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PART I
This Annual Report should be read in conjunction with the consolidated financial statements and accompanying notes included in this report.
Unless otherwise indicated, references in this Annual Report to “Seapeak,” the “Company,” “we,” “us” and “our” and similar terms refer to Seapeak LLC and/or one or more of its subsidiaries, except that those terms, when used in this Annual Report in connection with common units or the preferred units described herein, shall mean specifically Seapeak LLC.
In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements relate to future events and our operations, objectives, expectations, performance, financial condition and intentions. When used in this Annual Report, the words “expect,” “intend,” “plan,” “believe,” “anticipate,” “estimate” and variations of such words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, in particular, statements regarding:
•our ability to make cash distributions on our preferred units;
•our future financial condition and results of operations, our future revenues, expenses and capital expenditures, and our expected financial flexibility to pursue capital expenditures, acquisitions and other expansion opportunities, including vessel acquisitions;
•our liquidity needs, including our anticipated funds and sources of financing for liquidity and working capital needs, the sufficiency of cash flows and our expected refinancing of our revolving credit facility, and our estimation that we will have sufficient liquidity for at least a one-year period;
•our ability to obtain financing, including new bank financings and financing for our newbuilding vessels, and to refinance existing indebtedness;
•the expected scope, duration and effects of the novel coronavirus (or COVID-19) pandemic, and the consequences of any future epidemic or pandemic crises;
•growth prospects and future trends of the markets in which we operate;
•our expectations regarding demand in the gas industry;
•our expectations regarding applicability of tax exemptions and tax liabilities, including whether applicable tax authorities may agree with our tax positions;
•liquefied natural gas (or LNG) and natural gas liquid (or NGL) market fundamentals, including the balance of supply and demand in the LNG and NGL markets, estimated growth in size of the world LNG and NGL fleets and spot LNG and NGL charter rates;
•our expectations as to the useful lives of our vessels;
•our expectations and estimates regarding future charter business, including with respect to minimum charter hire payments, revenues and our vessels’ ability to perform to specifications and maintain their hire rates in the future;
•our expectations regarding the ability of our customers to make charter payments to us;
•our ability to maximize the use of our vessels, including the redeployment or disposition of vessels no longer under long-term charter or whose charter contract is expiring in 2023 and 2024;
•our expectations regarding the delivery of certain vessels we agreed to sell and expected delivery dates for newbuilding vessels;
•the impact of the invasion of Ukraine by Russia on the economy, our industry and our business, including as the result of sanctions on Russian companies and individuals and any retaliatory measures by Russia or other countries in response;
•the adequacy of our insurance coverage, less any applicable deductible;
•the possibility of future resumption of the LNG plant in Yemen operated by Yemen LNG Company Limited (or YLNG) and the repayment of deferred hire amounts from YLNG on our two 52%-owned vessels, the Seapeak Marib and Seapeak Arwa;
•our ability to continue to derive a significant portion of our revenues and cash flow from a limited number of customers;
•our continued ability to enter into long-term, fixed-rate time-charters with our LNG and NGL customers;
•obtaining LNG and NGL projects that we bid on;
•our expectations regarding the performance of the receiving and regasification terminal in Bahrain owned by Bahrain LNG W.L.L., a joint venture owned by us (30%), the Kingdom of Bahrain's Ministry of Oil and Gas (formerly National Oil & Gas Authority) (30%), Gulf Investment Corporation (24%) and Samsung C&T (16%) (or the Bahrain LNG Joint Venture);
•our ability to obtain all permits, licenses, and certificates with respect to the conduct of our operations;
•the impact and expected cost of, and our ability and plans to comply with, new and existing governmental regulations and maritime self-regulatory organization standards applicable to our business, including the expected cost to install ballast water treatment systems on our vessels;
•the impact on our business of heightened awareness of and concern with climate change, including on demand for our services and alternative energy sources to LNG and NGL;
•the expected impact of heightened environmental and quality concerns of insurance underwriters, regulators and charterers;
•the expected impact of the cessation of the London Inter-bank Offered Rate (or LIBOR), adoption of the "Poseidon Principles" by financial institutions or any change in jurisdictional economic substance requirements;
•the future valuation or impairment of our assets, including goodwill;
•our hedging activities relating to foreign exchange, interest rate and spot market risks, and the effects of fluctuations in foreign currency exchange, interest rate and spot market rates on our business and results of operations;
•the potential impact of new accounting standards guidance or the adoption of new accounting standards;
•our ability to maintain good relationships with the labor unions that work with us;
•the Angola Joint Venture obtaining a waiver for certain covenant requirements that were not met at December 31, 2022;
•the outcome of pending litigation and claims; and
•our business strategy and other plans and objectives for future operations, including our Environmental, Social and Governance (or ESG) initiatives.
Forward-looking statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, those factors discussed in “Item 3 – Key Information: Risk Factors,” and other factors detailed from time to time in other reports we file with or furnish to the U.S. Securities and Exchange Commission (or the SEC).
We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may subsequently arise. You should carefully review and consider the various disclosures included in this Annual Report and in our other filings made with the SEC that attempt to advise interested parties of the risks and factors that may affect our business prospects and results of operations.
Item 1.Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2.Offer Statistics and Expected Timetable
Not applicable.
Item 3.Key Information
RISK FACTORS
Some of the risks summarized below and discussed in greater detail in the following pages relate principally to the industry in which we operate and to our business in general. Other risks relate principally to the securities market and to ownership of our preferred units. The occurrence of any of the events described in this section could materially and adversely affect our business, financial condition, operating results and ability to pay distributions on, and the trading price of, our preferred units.
Risk Factor Summary
Risks Related to Our Industry
•Our future performance and ability to secure future employment for our LNG and NGL vessels depends on growth in LNG and NGL production, demand and supply for LNG and NGL, and associated demand and supply for LNG and NGL shipping.
•Adverse economic conditions or other developments, including disruptions in the global credit markets, could adversely affect our business and may affect our customers’ ability to pay for our services.
•Declines in natural gas and oil prices may adversely affect our growth prospects and results of operations.
•If the active short-term, medium-term or spot LNG shipping markets continue to develop, entering into long-term, fixed-rate LNG time-charters may be difficult.
•Marine transportation incidents involving any of our vessels could harm our business.
•Terrorist attacks, increased hostilities, political change or war could lead to further economic instability, increased costs and business disruption.
•Acts of piracy on ocean-going vessels continue to be a risk, which could adversely affect our business.
•Public health threats, including COVID-19 or variants, could have an adverse effect on our operations and financial results.
Risks Related to Our Business
•We may not have sufficient cash from operations to enable us to pay distributions on our preferred units.
•Over time, the value of our vessels may decline, which could result in both write-downs and an adverse effect on our operating results.
•Substantial operations outside the United States expose us and our customers to political, governmental and economic instability, which could harm our operations.
•We depend on certain of our joint venture partners to assist us in operating our business.
•We may be unable to charter or recharter vessels at attractive rates, which may lead to reduced revenues and profitability.
•The loss of any key customer, charter or vessel, or any material adjustment to our charter contracts could result in a significant loss of revenues and cash flow.
•Financing agreements containing operating and financial restrictions may restrict our business and financing activities.
•Any capital expenditures may impact our liquidity position. Our failure to obtain the funds for necessary future capital expenditures could have a material adverse effect on our business.
•Our substantial debt levels may limit our flexibility in obtaining additional financing, refinancing credit facilities upon maturity, and pursuing other business opportunities.
•Restrictions in our financing agreements may prevent us from paying distributions on our preferred units.
•We and certain of our joint venture partners may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business, or may have to pay substantially increased costs for our employees and crew.
•Changes in the NGL markets could result in decreased demand for our NGL vessels operating in the spot market.
•We may face substantial competition to expand relationships with existing customers and obtain new customers.
•We have recognized asset impairments in the past and we may recognize additional impairments in the future.
•Increased technological innovation in vessel design or equipment could reduce the competitive capability of certain of our vessels, our charter hire rates and the value of vessels.
•Actual results of new vessel technologies or upgrades may differ from expected results and affect our results of operations.
•We or our partners may be exposed to conditions or requirements that adversely affect us or our joint ventures.
•Implementing our strategy through acquisitions may harm our business and we may not realize expected benefits.
•Our insurance may not be sufficient to cover losses that may occur to our property or result from our operations.
•Sanctions against participants in the Yamal LNG Project could impede its performance of the project.
•Failure, shutdown or other adverse events impacting the Yamal LNG Project may result in our inability to re-deploy the ARC7 LNG carriers.
•We assume credit risk by entering into agreements with unrated entities.
•Exposure to currency exchange rate and interest rate fluctuations will result in fluctuations in our cash flows and operating results.
•If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
•Use of LIBOR is currently scheduled to cease, and interest rates on our LIBOR-based obligations may increase, and distributions on our Series B Preferred Units may change, in the future.
•Many of our seafaring employees are covered by collective bargaining agreements and the failure to renew those agreements or any future labor agreements may disrupt our operations and adversely affect our operations.
•Our directors and officers and Stonepeak Partners L.P. (or Stonepeak) and its other affiliates have conflicts of interest and limited or no fiduciary duties, which may permit them to favor their own interests to those of us or our preferred unitholders.
•Except in limited circumstances, our board of directors (or Board) has the power and authority to conduct our business without approval of our preferred unitholders.
•Our joint venture arrangements impose obligations upon us but in certain circumstances limit our control of the joint ventures, which may affect our ability to achieve our joint venture objectives.
Legal and Regulatory Risks
•Climate change and greenhouse gas (or GHG) restrictions may adversely impact our operations and markets.
•Increasing scrutiny and changing expectations with respect to ESG policies and practices may impose additional costs on us or expose us to additional risks.
•The marine energy transportation industry is subject to substantial environmental and other regulations.
•Regulations relating to ballast water discharge may adversely affect our operational results and financial condition.
•Failure to comply with anti-bribery legislation, sanctions legislations or trade compliance regulations could result in fines, criminal penalties, contract terminations and an adverse effect on our business.
•Our operations may be subject to economic substance requirements in the Marshall Islands and other offshore jurisdictions, which could impact our business.
Information and Technology Risks
•A cyber-attack could materially disrupt our business.
•Our failure to comply with data privacy laws could damage our customer relationships and expose us to litigation risks and potential fines.
Risks Related to an Investment in Our Securities
•It may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.
Tax Risks
•U.S. tax authorities could treat us as a “passive foreign investment company” (or PFIC) which could have adverse U.S. federal income tax consequences to U.S. holders.
•We are subject to taxes, which may impact our liquidity position.
Risks Related to Our Industry
Our future performance and ability to secure future employment for our LNG and NGL vessels depends on growth in LNG and NGL production, demand and supply for LNG and NGL, and associated demand and supply for LNG and NGL shipping.
Our future performance, including our ability to strengthen our balance sheet and to profitably employ and expand our fleet, will depend on growth in LNG and NGL production, demand and supply for LNG and NGL, and associated demand and supply for LNG and NGL shipping services. Demand or supply for LNG and NGL and for the marine transportation of LNG and NGL could be negatively affected by a number of factors, such as:
•increases in the cost of natural gas derived from LNG relative to the cost of natural gas generally;
•increases in the cost of NGL relative to the cost of other competing petrochemicals;
•increases in the production of natural gas in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-natural gas pipelines to natural gas pipelines in those markets;
•decreases in the consumption of natural gas due to increases in its price relative to other energy sources, such as oil, or other factors making consumption of natural gas less attractive;
•increases in availability of additional sources of natural gas, including shale gas;
•increases in the number of LNG or NGL newbuilding vessels, which could lead to an oversupply of vessels in the market and in turn create downward pressure on the demand for LNG and NGL shipping services;
•changes in weather patterns leading to warmer winters in the northern hemisphere and lower gas demand in the traditional peak heating season;
•increases in availability of alternative or renewable energy sources; and
•negative global or regional economic or political conditions, particularly in LNG and NGL consuming regions, which could reduce energy consumption or its growth, including labor or political unrest or military conflicts affecting existing or proposed areas of LNG production or regasification.
In addition, the ongoing COVID-19 pandemic and Russia’s invasion of Ukraine may significantly impact global economic activity (including the demand for LNG and NGL, and associated shipping rates, which may in turn negatively affect our vessels) and may disrupt, delay or lead to cancellations of the construction of new LNG projects (including production, liquefaction, regasification, storage and distribution facilities), which could negatively affect our business, results of operations and financial condition.
Currently, the conflict in Ukraine has significantly increased demand and rates for LNG by reshaping global energy trading patterns, including an increase in LNG imports to the European Union (or EU) from distant sources. Changes in or resolution of the conflict in Ukraine may lead to a reversal of these trading patterns or other effects that could significantly decrease demand and rates for LNG.
Reduced demand for LNG and NGL shipping could have a material adverse effect on our future growth and could harm our business, results of operations and financial condition.
Adverse economic conditions or other developments may affect our customers’ ability to charter our vessels and pay for our services and may adversely affect our business, financial condition and results of operations.
Adverse economic conditions or other developments relating directly to our customers may lead to a decline in our customers’ operations or ability to pay for our services, which could result in decreased demand for our vessels and services. Our customers’ inability to pay for any reason could also result in their default on our current contracts and charters. The decline in the amount of services requested by our customers or their default on our contracts with them could have a material adverse effect on our business, financial condition and results of operations.
