quarter of 2019. There was an average of 64.2 vessels operating in 2019 compared to an average of 64.3 vessels in 2018, the slight decrease relating to the sale of the VLCC vessel Millennium during April 2018, partially offset by the delivery of one aframax vessel during October 2019. Based on the total days that the vessels were actually employed as a percentage of the days that the Company owned or chartered-in the vessels, the fleet enjoyed 96.2% employment for each of the years ended December 31, 2019 and 2018 respectively, the lost time being mainly due to dry-dockings and repositioning voyages.

Market conditions for tankers remained strong during the first quarter of 2019, followed by a reasonable decline in freight rates during the second and third quarter of 2019, attributed to the expected seasonal oil demand factors and the extension of OPEC production cuts. In the fourth quarter of 2019, a significant improvement in the market rate environment, primarily driven by higher oil production from non-OPEC countries, the upcoming environmental legislation imposed by IMO and geopolitical developments, positively affected market rates. The Company, by following a diversified employment strategy was able to benefit from the upward trend in the market, mainly from the suezmaxes and aframaxes which enjoyed strong results by either participating in the spot market or earning profit share above their fixed time-charter rates. In addition, the Company managed to enter into new time charter arrangements for both LNG carriers with favorable charter rates, evident also by their TCE performance which surged to $49,251 per day for the year ended December 31, 2019, compared to $29,491 per day for the equivalent period of 2018.

The average time charter equivalent rate per vessel for the year 2019 was $21,378 per day, an impressive increase of 17.3% from $18,226 per day in 2018. The overall improvement of the market positively affected all different types and sizes of our fleet, with TCE’s being well above the prior year’s levels and increases ranging from 2.0% to 67.0% for the year ended December 31, 2019 compared to the equivalent period of 2018. Our aframax vessels generated additional revenue of $24.4 million, the increase being driven by the spike of spot market rates during the first and fourth quarter of 2019, with average time charter equivalent rate reaching $21,303 per day for the year ended December 31, 2019, compared to $18,926 per day for the year ended

 

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December 31, 2018, a 12.6% increase. Our suezmax tankers also enjoyed strong results with profit share earnings surging up to $32.1 million in 2019, compared to $11.5 million profit share earned for the year ended December 31, 2018. An additional contribution of $14.9 million in revenue was generated by our LNG carriers for the year ended December 31, 2019, compared to the corresponding period of 2018, due to time charter renewals with higher rates. Approximately 72.3% of the fleet was operating on time-charter arrangements during 2019. The revenue generated by vessels on time charters alone was enough to cover all cash expenditure relating to operating costs, commissions, finance costs and overhead costs of the whole fleet.

Average daily TCE rates earned for the years ended December 31, 2019 and 2018, were as follows:

 

     Year ended
December 31,
 
     2019      2018  
     U.S. $      U.S. $  

LNG carrier

     49,251        29,491  

VLCC

     32,233        26,139  

Suezmax

     22,083        17,228  

DP2 shuttle

     50,397        49,401  

Aframax

     21,303        18,926  

Panamax

     14,002        12,896  

Handymax

     13,380        12,883  

Handysize

     13,242        10,706  

TCE is calculated by taking voyage revenue less voyage costs divided by the number of revenue days less 446 days lost as a result of calculating revenue on a loading to discharge basis for the year ended December 31, 2019 compared to 378 days lost for the year ended December 31, 2018. In the case of a bare-boat charter, we add an estimate of operating expenses of $10,000 per day in order to render the bare-boat charter comparable to a time-charter. Time charter equivalent revenue and TCE rate are not measures of financial performance under U.S. GAAP and may not be comparable to similarly titled measures of other companies. However, TCE is a standard shipping industry performance measure used primarily to compare period-to-period changes in shipping performance despite changes in the mix of charter types (i.e. spot voyage charters, time charters and bare-boat charters) under which the vessels may be employed between the periods. The following table reflects the calculation of our TCE rates for the periods presented (amount in thousands of U.S. dollars, except for TCE rate, which is expressed in U.S. dollars, and operating days):

 

