UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission File Number 001–14135
OMI CORPORATION
(Exact name of Registrant as specified in its charter)
incorporation or organization) |
Identification No.) |
Registrant’s Address:
One Station Place
Stamford, Connecticut 06902
www.omicorp.com
Registrant’s telephone number including area code: (203) 602–6700
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
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 X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K.
YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES X NO
Aggregate market value of Registrant’s voting stock, held by non–affiliates, based on the closing price on the New York Stock Exchange as of the close of business on June 30, 2004:
$1,076,241,022
Number of shares of the Registrant’s Common Stock outstanding as of March 10, 2005:
85,679,944
The following document is hereby incorporated by reference into Part III of this Form 10–K:
(1) Portions of the OMI Corporation 2005 Proxy Statement to be filed with the Securities and Exchange Commission.
INDEX
| Items | |||
| 1. and 2. | Business and Properties | 1 | |
| 3. | Legal Proceedings | 15 | |
| 4. | Submission of Matters to a Vote of Security Holders | 15 | |
| 4A. | Management and Directors | 16 | |
| 5. | Market for OMI Corporation’s
Common Stock and Related Stockholder Matters and Issurer Purchases of Equity Securities |
18 | |
| 6. | Selected Financial Data | 20 | |
| 7. | Management’s
Discussion and Analysis of Results of Operations and Financial Condition |
22 | |
| Overview | 22 | ||
| 2004 Financial Summary | 22 | ||
| Market Overview | 25 | ||
| Critical Accounting Estimates | 28 | ||
| Results of Operations | 30 | ||
| Financial Condition and Capital Resources | 42 | ||
| 7A. | Quantitative and Qualitative Disclosures about Market Risks | 51 | |
| 8. | Financial Statements and Supplementary Data | 53 | |
| 9. | Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure |
81 | |
| 9A. | Controls and Procedures | 81 | |
| Management’s Report on Internal Control Over Financial Reporting | 81 | ||
| 9B. | Other Information | 84 | |
| 10. | Directors and Executive Officers of OMI Corporation | 84 | |
| 11. | Executive Compensation | 84 | |
| 12. | Security Ownership of Certain Beneficial Owners and Management | 84 | |
| 13. | Certain Relationships and Related Transactions | 84 | |
| 14. | Principal Accountant Fees and Services | 84 | |
| 15. | Exhibits, Financial Statement Schedules | 84 | |
| SIGNATURES | |||
ii
PART I
Items 1 and 2. BUSINESS AND PROPERTIES
General
OMI Corporation was incorporated under the laws of the Republic of the Marshall Islands on January 9, 1998. We have our principal place of business at One Station Place, Stamford, Connecticut and are listed on the New York Stock Exchange under the symbol “OMM”. The telephone number is (203) 602–6700.
We separated from our former parent entity in 1998 in a transaction designed to create a shipping company with only internationally flagged vessels. Our predecessor entities, however, date back to 1960.
Unless the context otherwise requires, in this Form 10-K the “Company,” “OMI,” “we,” “us,” and “our” refer to OMI Corporation and its subsidiaries.
For terms specific to the shipping industry please see “Glossary” beginning on page 12.
Certifications Regarding Public Disclosures and Listing
Standards
The unqualified certifications of the Chief Executive Officer
and the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley
Act regarding the quality of OMI’s public disclosure are filed with the
Securities and Exchange Commission as exhibits 31.1 and 31.2 to this Annual
Report on Form 10-K for the year ended December 31, 2004.
In addition, the annual certification of the Chief Executive Officer regarding compliance by the Company with the corporate governance listing standards of the New York Stock Exchange was submitted without qualification to the New York Stock Exchange following the May 2004 annual shareholder meeting.
Website Information
It is the Company’s policy to make all of its filings with the Securities and Exchange Commission (“SEC”) , which include this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all related amendments, available, free of charge, on our website at www.omicorp.com, Investor Relations. These reports are available soon after they are filed electronically with the SEC. You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov.
Interested parties may find the Board Guidelines on Corporate Governance Issues, the charters of its Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee and the Company’s Corporate Code of Ethics on our website. The information on our website is not incorporated by reference into this report.
Forward-Looking Statements
The Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to be covered by the safe harbor provided for under these sections. These statements may include words such as “may,” “assume,” “forecast,” “predict,” “strategy,” “believe,” “estimate,” “project,” “intend,” “expect,” “plan,” “anticipate,” “budget,” “potential,” or “continue,” and similar expressions in connection with any discussion of the timing or nature of future operating or financial performance or other events. For a description of the Forward Looking Statements which may appear in this Form 10-K, and risks and uncertainties associated with their “Forward Looking Statements” see page 50.
We disclaim any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
1
Description of Business/Properties
Development of OMI’s Business
We are a leading seaborne transporter of crude oil and refined petroleum products operating in the international shipping markets. The Company owns and has on order only double hull tankers. Our modern fleet comprising 42 double hull vessels is one of the youngest in the world, with an average age of approximately 2.6 years,1 compared to an industry average of approximately 9.3 years as of December 31, 2004.
Our customers include many of the world’s largest commercial and government owned oil companies and oil trading companies. To serve our customers with high-quality, modern vessels, we embarked on a fleet renewal program beginning in 1998 that has substantially reduced the age of our fleet, while at the same time expanding the fleet and concentrating our vessels into two core categories: Suezmax tankers and petroleum product carriers. As a result of our renewal program, our fleet now comprises 27 product carriers, which primarily transport refined petroleum products from refinery locations to consuming locations, and 15 Suezmax tankers (approximately 160,000 dwt each), which transport oil from production and storage locations to refinery locations. Our product carriers are smaller to mid-size tankers, namely, handysizes (25,000-40,000 dwt), handymaxes (40,000-50,000 dwt) and Panamaxes (50,000-80,000 dwt).