Adverse economic conditions, including disruptions in the global credit markets, could adversely affect our business, financial condition, and results of operations.
Economic downturns and financial crises in the global or regional markets could produce illiquidity in the capital markets, market volatility, increased exposure to interest rate and credit risks and reduced access to capital markets. If global financial markets and economic conditions significantly deteriorate in the future, we may face restricted access to the capital markets or bank lending, which may make it more difficult and costly to fund future growth. Decreased access to such resources could have a material adverse effect on our business, financial condition and results of operations.
Declines in natural gas and oil prices may adversely affect our growth prospects and results of operations.
Low energy prices may negatively affect both the competitiveness of natural gas as a fuel for power generation and the market price of natural gas, to the extent that natural gas prices are benchmarked to the price of crude oil. Low energy prices may also adversely affect energy and capital markets and available sources of financing for our capital expenditures and debt repayment obligations. If a sustained low energy price environment were to develop, our business, results of operations and financial condition may be adversely affected, as well as our ability to make cash distributions on our preferred units, as a result of, among other things, the following events which are beyond our control:
•fluctuations in worldwide and regional supply of and demand for natural gas;
•a reduction in exploration for or development of new natural gas reserves or projects, or the delay or cancellation of existing projects as energy companies lower their capital expenditures budgets, which may reduce our growth opportunities;
•lower demand for vessels of the types we own and operate, which may reduce available charter rates and revenue to us upon redeployment of our vessels following expiration or termination of existing contracts or upon the initial chartering of vessels, or which may result in extended periods of our vessels being idle between contracts;
•customers potentially seeking to renegotiate or terminate existing vessel contracts, or failing to extend or renew contracts upon expiration, or seeking to negotiate cancellable contracts;
•the inability or refusal of customers to make charter payments to us or to our joint ventures, due to financial constraints or otherwise; or
•declines in vessel values, which may result in losses to us upon vessel sales or impairment charges against our earnings.
We may have more difficulty entering into long-term, fixed-rate LNG time-charters if the active short-term, medium-term or spot LNG shipping markets continue to develop.
LNG shipping historically has been transacted with long-term, fixed-rate time-charters, usually with terms ranging from 15 to 20 years. One of our principal strategies is to enter into additional long-term, fixed-rate LNG time-charters. In recent years, the amount of LNG traded on a spot and short-term basis (defined as contracts with a duration of three years or less) has been increasing.
If the active spot, short-term or medium-term markets continue to develop, we may have increased difficulty entering into long-term, fixed-rate time-charters for our LNG carriers and, as a result, our cash flow may decrease and be less stable. In addition, an active short-term, medium-term or spot LNG shipping market may require us to enter into charters with rates based on changing market prices, as opposed to contracts based on a fixed rate, which could result in a decrease in our cash flow in periods when the market price for shipping LNG is depressed.
Marine transportation is inherently risky, and an incident involving significant loss of or environmental contamination by any of our vessels could harm our reputation and business.
Our vessels, crew and cargoes are at risk of being damaged, injured or lost because of events such as:
•marine disasters;
•bad weather or natural disasters;
•mechanical failures;
•grounding, fire, explosions and collisions;
•piracy (hijacking and kidnapping);
•cyber-attack;
•acute-onset illness in connection with global or regional pandemics or similar public health crises;
•mental health of crew members;
•human error; and
•war and terrorism.
An accident involving any of our vessels could result in any of the following:
•significant litigation with our customers or other third parties;
•death or injury to persons, loss of property or environmental damage;
•delays in the delivery of cargo;
•liabilities or costs to recover any spilled fuel oil, NGL or other products and to restore the environment affected by the spill;
•loss of revenues from charters or termination of charter contracts;
•governmental fines, penalties or restrictions on conducting business;
•higher insurance rates; and
•damage to our reputation and customer relationships generally.
Any of these results could have a material adverse effect on our business, financial condition and operating results. In addition, any damage to, or environmental contamination involving, production facilities serviced by our vessels could result in the suspension or curtailment of operations by our customer, which would in turn result in loss of revenues.
Terrorist attacks, increased hostilities, political change or war could lead to further economic instability, increased costs and business disruption.
Terrorist attacks, and current or future conflicts in Ukraine, the Middle East and elsewhere, and political change, may adversely affect our business, operating results, financial condition, and ability to raise capital and future growth. Recent hostilities in Ukraine, the Middle East and elsewhere may lead to additional armed conflicts or to further acts of terrorism and civil disturbance which may contribute to economic instability and disruption of LNG and NGL production and distribution, which could result in reduced demand for our services or impact on our operations and or our ability to conduct business.
Furthermore, sanctions announced in response to Russia's invasion of Ukraine in 2022 may also adversely impact our business given Russia’s role as a major global exporter of crude oil and natural gas. Our business could be harmed by trade tariffs, trade embargoes, restrictions imposed on financial institutions, entity designations or other economic sanctions by the United States, the EU, United Kingdom or other countries against Russia, companies with Russian connections or the Russian energy sector and harmed by any retaliatory measures by Russia or other countries in response. While uncertainty remains regarding the global impact of the Russia's invasion of Ukraine, it is possible that such tensions could adversely affect our business, financial condition, results of operation and cash flows. In addition, it is possible that third parties with which we have charter contracts may be impacted by events in Russia and Ukraine, which could adversely affect our operations and financial condition.
LNG and NGL facilities, shipyards, vessels, pipelines and gas fields could be targets of future terrorist attacks and warlike operations and our vessels could be targets of hijackers, terrorists or warlike operations. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport LNG and NGL to or from certain locations. Terrorist attacks, war, hijacking or other events beyond our control that adversely affect the distribution, production or transportation of LNG and NGL to be shipped by us could entitle our customers to terminate our charter contracts, which would harm our cash flow and our business.
Terrorist attacks, or the perception that LNG or NGL facilities and carriers are potential terrorist targets, could materially and adversely affect the expansion of LNG and NGL infrastructure and the continued supply and export of LNG and NGL involving the United States and other countries. Concern that LNG or NGL facilities may be targeted for attack by terrorists, as well as environmental concerns, has contributed to significant community resistance to the construction of a number of LNG or NGL facilities. If a terrorist incident involving an LNG or NGL facility or LNG or NGL carrier did occur, in addition to the possible effects identified in the previous paragraph, the incident may adversely affect the construction of additional LNG or NGL facilities or lead to the temporary or permanent closing of various LNG or NGL facilities currently in operation.
Acts of piracy on ocean-going vessels continue to be a risk, which could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, Gulf of Guinea and the Indian Ocean off the coast of Somalia. There continues to be a significant risk of piracy incidents in the Gulf of Guinea and South East Asia. If these piracy attacks result in regions in which our vessels are deployed being named on the Joint War Committee Listed Areas, war risk insurance premiums payable for such coverage may increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which may be incurred to the extent we employ on-board security guards and escort vessels, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, hijacking as a result of an act of piracy against our vessels, or an increase in cost or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations.
Public health threats, including COVID-19 or variants, could have an adverse effect on our operations and financial results.
Public health threats and highly communicable diseases, such as COVID-19, outbreaks of which have already occurred in various parts of the world near where we operate, could adversely affect our operations, the operations of our customers or suppliers and the global economy. In response to the COVID-19 pandemic, many countries, ports, terminals and organizations, including those where we conduct a large part of our operations, implemented measures to combat the outbreak, such as quarantines and travel restrictions. Such measures caused severe trade disruptions. In addition, the pandemic initially resulted, and the pandemic or other future public health threats may again result in, a significant decline in global demand for natural gas and oil. Any significant decrease in demand for the cargo we transport could adversely affect demand for our vessels and services. The extent to which the COVID-19 pandemic or any other public health threat may impact our business, results of operations and financial condition, including possible impairments, will depend on future developments, which are uncertain and cannot be predicted, including, among others, the development of variants of the COVID-19 virus, and the level of the effectiveness and administration of vaccines and other actions to contain or treat its impact.
Risks Related to Our Business
We may not have sufficient cash from operations to enable us to pay distributions on our preferred units.
Our ability to pay distributions on our preferred units principally depends upon our ability to continue generating cash from our operations, which may fluctuate based on, among other things:
•the rates we obtain from our charters and the performance by our charterers of their obligations under the charters;
•the expiration of charter contracts;
•the charterers' option to terminate charter contracts or repurchase vessels, in either case upon our breach of the relevant contract, or payment of any applicable early termination or repurchase amounts;
•the occurrence of off-hire days;
•the utilization levels of our vessels trading in the spot or short-term market;
•the level of our operating costs, such as the cost of crews and insurance;
•the continued availability of LNG and NGL production, liquefaction and regasification facilities;
•the number of unscheduled off-hire days for our fleet and the timing of, and number of days required for, scheduled dry docking of our vessels;
•prevailing global and regional economic and political conditions;
•currency exchange and interest rate fluctuations;
•the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business; and
•limitations on obtaining cash distributions from joint venture entities due to similar restrictions on the joint venture entities.
The actual amount of cash we will have available for distribution also will depend on factors such as:
•the level of capital expenditures we make, including for maintaining or repairing vessels, building new vessels, acquiring existing vessels and complying with regulations;
•our debt service requirements, financial covenants and restrictions on distributions contained in our debt instruments;
•fluctuations in our working capital needs;
•our ability to make working capital borrowings, including to pay distributions to preferred unitholders; and
•the amount of any cash reserves, including reserves for future capital expenditures, anticipated future credit needs and other matters, established by our Board, in its discretion.
Over time, the value of our vessels may decline, which could adversely affect our operating results.
Vessel values for LNG and NGL carriers can fluctuate substantially over time due to a number of different factors, including:
•prevailing economic conditions in natural gas and energy markets;
•a substantial or extended decline in demand for natural gas, LNG or NGL;
•competition from more technologically advanced vessels;
•the age of the vessel relative to other alternative vessels that are available in the market;
•increases in the supply of vessel capacity; and
•the cost of retrofitting or modifying existing vessels, as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulation or standards, or otherwise.
Vessel values may decline from existing levels. If the operation of a vessel is not profitable, or if we cannot redeploy a chartered vessel at attractive rates upon charter termination, rather than continue to incur costs to maintain and finance the vessel, we may seek to dispose of it. Our inability to dispose of the vessel at a fair market value or the disposal of the vessel at a fair market value that is lower than its book value could result in a loss on its sale and adversely affect our results of operations and financial condition. Further, if we determine at any time that a vessel’s future useful life and earnings require us to impair its value on our financial statements, we may need to recognize a significant charge against our earnings.
Our and many of our customers’ substantial operations outside the United States expose us and them to political, governmental and economic instability, which could harm our operations.
Because our operations, and the operations of certain of our customers, are primarily conducted outside of the United States, we or they may be affected by economic, political and governmental conditions in the countries where we or our customers engage in business or where our vessels are registered. Any disruption caused by these factors could harm our business or the business of these customers, including through reduction in the levels of oil and gas exploration, development and production activities in these areas or restricting the pool of customers. We derive some of our revenues from shipping LNG and NGL from politically and economically unstable regions, such as Russia, Angola and Yemen. Hostilities, strikes, or other political or economic instability in regions where we or these customers operate or where we or they may operate could have a
material adverse effect on the growth of our business, results of operations and financial condition and ability to make cash distributions, or on the ability of these customers to make payments or otherwise perform their obligations to us.
In addition, tariffs, trade embargoes, asset freezes and other economic sanctions by the United States or other countries against countries in which we operate, or to which we trade, or to which we or any of our customers, joint venture partners or business partners become subject, may harm our business. For example, general trade tensions between the United States and China escalated in 2018 and continued through much of 2019, with the United States imposing a series of tariffs on China and China responding by imposing tariffs on United States products. Although during the last quarter of 2019, the United States and China negotiated an agreement to reduce trade tensions which became effective in February 2020, our business could be harmed by increasing trade protectionism or trade tensions between the United States and China, as well as any trade embargoes or other economic sanctions by the United States or other countries against countries in the Middle East, Asia, Russia or elsewhere as a result of terrorist attacks, hostilities, or diplomatic or political pressures that limit trading activities with those countries. In addition, sanctions imposed on certain Russian companies and individuals starting in 2014 based on Russia's involvement in divesting control by Ukraine of the Crimea region and sanctions announced in response to Russia's invasion of Ukraine in 2022 may also adversely impact our business, given Russia’s role as a major global exporter of crude oil and natural gas. Further, a government could requisition one or more of our vessels, which is most likely during war or national emergency. Any such requisition would cause a loss of the vessel and could harm our cash flow and financial results. Please see below relating to our two vessels chartered out to YLNG in “Item 3 – Risk Factors: We derive a substantial majority of our revenues from a limited number of customers, and the loss of any customer, charter or vessel, or any adjustment to our charter contracts could result in a significant loss of revenues and cash flow.”
We depend on certain of our joint venture partners to assist us in operating our business and competing in our markets.
We have entered into, and expect to enter into additional, joint venture arrangements with third parties to expand our fleet and access growth opportunities. In particular, we rely on the expertise and relationships that our joint ventures and joint venture partners may have with current and potential customers to jointly pursue LNG and NGL projects and provide assistance in competing in new markets.
