NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note
1 — Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include the accounts of Overseas Shipholding Group, Inc., a
Delaware corporation (the “Parent Company”), and its wholly-owned subsidiaries (collectively, the “Company”
or “OSG”, “we”, “us” or “our”). The Company owns and operates a fleet of oceangoing
vessels engaged primarily in the transportation of crude oil and refined petroleum products in the U.S. Flag trade through three
wholly-owned subsidiaries.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do
not include all of the information and notes required by generally accepted accounting principles in the United States. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of
the results have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2020 or for any other interim period.
The
condensed consolidated balance sheet as of December 31, 2019 has been derived from the audited financial statements at that date
but does not include all of the information and notes required by generally accepted accounting principles in the United States
for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“Form 10-K”).
Note
2 — Recently Adopted and Issued Accounting Standards
Recently
Adopted Accounting Standards
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for
all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The new
guidance was effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The
Company adopted this standard on January 1, 2020. The adoption of this standard did not have an impact on the Company’s
consolidated financial statements.
Recently
Issued Accounting Standards
In
August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),
Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove
and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The new guidance is effective
for fiscal years ending after December 15, 2020 and is required to be applied on a retrospective basis to all periods presented.
Early adoption is permitted. The Company plans to adopt this standard on January 1, 2021. The adoption of this standard is not
expected to have a material effect on the Company’s consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which adds a new Topic 326 and removes the thresholds that companies apply to measure credit losses
on financial instruments measured at amortized cost, such as loans, receivables, and held-to maturity debt securities. Under current
U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance
will remove all recognition thresholds and will require entities to recognize an allowance for credit losses for the difference
between the amortized cost basis of a financial instrument and the amount of amortized cost that the entity expects to collect
over the instrument’s contractual life. Subsequently, the FASB issued ASU 2018-19, Codification Improvements to Topic
326, to clarify that receivables arising from operating leases are within the scope of lease accounting standards.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
In
November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815) and Leases (Topic 842): Effective Dates, which allows a two-bucket approach for determining the effective dates
of these accounting standards. Under this approach, the buckets would be defined as follows:
Bucket
1— All public business entities (“PBEs”) that are SEC filers (as defined in U.S. GAAP), excluding smaller reporting
companies (“SRCs”) (as defined by the SEC). The credit losses standard would be effective January 1, 2020.
Bucket
2— All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations,
and employee benefit plans. The credit losses standard would be effective January 1, 2023.
At
the annual evaluation date on June 30, 2019, the Company met the SEC definition of a smaller reporting company. Accordingly, the
Company plans on adopting the credit losses standard on January 1, 2023. Management is currently reviewing the impact of the adoption
of this accounting standard on the Company’s consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which
removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity
in accounting for income taxes. The new guidance is effective for fiscal years beginning after December 15, 2020 and for interim
periods within those fiscal years. The Company will adopt this standard on January 1, 2021. Management is currently reviewing
the impact of the adoption of this accounting standard on the Company’s consolidated financial statements.
Note
3 - Revenue Recognition
Shipping
Revenues
Time
Charter Revenues
The
Company enters into time charter contracts under which a customer pays a fixed daily or monthly rate for a fixed period of time
for use of a vessel. The Company recognizes revenues from time charters as operating leases ratably over the noncancellable contract
term. Customers generally pay voyage expenses such as fuel, canal tolls and port charges. The Company also provides the charterer
with services such as technical management expenses and crew costs. While there are lease and service (non-lease) components related
to time charter contracts, the predominant component of the contract is the charterer’s lease of the vessel. The non-lease
components of the contract have the same timing and pattern of transfer as the underlying lease component; therefore, the Company
applied the practical expedient to combine lease and non-lease components and recognizes revenue related to this service ratably
over the life of the contract term.
Voyage
Charter Revenues
The
Company enters into voyage charter contracts, under which the customer pays a transportation charge (voyage freight) for the movement
of a specific cargo between two or more specified ports. The Company’s performance obligation under voyage charters, which
consists of moving cargo from a load port to a discharge port, is satisfied over time. Accordingly, under ASC 606, the Company
recognizes revenue from voyage charters ratably over the estimated length of each voyage, calculated on a load-to-discharge basis.