During 2004, the Company acquired five Suezmax crude oil tankers, all built in 2003 and 2004. We also acquired contracts for eight product carriers under construction, three of which have since been delivered to us. We acquired one other handysize product carrier built in 2004. We have taken delivery of three previously ordered product carriers in the same time period, and sold six crude oil carriers and two product carriers, six of which were single hull and two of which were double sided, leaving us with an exclusively double hull fleet.
The following sets forth a summary of our current fleet:
| Crude Oil Fleet: | Number of Vessels | Aggregate dwt | |||||||||
| 1998-2004 built Suezmaxes | 15 | (a) | 2,393,862 | ||||||||
| Product Carrier Fleet: | |||||||||||
| 1999-2004 built handysizes | 15 | 549,126 | |||||||||
| 2000-2005 built handymaxes | 10 | 470,081 | |||||||||
| 2003 built Panamaxes | 2 | 140,659 | |||||||||
| Total | 27 | 1,159,866 | |||||||||
| Total Fleet | 42 | 3,553,728 | |||||||||
| (a) | Two Suezmax tankers are chartered-in. One charter expires December 2006 and the other expires June 2010. | |
We expect to take delivery of three more new ice class 1A product carriers in 2005, and five product carriers, one of which is ice class 1A, in 2006. We also have agreed to time charter in two Suezmaxes for seven years, to commence following deliveries from the shipbuilder expected in June and September of this year.
We have been successful in implementing a chartering strategy that has allowed us to generate stable cash flow while retaining significant profit generating capabilities in a strong charter rate environment. While we have 16 of our 42 vessels on time charter, approximately 80% of our vessels on a dwt basis operate in the spot market. In 2004, we generated approximately $131 million of time charter (“TC”) revenue from time charters on 23 product carriers and two crude carriers. Revenue from time charters in 2005 is expected to be approximately $83 million, assuming seven time charters that expire are not renewed and others are not entered into. In 2004, TC revenue from time charters covered in excess of 100% of the following fixed expenses: company-wide general and administrative expense, total interest expense and operating expenses for vessels under time charter.
| 1 | All averages referring to vessel
age in this Form 10-K are based on deadweight tons (“dwt”). Dwt, expressed
in metric tons each of which is equivalent to 1000 kilograms, refers to the total
weight a vessel can carry when loaded to a particular load line. Unless otherwise
indicated, when we refer to our fleet of 42 vessels, we include two Suezmax tankers
that we sold and subsequently “chartered-in” to our fleet under long-term
time charters in 2001 and 2002. We have also included one vessel delivered to us
on January 4, 2005 and one vessel delivered to us on March 1, 2005, and excluded
two vessels sold in January 2005. | |
2
Our Strategy
Our strategy includes the following initiatives:
Concentration in two vessel categories
We have chosen to concentrate our fleet in two categories: Suezmax tankers, because they offer size advantages over aframax tankers and geographic flexibility relative to VLCCs, and product carriers because new refineries are not generally being built near the areas of greatest demand for petroleum products. The large scale of our product carrier and Suezmax fleets relative to many of our competitors enables us to realize economies of scale and increase vessel utilization, and concentrated fleets allows us to more efficiently spread overhead costs, including costs associated with our customers inspecting and approving, or “vetting”, our vessels and complying with environmental and other regulations. By gaining expertise in operating, supplying and maintaining selected vessel classes, our crews and management are more efficient and effective. Large and concentrated fleets also improve utilization by affording greater opportunities for backhauls, which are voyages from areas near discharge locations to areas of normal load location. Backhauls reduce the amount of ballast time, i.e. voyages without cargo.
Balanced chartering in spot and time charter markets
We actively manage the balance between our spot and time charters to maintain cash flow stability without losing our ability to participate in strong spot markets. Our general objective is for revenue from our time chartered vessels to cover the following fixed expenses: company-wide general and administrative expense, total interest expense and operating expenses of the time chartered vessels. Our balanced chartering strategy helped us to be profitable even in the weak market conditions which prevailed from the second quarter of 2001 into the fourth quarter of 2002. In early 2004, we were able to extend the charter periods for four of our vessels, two by one year and two by two years. Additionally, of the product carriers delivered to us in 2004, three began five-year charters upon delivery from the shipyard and two being delivered in 2005 will begin five year time charters, all five of which charters provide for profit sharing. However, all of our Suezmax tankers operate in the spot market, which allows us to capitalize on a strong charter rate environment, as was the case during 2003, 2004 and currently, when market conditions were and are strong. Of the five product carriers whose charters expired in the fourth quarter of 2004, one was chartered for three years at a higher rate and the others entered into the spot market. At this time, our intention is to enter into additional time charters in order to increase the amount of predictable revenue going forward.
Our use of time charters also mitigates in part the seasonality of the spot market business. Generally, spot markets are strongest in the first and fourth quarters of the calendar year, and weaker in the second and third quarters. We also have several contracts of affreightment (“COAs”), which are agreements whereby the shipowner is hired to move an agreed amount of cargo on an agreed route at a set price per ton. Our existing COAs are of shorter duration than most of our time charters, but serve the same function. Finally, we have recently commenced trading in freight futures or the “paper market.” We can take a “long” position, which is similar in effect to chartering in a vessel (i.e. it is speculative) or a “short” position, which is similar in effect to time chartering out a vessel. COAs and freight futures are additional means of balancing risks in our business.