     Year ended December 31,  
     2019     2018  

Voyage revenues

   $ 597,452     $ 529,879  

Less: Voyage expenses

     (125,802     (125,350

Add: Representative operating expenses for Bareboat charter ($10,000 daily)

     720        

Time charter equivalent revenues

   $ 472,370     $ 404,529  

Divided by: net earnings (operating) days

     22,096       22,195  
  

 

 

   

 

 

 

Average TCE per vessel per day

   $ 21,378     $ 18,226  

 

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Voyage expenses

 

     Total voyage expenses
per category
    Average daily voyage
expenses per relevant vessel
 
     Year ended
December 31,
     % increase/
(decrease)
    Year ended
December 31,
     % increase/
(decrease)
 
     2019      2018            2019      2018         
     U.S.$ million      U.S.$ million            U.S.$      U.S.$         

Bunkering expenses

     66.8        70.2        (4.8 )%      10,677        10,780        (1.0 )% 

Port and other expenses

     38.1        36.4        4.7     6,088        5,587        9.0

Commissions

     20.9        18.8        11.2     3,347        2,892        15.7
  

 

 

    

 

 

      

 

 

    

 

 

    

Total voyage expenses

     125.8        125.4        0.4     20,112        19,259        4.4
  

 

 

    

 

 

      

 

 

    

 

 

    

Days on spot and Contract of Affreightment (COA) employment

                    6,255        6,509     
     

 

 

      

 

 

    

 

 

    

 

 

 

Voyage expenses include port charges, agents’ fees, canal dues, commissions and bunker (fuel) costs relating to spot charters or contracts of affreightment. These voyage expenses are borne by the Company unless the vessel is on time charter or bareboat charter, in which case they are borne by the charterer. Commissions are borne by the Company for all types of charter. Voyage expenses remained relatively stable at $125.8 million during 2019 compared to $125.4 million in 2018, a 0.4% increase. The total operating days on spot charters and contracts of affreightment totaled 6,255 days in 2019 and 6,509 days in 2018, a 3.9% reduction.

Voyage expenses are highly dependent on the voyage patterns followed and size of vessels employed on spot charter or contract of affreightment. Bunkering purchases typically constitute the largest part of voyage expenses and therefore the usual volatility and price swings of crude oil in any given year affect bunker prices and consequently voyage expenses. While oil prices remained at high levels throughout 2019, both crude oil and global bunker prices had surged in 2018, resulting in a 3.6% decrease in the average delivered price paid by the Company for the bunkers procured globally during 2019, and a 4.8% decrease in the annual bunkering expenses of the fleet. Also, during 2019, there was an increase of 4.7% in the amount of port expenses that vessels operating on spot and COA employment bearing voyage expenses incurred, due to short haul voyages and increased port calls. On a per relevant vessel basis the average daily voyage expense increased by 4.4% mainly due to the increase in commission charges and port expenses.

Commissions in 2019 totaled $20.9 million compared to $18.8 million in 2018, an 11.2% increase. As commissions are highly correlated with revenue patterns, the increase in commissions is attributed to the overall increase of revenue by 12.8%. Additionally, commissions represented 3.5% of revenue from vessels in 2019 compared to 3.6% in 2018.

 

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Vessel operating expenses

 

     Operating expenses
per category
    Average daily operating
expenses per vessel
 
     2019     2018      % increase/
(decrease)
    2019     2018      % increase/
(decrease)
 
     U.S.$ million     U.S.$ million     U.S.$     U.S.$  

Crew expenses

     107.0       108.6        (1.5 )%      4,580       4,630        (1.1 )% 

Insurances

     15.4       15.6        (1.5 )%      659       667        (1.1 )% 

Repairs and maintenance, and spares

     27.1       25.4        6.8     1,159       1,080        7.2

Stores

     11.6       11.3        2.9     497       481        3.4

Lubricants

     7.5       7.3        3.1     321       310        3.5

Other (quality and safety, taxes, registration fees, communications)

     11.8       13.5        (12.5 )%      507       577        (12.1 )% 

Foreign currency (gains)

     (0.2     0.0        (100 )%      (7     0        (100 )% 
  

 

 

   

 

 

           

Total operating expenses

     180.2       181.7        (0.8 )%      7,716       7,745        (0.4 )% 

Earnings capacity days excluding vessel on bare-boat charter

            23,360       23,460     

Vessel operating expenses include crew costs, insurances, repairs and maintenance, spares, stores, lubricants, quality and safety costs and other expenses such as tonnage tax, registration fees and communication costs, as well as foreign currency gains. Total operating costs were $180.2 million in 2019, compared to $181.7 million during 2018, a slight decrease of 0.8%.