Our ability to compete for the transportation requirements of certain LNG and NGL projects, enter into new charter contracts, secure financings and expand our customer relationships depends in part on our ability to leverage our relationships with our joint venture partners and their reputations and relationships in the shipping industry. If certain of our joint venture partners suffer material damage to their reputations or relationships it may harm our ability to:
•renew existing charters upon their expiration;
•obtain new charters;
•successfully interact with shipyards during periods of shipyard construction constraints;
•obtain financing on commercially acceptable terms; or
•maintain satisfactory relationships with our employees and suppliers.
If our ability to do any of the things described above is impaired, it could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions to our preferred unitholders.
We may be unable to charter or recharter vessels at attractive rates, which may lead to reduced revenues and profitability.
Our ability to charter or recharter our LNG and NGL carriers upon the expiration or termination of their current time charters and the charter rates payable under any renewal or replacement charters depend upon, among other things, the then current states of the LNG and NGL carrier markets. As of December 31, 2022, in our LNG and NGL operating fleets, we had one and seven vessels, respectively, that were laid-up or trading in the spot market; two and 11 vessels, respectively, with charters scheduled to expire in 2023, excluding extension options; and seven and six vessels, respectively, with charters scheduled to expire in 2024, excluding extension options. If charter rates are low when existing time charters expire, we may be required to recharter our vessels at reduced rates or even possibly at a rate whereby we incur a loss, which would harm our results of operations. Alternatively, we may determine to leave such vessels off-charter, which would also harm our results of operations. The size of the current orderbooks for LNG carriers and NGL carriers is expected to result in the increase in the size of the world LNG and NGL fleets over the next few years. An over-supply of vessel capacity, combined with stability or any decline in the demand for LNG or NGL carriers, may result in a reduction of charter hire rates.
We derive a substantial majority of our revenues from a limited number of customers, and the loss of any customer, charter or vessel, or any adjustment to our charter contracts could result in a significant loss of revenues and cash flow.
We have derived, and believe that we will continue to derive, a significant portion of our revenues and cash flow from a limited number of customers. Please read “Item 18 – Financial Statements: Note 4 – Segment Reporting.”
We could lose a customer or the benefits of a time-charter if:
•the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise;
•we agree to reduce the charter payments due to us under a charter because of the customer’s inability to continue making the original payments;
•upon a breach by us of the relevant contract, the customer exercises certain rights to terminate the charter, purchase or cause the sale of the vessel or, under some of our charters, convert the time-charter to a bareboat charter (some of which rights are exercisable at any time);
•the customer terminates the charter because we fail to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or we default under the charter;
•under some of our time-charters, the customer terminates the charter because of the termination of the charterer’s sales agreement or a prolonged force majeure event affecting the customer, including damage to or destruction of relevant facilities, war or political unrest preventing us from performing services for that customer; or
•the customer becomes subject to applicable sanctions laws which prohibit our ability to lawfully charter our vessel to or receive payment from such customer.
Two of the six MALT LNG Carriers in our 52%-owned MALT Joint Venture, the Seapeak Marib and Seapeak Arwa, were chartered-out to Yemen LNG under long-term charter contracts with YLNG. However, due to the political unrest in Yemen, YLNG decided to temporarily close operation of its LNG plant in Yemen in 2015. As a result, commencing January 1, 2016, the MALT Joint Venture agreed to successive deferral arrangements with YLNG pursuant to which a portion of the charter payments was deferred. Concurrently with the expiration of the most recent deferral arrangement, in February 2022, the MALT Joint Venture entered into a second suspension agreement with YLNG (or the Second Suspension Agreement) pursuant to which the MALT Joint Venture and YLNG agreed to suspend the two charter contracts for a further period of up to three years until February 2025. Subsequently, YLNG approved the sub-chartering of the Seapeak Marib by the MALT Joint Venture until mid-2026. Please read “Item 5 – Operating and Financial Review and Prospects: Significant Developments in 2022 and Early 2023 – MALT LNG Carriers Charter Contracts."
If we lose a key LNG time-charter, we may be unable to redeploy the related vessel on terms as favorable to us due to the long-term nature of most LNG time-charters and fluctuations in the LNG spot market. If we are unable to redeploy a LNG carrier, we will not receive any revenues from that vessel, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition. In addition, if a customer exercises its right to purchase a vessel, we would not receive any further revenue from the vessel and may be unable to obtain a substitute vessel and charter. This may cause us to receive decreased revenue and cash flows from having fewer vessels operating in our fleet. Any compensation under our charters for a purchase of the vessels may not adequately compensate us for the loss of the vessel and related time-charter.
The loss of certain of our customers, time-charters or vessels, or a decline in payments under our charters, could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions to our preferred unitholders.
Financing agreements containing operating and financial restrictions may restrict our business and financing activities.
The operating and financial restrictions and covenants in our financing arrangements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to pursue and expand our business activities. For example, these financing arrangements may restrict our ability to:
•incur or guarantee indebtedness;
•change ownership or structure, including mergers, consolidations, liquidations and dissolutions;
•make dividends or distributions when in default of the relevant loans;
•make certain negative pledges and grant certain liens;
•sell, transfer, assign or convey assets;
•make certain investments; and
•enter into new lines of business.
Some of our financing arrangements require us to maintain a minimum level of tangible net worth, to maintain certain ratios of vessel values as it relates to the relevant outstanding principal balance, to maintain a minimum level of aggregate liquidity, to maintain leverage below a maximum level and require certain of our subsidiaries to maintain restricted cash deposits. Please read "Item 5 – Operating and Financial Review and Prospects: Liquidity and Capital Resources." Our ability to comply with covenants and restrictions contained in our financing agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions, and in certain cases the ability of our joint venture partners to comply with applicable laws and regulations (including business corruption and sanctions regulations). If any such events were to occur, compliance with these covenants may be impaired. If restrictions, covenants, ratios or tests in the financing agreements are breached, and we are unable to cure such breach within the prescribed cure period, a significant portion or all of the obligations may, at the election of the relevant lender, become immediately due and payable, and the lenders’ commitment to make further loans available to us may terminate. In certain circumstances, this could lead to cross-defaults under other financing agreements which in turn could result in obligations becoming due and commitments being terminated under such agreements. A default under financing agreements could also result in foreclosure on any of our vessels and other assets securing related loans and finance leases or our need to sell assets or take other actions in order to meet our debt obligations.
Furthermore, the termination of any of our charter contracts by our customers could result in the repayment of our financing agreements to which the chartered vessels relate.
Any capital expenditures, including as a result of pursuing future fleet expansion opportunities, may impact our liquidity position. Our failure to obtain the funds for necessary future capital expenditures could have a material adverse effect on our business, results of operations and financial condition and on our ability to make cash distributions to our preferred unitholders.
We make substantial capital expenditures to maintain and expand our fleet or business, including capital expenditures associated with drydocking vessels, modifying existing vessels, and acquiring secondhand or newbuilding vessels. We currently have on order five LNG carrier newbuilding vessels that are scheduled for deliveries during 2027. If we bid on and are awarded contracts relating to any LNG and NGL project, we will incur
significant additional capital expenditures to build the related LNG and NGL carriers. Obligations of us and our joint ventures to pay committed expenditures are not conditional upon our or their ability to obtain financing for such expenditures.
To fund any future capital expenditures, we will be required to use cash from operations or incur borrowings or raise capital through the sale of debt or equity securities. Use of cash from operations may impact our liquidity and ability to pay distributions to preferred unitholders. Our ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for future capital expenditures could have a material adverse effect on our business, results of operations and financial condition, including the possibility of defaulting under our newbuilding contracts.
In addition, although delivery of a completed vessel will not occur until much later (approximately two to three years from the time an order is placed), we typically must pay an initial installment up-front upon signing the purchase contract. During the construction period, we generally are required to make installment payments on newbuildings prior to their delivery, in addition to incurring financing, miscellaneous construction and project management costs, but we do not derive any income from the vessel until after its delivery.
Our substantial debt levels may limit our flexibility in obtaining additional financing, refinancing credit facilities upon maturity, and pursuing other business opportunities.
As at December 31, 2022, our consolidated debt and obligations related to our credit facilities and finance leases totaled $3.1 billion and we had the capacity to borrow an additional $45.0 million under our revolving credit facility. This facility may be used by us for general corporate purposes. If we obtain debt financing for future newbuilding orders or we are awarded contracts for new LNG or NGL newbuild projects, our consolidated debt and obligations will increase, perhaps significantly. We will continue to have the ability to incur additional debt, subject to limitations in our credit facilities. Our level of debt could have important consequences to us, including the following:
•our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired, or such financing may not be available on favorable terms, if at all;
•we will need a substantial portion of our cash flow to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations and future business opportunities;
•our debt level may make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our industry or the economy generally; and
•our debt level may limit our flexibility in responding to changing business and economic conditions.
Our ability to service our debt and obligations related to our credit facilities and finance leases depends upon, among other things, our future financial and operating performance, which is affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. Furthermore, our ability to borrow against the vessels in our existing fleet and any vessels we may acquire in the future largely depends on the value of the vessels, which in turn depends in part on charter hire rates, charter lengths and the ability of our charterers to comply with the terms of the charters. If our operating results are not sufficient to service our current or future indebtedness under our financing agreements, we will be forced to take actions such as reducing distributions, reducing, canceling or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, seeking to restructure or refinance our debt, seeking additional debt or equity capital or seeking bankruptcy protection. We may not be able to affect any of these remedies on satisfactory terms, or at all.
Restrictions in our financing agreements may prevent us from paying distributions on our preferred units.
The payment of principal and interest on our debt reduces cash available for distribution on our preferred units. In addition, our financing agreements prohibit the payment of distributions upon the occurrence of the following events, among others:
•failure to pay any principal, interest, fees, expenses or other amounts when due;
•breach or lapse of any insurance with respect to vessels securing the facility;
•breach of certain financial covenants;
•failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;
•default under other indebtedness;
•bankruptcy or insolvency events;
•failure of any representation or warranty to be materially correct;
•a change of control, as defined in the applicable agreement; or
•a material adverse effect, as defined in the applicable agreement.
We and certain of our joint venture partners may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business, or may have to pay substantially increased costs for our employees and crew.
Our success depends in large part on the ability of us and certain of our joint venture partners to attract and retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work. The ability to attract and retain qualified crew members under a competitive industry environment continues to put upward pressure on crew manning costs.
If we are not able to increase our charter rates to compensate for any crew cost increases, our financial condition and results of operations may be adversely affected. Any inability we experience in the future to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business.
Changes in the NGL markets could result in decreased demand for our NGL vessels operating in the spot market.
Our NGL carriers that operate in the NGL spot market are either owned by us or owned or chartered-in by our 50/50 NGL-related joint venture with Exmar NV (or Exmar) (or the Exmar LPG Joint Venture) that owns and charters-in NGL carriers with a primary focus on the mid-size NGL carrier segment. The charters in the spot market operate for short durations and are priced on a current, or “spot,” market rate. The NGL spot market is volatile and fluctuates based upon the many conditions and events that affect the price, production and transport of NGL, including, among others, competition from alternative energy sources and negative global or regional economic or political conditions. Any adverse changes in the NGL markets may impact our ability to enter into economically beneficial charters when our NGL carriers complete their existing short-term charters in the NGL spot market, which may reduce vessel earnings and impact our operating results.
Our growth depends on our ability to expand relationships with existing customers and obtain new customers, for which we will face substantial competition.
One of our principal objectives is to enter into long-term, fixed-rate LNG charters. The process of obtaining new long-term charters is highly competitive and generally involves an intensive screening process and competitive bids, and often extends for several months. Shipping contracts are awarded based upon a variety of factors relating to the vessel operator, including:
•size, age, technical specifications and condition of the vessel;
•shipping industry relationships and reputation for customer service and safety;
•shipping experience and quality of ship operations (including cost effectiveness);
•operational reliability and performance capabilities of the vessel;
•quality and experience of seafaring crew;
•safety record;
•the ability to finance vessels at competitive rates and financial stability generally;
•relationships with shipyards and the ability to get suitable berths;
•construction management experience, including the ability to obtain on-time delivery of new vessels according to customer specifications;
•willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for prolonged off-hire; and
•competitiveness of the bid in terms of overall price.
We compete for providing marine transportation services for potential energy projects with a number of experienced companies, including state-sponsored entities and major energy companies affiliated with the energy project requiring energy shipping services. Many of these competitors have significantly greater financial resources than we do. We anticipate that an increasing number of marine transportation companies – including many with strong reputations and extensive resources and experience – will enter the energy transportation sector. This increased competition may cause greater price competition for time-charters. As a result of these factors, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which could have a material adverse effect on our business, results of operations and financial condition.
We have recognized asset impairments in the past and we may recognize additional impairments in the future, which will reduce our earnings and net assets.
If we determine at any time that an asset has been impaired, we may need to recognize an impairment charge that will reduce our earnings and net assets. We review our vessels for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable, which occurs when an asset's carrying value is greater than the estimated undiscounted future cash flows the asset is expected to generate over its remaining useful life. We review our goodwill for impairment annually and if a reporting unit's goodwill carrying value is greater than the estimated fair value, the goodwill attributable to that reporting unit is impaired. We evaluate our investments in equity-accounted joint ventures for impairment when events or circumstances indicate that the carrying value of such investment may have experienced an other-than-temporary decline in value below its carrying value.