3
The following table reflects our contracted TC revenue through 2009:
| Time Charter Revenue: | |||||||||||||||||||||
| Actual | |||||||||||||||||||||
| (In Millions) | 2004 | ||||||||||||||||||||
| TC Revenue | $130.6 | $82.5 | $57.3 | $38.9 | $27.1 | $14.1 | |||||||||||||||
| Number of Vessels (a) | 21(b) | 15(c) | 8(d) | 7(e) | 5(f) | 2(g) | |||||||||||||||
| (a) | Number of vessels at the end of
each year. |
|
| (b) | Twenty-five vessels operated on
time charters during 2004; four vessels began contracts upon delivery, four vessels
began new or renewal contracts and five vessels completed contracts during the year. |
|
| (c) | Twenty-three vessels will operate
on time charters during 2005, including two vessels that will begin time charters
upon delivery; assuming no extensions, 8 vessels complete time charters. |
|
| (d) | Fifteen vessels will operate on
time charters during 2006; assuming no extensions, 7 vessels complete time charters. |
|
| (e) | Eight vessels will operate on
time charters during 2007; assuming no extensions, 1 vessel will complete its time
charter. |
|
| (f) | Seven vessels will operate on
time charters during 2008; assuming no extensions, 2 vessels will complete their
time charters. |
|
| (g) | Three vessels will complete their
time charters in 2009 and two in 2010. |
|
| Note: | TC revenue is the amount
contracted to date in the table above and does not include projections other than
for expected delivery dates of newbuildings and offhire relating to drydock. We
intend to time charter vessels at opportunistic times. | |
Continued acquisition of modern vessels while improving our balance sheet
Our strategy is to continue building our fleets of Suezmax tankers and product carriers as market conditions and opportunities warrant, while maintaining a prudent debt-to-total capitalization ratio. During 2004, we invested $675 million in acquiring modern vessels, while at the same time our total debt (current portion of long-term debt plus long-term debt) to total capitalization (debt plus stockholders’ equity) went from 51% as of December 31, 2003 to 55% as of December 31, 2004. During the period we issued $140 million value in our common stock and expended $141 million in repurchasing common stock.
The rise of the total debt-to-total capitalization to 55% occurred due to the repurchase of 6.3 million shares of common stock in the fourth quarter, which reduced equity. Due to continuing strong tanker markets, we expect to reduce this percentage during 2005. We will continue to monitor opportunities to acquire modern vessels at attractive returns on capital.
Enter into strategic alliances
Working with other business enterprises in our industry provides us with superior market information, scheduling efficiencies and access to expertise. It provides opportunities to reduce ballast time which may result in higher earnings for our vessels. All 15 of our Suezmax tankers are marketed through a marketing alliance known as Alliance Chartering LLC (“Alliance”) with another large Suezmax tanker owner Frontline Ltd. Commencing in December 2003, our Suezmax tankers were pooled with a European shipowner in the Gemini Pool (“Gemini”). This pool for double hull Suezmax vessels, is operated by Gemini Tankers LLC, a wholly owned subsidiary of OMI and marketed by Alliance.
4
Our Fleet
The following tables set forth additional detail about our fleet. Our current fleet consists of two segments; crude oil fleet and product carrier fleet.
EXISTING FLEET(a)
| Name of Vessel | ||||||||||||||
| CRUDE OIL FLEET: | ||||||||||||||
| ARLENE | Suezmax | 2003 | 165,293 | SPOT | ||||||||||
| INGEBORG | Suezmax | 2003 | 165,293 | SPOT | ||||||||||
| SOMJIN | Suezmax | 2001 | 160,183 | SPOT | ||||||||||
| HUDSON | Suezmax | 2000 | 159,999 | SPOT | ||||||||||
| POTOMAC | Suezmax | 2000 | 159,999 | SPOT | ||||||||||
| DELAWARE | Suezmax | 2002 | 159,452 | SPOT | ||||||||||
| DAKOTA | Suezmax | 2002 | 159,435 | SPOT | ||||||||||
| ADAIR | Suezmax | 2003 | 159,199 | SPOT | ||||||||||
| ANGELICA | Suezmax | 2004 | 159,106 | SPOT | ||||||||||
| JANET | Suezmax | 2004 | 159,100 | SPOT | ||||||||||
| SACRAMENTO | Suezmax | 1998 | 157,411 | SPOT | ||||||||||
| PECOS | Suezmax | 1998 | 157,406 | SPOT | ||||||||||
| SABINE | Suezmax | 1998 | 157,332 | SPOT | ||||||||||
| OLIVER JACOB(c) | Suezmax | 1999 | 157,327 | SPOT | ||||||||||
| MAX JACOB(c) | Suezmax | 2000 | 157,327 | SPOT | ||||||||||
| 2,393,862 | ||||||||||||||
| PRODUCT CARRIER FLEET: | ||||||||||||||
| OTTAWA | Panamax | 2003 | 70,297 | Apr-08 | ||||||||||
| TAMAR | Panamax | 2003 | 70,362 | Jul-08 | ||||||||||
| NECHES | Handymax | 2000 | 47,052 | Oct-07 | ||||||||||
| SAN JACINTO | Handymax | 2002 | 47,038 | SPOT | ||||||||||
| MOSELLE | Handymax | 2003 | 47,037 | Feb-06 | ||||||||||