The transaction price is in the form of a fixed fee at contract inception, which is the transportation charge. Voyage charter
contracts also include variable consideration primarily in the form of demurrage, which is additional revenue the Company receives
for delays experienced in loading or unloading cargo that are not deemed to be the responsibility of the Company. The Company
does not include demurrage in the transaction price for voyage charters as it is considered constrained since it is highly susceptible
to factors outside the Company’s influence. Examples of when demurrage is incurred include unforeseeable weather conditions
and security regulations at ports. The uncertainty related to this variable consideration is resolved upon the completion of the
voyage, the duration of which is generally less than 30 days.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
U.S.
Maritime Security Program
Two
of the Company’s U.S. Flag Product Carriers participate in the U.S. Maritime Security Program (“MSP”), which
ensures that privately-owned, military-useful U.S. Flag vessels are available to the U.S. Department of Defense in the event of
war or national emergency. The Company considers the MSP contract with the U.S. government a service arrangement under ASC 606.
Under this arrangement, the Company receives an annual operating-differential subsidy pursuant to the Merchant Marine Act of 1936
for each participating vessel, subject in each case to annual congressional appropriations. The subsidy is intended to reimburse
owners for the additional costs of operating U.S. Flag vessels; therefore, the Company has presented this subsidy as an offset
to vessel expenses.
Contracts
of Affreightment
The
Company enters into contracts of affreightment (“COA”) to provide transportation services between specified points
for a stated quantity of cargo over a specific time period, but without designating voyage schedules. The Company has COA arrangements
to provide for lightering services and other arrangements based on the number of voyages. These contracts are service contracts
within the scope of ASC 606 for which the underlying performance obligation is satisfied as a series of distinct services.
The
Company’s COA include minimum purchase requirements from customers that are expressed in either fixed monthly barrels, annual
minimum barrel volume requirements or annual minimum number of voyages to complete. The Company is required to transport and the
charterer is required to provide the Company with a minimum volume requirement. These contract minimums represent fixed consideration
within the contract which is recognized as the distinct services of delivering barrels or voyages are performed in the series
over time. The Company will adjust revenue recognized for any minimum volume unexercised right.
COA
provide the charterer with the opportunity to purchase additional transportation services above the minimum. If this is not considered
a material right, the Company recognizes revenue related to the additional services at the contractual rate as the product is
transferred over time. If the additional transportation service is considered a material right, the Company applies the practical
alternative to allocate the transaction price to the material right. As a result, the Company may recognize revenue related to
COA at an amount which is different than the invoiced amount if the Company’s estimated volume to be transported under the
contract exceeds the contractual minimum.
COA
also include variable consideration primarily related to demurrage. The Company does not include this variable consideration in
the transaction price for these contracts as the consideration is constrained since the obligation to deliver this service is
outside the control of the Company. The uncertainty related to this variable consideration is resolved with the customer over
the course of the contract term as individual voyages discharge. Revenue generated by COA is included within voyage charter revenues
on the consolidated statements of operations.
At
March 31, 2020, the Company did not have deferred revenue related to the Company’s COA.
Disaggregated
Revenue
The
Company has disaggregated revenue from contracts with customers into categories that depict how the nature, amount, timing
and uncertainty of revenue and cash flows are affected by economic factors. Consequently, the disaggregation below is based on
contract type. Since the terms within these contract types are generally standard in nature, the Company does not believe that
further disaggregation would result in increased insight into the economic factors impacting revenue and cash flows.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The
following table shows the Company’s shipping revenues disaggregated by nature of the charter arrangement for the three months
ended March 31, 2020 and 2019:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Time and bareboat charter revenues
|
|
$
|
78,150
|
|
|
$
|
63,120
|
|
Voyage charter revenues(1)
|
|
|
11,468
|
|
|
|
7,633
|
|
Contracts of affreightment revenues
|
|
|
11,241
|
|
|
|
16,984
|
|
Total shipping revenues
|
|
$
|
100,859
|
|
|
$
|
87,737
|
|
(1)
Voyage charter revenues include approximately $11,319 and $769 of revenue related to short-term time charter contracts for the
three months ended March 31, 2020 and 2019, respectively.