During 2020, we recognized total write-downs of vessels of $51.0 million. During 2021, we recognized a $30.0 million write-down on our investment in our 50% owned joint venture with Exmar which owned one LNG carrier (or the Excalibur Joint Venture). In September 2022, we sold our 50% ownership interest in the Excalibur Joint Venture. During 2022, we recognized total write-downs of vessels of $54.0 million and a $86.9 million write-down on our investment in our MALT Joint Venture. For information about these write-downs, please read "Item 5 – Operating and Financial Review and Prospects: Management's Discussion and Analysis of Financial Condition and Results of Operations – Year Ended December 31, 2022 versus Year Ended December 31, 2021", "Item 18 - Financial Statements: Note 7 - Equity-Accounted Joint Ventures", and "Item 18 – Financial Statements: Note 19 – Write-down and Gain on Sales of Vessels."
Increased technological innovation in vessel design or equipment could reduce the competitive capability of certain of our vessels, our charter hire rates and the value of vessels.
The charter hire rates and the value and operational life of a vessel are determined by a number of factors, including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy, boil-off ratio and reliquefaction capabilities (in the case of LNG vessels), and the ability for LNG or NGL cargo to be loaded and unloaded quickly. More efficient vessel designs, engines or other features may increase overall vessel efficiency. Flexibility includes the ability to access LNG and NGL storage facilities, utilize related docking facilities and pass through canals and straits. Physical life is related to the original design and construction, maintenance and the impact of the stress of operations. If new LNG or NGL carriers are built that are more efficient or flexible or have longer physical lives than our vessels, competition from these more technologically advanced LNG or NGL carriers could reduce recharter rates available to our vessels and the resale value of the vessels. As a result, our business, results of operations and financial condition could be harmed.
Actual results of new vessel technologies or upgrades may differ from expected results and affect our results of operations.
We have invested and are investing in vessel technology upgrades such as M-type, Electronically Controlled, Gas Injection (or MEGI) engines, M-type, Electronically Controlled, Gas Admission (or MEGA) engines, and other equipment and designs for certain LNG carriers, including, among other things, to improve fuel efficiency and vessel performance. These new engine designs and other equipment may not perform to expectations during actual operations, which may result in our exposure to performance claims based on failure to achieve specified performance requirements included in certain charter party agreements. During certain operations, actual fuel consumption for our MEGI LNG carriers has exceeded and may continue to exceed specified levels in certain charter party agreements, which resulted and may continue to result in reimbursement by us to the charterer for the cost of the excess fuel consumed. We completed installations of additional equipment on certain of our MEGI LNG carriers to lower fuel consumption on these vessels. Continued reimbursement obligations, unrecovered capital expenditures, delays in the installation of future equipment, or new equipment installations not performing to our expectations could harm our results of operations or financial condition.
We or our joint venture partners may be unable to operate an LNG receiving and regasification terminal and may be exposed from time to time to conditions, developments, or requirements that may adversely affect us or our joint venture.
We have a 30% ownership interest in an LNG regasification and receiving terminal in Bahrain (please read “Item 18 – Financial Statements: Note 7a(ii) – Equity-Accounted Joint Ventures”). Although the Bahrain LNG Joint Venture has completed mechanical construction and commissioning of the Bahrain terminal and is currently receiving terminal use payments, certain handover arrangements in respect of the Bahrain terminal remain subject to the approval of the lenders of the Bahrain LNG Joint Venture. As a result, the Bahrain LNG Joint Venture may experience associated delays in the formal acceptance of the terminal and the commencement of commercial operations if the Bahrain LNG Joint Venture does not satisfy all applicable conditions and obtain all necessary consents in accordance with its financing agreements. Accordingly, we or our joint venture partners may be unable to operate the LNG receiving and regasification terminal properly, whether due to a lack of satisfaction of such conditions, a lack of obtaining such consents, a lack of industry experience, or otherwise, which could affect our ability to operate the terminal, including as a result of a reduction in the expected output of the terminal. Any such reduction could decrease revenues to the Bahrain LNG Joint Venture which may harm our business, results of operations and financial condition.
In addition, the development, construction and operation of large-scale energy and regasification projects, such as the Bahrain terminal, are inherently subject to unforeseen conditions or developments. Such conditions or developments may include, among others: shortages or delays in deliveries of equipment, materials or labor; significant cost over-runs; labor disruptions; government issues; regulatory changes; legal disputes with third-parties, including contractors, sub-contractors and customers; investigations involving various authorities; adverse weather conditions; unanticipated increases in equipment, material or labor costs; reductions in access to financing, an increase in the amount of required support from shareholders of the Bahrain LNG Joint Venture under the terms of the financing, the ability to comply with all conditions and requirements under the terms of the financing, and the ability to obtain any applicable waivers or consents from our lenders on a timely basis or at all; unforeseen engineering, technical and technological design, environmental, infrastructure or engineering issues; the inability to operate the Bahrain terminal at its full designed capacity; a temporary shutdown of the Bahrain terminal; and a general inability to realize the anticipated benefits of the Bahrain terminal, including all the benefits associated with the long-term contract with the customer. In the event that one or more of these conditions or developments were to materialize or continue for a prolonged period (in particular, any legal disputes with third parties or the Bahrain LNG Joint Venture’s inability to comply with all conditions and requirements under the terms of its financing or obtain any applicable waivers or consents from its lenders under the terms of its financing), our business, results of operations and financial condition could be harmed.
We may be unable to make or realize expected benefits from acquisitions, and implementing our strategy through acquisitions may harm our business, financial condition and operating results.
Part of our strategy includes acquiring existing LNG and NGL carriers or LNG and NGL shipping businesses as the opportunities arise. Historically, there have been very few purchases of existing vessels and businesses in the LNG and NGL shipping industries. Factors that may contribute to a limited number of acquisition opportunities in the LNG and NGL shipping industries in the near term include the relatively small number of independent LNG and NGL fleet owners and the limited number of LNG and NGL carriers not subject to existing long-term charter contracts. In addition, competition from other companies could reduce our acquisition opportunities or cause us to pay higher prices.
In December 2022, we acquired Greenship Gas Trust, Greenship Gas Manager Pte. Ltd. and their subsidiaries (collectively Evergas), which owns and operates a fleet of 16 NGL vessels (including six in-chartered vessels) and owns a 50% interest in the Dan-Unity CO2 joint venture (Dan-Unity JV).
Our acquisition of Evergas, along with any other acquisitions of a vessel or business, may not be profitable to us at or after the time we acquire it and may not generate cash flow sufficient to justify our investment. In addition, acquisitions, including our acquisition of Evergas, may expose us to risks that may harm our business, financial condition and operating results, including risks that we may:
•fail to realize anticipated benefits, such as new customer relationships, successful integration, cost-savings or cash flow enhancements;
•be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;
•decrease our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions;
•significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;
•incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or
•incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.
Unlike newbuildings, existing vessels typically do not carry warranties as to their condition. While we generally inspect existing vessels prior to purchase, such an inspection would normally not provide us with as much knowledge of a vessel’s condition as we would possess if it had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for vessels we have operated since they were built. These costs could decrease our cash flow and reduce our liquidity.
Our insurance may not be sufficient to cover losses that may occur to our property or result from our operations.
The operation of LNG and NGL carriers, and LNG facilities, is inherently risky. Although we carry hull and machinery (marine and war risks) and protection and indemnity insurance, and other liability insurance, all risks may not be adequately insured against, and any particular claim may not be paid or paid in full. In addition, only certain of our LNG and NGL carriers carry loss of hire insurance covering the loss of revenues resulting from vessel off-hire time due to our assessment of the cost of the insurance relative to our off-hire experience. Any significant off-hire time of our vessels could harm our business, operating results and financial condition. Any claims relating to our operations covered by insurance are subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves. In addition, the cost of this protection and indemnity coverage has significantly increased and may continue to increase. Even if our insurance coverage is adequate to cover our losses, we may not be able to obtain a timely replacement vessel in the event of a total loss of a vessel.
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. A catastrophic oil spill, marine disaster or natural disasters could result in losses that exceed our insurance coverage, which could harm our business, financial condition and operating results. Any uninsured or underinsured loss could harm our business and financial condition. In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable maritime regulatory organizations.
Changes in the insurance markets attributable to structural changes in insurance markets, economic factors, sanctions (particularly those relating to Russia), the impact of the COVID-19 pandemic, outbreaks of other communicable diseases, war, terrorist attacks, environmental catastrophes, or political change may also make certain types of insurance more difficult for us to obtain. In addition, the insurance that may be available may be significantly more expensive than our existing coverage or be available with restrictive terms.
Sanctions against key participants in the Yamal LNG Project could impede performance of the Yamal LNG Project, which could have a material adverse effect on us.
In 2014, the U.S. Treasury Department’s Office of Foreign Assets Control (or OFAC) placed Russia-based Novatek, a 50.1% owner of the Yamal LNG Project, on the Sectoral Sanctions Identifications List. OFAC also previously imposed sanctions on an investor in Novatek and these sanctions also remain in effect. The current restrictions on Novatek prohibit U.S. persons (and their subsidiaries) from participating in debt financing transactions of greater than 60 days maturity with Novatek and, by virtue of Novatek’s 50.1% ownership interest, the Yamal LNG Project. The EU also imposed certain sanctions on Russia. These sanctions require an EU license or authorization before a party can provide certain technologies or technical assistance, financing, financial assistance, or brokering with regard to these technologies. However, the technologies being currently sanctioned by the EU appear to focus on oil exploration projects, not gas projects. In addition, OFAC and other governments or organizations may impose additional sanctions on Novatek, the Yamal LNG Project or other project participants, which may adversely affect the Yamal LNG Project. Although we believe that we are in compliance with all applicable sanctions, laws and regulations, and intend to maintain such compliance, the scope of these sanctions laws may be subject to change.
Russia's invasion of Ukraine in early 2022 has resulted in further economic sanctions issued by the United States, the EU, the United Kingdom and other jurisdictions relating to the banning of transactions with numerous Russian financial institutions, a ban on the transportation of certain types of Russian cargo including crude oil, a ban on new investments in Russia, and numerous other trade restrictions. While uncertainty remains regarding the global impact of the conflict in Ukraine, it is possible that such tensions and future sanctions could adversely affect our business, financial condition, results of operation and cash flows. Furthermore, it is possible that third parties with whom we have charter contracts may be impacted by events in Russia and Ukraine, which could adversely affect our operations.
In addition to our 50%-owned joint venture with China LNG Shipping (Holdings) Limited (or the Yamal LNG Joint Venture), participants in other projects in which we are involved (including, with respect to such other projects, our joint venture partners, customers, and their respective shareholders or management) may be subject to sanctions, which sanctions may have a material adverse effect on the success of those projects or our joint ventures and, in turn, on our business, financial condition, and results of operations.
Failure, shutdown or other adverse events impacting the Yamal LNG Project may result in our inability to re-deploy the ARC7 LNG carriers.
The charter party under the Yamal LNG Joint Venture’s time-charter contracts for the Yamal LNG Project is Yamal Trade Pte. Ltd., a wholly-owned subsidiary of Yamal LNG, the project’s sponsor. If the Yamal LNG Project were to shutdown or face other adverse events, in either case on a permanent or even temporary basis, we may be unable to redeploy the ARC7 LNG carriers under other time-charter contracts or may be forced to scrap the vessels. Any such events could adversely affect our results of operations.
We assume credit risk by entering into agreements with unrated entities.
Some of our vessels are chartered to unrated entities and some of these unrated entities will use revenue generated from the sale of the shipped gas to pay their shipping and other operating expenses, including the charter fees. The price of the gas may be subject to market fluctuations and the LNG supply may be curtailed by start-up delays and stoppages. If the revenue generated by the charterer is insufficient to pay the charter fees, we may be unable to realize the expected economic benefit from these charter agreements.
Exposure to currency exchange rate fluctuations will result in fluctuations in our cash flows and operating results.
We are paid in Euros under some of our charters, and certain of our vessel operating expenses and general and administrative expenses currently are denominated in Euros, which is primarily a function of the nationality of our crew and administrative staff. We also make payments under two Euro-denominated term loans. In addition, from time to time we may incur certain capital expenditures relating to our vessels in Euros. If the amount of our Euro-denominated obligations exceeds our Euro-denominated revenues, we must convert other currencies, primarily the U.S. Dollar, into Euros. An increase in the strength of the Euro relative to the U.S. Dollar would require us to convert more U.S. Dollars to Euros to satisfy those obligations, which would cause us to have less cash available for distribution to unitholders. In addition, if we do not have sufficient U.S. Dollars, we may be required to convert Euros into U.S. Dollars for distributions to unitholders. An increase in the strength of the U.S. Dollar relative to the Euro could cause us to have less cash available for distribution in this circumstance. We have not entered into currency swaps or forward contracts or similar derivatives to mitigate this risk.
Because we report our operating results in U.S. Dollars, changes in the value of the U.S. Dollar relative to the Euro and Norwegian Krone (or NOK) also result in fluctuations in our reported revenues and earnings. In addition, under U.S. accounting guidelines, all foreign currency-denominated monetary assets and liabilities such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, accrued liabilities, advances from affiliates and long-term debt, are revalued and reported based on the prevailing exchange rate at the end of the period. This revaluation historically has caused us to report significant unrealized foreign currency exchange gains or losses each period. The primary source for these gains and losses is our Euro-denominated term loans and our NOK-denominated bonds.
Exposure to interest rate fluctuations will result in fluctuations in our cash flows and operating results.