| GUADALUPE | Handymax | 2000 | 47,037 | SPOT | ||||||||||
| AMAZON | Handymax | 2002 | 47,037 | SPOT | ||||||||||
| ROSETTA | Handymax | 2003 | 47,015 | Mar-06 | ||||||||||
| BRAZOS(d) | Handymax | 2005 | 47,000 | SPOT | ||||||||||
| LAUREN(e) | Handymax | 2005 | 46,955 | SPOT | ||||||||||
| JEANETTE | Handymax | 2004 | 46,955 | SPOT | ||||||||||
| HORIZON | Handymax | 2004 | 46,955 | SPOT | ||||||||||
| ORONTES | Handysize | 1B | 2002 | 37,383 | Mar-06 | |||||||||
| OHIO | Handysize | 1B | 2001 | 37,278 | Dec-05 | |||||||||
| GARONNE | Handysize | 1A | 2004 | 37,278 | ||||||||||
| GANGES | Handysize | 1A | 2004 | 37,178 | ||||||||||
| RUBY | Handysize | 1B | 2004 | 37,384 | ||||||||||
| ASHLEY | Handysize | 1B | 2001 | 37,270 | ||||||||||
| MARNE | Handysize | 1B | 2001 | 37,230 | ||||||||||
| LOIRE | Handysize | 1A | 2004 | 37,106 | ||||||||||
| SAONE | Handysize | 1A | 2004 | 36,986 | ||||||||||
| TRINITY | Handysize | 2000 | 35,834 | Oct-06 | ||||||||||
| MADISON | Handysize | 2000 | 35,828 | Sep-06 | ||||||||||
5
Our Fleet (continued)
| Ice | Year | Charter | |||||||||||||||||||||||
| Name of Vessel | Class(b) | Built | Dwt | Expiration | |||||||||||||||||||||
| RHONE | Handysize | 2000 | 35,775 | Apr-05 | |||||||||||||||||||||
| CHARENTE | Handysize | 2001 | 35,751 | ||||||||||||||||||||||
| ISERE | Handysize | 1999 | 35,438 | ||||||||||||||||||||||
| SEINE | Handysize | 1999 | 35,407 | Jul-05 | |||||||||||||||||||||
| 1,159,866 | |||||||||||||||||||||||||
| Total Current Fleet | 3,553,728 |
||||||||||||||||||||||||
| (a) | All vessels are double hull. | |
| (b) | See Glossary beginning on page12 for trading capabilities. | |
| (c) | Chartered –in vessel. | |
| (d) | Vessel delivered from the shipbuilder in March 2005. | |
| (e) | Vessel delivered from the shipbuilder in January 2005. | |
| (f) | Time charters with profit sharing.
(SEINE and RHONE received profit sharing in 2004; however, the 2004 time charter
extensions were renewed at higher rates with no profit sharing) | |
Currently, we have the following eight product carriers and two Suezmaxes to be delivered:
VESSELS TO BE ACQUIRED(a)
| Ice | Date To Be | Charter | |||||||||||||||||||||
| Name of Vessel | Class(b) | Delivered | Dwt | Expiration | |||||||||||||||||||
| Vessels under construction: | |||||||||||||||||||||||
| FOX | Handysize | 1A | Jun-05 | 37,000 | |||||||||||||||||||
| THAMES | Handymax | 1A | Aug-05 | 47,000 | |||||||||||||||||||
| TEVERE | Handysize | 1A | Aug-05 | 37,000 | |||||||||||||||||||
| WABASH | Handymax | Jan-06 | 47,000 | SPOT | |||||||||||||||||||
| KANSAS | Handymax | Mar-06 | 47,000 | SPOT | |||||||||||||||||||
| REPUBLICAN | Handymax | Apr-06 | 47,000 | SPOT | |||||||||||||||||||
| RHINE | Handysize | 1A | Apr-06 | 37,000 | SPOT | ||||||||||||||||||
| PLATTE | Handymax | May-06 | 47,000 | SPOT | |||||||||||||||||||
| Total | 346,000 | ||||||||||||||||||||||
| Vessels to be Chartered in: | |||||||||||||||||||||||
| TBN(d) | Suezmax | Jun-05 | 160,000 | SPOT | |||||||||||||||||||
| TBN(d) | Suezmax | Sep-05 | 160,000 | SPOT | |||||||||||||||||||
| Total | 320,000 | ||||||||||||||||||||||
| Total Vessels to be delivered | 666,000 |
||||||||||||||||||||||
| Total Fleet with Vessels to be Acquired | 4,219,728 |
||||||||||||||||||||||
| (a) | All vessels are double hull. | ||
| (b) | See Glossary beginning on page12 for trading capabilities. | ||
| (c) | Time charters with profit sharing. | ||
| (d) | To be named; vessel is time chartered-in for seven years. | ||
Operations
There are two central aspects to the operation of our fleet:
| • | Commercial Operations, which involves chartering a vessel; and | ||
| • | Technical Operations, which involves maintaining, crewing and insuring a vessel. |
Our office staff, either directly or through a subsidiary, provides the following services:
6
| • | commercial operations and technical supervision; | ||
| • | safety monitoring; | ||
| • | vessel acquisition, construction management and oversight; and | ||
| • | financial, accounting and information technology services. |
Commercial operations
We arrange voyage charters for vessels that we operate in the spot market and time charters for vessels for which we seek longer term commitments. Under a voyage charter, the owner of a vessel provides the vessel for the transport of goods between specific ports in return for the payment of an agreed-upon freight per ton of cargo or, alternatively, a specified total amount. All operating costs are borne by the owner of the vessel. A single voyage charter is often referred to as a “spot market” charter, which generally lasts from two to ten weeks. Our vessels in the spot market may spend time idle waiting for business, or may have to be “laid up” if the markets are especially weak for protracted periods.