Voyage
Receivables
As
of March 31, 2020 and December 31, 2019, contract balances from contracts with customers consisted of voyage receivables, including
unbilled receivables, of $5,729 and $5,831, respectively, net of reserve for doubtful accounts for voyage charters and lightering
contracts. For voyage charters, voyage freight is due to the Company upon completion of discharge at the last discharge port.
For lightering contracts, the Company invoices the customer monthly based on the actual barrels of cargo lightered. The Company
routinely reviews its voyage receivables and makes provisions for probable doubtful accounts; however, those provisions are estimates
and actual results could differ from those estimates and those differences may be material. Voyage receivables are removed from
accounts receivable and the reserve for doubtful accounts when they are deemed uncollectible. The Company deems voyage receivables
uncollectible when the Company has exhausted collection efforts.
Costs
to Fulfill a Contract
Under
ASC 606, for voyage charters and contracts of affreightment, the Company capitalizes the direct costs, which are voyage expenses,
of relocating the vessel to the load port to be amortized during transport of the cargo. At March 31, 2020, the costs related
to voyages that were not yet completed were not material.
Additionally,
these contracts include out-of-pocket expense (i.e. fuel, port charges, canal tolls) incurred by the Company in fulfilling its
performance obligation, which are reimbursed by the charterer at cost. The reimbursement for these fulfillment costs have been
included in the Company’s estimated transaction price for the contract and recognized as revenue when performance obligations
are satisfied.
Transaction
Price Allocated to the Remaining Performance Obligations
As
of March 31, 2020, there was an aggregate amount of $32,496 of revenue under COA which the Company will be entitled to by providing
services in the future. The Company expects to recognize revenue of approximately $28,701 in 2020 and $3,795 in 2021 under these
contracts. These estimated amounts relate to the fixed consideration of contractual minimums within the contracts based on the
Company’s best estimate of future services.
Practical
Expedients and Exemptions
The
Company’s voyage charter contracts and some of the Company’s COA have an original expected duration of one year or
less; therefore, the Company has elected to apply the practical expedient, which permits the Company to not disclose the portion
of the transaction price allocated to the remaining performance obligations within these contracts.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The
Company expenses broker commissions for voyage charters, which are costs of obtaining a contract, as they are incurred because
the amortization period is less than one year or are otherwise amortized as the underlying performance obligation is satisfied.
The Company records these costs within voyage expenses in the consolidated statements of operations.
Note
4 — Earnings per Common Share
Basic
earnings per common share is computed by dividing earnings, after the deduction of dividends and undistributed earnings allocated
to participating securities, by the weighted average number of common shares outstanding during the period. As management deems
the exercise price for the Class A warrants of $0.01 per share to be nominal, warrant proceeds are ignored and the shares
issuable upon Class A warrant exercise are included in the calculation of basic weighted average common shares outstanding for
all periods.
The
computation of diluted earnings per share assumes the issuance of common stock for all potentially dilutive stock options and
restricted stock units. Participating securities are defined by ASC 260, Earnings Per Share, as unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents and are included in the computation of earnings
per share pursuant to the two-class method.
Class
A
As of March 31, 2020, there were
2,681,891 shares of Class A common stock issuable under restricted stock units and 1,478,756 shares of Class A common
stock issuable under options outstanding, which were considered to be potentially dilutive securities. As of March 31,
2019, there were 1,536,146 shares of Class A common stock issuable under restricted stock units and 1,478,756 shares
of Class A common stock issuable under options outstanding, which were considered to be potentially dilutive
securities.
The
components of the calculation of basic earnings per share and diluted earnings per share are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net income
|
|
$
|
25,125
|
|
|
$
|
3,197
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Class A common stock - basic
|
|
|
89,422,311
|
|
|
|
89,004,947
|
|
Class A common stock - diluted
|
|
|
90,388,988
|
|
|
|
89,421,143
|
|
For
the three months ended March 31, 2020 and 2019, there were dilutive equity awards outstanding covering 966,677 and 416,196
shares, respectively.