We are exposed to the impact of interest rate changes primarily through our variable-rate borrowings and finance lease obligations that require us to make interest payments based on LIBOR, the Euro Interbank Offered Rate (or EURIBOR), the Norwegian Interbank Offered Rate (or NIBOR) or the Secured Overnight Finance Rate (or SOFR). Significant increases in interest rates could adversely affect our profit margins, results of operations and our ability to service our financing agreements. In accordance with our risk management policy, we use interest rate swaps on certain of our debt and cross currency swaps on our NOK bonds to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our floating rate debt. However, any hedging activities entered into by us may not be effective in fully mitigating our interest rate risk from our variable rate obligations.
In addition, we are exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. For further information about our financial instruments at December 31, 2022, that are sensitive to changes in interest rates, please read "Item 11 – Quantitative and Qualitative Disclosures About Market Risk."
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, which could harm our business and the trading price of our preferred units.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing we conduct in connection with Section 404 of the Sarbanes-Oxley Act of 2002 may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Ineffective internal controls could also cause us to incur additional costs to improve our internal control and disclosure control systems and procedures, which could harm our business and have a negative effect on the trading price of our securities.
In February 2023, following discussions with KPMG LLP, our independent external auditor, we identified an error in our reporting of unrealized gains from the interest rate swaps in two of our equity-accounted joint ventures (or the Joint Ventures) for the three months ended March 31, 2022, the three and six months ended June 30, 2022 and the three and nine months ended September 30, 2022, as we reported these gains in equity income in our consolidated statements of income for the periods indicated instead should have reflected the application of hedge accounting and the income impact of changes in the fair value of the designated instruments within other comprehensive income in our consolidated statements of comprehensive income for such periods. We have filed with the SEC amended Forms 6-K/A relating to the periods ended March 31, June 30 and September 30, 2022 that restate our previously reported results for the applicable periods, to reflect the unrealized gains within other comprehensive income within our statements of comprehensive income for such periods. There were no changes or impact to our previously reported total comprehensive income (including the allocation of such amount between the Company’s common unitholders and preferred unitholders), or to our previously reported assets, liabilities, total equity (including the allocation of such amount between our common unitholders and preferred unitholders), cash flows and liquidity. Further, for the year ended December 31, 2022 included in this Annual Report, we have included unrealized gains (losses) from interest rate swaps in the Joint Ventures within other comprehensive income within our consolidated
statements of comprehensive income for such period, in compliance with GAAP. Additional information about the restatement is contained in Note 18 to our consolidated financial statements for the three and nine months ended September 30, 2022 included in our Form 6-K/A covering such periods filed with the SEC as of the date of this Annual Report on March 31, 2023.
It was also determined that this deficiency constituted a material weakness in our internal control over financial reporting. Consequently, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2022, as indicated in “Item 15. Controls and Procedures” of this Annual Report. We have taken steps to remediate the internal control deficiency, which consists of us modifying our policy on assessing complex accounting issues to require our analysis to include a review of certain published non-authoritative guidance, where such guidance exists. We believe that the above actions will be effective in remediating the internal control deficiency described above. Although we have taken steps to remediate the deficiency, there is no assurance that other deficiencies or material weaknesses may not exist or arise in the future.
Use of LIBOR is currently scheduled to cease, and interest rates on our LIBOR-based obligations may increase, and distributions on our Series B Preferred Units may change, in the future.
A significant portion of our debt facilities include interest rates primarily based on LIBOR, and the distribution rate on our Series B Preferred Units is scheduled to become based on LIBOR or an alternative rate after October 15, 2027. LIBOR is no longer published on a representative basis, with the exception of the most commonly used tenors of U.S. dollar LIBOR, which will no longer be published on a representative basis after June 30, 2023. The U.S. Federal Reserve has selected as an alternative SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities. SOFR is observed and backward-looking, in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. The ongoing transition from LIBOR to SOFR or any other alternative to LIBOR may not produce the economic equivalent of LIBOR for purposes of our LIBOR-based obligations, including, following October 2027, the distribution rate on our Series B Preferred Units. The manner and impact of this transition may materially adversely affect the trading market for LIBOR-based agreements, including our credit facilities, interest rate swaps and Series B Preferred Units. We will need to negotiate the replacement benchmark rate on our LIBOR-based credit facilities and interest rate swaps, and the use of an alternative rate or benchmark may negatively impact our interest rate expense. Any other contracts entered into in the ordinary course of business which currently refer to, use or include LIBOR, may also be impacted.
Many of our seafaring employees are covered by collective bargaining agreements and the failure to renew those agreements or any future labor agreements may disrupt our operations and adversely affect our operations.
A significant portion of our seafarers are employed under collective bargaining agreements. While some of our labor agreements have recently been renewed, crew compensation levels under future collective bargaining agreements may exceed existing compensation levels, which would adversely affect our results of operations and cash flows. We may be subject to labor disruptions in the future if our relationships deteriorate with our seafarers or the unions that represent them. Our collective bargaining agreements may not prevent labor disruptions, particularly when the agreements are being renegotiated. Any labor disruptions could harm our operations and could have a material adverse effect on our business, results of operations and financial condition.
Our directors and officers and Stonepeak and its other affiliates which have a controlling interest in us and control the appointment of members of our Board have conflicts of interest and limited or no fiduciary duties, which may permit them to favor their own interests to those of us or our preferred unitholders.
Stonepeak and its affiliates own all of our outstanding common units, which also permits them to appoint and remove all of our directors (other than any single director our preferred unitholders may be permitted to elect if we are six months in arrears in paying preferred unit distributions (or a Preferred Unit Elected Director)). Neither we nor our directors or officers nor Stonepeak owe any fiduciary duties to our preferred unitholders, other than an implied contractual duty of good faith and fair dealing pursuant to our operating agreement. Three of our directors currently also serve as officers and/or directors of Stonepeak or its other affiliates. In addition, one of our directors is also a member of our management and therefore is considered to be non-independent. Consequently, these directors may encounter situations in which their fiduciary obligations to Stonepeak or its other affiliates, on the one hand, and any obligation to us or our preferred unitholders, on the other hand, are in conflict. The resolution of these conflicts may not always be in the best interest of us or our preferred unitholders. These conflicts include, among others, the following situations:
•neither our operating agreement nor any other agreement requires Stonepeak or its affiliates to pursue a business strategy that favors us or utilizes our assets, and directors and officers of Stonepeak and its other affiliates have fiduciary duties to make decisions in the best interests of the owners of Stonepeak and such other affiliates, which may be contrary to our interests;
•our Board is allowed to take into account the interests of parties other than us, such as Stonepeak and its other affiliates, in resolving conflicts of interest, which has the effect of limiting any obligation to our preferred unitholders;
•our operating agreement limits the liability and reduces the fiduciary duties and obligations of our directors and officers under the laws of the Republic of the Marshall Islands, while also restricting the remedies available to our preferred unitholders, and preferred unitholders are treated as having agreed to such modified standards and to certain actions that may be taken by our Board, all as set forth in our operating agreement;
•our Board controls the enforcement of obligations owed to us by Stonepeak and its other affiliates; and
•our Board decides whether to retain separate counsel, accountants or others to perform services for us, which may be the same firms that provide services to Stonepeak or other affiliates.
Except in limited circumstances, our Board, which is appointed by a common unit majority, has the power and authority to conduct our business without approval of our preferred unitholders.
Our operating agreement provides that members of our Board (other than any Preferred Unit Elected Director) are appointed only by a common unit majority and may be removed, with or without cause, and at any time, by a common unit majority. As a result, Stonepeak and its affiliates, which own all our outstanding common units, are able to control the appointment and removal of members of our Board (other than any Preferred Unit Elected Director). Under our operating agreement, our Board generally has full power and authority to do all things (other than those limited items that require approval of our preferred unitholders or with respect to which our Board has sought Conflicts Committee approval) on such terms as it determines to be necessary or appropriate to conduct our business including, among others, the following:
•the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness, including, subject to any rights of our preferred unitholders, indebtedness that is convertible into securities of us, and the incurring of any other obligations;
•the negotiation, execution and performance of any contracts, conveyances or other instruments;
•the distribution of our cash;
•the selection and dismissal of employees and agents, outside attorneys, accountants, consultants and contractors and the determination of their compensation and other terms of employment or hiring;
•the maintenance of insurance for our benefit and the benefit of our members;
•the formation of, or acquisition of an interest in, and the contribution of property and the making of loans to, any other limited or general partnerships, joint ventures, corporations, limited liability companies or other relationships; the control of any matters affecting our rights and obligations, including the bringing and defending of actions at law or in equity and otherwise engaging in the conduct of litigation, arbitration or mediation and the incurring of legal expense and the settlement of claims and litigation;
•the indemnification of any person against liabilities and contingencies to the extent permitted by law; and
•subject to the prior payment of all quarterly distributions on the Series A Preferred Units and Series B Preferred Units through the most recent applicable distribution payment dates, the purchase, sale or other acquisition or disposition of our securities or, subject to any rights of our preferred unitholders, the issuance of additional securities of us and of options, rights, warrants and appreciation rights relating to our securities.
Our joint venture arrangements impose obligations upon us but in certain circumstances limit our control of the joint ventures, which may affect our ability to achieve our joint venture objectives.
For financial or strategic reasons, we conduct a portion of our business through joint ventures. Generally, we are obligated to provide proportionate financial support for the joint ventures although our control of the business entity may be substantially limited. Due to this limited control, we generally have less flexibility to pursue our own objectives through joint ventures or to access available cash of the joint ventures than we would with our own subsidiaries. There is no assurance that our joint venture partners will continue their relationships with us in the future or that we will be able to achieve our financial or strategic objectives relating to the joint ventures and the markets in which they operate. In addition, our joint venture partners may have business objectives that are inconsistent with ours, experience financial and other difficulties (including under relevant sanctions and anti-bribery and corruption laws) that may affect the success of the joint venture or be unable or unwilling to fulfill their obligations under the joint ventures, which may affect our financial condition or results of operations. In addition, we do not have control over the operations of, nor do we have any legal claim to the revenues and expenses of our equity-accounted investments. Consequently, the cash flow generated by our equity-accounted investments may not be available for use by us in the period that such cash flows are generated, if at all.
Legal and Regulatory Risks
Climate change and GHG restrictions may adversely impact our operations and markets.
An increasing concern for, and focus on, climate change has promoted extensive existing and proposed international, national and local regulations intended to reduce GHG emissions (including from various countries and the International Maritime Organization (or IMO)). These regulatory measures may include the adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Compliance with these or other regulations and our efforts to participate in reducing GHG emissions could increase our compliance costs, require additional capital expenditures to reduce vessel emissions and may require changes to our business.
Our business includes transporting LNG and NGL. Regulatory changes and growing public concern about the environmental impact of climate change may lead to reduced demand for hydrocarbon products and decreased demand for our services, while increasing or creating greater incentives for use of alternative energy sources. We expect regulatory and consumer efforts aimed at combating climate change to intensify and accelerate. Although we do not expect demand for oil and gas to decline dramatically over the short-term, in the long-term, climate change initiatives will likely significantly affect demand for oil and gas and for alternatives. Any such change could adversely affect our ability to compete in a changing market and our business, financial condition and results of operations.
Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to ESG policies and practices may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increasing scrutiny relating to their ESG policies and disclosures. Investor advocacy groups, certain institutional investors, investment funds, lenders and other market participants are increasingly focused on ESG practices and, in recent years, have placed increasing importance on the implications and social cost of their investments. The increased focus and activism related to ESG and similar matters may hinder access to capital, as investors and lenders may decide to reallocate capital or to not commit capital as a result of their
assessment of a company’s ESG practices. Companies that do not adapt to or comply with investor, lender or other industry shareholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and their business and financial condition may be adversely affected.
We may face increasing pressures from investors, lenders, customers and other market participants, which are increasingly focused on climate change, to prioritize sustainable energy practices, reduce our carbon footprint and promote sustainability. As a result, we may be required to implement more stringent ESG procedures or standards so that our existing investors and lenders remain invested in us and make further investments in us, or in order for customers to consider conducting future business with us, especially given our business of transporting LNG and NGL. In addition, it is likely we will incur additional costs and require additional resources to monitor, report and comply with wide-ranging ESG requirements. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
The marine energy transportation industry is subject to substantial environmental and other regulations, which may significantly limit our operations or increase our expenses.
Our operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties and conventions which are in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. Many of these requirements are designed to reduce the risk of oil spills and other pollution. In addition, we believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on vessels. For example, new or amended legislation relating to ship recycling, sewage systems, emission control (including emissions of GHGs and other pollutants) as well as ballast water treatment and ballast water handling may be adopted. The IMO has also established progressive standards limiting emissions from ships starting from 2023 towards 2030 and 2050 goals. These and other laws or regulations may require significant additional capital expenditures or operating expenses in order for us to comply with the laws and regulations and maintain our vessels in compliance with international and national regulations. In addition, the higher emissions of our steam vessels relative to more modern vessels could make it more difficult to secure employment for these vessels and reduce the rates at which we can charter these vessels to its customers.
The environmental and other laws and regulations applicable to us can affect the future charter rates, resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or other hazardous substances from our vessels or otherwise in connection with our operations. We could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with our operations. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations, including, in certain instances, seizure or detention of our vessels.
Regulations relating to ballast water discharge may adversely affect our operational results and financial condition.