Under a time charter, the owner of the vessel provides the vessel to the charterer to use for a fixed period of time in return for the payment of a specified daily or monthly hire rate. Operating costs, such as for crews, maintenance and insurance are typically paid by the vessel owner, while voyage costs, such as fuel and port charges, are paid by the charterer. Once we have time chartered a vessel, trading of the vessel and the commercial risk shift to the customer.
We charter our vessels for varying periods, ranging from a single voyage, as in the case of our spot market charters, to multiple years, as in the case of our long-term time charters. In general, our time charters afford us greater assurance that we will be able to cover a fixed portion of our costs. In addition, there is also a profit sharing element in five of our existing time charters (and two currently under construction) that allows us to further capitalize on the upside of the spot market without undue risk. Operating vessels in the spot market affords us greater speculative opportunity to capitalize on fluctuations in the spot market; when vessel demand is high we earn higher rates, but when demand is low our rates are lower and potentially insufficient to cover costs. Spot market rates are volatile and are affected by world economics, international events, weather conditions, strikes, governmental policies, supply and demand, and other factors beyond our control.
Crude oil tankers
Our Suezmax tankers are commercially managed by Alliance Chartering LLC, a marketing alliance we operate in conjunction with Frontline Ltd., another large Suezmax tanker owner and operator. Alliance currently manages approximately 44 Suezmax tankers, including the Suezmax fleets of Frontline Ltd. and several smaller owners. The overall size and quality of the fleet give us access to market information and improve our vessel utilization.
Alliance operates through Frontline’s offices in Oslo, Norway and through our offices in Stamford, Connecticut. The Oslo office commences trading at the time of its opening and transfers trading to our Stamford office later in the day. Our vessels may load at any oil production area and discharge at any refinery suitable for Suezmax vessels. Typical voyages chartered through Alliance for our Suezmax tankers are for loading crude oil in North Sea or West African ports and discharging it at refineries in the East or Gulf Coasts of the United States. Alliance employs objective criteria when it selects a vessel for a particular charter. Each vessel owner receives the revenues from voyages it performs.
Under an arrangement that commenced in December 2003, we have pooled all of our Suezmax tankers with two Suezmax tankers owned by a European shipowner in a pool called “Gemini Tankers”. Alliance commercially manages the vessels in the pool and revenues are paid into the pool for the vessel performing the charter. Revenues received by the pool are shared by the Company and the European shipowner according to an agreed formula.
Product carriers
Our product carriers are available for spot market voyages, contracts of affreightment or time charters and are commercially managed by us from our Stamford and London offices. Sixteen of our 27 product carriers currently
7
are on time charter. The charterers of time chartered vessels decide where to send the vessels to load and discharge. We trade the other product carriers in the spot market.
Technical operations
All of our owned vessels are operated and managed on a technical basis by our wholly owned subsidiary, OMI Marine Services LLC, which has offices in Houston, Texas and Stamford, Connecticut. Technical management involves crewing, maintaining and insuring the vessels and arranging for vetting by customers, potential customers and others. OMI Corporation provides certain services to OMI Marine Services LLC, including arranging insurance and providing claims services. OMI Marine Services LLC currently obtains crews through Orinoco Maritime Consultancy India Pvt. Ltd. (“OMCI”), an unaffiliated crewing agent in Mumbai, India. OMCI provides crews, most of whom are from India. In addition to operating the vessels during voyages, the crews perform general maintenance, sometimes with the help of additional personnel. A portion of our technical management is subcontracted to the crewing agent as well, as the crewing agent has access to many seamen who have previously served on our vessels and therefore have knowledge of our ships and experience with our operations.
Contractual arrangements between us and our Indian agent provide us with the ability to ensure that the standards of recruiting and training that we require are followed and that the training of crew members includes continuous updating and emphasizes awareness of, and adherence to, applicable environmental and safety regulations. As part of this relationship, we jointly sponsor and hold monthly training seminars for crew members in India to discuss and promote environmental and safety compliance. Many of our crew members frequently crew on our vessels and have attended our jointly sponsored seminars to improve their shipboard skills and heighten their environmental awareness.
Our vessels are inspected often by customers, potential customers, regulatory authorities and by us. We also drydock our vessels periodically as required by applicable regulations or earlier, as appropriate. Our employees prepare specifications for and observe the performance of the drydockings to ensure proper performance. The two vessels we charter-in, the OLIVER JACOB and the MAX JACOB, are managed by their respective owners, who provide crews and all technical services for these vessels and also obtain required vettings from major oil companies.
Competition
The international shipping industry is highly competitive with many market participants. There are approximately 3,100 tankers aggregating approximately 305.7 million dwt, and the largest tanker owner has less than 5.0% of the total market dwt. The refined petroleum products transport segment is even more fragmented than the crude oil transport segment with the largest fleet being approximately 2.1% of the segment.
In the spot market, our vessels compete with all other vessels that satisfy the size and availability requirements specified by a customer. Competition in the spot market is based primarily on price, although many charterers are becoming more selective with respect to the quality of vessel they charter, focusing on a number of factors, including age, ship specifications, such as double hulls, reliability and quality of operations. Our competitors in the crude oil and products transport market are mainly privately owned fleets and some government owned fleets. We also compete with oil companies and traders who own or charter-in vessels. Competition for voyage charters may also include vessels that are in other classes. For example, our Suezmax tankers compete with VLCC tankers in certain markets and aframax tankers in other markets.
As in the spot market, the time charter market is price sensitive and also depends on our ability to demonstrate the high quality of our vessels and operations to chartering customers. However, because of the longer term commitment, customers entering time charters are more concerned about their exposure and image from chartering vessels that do not comply with environmental regulations or that will be forced out of service for extensive maintenance and repairs.