Note
5 — Fair Value Measurements and Fair Value Disclosures
The
following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash
and cash equivalents and restricted cash— The carrying amounts reported in the condensed consolidated balance sheet
for interest-bearing deposits approximate their fair value. Investments in trading securities consist of equity securities and
were measured using quoted market prices at the reporting date multiplied by the quantity held.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Debt—
The fair values of the Company’s publicly traded and non-public debt are estimated based on quoted market prices.
ASC
820, Fair Value Measurements and Disclosures, relating to fair value measurements defines fair value and establishes
a framework for measuring fair value. The ASC 820 fair value hierarchy distinguishes between market participant assumptions
developed based on market data obtained from sources independent of the reporting entity and the reporting entity’s own
assumptions about market participant assumptions developed based on the best information available in the circumstances. ASC 820
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, essentially an exit price. In addition, the fair value of assets and liabilities
should include consideration of non-performance risk, which for the liabilities described below includes the Company’s own
credit risk.
The
levels of the fair value hierarchy established by ASC 820 are as follows:
Level
1 - Quoted prices in active markets for identical assets or liabilities
Level
2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities
Financial
Instruments that are not Measured at Fair Value on a Recurring Basis
The
estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis, categorized
based upon the fair value hierarchy, are as follows:
|
|
Carrying
|
|
|
Fair Value
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
|
$
|
101,507
|
|
|
$
|
101,507
|
|
|
$
|
—
|
|
Total
|
|
$
|
101,507
|
|
|
$
|
101,507
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan agreement, due 2023
|
|
$
|
286,199
|
|
|
$
|
—
|
|
|
$
|
299,048
|
|
Term loan agreements, due 2024
|
|
|
47,718
|
|
|
|
—
|
|
|
|
49,062
|
|
Alaska Tankers term loan agreement, due 2025
|
|
|
53,249
|
|
|
|
—
|
|
|
|
52,009
|
|
OSG 204 LLC term loan agreement, due 2025
|
|
|
27,647
|
|
|
|
—
|
|
|
|
28,963
|
|
Term loan agreement, due 2026
|
|
|
26,099
|
|
|
|
—
|
|
|
|
26,888
|
|
Unsecured senior notes
|
|
|
689
|
|
|
|
—
|
|
|
|
724
|
|
Total
|
|
$
|
441,601
|
|
|
$
|
—
|
|
|
$
|
456,694
|
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
|
|
Carrying
|
|
|
Fair Value
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (1)
|
|
$
|
41,677
|
|
|
$
|
41,677
|
|
|
$
|
—
|
|
Total
|
|
$
|
41,677
|
|
|
$
|
41,677
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan agreement, due 2023
|
|
$
|
291,994
|
|
|
$
|
—
|
|
|
$
|
299,974
|
|
Term loan agreements, due 2024
|
|
|
48,289
|
|
|
|
—
|
|
|
|
49,015
|
|
Term loan agreement, due 2026
|
|
|
27,075
|
|
|
|
—
|
|
|
|
27,359
|
|
Unsecured senior notes
|
|
|
689
|
|
|
|
—
|
|
|
|
722
|
|
Total
|
|
$
|
368,047
|
|
|
$
|
—
|
|
|
$
|
377,070
|
|
(1)
|
Includes
current and non-current restricted cash aggregating $20,148 and $174 at March 31, 2020 and December 31, 2019, respectively.
For $20,000 of restricted cash at March 31, 2020, if Banc of America Leasing & Capital, LLC is unable to sell a participating
interest in the term loan on the Overseas Gulf Coast, due 2024, by June 12, 2020, Banc of America Leasing & Capital,
LLC has the right to apply the $20,000 held in restricted cash as a prepayment on the term loan on the Overseas Gulf Coast,
due 2024, or roll it over to continue as restricted cash. Restricted cash of $148 and $174 as of March 31, 2020 and December
31, 2019, respectively, was related to the Company’s Unsecured Senior Notes.
|
Nonfinancial
Instruments that are Measured at Fair Value on a Nonrecurring Basis
Vessel
and Intangible Assets Impairments
During
the first quarter of 2020, the Company considered whether events or changes in circumstances had occurred since December 31, 2019
that could indicate the carrying amounts of the vessels in the Company’s fleet and the carrying value of the Company’s
intangible assets may not be recoverable as of March 31, 2020.
The
Company concluded that no such events or changes in circumstances had occurred for its intangible assets at March 31, 2020.