Average operating expenses per vessel per day for the fleet decreased marginally by 0.4% to $7,716 for 2019 from $7,745 in 2018, remaining relatively stable, assisted by the strengthening of U.S. dollar by approximately 5.2% over the course of 2019, impacting positively our crew costs, in addition to lower tax rates contributing to a decrease in our other operating expenses. These decreases were partially offset by a slight increased average daily vessel expenditure on spares, stores lubricants and repairs and maintenance costs.

Depreciation and Amortization

Depreciation and amortization charges totaled $139.4 million in 2019 compared to $146.8 million in 2018, a 5.0% decrease.

Depreciation amounted to $128.8 million in 2019 compared to $137.0 million during 2018, a decrease of $8.2 million, or 6.0%. The decrease being mainly due to the vessels Izumo Princess, Alaska and Archangel, which were classified as held for sale during the second quarter of 2019 and did not incur depreciation expense since then. In addition, the decrease is also attributed to the impairment charge taken on five vessels of the fleet during the fourth quarter of 2018.

During 2019, amortization of deferred dry-docking costs was $10.6 million compared to $9.8 million in 2018. The increase relates mainly to the dry-dock of the two DP2 shuttle tankers Rio 2016 and Brasil 2014, which incurred higher costs than conventional tankers, and from the increased number of vessels that underwent dry-docking in recent years.

General and administrative expenses

Management fees, including those paid to third-party managers, totaled $21.7 million during 2019, compared to $21.8 million in 2018, a 0.5% decrease due to the decrease of the average number of vessels for the year ended December 31, 2019 compared to 2018.

The Company pays Tsakos Energy Management fixed fees per vessel under a management agreement. The fee includes remuneration for services that cover both the management of the individual vessels and of the

 

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enterprise as a whole. According to the management agreement, there may be an adjustment to the fees based on certain criteria within the agreement, if both parties agree. There was no increase in management fees payable to the management company in 2019. During 2019, all the vessels in the fleet were managed by TCM, apart from the LNG carriers Neo Energy and Maria Energy, the VLCCs Ulysses, Hercules I, the suezmax Eurochampion 2004 and the aframaxes Maria Princess and Sapporo Princess, which were managed by third-party managers. Monthly management fees for operating conventional vessels are $27,500 per month, since January 1, 2012. The monthly fee relating to vessels chartered-in or chartered-out on a bare-boat basis or for vessels under construction is $20,400. Management fees for the LNG carriers Neo Energy and Maria Energy are $36,877 per month, of which $10,000 is payable to the management company and $26,877 to the third-party manager. Management fees for the DP2 suezmax shuttle tankers Rio 2016, Brasil 2014 and Lisboa are $35,000 per month. Management fees for vessels Eurochampion 2004, Maria Princess, Sapporo Princess and VLCCs Hercules I and Ulysses are $27,500 per month, of which $14,503 is payable to a third-party manager. Management fees paid relating to vessels under construction are capitalized as part of the vessels’ costs.

Office general and administrative expenses consist primarily of professional fees, investor relations, office supplies, advertising costs, directors’ liability insurance, directors’ fees and reimbursement of our directors’ and officers’ travel-related expenses. Office general and administrative expenses in 2019 totaled $5.5 million compared to $5.1 million in 2018, a 9.5% increase mainly due to increased consultant fees and new projects’ cost.

Total general and administrative expenses plus management fees paid to Tsakos Energy Management, any management incentive award, any special awards (described below) and stock compensation expense, all together represent the overhead of the Company. On a per vessel basis, daily overhead costs remained relatively stable at $1,182 for the year ended December 31, 2019 and $1,152 for the equivalent period of 2018, a 2.6% increase.