Employees and Labor Relations
As of December 31, 2004, we had approximately 50 office employees. Additionally, there are in aggregate approximately 1,200 seagoing personnel on board our vessels at any one time.
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Our agent signs labor contracts in India with labor organizations that represent seagoing personnel. We are not a party to these contracts. One of these contracts is with a union representing the ratings, or non-officer, seagoing personnel and another is with a union representing officers. Our labor relations historically have been good and we expect these positive relations to continue.
Customers
Revenues from major customers, defined as 10 percent or more of consolidated revenue was as follows:
| 2004 | 2003 | 2002 | ||||||
| Chartering and Shipping S.A. | $67,327,000 | $34,305,000 | $34,468,000 | |||||
| Chevron Transport Corp. | 53,966,000 | — | — | |||||
| El Paso Marine Company | — | 43,254,000 | 27,762,000 | |||||
We note that loss of any particular customer is irrelevant in the spot market, as other customers are always available, and relevant in the time charter market only to the extent the time charter rate with that customer exceeds the then current time charter or spot market rate.
Regulations
Environmental regulations
Our operations are affected by U.S. federal, state and foreign environmental protection laws and regulations, particularly OPA 90, CERCLA, the U.S. Port and Tanker Safety Act, the Act to Prevent Pollution from Ships, regulations adopted by the IMO and the European Union, various volatile organic compound emission requirements, the IMO/U.S. Coast Guard pollution regulations and various Safety of Life at Sea (“SOLAS”) amendments, as well as the regulations described below. Compliance with these laws and regulations entails additional expense, including vessel modifications and implementation of certain operating procedures.
United States requirements
OPA 90 affects all vessel owners and operators shipping oil or hazardous material to, from, or within U.S. waters. The law phases out the use of tankers having single hulls and effectively imposes on vessel owners and operators unlimited liability in the event of a catastrophic oil spill. OPA 90 requires that tankers over 5,000 gross tons calling at U.S. ports have double hulls if contracted after June 30, 1990 or delivered after January 1, 1994. Furthermore, OPA 90 calls for the phase out of all single hulled tankers by the year 2010 according to a schedule that is based on size and age of the vessel, unless the tankers are retrofitted with double hulls. OPA 90 permits single hulled tankers to operate until the year 2015 if they discharge at the Louisiana Offshore Oil Port (“LOOP”) or off-load, or lighter, at approved lightering areas more than 60 miles offshore.
Under OPA 90, a vessel owner or operator is liable, without regard to fault, for removal costs and damages, including economic loss without physical damage to property for oil pollution in U.S. waters. Liability is limited to $1,200 per gross ton of the vessel unless the spill is caused by gross negligence, willful misconduct or a violation of certain regulations, in which case liability is unlimited. In addition, OPA 90 does not preempt state law; therefore states may and have enacted laws imposing additional liability. Coastal states have enacted pollution prevention, liability and response laws, many providing for unlimited liability.
OPA 90 also requires owners and operators of vessels to adopt contingency plans for reporting and responding to oil spill scenarios up to a “worst case” scenario and to identify and ensure, through contracts or other approved means, the availability of necessary private response resources to respond to a “worst case discharge.” In addition, periodic training programs for shore and response personnel and for vessels and their crews are required. Our vessel response plans have been approved by the U.S. Coast Guard.
CERCLA applies to the discharge of hazardous substances whether on land or at sea. CERCLA contains liability aspects similar to those of OPA 90 and also imposes liability for cleanup, removal and natural resource damages. Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million unless the spill is caused by gross negligence, willful misconduct, or a violation of certain regulations, in which case liability is unlimited.
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Under the financial responsibility regulations issued under OPA 90, all vessels entering U.S. waters are required to obtain Certificates of Financial Responsibility or COFRs in the amount of $1,500 per gross ton for tankers, combining the OPA 90 limitation of liability of $1,200 per gross ton with the CERCLA liability of $300 per gross ton as discussed above. Under the regulations, owners or operators of fleets of vessels are required to demonstrate evidence of financial responsibility of the tanker having the maximum aggregate liability under OPA 90 and CERCLA. All of our vessels that need COFRs have them.
We believe that we are in substantial compliance with OPA 90, CERCLA and all applicable state regulations in U.S. ports where our vessels call.
International requirements
Similar laws and regulations have been adopted by the EU and by the IMO, which phase out non-double hulled tankers at different periods from OPA 90. As a result, some vessels that are eligible to trade internationally will be unable to carry cargo to or from the United States, and some vessels that may trade in the U.S. will be unable to trade elsewhere.
The European Parliament’s new Regulation No. 1726/2003, effective October 21, 2003, provides for an accelerated phase out of non-double hull tankers. Specific phase-out dates depend upon the year of construction and whether the tanker has segregated ballast tanks, among other factors. In addition, non-double hull tankers cannot carry heavy grades of oil to or from member ports, and commencing in 2005 all single hull tankers above 15 years of age must comply with a condition assessment program to enter or leave member states’ ports. In December 2003, IMO announced the adoption of a revised accelerated phase out schedule for single hull tankers along with other measures, including an extended application of the condition assessment program for single hulled tankers 15 years old or older and a ban on the carriage of certain heavy grades of oil in single hulled tankers, all of which enter into force April 5, 2005.
We no longer have any non-double hull vessels and therefore do not have issues relating to their trading.