The IMO, the United Nations agency for maritime safety and the prevention of pollution by vessels, has imposed updated guidelines for ballast water management systems specifying the maximum amount of viable organisms allowed to be discharged from a vessel’s ballast water. For most vessels, compliance with the applicable standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms. We have implemented and are continuing to implement ballast water management system upgrades on certain of our vessels in accordance with the applicable timelines imposed by the IMO. The cost of compliance with these regulations, including as a result of installing such systems, may be substantial and may adversely affect our results of operation and financial condition. In addition to the requirements under the IMO, the United States Coast Guard (or USCG) has imposed mandatory ballast water management practices for all vessels equipped with ballast water tanks and entering U.S. waters. These USCG regulations may have the effect of restricting our vessels from entering U.S. waters, unless we equip our vessels with pre-approved ballast water treatment system (or BWTS) or receive authorization by a duly-issued permit or exemption.
Failure to comply with the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, the UK's Criminal Finances Act and other anti-bribery or anti-money laundering legislation in other jurisdictions could result in fines, criminal penalties, contract terminations and an adverse effect on our business.
We operate our vessels worldwide, which may require our vessels to trade in countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws and have adopted a code of business conduct and ethics which is consistent and in full compliance with the U.S. Foreign Corrupt Practices Act of 1977 (or the FCPA), the Bribery Act 2010 of the United Kingdom (or the UK Bribery Act) and the Criminal Finances Act 2017 of the United Kingdom (or the CFA). We are subject, however, to the risk that we, our joint venture partners, our affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation of such anti-corruption and anti-money laundering laws, including the FCPA, the UK Bribery Act and the CFA. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, or curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
With a majority of our subsidiaries being Marshall Islands entities and also having subsidiaries in other offshore jurisdictions, our operations may be subject to economic substance requirements, which could impact our business.
Finance ministers of the EU rate jurisdictions for tax transparency, governance, real economic activity and corporate tax rate. Countries that do not adequately cooperate with the finance ministers are put on a “grey list” or a “black list”. Bermuda and the Marshall Islands were removed from the
black list in May and October 2019, respectively. Subsequently, in February 2020, Bermuda and the Marshall Islands were "white-listed" by the EU. On February 24, 2022, Bermuda was put on the "grey list" and was moved back to the "white list" on October 25, 2022. On February 14, 2023, the Marshall Islands was re-added to the "black list". Although we understand that the Marshall Islands is committed to full cooperation with the EU and expects to be re-designated to the "white list" in October 2023, subject to review by the EU Council, we do not know what actions the Marshall Islands may take, if any, to remove itself from the "black list" and whether the EU will remove the Marshall Islands from the list in October 2023 or at all.
EU member states have agreed upon a set of measures, which they can choose to apply against the grey or black listed countries, including increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The European Commission has stated it will continue to support member states' efforts to develop a more coordinated approach to sanctions for the listed countries. EU legislation prohibits EU funds from being channeled or transited through entities in countries on the "black list". The effect of the EU "black list" could have material adverse effects on our business, financial condition and operating results.
A majority of our subsidiaries are Marshall Islands entities and some of our subsidiaries are either organized or registered in Bermuda. These jurisdictions have enacted economic substance laws and regulations with which we may be obligated to comply. We believe that we and our subsidiaries are compliant with the Bermuda and the Marshall Islands economic substance requirements and do not currently expect that these requirements will have a material adverse effect on our business, financial condition and operating results. However, if there were a change in the requirements or interpretation thereof, or if there were an unexpected change to our operations, any such change could result in noncompliance with the economic substance legislation and related fines or other penalties, increased monitoring and audits, and dissolution of the noncompliant entity, which could have an adverse effect on our business, financial condition or operating results.
Information and Technology Risks
A cyber-attack could materially disrupt our business.
We rely on information technology systems and networks in our operations and the administration of our business. Cyber-attacks have increased in number and sophistication in recent years. Our operations could be targeted by individuals or groups seeking to sabotage or disrupt our information technology systems and networks, or to steal data. A successful cyber-attack could materially disrupt our operations, including the safety of our operations, or lead to unauthorized release of information or alteration of information on our systems. Any such attack or other breaches of our information technology systems could have a material adverse effect on our business and results of operations.
Our failure to comply with data privacy laws could damage our customer relationships and expose us to litigation risks and potential fines.
Data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services and continue to develop in ways which we cannot predict, including with respect to evolving technologies such as cloud computing. The EU has adopted the General Data Privacy Regulation (or the GDPR), a comprehensive legal framework to govern data collection, processing, use, transfer and sharing and related consumer privacy rights which took effect in May 2018 and the People’s Republic of China adopted the Personal Information Protection Law, containing similar provisions, which took effect in November 2021. These and other privacy laws include significant penalties for non-compliance. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to an Investment in Our Securities
Because we are organized under the laws of the Marshall Islands, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.
We are organized under the laws of the Marshall Islands, and all of our assets are located outside of the United States. In addition, certain of our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible to bring an action against us or against these individuals in the United States. Even if successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict the enforcement of a judgment against us or our assets or the assets of our directors and officers.
Tax Risks
In addition to the following risk factors, you should read "Item 4E – Taxation of the Company", "Item 10 – Additional Information – Material United States Federal Income Tax Considerations" and “Item 10 – Additional Information – Non-United States Tax Considerations" for a more complete discussion of the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of our units.
U.S. tax authorities could treat us as a PFIC which could have adverse U.S. federal income tax consequences to U.S. holders.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a PFIC for such purposes in any taxable year in which, after taking into account the income and assets of the corporation and, pursuant to a “look-through” rule, any other corporation or partnership in which the corporation directly or indirectly owns at least 25% of the stock or equity interests (by value) and any partnership in which the corporation directly or indirectly owns less than 25% of the equity interests (by value) to the extent the corporation satisfies an "active partner" test and does not elect out of "look through" treatment, either (i) at least 75% of its gross income consists of “passive income,” or (ii) at least 50% of the average value of the entity’s assets is attributable to assets that produce or are held for the production of “passive income.” For purposes of these
tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties (other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business). By contrast, income derived from the performance of services does not constitute “passive income”.
There are legal uncertainties involved in determining whether the income derived from our and our look-through subsidiaries' time-chartering activities constitutes rental income or income derived from the performance of services, including the decision in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), which held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign sales corporation provision of the Internal Revenue Code of 1986, as amended (or the Code). However, the Internal Revenue Service (or the IRS) stated in an Action on Decision (AOD 2010-01) that it disagrees with, and will not acquiesce to, the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing passive foreign investment companies (or PFICs), there can be no assurance that the IRS or a court would not follow the Tidewater decision in interpreting the PFIC provisions of the Code. Nevertheless, based on our and our look-through subsidiaries’ current assets and operations, we intend to take the position that we are not now and have never been a PFIC. No assurance can be given, however, that this position would be sustained by a court if contested by the IRS, or that we would not constitute a PFIC for the 2023 taxable year or any future taxable year if there were to be changes in our and our look-through subsidiaries' assets, income or operations.
If we or the IRS were to determine that we are or have been a PFIC for any taxable year during which a U.S. Holder (as defined below under "Item 10 – Additional Information: Material United States Federal Income Tax Considerations") held units, such U.S. Holder would face adverse U.S. federal income tax consequences. For a more comprehensive discussion regarding the tax consequences to U.S. Holders if we are treated as a PFIC, please read "Item 10 – Additional Information: Material United States Federal Income Tax Considerations – United States Federal Income Taxation of U.S. Holders – Consequences of Possible PFIC Classification." In addition, if we or the IRS were to determine that we are or have been a PFIC, the price of our preferred units may decline and our ability to raise capital on acceptable terms may be adversely affected.
We are subject to taxes, which may impact our liquidity position.
We or our subsidiaries (including those owned in our joint ventures) are subject to tax in certain jurisdictions in which we or our subsidiaries are organized, own assets or have operations, which may adversely impact our liquidity position. In computing our tax obligations in these jurisdictions, we are required to take various tax accounting and reporting positions, including in certain cases estimates, on matters that are not entirely free from doubt and for which we may not have received rulings from the governing authorities. We cannot assure you that upon review of these positions, the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on us or our subsidiaries, further reducing our cash available for distribution. We have established reserves in our financial statements that we believe are adequate to cover our liability for any such additional taxes. We cannot assure you, however, that such reserves will be sufficient to cover any additional tax liability that may be imposed on us or our subsidiaries. In addition, changes in our operations or ownership could result in additional tax being imposed on us or on our subsidiaries in jurisdictions in which operations are conducted. For example, with respect to our taxable year ending in 2022, we expect that the Section 883 Exemption (as defined below under “Item 4E – Taxation of the Company”) will be applicable to us, however, changes in the ownership of our units may cause us to be unable to claim a Section 883 Exemption. If we were not exempt from taxation under Section 883 of the Code, we would be subject to U.S. federal income tax on income we earn from voyages into or out of the United States, which is not within our complete control. In addition, we and some of our subsidiaries may rely on an exemption under subsection 250(6) of the Income Tax Act (Canada) (or the Canada Tax Act) for (i) corporations whose principal business is international shipping and that derive all or substantially all of their revenue from international shipping, and (ii) corporations that hold eligible interests in such corporations or other eligible entities. The exemption deems the qualifying corporations not to be resident in Canada for Canadian income tax purposes. If a corporation that would, but for the subsection 250(6) exemption, be resident in Canada is unable to satisfy the requirements of the subsection 250(6) exemption, that corporation would be subject to Canadian income tax on its world-wide income and dividend distributions to the corporation’s shareholders who are non-residents of Canada would generally be subject to Canadian withholding tax.
Additionally, tax laws, including tax rates, in the jurisdictions in which we operate may change as a result of macroeconomic or other factors outside of our control. For example, various governments and organizations such as the EU and Organization for Economic Co-operation and Development (or the OECD) are increasingly focused on tax reform and other legislative or regulatory action to increase tax revenue. In January 2019, the OECD announced further work in continuation of its Base Erosion and Profit Shifting project, focusing on two “pillars.” Pillar One provides a framework for the reallocation of certain residual profits of multi-national enterprises to market jurisdictions where goods or services are used or consumed. Pillar Two consists of two interrelated rules referred to as Global Anti-Base Erosion Rules, which operate to impose a minimum tax rate of 15% calculated on a jurisdictional basis. In October 2021, more than 130 countries tentatively signed on to a framework that imposes a minimum tax rate of 15%, among other provisions. The framework calls for law enactment by OECD and G20 members in 2022 to take effect in 2023 and 2024. Qualifying international shipping income is currently exempt from many aspects of this framework if the exemption requirements are met. On December 20, 2021, the OECD published model rules to implement the Pillar Two rules, which are generally consistent with the agreement reached by the framework in October 2021. On December 12, 2022, the EU member states agreed to implement the OECD’s Pillar Two global corporate minimum tax rate of 15% on large multinational enterprises with revenues of at least €750 million, which generally would go into effect in 2024. If we are in the scope of OECD’s Pillar Two rules, including due to our inability to satisfy the requirements of the international shipping exemption, these changes, when and if enacted and implemented by various countries in which we do business, could result in additional tax imposed on us or our subsidiaries, further reducing our cash available for distribution.
Typically, most of our charter contracts require the charterer to indemnify us in respect of taxes incurred as a consequence of the voyage activities of our vessels, which are under the direction of the charterers. However, we, our joint ventures and our subsidiaries operate in numerous jurisdictions which may result in various voyage-related or freight taxes being imposed. Although we are generally entitled to indemnification from our charterers for these taxes, there is a risk that we may not be able to successfully claim an indemnity for tax liabilities which could impact our financial condition and ability to make cash distributions.
Item 4.Information on the Company
A.Overview, History and Development
Overview and History
Seapeak LLC is an international provider of marine transportation services focusing on LNG and NGL. We were formed in 2004 for the purpose of operating in the LNG shipping sector. Our primary strategy focuses on servicing our customers through our fleet of LNG and NGL carriers under medium to long-term, fixed-rate charters. In executing our strategy, we may engage in vessel or business acquisitions or enter into joint ventures and partnerships with companies that provide increased access to emerging opportunities from global expansion of the LNG and NGL sectors. We pursue opportunities in the LNG and NGL sectors and may consider other opportunities to which our competitive strengths are well suited, including entering into adjacent liquefied gas markets, renewable markets, and other maritime opportunities.
As of December 31, 2022, our fleet, excluding newbuildings, consisted of 46 LNG carriers (including 24 LNG carriers that are accounted for under the equity method) and 41 NGL carriers (including the 19 carriers that are accounted for under the equity method). In addition, as at December 31, 2022, we had one LNG receiving and regasification terminal in Bahrain, in which we have a 30% ownership interest. Our equity-accounted LNG carriers include (i) six LNG carriers (or the MALT LNG Carriers) relating to our 52% ownership interest in the MALT Joint Venture, (ii) four LNG carriers (or the RasGas III LNG Carriers) relating to our joint venture with QGTC Nakilat (1643-6) Holdings Corporation in which we have a 40% ownership interest, (iii) four LNG carriers relating to the Angola Project (or the Angola LNG Carriers) in our joint venture with Mitsui & Co. Ltd. and NYK Energy Transport (Atlantic) Ltd. (or the Angola Joint Venture) in which we have a 33% ownership interest, (iv) four LNG carriers (or the Pan Union LNG Carriers), in which we have interests ranging from 20% to 30%, relating to our joint venture with China LNG, CETS Investment Management (HK) Co. Ltd. and BW Investments Pte. Ltd, and (v) six ARC7 LNG carriers relating to the Yamal LNG Joint Venture. As of December 31, 2022, our 19 equity-accounted NGL carriers (or the Exmar LPG Carriers) relate to our Exmar LPG Joint Venture. As at December 31, 2022, we had five LNG carrier newbuildings scheduled for delivery throughout 2027, and two NGL carrier newbuildings within the Exmar LPG Joint Venture scheduled for delivery between 2024 and 2025.