The Board of Directors approved an award of $0.5 million and $0.2 million to the management company for the years ended December 31, 2019 and 2018 respectively, based on various performance criteria and taking into account cash availability and market volatility. A separate award of $0.8 million was made in 2018 to Tsakos Energy Management in relation to services provided towards a public offering in 2018, which was included as a deduction of additional paid in capital in the accompanying Consolidated Financial Statements.

The Company did not grant any stock compensation awards in 2019 and 2018.

Loss on sale of vessels

There were no vessel sales during 2019. In April 2018, the VLCC Millennium was sold for net proceeds of $17.1 million, resulting in a net loss of $0.4 million.

Impairment charges

During 2019, vessel values recovered considerably compared to 2018. As a result, 49 of our vessels had carrying values in excess of their market values. Our fleet is for the most part young, with an average age of 9.1 years as of December 31, 2019 and in all these cases, except for two suezmax, one aframax and four handysize vessels, the remaining vessels are expected to generate considerably more cash during their remaining expected useful lives than their carrying values as at December 31, 2019. The Company’s cash flow tests per vessel for assessing whether an impairment charge was required indicated that an impairment charge of $23.2 million was required as at December 31, 2019, based on Level 2 inputs of the fair value hierarchy, as determined by management taking into consideration valuations from independent marine valuers and $3.4 million was required based on Level 1 inputs for the year ended December 31, 2019, determined by the sale price less cost to sell at the measurement date. An impairment charge of $66.0 million was recorded in 2018 for two handysize vessels, two panamaxes, one suezmax and one advance for an under-construction vessel (later abandoned).

 

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The Company held 125,000 common shares at a total cost of $1.0 million in a private U.S. company which undertakes research into synthetic genomic processes which may have a beneficial environmental impact within the energy and maritime industries. Management performed a qualitative assessment considering impairment indicators and evaluated that the investment was impaired in 2019. The impairment charge of $1.0 million was recorded in 2019 and is included in “Impairment charges”.

Operating income (loss)

For 2019, income from vessel operations was $85.9 million compared to loss of $28.1 million in 2018, a significant increase. The increase was mainly driven by the overall improvement of the market and the increase in revenue in addition to the lower impairment charges in 2019.

Interest and finance costs, net

 

     2019     2018  
     U.S.$ million     U.S.$ million  

Loan interest expense

     70.0       71.4  

Interest rate swap cash settlements—hedging

     —         0.9  

Less: Interest capitalized

     (1.0     (0.3
  

 

 

   

 

 

 

Interest expense, net

     69.0       72.0  

Interest rate swap cash receipts—hedging

     —         (0.5

Bunkers non-hedging instruments cash settlements

     1.5       (9.9

Change in fair value of non-hedging instruments

     (0.8     10.8  

Amortization of loan expenses

     4.8       4.0  

Bank loan charges

     0.2       0.4  
  

 

 

   

 

 

 

Net total

     74.7       76.8  
  

 

 

   

 

 

 

Interest and finance costs, net, were $74.7 million for 2019 compared to $76.8 million for 2018, a 2.7% decrease. Loan interest, excluding payment of swap interest, decreased to $70.0 million from $71.4 million, a 2.1% decrease mainly due to the decreased level of average debt during the course of the year. The decrease was partially offset by the upward trend of LIBOR during the year.

Cash settlements, net, on both hedging and non-hedging interest rate swaps, based on the difference between fixed payments and variable six and three-month LIBOR, were less than $0.1 million in 2019, compared to $0.4 million in 2018, due to the number of effective swaps between the two periods and the early termination of swap agreements in 2018, resulting in interest rate cash receipts of $0.5 million.

Capitalized interest, which is based on expenditures incurred to date on vessels under construction, was $1.0 million in 2019, compared to $0.3 million in 2018, the increase being attributed to three additional vessels under construction, two suezmax tankers and one LNG carrier, during the period ended December 31, 2019.