Other regulations
We are also required by various other governmental and quasi–governmental agencies to obtain permits, licenses and certificates for our vessels, depending upon such factors as the country of registry, the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew, the age of the vessel and our status as owner or charterer. We believe that we have, or can readily obtain, all permits, licenses, approvals and certificates necessary to permit our vessels to operate.
Industry regulations require that a vessel be “in class” as a condition to its initial and continued registration under a country flag. Being certified as “in class” means that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the country of registry of the vessel and the international conventions to which that country is a member. Each vessel is inspected by a surveyor of the classification society in three types of surveys: annual surveys, intermediate surveys every two to three years and special surveys every five years. A vessel may be required to be drydocked as part of an intermediate survey for inspection of the underwater parts. A vessel is required to be drydocked for special surveys. Should any defects be found during any survey, the classification surveyor will issue a recommendation for appropriate repairs to be made by the shipowner, which have to be made within required time periods. Our vessels have all been certified as being in class by their respective classification societies.
The requirements contained in the International Safety Management Code, or ISM Code, promulgated by the IMO also affects our operations. The ISM Code requires the party with operational control of a vessel to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. OMI Marine Services LLC, our wholly owned subsidiary that is the technical operator of all of our owned vessels, is certified as an approved ship manager under the ISM Code, as is OMCI, to whom work is subcontracted.
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The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with code requirements for a safety management system. No vessel can obtain a certificate unless its manager has been awarded a Document of Compliance, issued by the vessel’s flag state, or by an appointed classification society, under the ISM Code. All of our vessels and OMI Marine Services LLC have received ISM Certification.
Non-compliance with the ISM Code and other IMO regulations may subject the shipowner to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. Both the U.S. Coast Guard and EU authorities have indicated that vessels not in compliance with the ISM Code will be prohibited from trading in U.S. and EU ports, as the case may be. All of our vessels comply with the IMO regulations which pertain to them.
Inspections
Our vessels are subject to both scheduled and unscheduled inspections by a variety of governmental and private entities, each of which may have unique requirements. These entities include the local port authorities such as the U.S. Coast Guard, harbor master or equivalent, classification societies, flag state administration or country of registry, charterers, and particularly terminal operators and major oil companies which conduct frequent vessel inspections.
Insurance
We believe that our current insurance coverage is adequate to protect us against the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage, consistent with currently prevailing industry practice at commercially acceptable rates. We often do not purchase other available insurances, such as loss of hire, when in our view they are not commercially attractive. Not all risks can be insured against and we cannot assure that any specific claim will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.
We have arranged for insurance covering our vessels in line with currently prevailing industry practice for fleets comparable to ours. Our insurance policies include:
Hull and Machinery. We maintain marine hull and machinery and war risks insurance, and increased value coverage, which includes the risk of actual or constructive total loss for all of our vessels. Each of our vessels is insured for at least its fair market value, with deductibles generally ranging from $100,000 to $150,000 per vessel per incident.
Protection and Indemnity Insurance. We maintain P&I insurance for pollution and spillage of up to $1 billion, and for war and terrorist-related acts of $200 million, in each case per occurrence per vessel. P&I insurance is provided by mutual marine indemnity associations, or “P&I Clubs,” formed by shipowners to provide protection from large financial loss to one member by contribution towards that loss by all members. Each P&I Club has capped its exposure to each of its members at $4.25 billion; each member’s potential exposure to the P&I Club is not otherwise limited. Deductibles vary up to $25,000 per claim, depending on the nature of the claim. As with other forms of mutual insurance, the members of each P&I Club share in the benefits if the overall results of the P&I Club are favorable and are liable for additional payments when and if required.
Value of Assets and Cash Requirements
Although the replacement costs of comparable new vessels may be above the book value of OMI’s fleet, the market value of OMI’s fleet may be below book value when market conditions are weak and exceed book value when markets are strong. In common with other shipowners, OMI continually considers asset redeployment which at times includes the sale of vessels at less than their book value.
OMI’s results of operations and cash flow may be significantly affected by future charter markets.
Taxation of Operating Income
We believe that we currently qualify under Section 883 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) for an exemption from U.S. federal income tax on substantially all of our shipping income. This exemption
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may be lost if 50% or more of our stock is owned, for more than half the number of days during the taxable year, by persons who actually or constructively own 5% or more of our stock and we cannot qualify for an exemption from such rule. We can give no assurance that changes in the ownership of our stock will permit us to qualify for the Section 883 exemption in the future. If we do not qualify for an exemption pursuant to Section 883 of the Code, we will be subject to U.S. federal income tax, likely imposed on a gross basis at 4%, on our U.S. source shipping income, which constitutes not more than 50% of our gross shipping income. In such a case, our net income and cash flow will be reduced by the amount of such tax.
Under current law, we will not be subject to income taxation under the laws of the Republic of the Marshall Islands, and distributions to us by our subsidiaries also will not be subject to any Republic of the Marshall Islands tax.