Our fleets of LNG and NGL carriers (excluding newbuildings but including equity-accounted vessels) currently have approximately 7.6 million and 1.2 million cubic meters of total capacity, respectively.
On January 13, 2022, we (then known as Teekay LNG Partners L.P. (or the Partnership)) were acquired through a merger by investment vehicles managed by Stonepeak. Pursuant to the merger and related transactions (or the Stonepeak Transaction), Stonepeak and its affiliates acquired: (1) 100% of the issued and outstanding common units of the Partnership, (2) 100% of the ownership interests of Teekay GP L.L.C., the general partner of the Partnership (or the General Partner), and (3) certain operating subsidiaries from Teekay Corporation which provide services to the Partnership, its subsidiaries and joint ventures.
On February 25, 2022, the Partnership converted from a limited partnership formed under the laws of the Republic of the Marshall Islands into a limited liability company formed under the laws of the Republic of the Marshall Islands (or the Conversion). Concurrently with the Conversion, the Partnership changed its name from "Teekay LNG Partners L.P." to "Seapeak LLC". As a result of the Conversion, Seapeak LLC no longer has a general partner and affiliates of Stonepeak now own 100% of our limited liability company common units. Please see “Item 5 – Operating and Financial Review and Prospects: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Developments in 2022 and Early 2023” for additional information about the Stonepeak Transaction and the Conversion.
On December 29, 2022, we acquired Evergas and its fleet of 16 NGL vessels in an all-cash transaction plus the assumption of indebtedness. Evergas owns and operates two Very Large Ethane Carriers and eight Multigas/LNG carriers, all of which are on fixed-rate time-charters to Ineos Group Limited. Evergas also controls six LPG carriers under bareboat leases scheduled to end in December 2024. In addition, Evergas holds a 50% interest in the Dan-Unity JV with the remaining 50% held by Ultragas ApS, which is exploring potential CO2 carrier growth opportunities. Please read "Item 18 – Financial Statements: Note 20 – Acquisition of Evergas" for additional information about this transaction.
Our principal executive offices are at 2000, 550 Burrard Street, Vancouver, B.C., Canada, V6C 2K2. Our telephone number at such address is (604) 609-4735.
The SEC maintains an internet site at www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our website is www.seapeak.com. The information contained on our website is not part of this annual report.
B.Operations
Our Fleet and Our Charters
We generate revenues by charging customers for the transportation of their LNG and NGL using our vessels. The substantial majority of these services are provided through time-charter contracts, where vessels are chartered to customers for fixed periods of time at rates that are generally fixed but may contain a variable component based on inflation, interest rates or other factors.
Our vessels and our LNG regasification terminal in Bahrain primarily operate under fixed-rate contracts with major energy and utility companies. As of December 31, 2022, the average remaining term for these contracts was approximately 10 years for our LNG carriers and regasification terminal and approximately three years for our NGL carriers, subject, in certain circumstances, to termination or vessel purchase rights.
“Hire” rate refers to the basic payment from the customer for the use of a vessel. Hire is payable monthly, in advance, in U.S. Dollars or Euros, as specified in the charter. The hire rate generally includes two components – a capital cost component and an operating expense component. The capital cost component typically approximates the amount we are required to pay under vessel financing obligations. The operating expense component, which in certain cases adjusts annually for inflation, is intended to compensate us for vessel operating expenses.
Hire payments may be reduced or, under some charters, we must pay liquidated damages, if the vessel does not perform to certain of its specifications, such as if the average vessel speed falls below a guaranteed speed or the amount of fuel consumed to power the vessel under normal circumstances exceeds a guaranteed amount.
When a vessel is “off-hire” – or not available for service – the customer generally is not required to pay the hire rate and we are responsible for all costs. Prolonged off-hire may lead to vessel substitution or termination of the time-charter. A vessel will typically be deemed to be off-hire if it is in dry dock unless our contract specifies drydocking is not considered off-hire. We must periodically dry dock each of our vessels for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. In addition, a vessel generally will be deemed off-hire if there is a loss of time due to, among other things: operational deficiencies; equipment breakdowns; delays due to accidents, crewing strikes, certain vessel detentions or similar problems; or our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.
Liquefied Natural Gas Segment
LNG Carriers
The LNG carriers in our liquefied natural gas segment compete in the LNG market. LNG carriers are usually chartered to carry LNG pursuant to time-charter contracts, where a vessel is hired for a fixed period of time and the charter rate is payable to the owner on a monthly basis and in advance. LNG shipping historically has been transacted with long-term, fixed-rate, time-charter contracts. LNG projects require significant capital expenditures and typically involve an integrated chain of dedicated facilities and cooperative activities. Accordingly, the overall success of an LNG project depends heavily on long-range planning and coordination of project activities, including marine transportation. Most shipping requirements for new LNG projects continue to be provided on a long-term basis, though the levels of spot voyages (typically consisting of a single voyage), short-term time-charters and medium-term time-charters have grown in recent years.
In the LNG market, we compete principally with other private and state-controlled energy and utilities companies that generally operate captive fleets, and independent shipowners and operators. Many major energy companies compete directly with independent owners by transporting LNG for third parties in addition to their own LNG. Given the complex, long-term nature of LNG projects, major energy companies historically have transported LNG through their captive fleets. However, independent fleet operators have been obtaining an increasing percentage of charters for new or expanded LNG projects as some major energy companies have continued to divest non-core businesses.
LNG carriers transport LNG internationally between liquefaction facilities and import terminals. After natural gas is transported by pipeline from production fields to a liquefaction facility, it is supercooled to a temperature of approximately negative 260 degrees Fahrenheit. This process reduces its volume to approximately 1/600th of its volume in a gaseous state. The reduced volume facilitates economical storage and transportation by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to import natural gas. LNG carriers include a sophisticated containment system that holds the LNG and provides insulation to reduce the amount of LNG that boils off naturally. The natural boil off is either used as fuel to power the engines on the ship or it can be reliquefied and put back into the tanks. LNG is transported overseas in specially built tanks in double-hulled ships to a receiving terminal, where it is offloaded and stored in insulated tanks. In regasification facilities at the receiving terminal, the LNG is returned to its gaseous state and then shipped by pipeline for distribution to natural gas customers.
With the exception of the Seapeak Arctic and Seapeak Polar, which are the only two ships in the world that utilize the Ishikawajima Harima Heavy Industries Self Supporting Prismatic Tank IMO Type B independent tank technology, our fleet uses two of the Gaz Transport and Technigaz (or GTT) membrane containment systems. The GTT membrane systems are used in the majority of LNG tankers now being constructed. Unlike the oil tanker industry, there are currently no regulations that require the phase-out from trading of LNG carriers after they reach a certain age. As at December 31, 2022, our LNG carriers, including equity-accounted vessels, had an average age of approximately 10 years, compared to the world LNG carrier fleet average age of approximately 11 years. In addition, as at that date, there were approximately 710 vessels in the world LNG fleet and approximately 313 additional LNG carriers under construction or on order, inclusive of floating storage units and floating storage regasification units.
The following table provides additional information about the LNG carriers in our operating fleet as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel | | Capacity | | Delivery | | Our
Ownership | | Contract Type | | Charterer | | Expiration of Charter(1) |
| | | (cubic meters) | | | | | | | | | | |
| Operating LNG carriers: | | | | | | | | | | | | |
| Consolidated | | | | | | | | | | | | |
| Seapeak Arctic | | 87,305 | | | 1993 | | 100% | | Held for Sale(16) | | N/A | | N/A |
| Seapeak Polar | | 87,305 | | | 1993 | | 100% | | Time-charter | | TotalEnergies Gas & Power Limited | | May 2023 |
| Seapeak Hispania | | 137,814 | | | 2002 | | 100% | | Time-charter | | Deutsche Regas Betriebs GmbH | | Jun. 2024 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel | | Capacity | | Delivery | | Our
Ownership | | Contract Type | | Charterer | | Expiration of Charter(1) |
| | | (cubic meters) | | | | | | | | | | |
| Seapeak Catalunya | | 135,423 | | | 2003 | | 100% | | Time-charter | | Gas Natural SDG | | Aug. 2023 |
| Seapeak Galicia | | 137,814 | | | 2004 | | 100% | | Time-charter | | LNG Shipping S.P.A.(3) | | Jul. 2029(4) |
| Seapeak Madrid | | 135,423 | | | 2004 | | 100% | | Time-charter | | Shell International Trading Middle East Ltd. | | Dec. 2024 |
| Al Marrouna | | 149,539 | | | 2006 | | 70% | | Time-charter | | Ras Laffan Liquefied
Natural Gas Company Ltd. | | Oct. 2026(5) |
| Al Areesh | | 148,786 | | | 2007 | | 70% | | Time-charter | | Ras Laffan Liquefied
Natural Gas Company Ltd. | | Jan. 2027(5) |
| Al Daayen | | 148,853 | | | 2007 | | 70% | | Time-charter | | Ras Laffan Liquefied
Natural Gas Company Ltd. | | Feb. 2027(5) |
| Tangguh Hiri | | 151,885 | | | 2008 | | 70% | | Time-charter | | The Tangguh Production
Sharing Contractors | | Dec. 2028 |
| Tangguh Sago | | 155,000 | | | 2009 | | 70% | | Time-charter | | The Tangguh Production
Sharing Contractors | | May 2029 |
| Seapeak Creole | | 173,400 | | | 2016 | | 100% – Finance lease(6) | | Time-charter | | Trafigura Maritime Logistics Pte Ltd. | | Feb. 2023(14) |
| Seapeak Oak | | 173,400 | | | 2016 | | 100% – Finance lease(6) | | Time-charter | | ENN LNG (Singapore) Pte. Ltd | | Jun. 2032(15) |
| Macoma | | 173,400 | | | 2017 | | 100% – Finance lease(6) | | Time-charter | | Shell Tankers (Singapore) Private Ltd. | | Sep. 2026(7) |
| Murex | | 173,400 | | | 2017 | | 100% – Finance lease(6) | | Time-charter | | Shell Tankers (Singapore) Private Ltd. | | Oct. 2024(8) |
| Seapeak Vancouver | | 173,400 | | | 2017 | | 100% – Finance lease(6) | | Time-charter | | Petroleo Brasileiro S.A. | | Mar. 2025 |
| Magdala | | 173,400 | | | 2018 | | 100% – Finance lease(6) | | Time-charter | | Shell Tankers (Singapore) Private Ltd. | | Jan. 2024(8) |
| Myrina | | 173,400 | | | 2018 | | 100% – Finance lease(6) | | Time-charter | | Shell Tankers (Singapore) Private Ltd. | | May 2024(8) |
| Megara | | 173,400 | | | 2018 | | 100% – Finance lease(6) | | Time-charter | | Shell Tankers (Singapore) Private Ltd. | | Jul. 2024(8) |
| Seapeak Bahrain | | 173,400 | | | 2018 | | 100% | | Time-charter | | Bahrain LNG W.L.L. | | Feb. 2039 |
| Seapeak Glasgow | | 174,000 | | | 2018 | | 100% | | Time-charter | | BP Gas Marketing Limited | | Dec. 2031(9) |
| Seapeak Yamal | | 174,000 | | | 2019 | | 100% – Finance lease(6) | | Time-charter | | Yamal Trade PTE. Ltd | | Jan. 2034(2) |
| Equity-Accounted | | | | | | | | | | | | |
| Seapeak Marib | | 165,500 | | | 2008 | | 52% | | Time-charter | | Yemen LNG Company Limited(10) | | Mar. 2029(11) |
| Seapeak Arwa | | 165,500 | | | 2008 | | 52% | | Time-charter | | Yemen LNG Company Limited(10) | | Apr. 2029(11) |
| Al Huwaila | | 214,176 | | | 2008 | | 40% | | Time-charter | | Ras Laffan Liquefied
Natural Gas Company Ltd. | | May 2033(2) |
| Al Shamal | | 213,536 | | | 2008 | | 40% | | Time-charter | | Ras Laffan Liquefied
Natural Gas Company Ltd. | | May 2033(2) |
| Al Kharsaah | | 214,198 | | | 2008 | | 40% | | Time-charter | | Ras Laffan Liquefied
Natural Gas Company Ltd. | | Jun. 2033(2) |
| Al Khuwair | | 213,101 | | | 2008 | | 40% | | Time-charter | | Ras Laffan Liquefied
Natural Gas Company Ltd. | | Jul. 2033(2) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel | | Capacity | | Delivery | | Our
Ownership | | Contract Type | | Charterer | | Expiration of Charter(1) |
| | | (cubic meters) | | | | | | | | | | |
| Seapeak Methane | | 165,500 | | | 2008 | | 52% | | Time-charter | | Trafigura Maritime Logistics Pte Ltd. | | Jan. 2024 |
| Woodside Donaldson | | 165,500 | | | 2009 | | 52% | | Time-charter | | Pluto LNG Party Limited | | Jun. 2026(12) |
| Seapeak Magellan | | 165,700 | | | 2009 | | 52% | | Time-charter | | TotalEnergies Gas & Power Limited | | Jun. 2025 |
| Seapeak Meridian | | 165,700 | | | 2010 | | 52% | | Time-charter | | Total E&P Norge AS Mansel Limited | | Nov. 2030(10) |
| Soyo | | 160,400 | | | 2011 | | 33% | | Time-charter | | Angola LNG Supply Services LLC | | Aug. 2031(2) |
| Malanje | | 160,400 | | | 2011 | | 33% | | Time-charter | | Angola LNG Supply Services LLC | | Sep. 2031(2) |
| Lobito | | 160,400 | | | 2011 | | 33% | | Time-charter | | Angola LNG Supply Services LLC | | Oct. 2031(2) |
| Cubal | | 160,400 | | | 2012 | | 33% | | Time-charter | | Angola LNG Supply Services LLC | | Jan. 2032(2) |
| Pan Asia | | 174,000 | | | 2017 | | 30% | | Time-charter | | Methane Services Limited | | Oct. 2037(13) |
| Pan Americas | | 174,000 | | | 2018 | | 30% | | Time-charter | | Methane Services Limited | | Jan. 2038(13) |
| Pan Europe | | 174,000 | | | 2018 | | 20% | | Time-charter | | Methane Services Limited | | Jul. 2038(13) |
| Eduard Toll | | 172,410 | | | 2018 | | 50% | | Time-charter | | Yamal Trade PTE Ltd. | | Dec. 2045(2) |
| Rudolf Samoylovich | | 172,410 | | | 2018 | | 50% | | Time-charter | | Yamal Trade PTE Ltd. | | Dec. 2045(2) |
| Pan Africa | | 174,000 | | | 2019 | | 20% | | Time-charter | | Methane Services Limited | | Jan. 2039(13) |
| Nikolay Yevgenov | | 172,410 | | | 2019 | | 50% | | Time-charter | | Yamal Trade PTE Ltd. | | Dec. 2045(2) |
| Vladimir Voronin | | 172,410 | | | 2019 | | 50% | | Time-charter | | Yamal Trade PTE Ltd. | | Dec. 2045(2) |
| Georgiy Ushakov | | 172,410 | | | 2019 | | 50% | | Time-charter | | Yamal Trade PTE Ltd. | | Dec. 2045(2) |
| Yakov Gakkel | | 172,410 | | | 2019 | | 50% | | Time-charter | | Yamal Trade PTE Ltd. | | Dec. 2045(2) |
| | 7,604,218 | | | | | | | | | | | |
(1)Each of our time-charters are subject to certain termination and purchase provisions.