During
the first quarter of 2020 the Company established basic terms to sell for scrap the OSG 243 and OSG Independence,
one of the Company’s ATBs. Based on the negotiated sale terms, the Company recorded a loss, which was not material and included
in loss on disposal of vessels and other property, including impairments, net on the condensed consolidated statements of operations,
on the planned disposition of this barge.
Note
6 — Taxes
For
the three months ended March 31, 2020 and 2019, the Company recorded income tax provisions of $6,360 and $392, respectively,
which represented effective tax rates of 20% and 11%, respectively. The increase in the effective tax rate for the
three months ended March 31, 2020 compared to the three months ended March 31, 2019 was substantially due to the establishment
of deductible expenses related to Code Section 162(m) in 2019 causing a more favorable discrete adjustment compared to pretax
income. The effective tax rate for the three months ended March 31, 2020 and 2019 were less than the statutory rate due to a discrete
tax benefit in the quarters relating to state benefit resulting from the Alaska Tanker Company acquisition and deductible expenses
related to Code Section 162(m), respectively.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
On March 27, 2020, H.R. 748, the Coronavirus
Aid, Relief, and Economic Security Act, or the “CARES Act”, was signed into law. The CARES Act
includes tax provisions relevant to businesses that will impact taxes related to 2018, 2019 and 2020. Some of the significant
tax law changes are to increase the limitation on deductible business interest expense for 2019 and 2020, allow for the five
year carryback of net operating losses for 2018-2020, suspend the 80% limitation of taxable income for net operating loss carryforwards
for 2018-2020, provide for the acceleration of depreciation expense from 2018 and forward on qualified improvement property and
accelerate the ability to claim refunds of AMT credit carryforwards. The Company is required to recognize the effect on the consolidated
financial statements in the period the law was enacted, which is 2020. At this time, the Company does not expect the CARES Act
to have a material impact on the Company’s tax provision as any effect will be a reclassification between net
operating losses and the affected deferred tax assets or liabilities on the consolidated balance sheet.
As
of March 31, 2020 and December 31, 2019, the Company recorded a non-current reserve for uncertain tax positions of $878 and $864,
respectively.
Note
7 — Investment in Alaska Tanker Company, LLC
At December 31, 2019, the Company had a
37.5% interest in Alaska Tanker Company, LLC (“ATC”), a joint venture that was formed in 1999 among OSG America Operating
Co LLC, Keystone Shipping Company and subsidiaries of British Petroleum (“BP”). Each member in ATC was entitled to
receive its respective share of incentive charter hire related to time charter contracts in ATC with a minimum term ending in
December 2023.
In December 2019, the Company entered into
an agreement with BP to purchase three U.S.-flagged crude oil carrier vessels (Alaskan Explorer, Alaskan Legend
and Alaskan Navigator) for total cash consideration of $54,000, which was financed by borrowing $54,000 under a five-year
term loan as discussed in Note 12, “Debt”.
In connection with the purchase of the
vessels from BP, the Company agreed to time charter arrangements with BP for terms of 2.5 years to 6.4 years at a fixed daily
rate with an annual escalation and five renewal options for one year each. The time charter arrangements are treated as operating
leases under ASC 842. The Company also entered into a bareboat charter with BP for a fourth vessel, the Alaskan Frontier,
which is currently in layup. In connection with these transactions, the Company also acquired the remaining equity ownership of
ATC, making ATC a wholly owned subsidiary of the Company.
The Company accounted for the purchase
of the three vessels and remaining equity ownership interest in ATC collectively as an asset acquisition, with substantially all
the fair value of the acquisition attributed to the three vessels purchased from BP. The pre-existing ATC arrangements with a
minimum term through December 2023 were terminated, and a non-cash gain equal to the value of the remaining arrangement of $19,172
was recognized, with a corresponding increase in the value of the vessels acquired from BP.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note
8 — Capital Stock and Stock Compensation
Share
and Warrant Repurchases
During
the three months ended March 31, 2020, in connection with the vesting of restricted stock units (“RSUs”), the Company
withheld 104,552 shares of Class A common stock at an average price of $1.90 per share (based on the market prices on the dates
of vesting) from certain members of management to cover withholding taxes.