At December 31, 2019 and 2018, the Company held one interest rate swap that did not meet hedge accounting criteria. The fair value of non-hedging swap as of December 31, 2019 and 2018, amounted to $0.2 million (negative) and $0.1 million (negative), respectively. The changes in fair value amounting to $0.1 million (negative) and $0.1 million (negative) during 2019 and 2018, respectively, have been included in Change in fair value of non-hedging instruments in the table above.

At December 31, 2019 and 2018, the Company held one and three, respectively, call option agreements in order to hedge its exposure to bunker price fluctuations associated with the consumption of bunkers by its vessels. The value of the call options at December 31, 2019 and 2018 was $0.2 million (positive) and

 

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$0.4 million (positive), respectively. The changes in fair value of these call option agreements during 2019 and 2018, amounting to $0.2 million (negative) and $0.2 million (positive), respectively, have been included in Change in fair value of non-hedging instruments in the table above. During 2018, the Company entered into two call option agreements for a total premium of $1.5 million, which was paid in 2019.

As at December 31, 2019 and 2018, the Company had twenty-five and nineteen bunker swap agreements, respectively, in order to hedge its exposure to bunker price fluctuations associated with the consumption of bunkers by its vessels. The fair value of bunker swaps as of December 31, 2019 and 2018, amounted to $2.9 million (negative) and $4.0 million (negative), respectively. The change in their fair values amounted to $1.1 million (positive) during 2019 compared to $11.0 million (negative) in the prior year, due to a sudden sharp fall in oil prices in late December 2018.

In November 2018, the Company entered into early termination agreements of the three bunker swap agreements with expiring dates in September 2019 and October 2019. Total cash received from these swaps’ terminations amounted to $1.5 million in 2018. The change in their fair value during 2018 was $3.3 million (negative).

Amortization of loan expenses was $4.8 million in 2019 compared to $4.0 million in 2018. Other bank charges amounted to $0.2 million in 2019 and $0.4 million in 2018 due to the refinancing program.

Interest income

Interest income in 2019 amounted to $3.7 million compared to $2.5 million in 2018. The increase is due to higher interest rates in 2019 compared to 2018.

Non-controlling interest

There is a non-controlling interest of 49% in the subsidiary Mare Success S.A., which owns 100% of each of the companies that own the panamax vessels Maya and Inca. In the second quarter of 2019, Mare Success increased its paid-in capital by $20,408 of which $10,408 was the 51% share contributed by the Company and the remaining $10,000 was the 49% share contributed by Polaris Oil Shipping Inc. (“Polaris”), an affiliate of Flopec. After the recapitalization, the shareholding of Mare Success S.A. remained at 51% for the Company and 49% for Polaris. The additional paid-in capital was made to finance part of the intragroup sale of panamax vessels, Selini and Salamina. During the second quarter of 2019, the Company transferred the net assets of Selini and Salamina to Mare Success. S.A. The Company accounted for the transaction at the carrying amounts of the net assets.

Net loss attributable to the non-controlling interest amounted to $1.1 million in 2019 compared to $1.8 million net income in 2018.

Net income (loss) attributable to Tsakos Energy Navigation Limited

As a result of the foregoing, net income attributable to Tsakos Energy Navigation Limited for 2019 was $15.1 million, or a loss of $0.32 per share basic and diluted, after taking into account the cumulative dividends of $43.1 million on our preferred shares, compared to net loss of $99.2 million, or a loss of $1.53 per share basic and diluted, after taking into account the cumulative dividends of $33.8 million on our preferred shares for 2018.

 

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Year ended December 31, 2018 versus year ended December 31, 2017

Voyage revenues

Voyage revenues earned in 2018 and 2017 per charter category were as follows:

 

     2018     2017  
     U.S. $ million      % of total     U.S. $ million      % of total  

Time charter-bareboat

     —          0     3.8        1

Time charter-fixed rate

     236.6        45     222.1        42

Time charter-variable rate (profit share)

     108.5        20     106.7        20

Voyage charter-contract of affreightment

     40.7        8     38.5        7

Voyage charter-spot market

     144.1        27     158.1        30
  

 

 

    

 

 

   

 

 

    

 

 

 