GLOSSARY OF SHIPPING TERMS
| Aframax | means a tanker of 80,000 to 120,000
dwt. |
|
| Backhaul | when a vessel loads a cargo near
the vessel’s prior discharge port and transports the cargo near the next load
port. |
|
| Ballast | a vessel is in ballast when it is
steaming without cargo and is usually loaded down with seawater for stability. |
|
| Bunker | fuel oil used to operate a vessel’s
engines and generators. |
|
| b/d | means barrels per day. |
|
| Charter | is a contract entered into with a
customer for the use of a vessel for a specific voyage at a specific rate per unit
of cargo, or for a specific period of time at a specific rate per unit (day or month)
of time. |
|
| Charterer | means the customer who hires a vessel
to perform charter. |
|
| Chartered-in | means a Charter from another owner
of a vessel for use by the Company. |
|
| Classification societies | are organizations that establish
and administer standards for the design, construction and operational maintenance
of vessels. As a practical matter, vessels cannot trade unless they meet these standards. |
|
| Combined carriers | are vessels capable of carrying either
liquid or dry cargos in bulk. |
|
| Commercial operations | refers to the process of employment,
or chartering, of a vessel and associated functions, including seeking and negotiating
employment, billing and collecting revenues, issuing voyage instructions, purchasing
fuel and appointing port agents. |
|
| Contract of Affreightment or COA | COA is the abbreviation for Contract
of Affreightment, which is an agreement providing for the transportation of a specific
quantity of cargo over a specific time period but without designating specific vessels
or voyage schedules, thereby allowing flexibility in scheduling. COAs can either
have a fixed rate or a market-related rate. An example would be two shipments of
70,000 tons per month for the next two years at the prevailing spot rate at the
time of each loading. |
|
| Crude oil tanker | means a tanker vessel designed to
carry crude oil or low grade oil products.
| |
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| Double bottomed | refers to a vessel with an inner and outer bottom separated by void space. | |
| Double hull | refers to a vessel with an inner and outer side and bottom separated by void space. | |
| Double sided | refers to a vessel with an inner and outer side separated by void space. | |
| Drydocking | is the performance of repairs and maintenance while a vessel has been taken out of the water. During drydockings, which are required to be carried out periodically, certain mandatory Classification society inspections are carried out and relevant certifications issued. Normally, as the age of a vessel increases, the cost of drydocking increases. | |
| dwt | means deadweight ton, which is a unit of a vessel’s capacity for cargo, fuel oil, stores and crew. A vessel’s dwt or total deadweight is the total weight the vessel can carry when loaded to a particular load line. | |
| Gross ton | means the volume of the interior of a vessel including all spaces except the void areas related to a double hulled, double sided or double bottomed vessel, expressed in a ton equal to 100 cubic feet. | |
| Handymax | is a vessel of 40,000 to 50,000 dwt. | |
| Handysize | is a vessel of 25,000 to 40,000 dwt. | |
| Hull and machinery insurance | is the basic asset coverage insurance for repair or replacement of a damaged or lost vessel. | |
| Ice Class | refers to a vessel designed and built to be able to trade in areas in which there is ice. Ice Class 1A, 1B and 1C vessels can operate in ice areas no greater than 80cm thick, 60cm thick and 40cm thick, respectively. The vessels do not break ice, but may follow ships that do. | |
| IMO | the abbreviation for International Maritime Organization, an agency of the United Nations, which is the body that is responsible for the administration of internationally developed maritime safety and pollution treaties, including MARPOL 73/78. | |
| Lay-up | means taking a vessel out of service, generally for an extended period. | |
| Lightering | is the process of discharging a vessel’s cargo into smaller vessels. | |
| Lightweight | means the weight of the hull and superstructure in long tons. | |
| MARPOL 73/78 | is the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto, which includes regulations aimed at preventing and minimizing pollution from ships by accident and by routine operations. | |
| Newbuilding | means a newly constructed vessel. | |
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| OPA 90 | is the abbreviation for the U.S.
Oil Pollution Act of 1990. |
|
| Off-hire | is any period in which a vessel under
charter is not earning revenue. |
|
| Orderbook | refers to vessels under contract
to be constructed, usually expressed by number of vessels or dwt. |
|
| Panamax | means a vessel of 50,000 to 80,000
dwt. |
|
| Pool | is a grouping of vessels in which
the financial results are aggregated, then distributed among pool members according
to an agreement. |
|
| Product carrier | means a tanker that is used to transport
refined oil products, such as gasoline, jet fuel or heating oil. |
|
| P&I Insurance | is insurance obtained through a mutual
association or “P&I Club” formed by shipowners to provide protection
from large financial loss to one member by contribution towards that loss by all
members. |
|
| Scrapping | is the process by which a vessel
is stripped of equipment and broken up, generally for reprocessing of its steel. |
|
| Sister ship | is a vessel built to the same plans
and specifications as another vessel. |
|
| Slow steaming | means slowing the speed of
the vessel, which saves fuel. |
|
| Special survey | refers to the inspection of a vessel
by a Classification Society surveyor which takes place every four to five years. |
|
| Spot market | is the market for immediate chartering
of a vessel. |
|
| Suezmax | means a vessel of 120,000 to 200,000
dwt, which generally transports about one million barrels of oil. |
|
| Tanker | means a vessel designed to carry
liquid bulk commodities. |
|
| Technical operations | refers to the process of operation
of a vessel, including physically maintaining the vessels, maintaining certifications,
and supplying stores, spares, and lubricating oils. Responsibilities also generally
include selecting, engaging and training crew, and arranging insurance coverage. |
|
| Time charter | is a charter under which a Charterer
pays a fixed daily or monthly rate for a fixed period of time for use of the vessel.
Subject to any restrictions in the Charter, the Charterer decides the type and quantity
of cargo to be carried and the ports of loading and unloading. The Charterer pays
all voyage expenses such as fuel, canal tools, and port charges, while the shipowner
pays all normal vessel expenses. |
|
| Time Charter Equivalent or TCE | the abbreviation for Time Charter
Equivalent. TCE revenues, which is time charter revenues and voyage revenues less
voyage expenses, serves as an industry standard for measuring and managing fleet
revenue. |
|
| Tonne-mile | means tonnes carried by a vessel
multiplied by the distance traveled.
| |
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| Tonne | means a metric ton - 1,000 kilograms
|