Warrant
Conversions
During
the three months ended March 31, 2020, the Company did not issue any shares of Class A common stock as a result of the exercise
of Class A warrants. During the three months ended March 31, 2019, the Company issued 7,504 shares of Class A common stock as
a result of the exercise of 39,692 Class A warrants.
Stock
Compensation
The
Company accounts for stock compensation expense in accordance with the fair value based method required by ASC 718, Compensation
– Stock Compensation. This method requires share-based payment transactions to be measured based on the fair value of
the equity instruments issued.
Management
Compensation — Restricted Stock Units and Stock Options
During
the three months ended March 31, 2020, the Company granted 764,406 RSUs to its employees, including senior officers. The grant
date fair value of these awards was $2.03 per RSU. Each RSU represents a contingent right to receive one share of Class A common
stock upon vesting. Each award of RSUs will vest in equal installments on each of the first three anniversaries of the grant date.
During the three months ended March 31,
2020, the Company awarded 582,224 performance-based RSUs to its senior officers. Each performance-based RSU represents a contingent
right to receive RSUs based upon continuous employment through the end of a three-year performance period (the “Performance
Period”) and will vest as follows: (i) one-half of the target RSUs will vest and become nonforfeitable subject to OSG’s
return on invested capital (“ROIC”) performance in the three-year ROIC performance period relative to a target rate
(the “ROIC Target”) set forth in the award agreements (which define ROIC as net operating profit after
taxes divided by the net of total debt plus shareholders equity less cash); and (ii) one–half of the target RSUs will be
subject to OSG’s three–year total shareholder return (“TSR Target”) performance relative to that of a
performance index over a three–year TSR performance period. The index consists of companies that comprise a combination
of the oil and gas storage and transportation and marine GICS sub-industries indexes during the Performance Period. Vesting is
subject in each case to certification by the Human Resources and Compensation Committee of the Parent
Company’s Board of Directors as to achievement of the performance measures and targets.
The
ROIC Target RSU awards and the TSR Target RSU awards are subject to an increase up to a maximum of 291,112 target
RSUs combined (873,340 RSUs in total) or decrease depending on performance against the applicable measure and targets. The ROIC
performance goal is a performance condition which, as of March 31, 2020, management believed was probable of being achieved. Accordingly,
for financial reporting purposes, compensation costs have been recognized for these awards. The grant date fair value of the TSR
based performance awards, which have a market condition, was determined to be $2.03 per RSU.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note
9 — Accumulated Other Comprehensive Loss
The
components of accumulated other comprehensive loss, net of related taxes, in the condensed consolidated balance sheets follow:
As of
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Items not yet recognized as a component of net periodic benefit cost (pension and other postretirement benefit plans)
|
|
$
|
(6,351
|
)
|
|
$
|
(6,409
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(6,351
|
)
|
|
$
|
(6,409
|
)
|
The
following tables present the changes in the balances of each component of accumulated other comprehensive loss, net of related
taxes, during the three months ended March 31, 2020 and 2019:
|
|
Items not yet recognized as a component of net periodic benefit cost (pension and other postretirement plans)
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
$
|
(6,409
|
)
|
Current period change, excluding amounts reclassified from accumulated other comprehensive income
|
|
|
—
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
58
|
|
Total change in accumulated other comprehensive income
|
|
|
58
|
|
Balance as of March 31, 2020
|
|
$
|
(6,351
|
)
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
$
|
(7,192
|
)
|
Current period change, excluding amounts reclassified from accumulated other comprehensive income
|
|
|
(24
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
107
|
|
Total change in accumulated other comprehensive income
|
|
|
83
|
|
Balance as of March 31, 2019
|
|
$
|
(7,109
|
)
|
The
Company includes the service cost component for net periodic benefit cost/(income) in vessel expenses and general and administrative
expenses and other components in other income, net on the condensed consolidated statements of operations.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note
10 — Leases
For the three months ended March 31, 2020, the Company
had non-cash operating activities of $1,533 for obtaining operating right-of-use assets and liabilities.