Total voyage revenue

     529.9        100     529.2        100
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenue from vessels amounted to $529.9 million during the year ended December 31, 2018 compared to $529.2 million during 2017, a 0.1% increase mainly due to the upturn of the market during the fourth quarter of 2018. There was an average of 64.3 vessels operating in 2018 compared to an average of 62.6 vessels in 2017, the increase relates to the delivery of the final two vessels of the recent newbuilding program in July and October 2017, respectively, which were fully operational during 2018. The increase was partially offset by the sale of the VLCC vessel Millennium in April 2018. Based on the total days that the vessels were actually employed as a percentage of the days that we owned or chartered-in the vessels, the fleet enjoyed 96.2% employment in 2018 compared to 96.7% in 2017, the lost time being mainly due to dry-dockings and long-haul repositioning voyages.

Market conditions for tankers remained weak during the first nine months of 2018, with the market recovering during the fourth quarter of 2018. Production and export cuts by leading suppliers (notably OPEC countries), in addition to U.S. re-imposition of sanctions against Iran and the economic crisis in Venezuela, led to rate volatility as the tanker market underwent a cyclical low during 2018. There was significant improvement in the market rate environment in the fourth quarter of 2018, mainly due to increased oil demand as a result of lower oil prices and adequate oil supplies, particularly from U.S. exports positively affecting market rates. The Company was well positioned during the market upturn to take advantage of the strong freight rates.

The average time charter equivalent rate per vessel achieved for the year 2018 was $18,226 per day, down 3.7% from $18,931 per day in 2017. In 2018, our suezmax tankers suffered an average fall of 11% in average time charter equivalent rates from the previous year, mainly due to lower minimum rates on the renewal of time charters with profit sharing arrangements. The decrease in TCE rates for the conventional tankers was partially offset by the two LNG carriers, as average time charter equivalent rates for these vessels increased by 25% for the year ended December 31, 2018 compared to the corresponding period of 2017, due to time charters’ renewal with higher rates. Approximately 71% of the fleet was operating on time-charters. The revenue generated by vessels on time charters alone was enough to cover all cash expenditure relating to operating costs, commissions, finance costs and overhead costs of the whole fleet. Our panamax tankers, which were trading mostly on spot and on time charters with profit sharing arrangements, earned an average time charter equivalent rate 19% lower than in 2017.

 

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Average daily TCE rates earned for the years ended December 31, 2018 and 2017 were:

 

     Year ended
December 31,
 
     2018      2017  
     U.S. $      U.S. $  

LNG carrier

     29,491        23,641  

VLCC

     26,139        26,490  

Suezmax

     17,228        19,296  

DP2 shuttle

     49,401        49,654  

Aframax

     18,926        18,818  

Panamax

     12,896        15,932  

Handymax

     12,883        14,223  

Handysize

     10,706        10,909  

TCE is calculated by taking voyage revenue less voyage costs divided by the number of revenue days less 378 days lost as a result of calculating revenue on a loading to discharge basis for the year ended December 31, 2018. The change in the calculation of days is due to the adoption of the new revenue recognition standard. Time charter equivalent revenue and TCE rate are not measures of financial performance under U.S. GAAP and may not be comparable to similarly titled measures of other companies. However, TCE is a standard shipping industry performance measure used primarily to compare period-to-period changes in shipping performance despite changes in the mix of charter types (i.e. spot voyage charters, time charters and bare-boat charters) under which the vessels may be employed between the periods. The following table reflects the calculation of our TCE rates for the periods presented (amount in thousands of U.S. dollars, except for TCE rate, which is expressed in U.S. dollars, and operating days):

 

     Year ended December 31,  
     2018     2017  

Voyage revenues

   $ 529,879     $ 529,182  

Less: Voyage expenses

     (125,350     (113,403

Add: Representative operating expenses for Bareboat charter ($10,000 daily)

           2,500  

Time charter equivalent revenues

   $ 404,529     $ 418,279  

Divided by: net earnings (operating) days

     22,195       22,095  
  

 

 

   

 

 

 

Average TCE per vessel per day

   $ 18,226     $ 18,931  

Voyage expenses

 