Charters-in
On March 12, 2020, the Company commenced
a bareboat charter for the Alaskan Frontier for a lease term of three years. Based on the length of the lease term and
the remaining economic life of the vessel, it is accounted for as an operating lease. The lease contains an option
that can be exercised for three-years and is available indefinitely. The future minimum commitments under the
lease are $275 for the remainder of 2020, $365 in 2021, $365 in 2022 and $71 in 2023.
Charters-out
The Company is the lessor under its time charter contracts.
Total time charter revenue for the three months ended March 31, 2020 was equal to lease income from lease payments of $78,853,
less straight-line adjustments of $703.
Note
11 — Vessels
On
March 12, 2020, the Company’s subsidiaries completed the purchase of three U.S.-flagged crude oil carrier vessels, the Alaskan
Explorer, Alaskan Legend, and Alaskan Navigator, from BP for total consideration of $54,000 and have entered
into a bareboat charter with BP for a fourth vessel, the Alaskan Frontier. The vessels purchased will continue to be operated
by ATC under time charters with BP Exploration (Alaska), Inc., with firm charter periods lasting until 2022, 2025 and 2026. Each
charter also provides for five one-year extension options.
For
the three months ended March 31, 2020, the Company’s non-cash investing activities for the accrual of capital expenditures
related to the Company’s newbuilds were not material.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note
12 — Debt
On March
26, 2020, one of the Company’s subsidiaries, OSG 204 LLC, entered into a credit agreement with Wintrust Commercial Finance and
other syndicate lenders to finance one new 204,000 barrel U.S. Flag oil and chemical ATB barge, which is being built by the Greenbriar
Marine shipyard and is set to be delivered in the second quarter of 2020. The credit agreement includes a construction loan, against
which the Company can make drawdowns to pay for construction costs, and a five-year term loan. The construction loan, which is
guaranteed by the Company, is for an aggregate principal amount of $33,150, of which $28,084 was drawn at loan closing, and bears
a floating rate of interest of LIBOR plus 5.00%. The remaining two milestone construction payments for the barge totaling $5,066
will be funded as additions to the construction loan. The construction loan is secured by a collateral assignment of the vessel
construction contract. Upon delivery of the barge to OSG 204 LLC, the construction loan will be converted into either a
floating or fixed rate five-year term loan guaranteed by the Company. The amount of the term loan will be the lesser of 65% of
the construction cost of the barge or $33,150. The floating-rate loan will bear interest at LIBOR plus 4.00% and the fixed-rate
loan will bear interest at the five-year swap rate, as determined three days before closing date, plus 4.25%. The fixed-rate
term loan is to have a minimum interest rate of 5.00%. Upon closing of either the floating- or fixed-rate
term loan, the lenders will hold a perfected first priority security interest and preferred ship mortgage against the vessel.
Assuming the fixed rate term loan is chosen, the annual principal payments expected to be made are $967 for the remainder of 2020,
$2,008 in 2021, $2,110 in 2022, $2,218 in 2023, $2,332 in 2024 and $23,515 thereafter.
On
March 12, 2020, the Company entered into a loan with Banc of America Leasing & Capital, LLC and other syndicate lenders in
an aggregate principal amount of $54,000 to finance the purchase of three U.S.-flagged crude oil carrier vessels, the Alaskan
Explorer, Alaskan Legend, and Alaskan Navigator. The loan is secured by first preferred ship mortgages on the
vessels, bears a fixed rate of interest of 4.43% and has a five-year term maturing on March 12, 2025. The annual principal payments
required to be made are $3,017 for the remainder of 2020, $4,182 in 2021, $4,371 in 2022, $4,568 in 2023, $4,775 in 2024 and $33,087
thereafter.
Note
13 — Commitments and Contingencies
The
Company is a party, as plaintiff or defendant, to various suits in the ordinary course of business for monetary relief arising
principally from personal injuries (including without limitation exposure to asbestos and other toxic materials), wrongful death,
collision or other casualty and to claims arising under charter parties. A substantial majority of such personal injury, wrongful
death, collision or other casualty claims against the Company are covered by insurance (subject to deductibles not material in
amount). Each of the claims involves an amount which, in the opinion of management, are not expected to be material to the Company’s
financial position, results of operations and cash flows.
OVERSEAS
SHIPHOLDING GROUP, INC. AND SUBSIDIARIES