     Total voyage expenses
per category
    Total voyage expenses
per category
 
     Year ended
December 31,
     % increase/
(decrease)
    Year ended
December 31,
     % increase/
(decrease)
 
     2018      2017     

 

    2018      2017     

 

 
     U.S.$ million      U.S.$ million     

 

    U.S.$      U.S.$     

 

 

Bunkering expenses

     70.2        56.2        24.8     10,780        8,483        27.1

Port and other expenses

     36.4        37.2        (2.2 )%      5,587        5,606        (0.4 )% 

Commissions

     18.8        20.0        (5.9 )%      2,892        3,018        (4.2 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

Total voyage expenses

     125.4        113.4        10.5     19,259        17,107        12.6
  

 

 

    

 

 

      

 

 

    

 

 

    

Days on spot and Contract of Affreightment (COA) employment

             6,509        6,629        (1.8 )% 
     

 

 

      

 

 

    

 

 

    

 

 

 

 

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Voyage expenses include port charges, agents’ fees, canal dues, commissions and bunker (fuel) costs relating to spot charters or contracts of affreightment. These voyage expenses are borne by the Company unless the vessel is on time-charter or operating in a pool, in which case they are borne by the charterer or by the pool operators. Commissions are borne by the Company for all types of charter. Voyage expenses were $125.4 million during 2018 compared to $113.4 million in 2017, a 10.5% increase. The total operating days on spot charters and contracts of affreightment totaled 6,509 days in 2018, and 6,629 days in 2017, a 1.8% reduction.

Voyage expenses are highly dependent on the voyage patterns followed and size of vessels employed on spot charter or contract of affreightment. Bunkering purchases typically constitute the largest part of voyage expenses and therefore the usual volatility and price swings of crude oil in any given year affect bunker prices and subsequently voyage expenses. While oil prices recovered during 2017, both crude oil and global bunker prices surged in 2018, with the price of Brent increasing on average 30.9% between the two years, although a sharp fall in oil and, consequently, bunker prices occurred at the end of the year. Overall, this resulted in a 34.8% increase in the average delivered price paid by the Company for the bunkers procured globally during 2018, and a 24.8% increase in the annual bunkering expenses of the fleet. Also, during 2018, there was a decrease of 2.2% in the amount of port expenses that vessels operating on spot and COA employment bearing voyage expenses incurred, due to reduced employment of vessels on spot and COA. On a per relevant vessel basis the average daily voyage expense increased by 12.6% due mainly to the increase in price of oil.

Commissions in 2018 totaled $18.8 million compared to $20.0 million in 2017, a 5.9% decrease. Commissions were 3.6% of revenue from vessels in 2018 and 3.8% in 2017. The decrease in total commission charges relates mainly to time charter renewals for suezmax and handymax vessels with lower commission rates.

Vessel operating expenses

 

     Operating expenses
per category
    Average daily operating
expenses per vessel
 
     2018      2017      % increase/
(decrease)
    2018      2017      % increase/
(decrease)
 
     U.S.$ million      U.S.$ million     U.S.$      U.S.$  

Crew expenses

     108.6        105.5        3.0     4,630        4,663        (0.7 )% 

Insurances

     15.6        16.4        (4.9 )%      667        727        (8.3 )% 

Repairs and maintenance, and spares

     25.4        22.2        14.3     1,080        982        9.9

Stores

     11.3        10.2        10.7     481        451        6.6

Lubricants

     7.3        7.1        2.9     310        313        (0.9 )% 

Other (quality and safety, taxes, registration fees, communications)

     13.5        11.4        19.1     577        502        15.3

Foreign currency losses

     0.0        1.1        (100.8 )%         50        (100.8 )% 
  

 

 

    

 

 

            

Total operating expenses

     181.7        173.9        4.5     7,745        7,688        0.7

Earnings capacity days excluding vessel on bare-boat charter

             23,460        22,600     

Vessel operating expenses include crew costs, insurances, repairs and maintenance, spares, stores, lubricants, quality and safety costs and other expenses such as tonnage tax, registration fees and communication costs, as well as foreign currency gains or losses. Total operating costs were $181.7 million in 2018, compared to $173.9 million during 2017, an increase o