(2)The charterer has two options to extend the term for an additional five years each.
(3)LNG Shipping S.P.A. is a wholly-owned subsidiary of ENI S.P.A.
(4)The charterer has one option to extend the term for an additional five years.
(5)The charterer has three options to extend the term for an additional five years each.
(6)We are the lessee for these obligations related to finance leases and will be required to purchase the vessel after the end of the lease terms for a fixed price.
(7)The charterer has three options to extend the term for an additional three years each.
(8)The charterer has four options to extend the term for an additional three years each.
(9)The charterer has the right to terminate the charter contract in 2026.
(10)The charter contracts for the Seapeak Marib and Seapeak Arwa with YLNG are currently suspended until early-2025. As of December 31, 2022, Seapeak Marib entered into a nine-month time-charter contract (with three nine-month extension options exercisable by us) with TotalEnergies, which contract is expected to commence subsequent to the vessel redelivering from its current time-charter contract with Trafigura in mid-2023. As of December 31, 2022, the Seapeak Arwa is on a time-charter contract with TotalEnergies, which expires in February 2023. The contract has three further nine-month extension options exercisable by us, of which the first option was exercised in December 2022. Please see “Item 3 – Risk Factors: We derive a substantial majority of our revenues from a limited number of customers, and the loss of any customer, charter or vessel, or any adjustment to our charter contracts could result in a significant loss of revenues and cash flow” and “Item 5 – Operating and Financial Review and Prospects:
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Developments in 2022 and early 2023: MALT LNG Carriers Charter Contracts” relating to the status of this charter contract.
(11)The charterer has three options to extend the term for one, five and five additional years, respectively.
(12)The charterer has four options to extend the term for an additional five years each.
(13)The charterer has five options to extend the term for an additional two years.
(14)In February 2023, the vessel commenced a 23-year time-charter contract with China Petroleum & Chemical Corporation.
(15)The charterer has one option to extend the term for an additional three years.
(16)The vessel was sold in February 2023.
The following table provides information about our LNG carrier newbuildings as of December 31, 2022. Charters for these vessels typically commence upon delivery of the vessels.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel | | Capacity | | Scheduled Delivery Date | | Shipyard(1) | | Our Ownership | | Charterer | | Length of
Charter |
| | | (cubic meters) | | | | | | | | | | |
| Consolidated | | | | | | | | | | | | |
| SHI SN Hull No. 2656 | | 174,000 | | | Mar. 2027 | | SHI | | 100% | | SeaRiver Maritime LLC | | 10 years(2) |
| SHI SN Hull No. 2657 | | 174,000 | | | May 2027 | | SHI | | 100% | | SeaRiver Maritime LLC | | 10 years(2) |
| SHI SN Hull No. 2658 | | 174,000 | | | Aug. 2027 | | SHI | | 100% | | SeaRiver Maritime LLC | | 10 years(2) |
| SHI SN Hull No. 2659 | | 174,000 | | | Sep. 2027 | | SHI | | 100% | | SeaRiver Maritime LLC | | 10 years(2) |
| SHI SN Hull No. 2660 | | 174,000 | | | Dec. 2027 | | SHI | | 100% | | SeaRiver Maritime LLC | | 10 years(2) |
| | 870,000 | | | | | | | | | | | |
(1)Samsung Heavy Industries Co., Ltd.
(2)The charterer has two options to extend the term for an additional three years each.
For our consolidated voyage revenues from LNG customers that accounted for more than 10% of our consolidated voyage revenues, please read “Item 18 – Financial Statements: Note 4 – Segment Reporting
Charter Expirations
We have four LNG carriers (the Seapeak Polar, the Seapeak Catalunya, the Magdala, and the Seapeak Methane) that are subject to time-charter contracts that are scheduled to expire between May 2023 to January 2024.
In anticipation of the scheduled expiry of these time charters, we are pursuing various opportunities relating to the vessels, which may include the exercise of extension options, redeployment under new time charters, disposition, or other opportunities, all of which will depend on evolving market conditions. Please refer to and read “Item 4 – Information on the Company – Liquefied Natural Gas Segment – LNG Carriers” for additional information and the full list of scheduled expiration dates of our time-charter contracts.
Other Assets
We have a 30% ownership interest in an LNG receiving and regasification terminal in Bahrain. In addition, we provide the operation and maintenance services to the Bahrain terminal. The Bahrain LNG Joint Venture completed the mechanical construction and commissioning of the Bahrain terminal in late-2019 and began receiving terminal use payments in early-2020 under its agreement with the Kingdom of Bahrain's Ministry of Oil and Gas which ends in February 2039.
Natural Gas Liquid Segment
NGL Carriers
We have defined NGL shipping as the transportation of three main categories of cargo: liquid petroleum gases, including propane, butane and ethane; petrochemical gases, including ethylene, propylene and butadiene; and ammonia.
In the NGL market, we compete principally with independent shipowners and operators, and other private and state-controlled energy and chemical companies that generally operate captive fleets.
As of December 31, 2022, our NGL carriers (including equity-accounted vessels) had an average age of approximately nine years, compared to the world NGL carrier fleet average age of approximately 15 years. As of that date, the worldwide NGL tanker fleet consisted of approximately 1,583 vessels and approximately 156 additional NGL vessels were on order for delivery through 2026. NGL carriers range in size from approximately 100 to approximately 98,000 cubic meters. Approximately 38% of the vessels in the worldwide fleet are less than 5,000 cubic meters in size.
NGL carriers are mainly chartered to carry NGL on time-charters, contracts of affreightment or spot voyage charters. The two largest consumers of NGL are residential users and the petrochemical industry. Residential users, particularly in developing regions where electricity and gas pipelines are not developed, do not have fuel switching alternatives and generally are not NGL price sensitive. The petrochemical industry, however, has the ability to switch between NGL and other feedstock fuels depending on price and availability of alternatives.
The following table provides information about our NGL carriers in our operating fleet as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel | | Capacity | | Delivery | | Our Ownership | | Contract Type | | Charterer | | Expiration of Charter |
| | | (cubic meters) | | | | | | | | | | |
| Operating NGL carriers: | | | | | | | | | | | | |
| Consolidated | | | | | | | | | | | | |
| Seapeak Napa | | 10,077 | | | 2003 | | 100% | | Time-charter | | BW Epic Kosan Maritime PTE. Ltd. | | Oct. 2024 |
| Seapeak Pan | | 5,821 | | | 2009 | | 100% | | Time-charter | | Mitsubishi Corporation | | Apr. 2023(3) |
| Seapeak Cathinka | | 5,831 | | | 2009 | | 100% | | Spot | | Spot market | | — |
| Seapeak Camilla | | 5,479 | | | 2010 | | 100% | | Spot | | Spot market | | — |
| Seapeak Unikum | | 12,022 | | | 2011 | | 100% | | Held for Sale(9) | | N/A | | N/A |
| Seapeak Vision | | 12,022 | | | 2011 | | 100% | | Held for Sale(10) | | N/A | | N/A |
| Caesar | | 5,000 | | | 2012 | | 100% – Chartered-in | | Time-charter | | SHV Energy Supply & Risk Management SAS | | Apr. 2023(1) |
| Chukar | | 5,000 | | | 2012 | | 100% – Chartered-in | | Time-charter | | Chartering and Shipping SA | | Jun. 2023 |
| Alular | | 5,000 | | | 2012 | | 100% – Chartered-in | | Spot | | Spot market | | — |
| Jaguar | | 5,000 | | | 2012 | | 100% – Chartered-in | | Time-charter | | Eni Trade & Biofuels SpA | | Dec. 2023(1) |
| Lekvar | | 5,000 | | | 2013 | | 100% – Chartered-in | | Time-charter | | SHV Energy Supply & Risk Management SAS | | Jun. 2023(6) |
| Cougar | | 5,000 | | | 2013 | | 100% – Chartered-in | | Spot | | Spot market | | — |
| Ineos Dolphin | | 85,000 | | | 2020 | | 100% – Finance lease(4) | | Time-charter | | Ineos Europe AG | | Aug. 2029 |
| Ineos Marlin | | 85,000 | | | 2019 | | 100% – Finance lease(5) | | Time-charter | | Ineos Europe AG | | Apr. 2029 |
| Ineos Insight | | 27,500 | | | 2015 | | 100% – Finance lease(5) | | Time-charter | | Ineos Europe AG | | Sep. 2030 |
| Ineos Ingenuity | | 27,500 | | | 2015 | | 100% – Finance lease(5) | | Time-charter | | Ineos Europe AG | | Sep. 2030 |
| Ineos Intrepid | | 27,500 | | | 2015 | | 100% – Finance lease(5) | | Time-charter | | Ineos Europe AG | | Nov. 2030 |
| Ineos Inspiration | | 27,500 | | | 2016 | | 100% – Finance lease(5) | | Time-charter | | Ineos Europe AG | | Mar. 2031 |
| Ineos Innovation | | 27,500 | | | 2016 | | 100% – Finance lease(5) | | Time-charter | | Ineos Europe AG | | Jan. 2027(7) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel | | Capacity | | Delivery | | Our Ownership | | Contract Type | | Charterer | | Expiration of Charter |
| | | (cubic meters) | | | | | | | | | | |
| Ineos Independence | | 27,500 | | | 2017 | | 100% – Finance lease(5) | | Time-charter | | Ineos Europe AG | | Apr. 2027(7) |
| Ineos Invention | | 27,500 | | | 2017 | | 100% – Finance lease(4) | | Time-charter | | Ineos Europe AG | | May 2027(8) |
| Ineos Intuition | | 27,500 | | | 2017 | | 100% – Finance lease(4) | | Time-charter | | Ineos Europe AG | | May 2027(8) |
| Equity-Accounted | | | | | | | | | | | | |
| Bastogne | | 35,229 | | | 2002 | | 50% | | Held for Sale | | N/A | | N/A |
| Antwerpen | | 35,223 | | | 2005 | | 50% – Chartered-in | | Time-charter | | An international energy company | | Oct. 2023 |
| Libramont | | 38,455 | | | 2006 | | 50% | | Time-charter | | An international fertilizer company | | May 2026 |
| Sombeke | | 38,447 | | | 2006 | | 50% | | Time-charter | | An international fertilizer company | | Jun. 2027 |
| Sylvie | | 35,217 | | | 2007 | | 50% – Chartered-in | | Time-charter | | An international fertilizer company | | Oct. 2023 |
| BW Tokyo | | 83,300 | | | 2009 | | 50% – Chartered-in | | Spot | | In NGL Pool | | — |
| Waasmunster | | 38,115 | | | 2014 | | 50% | | Time-charter | | An international energy company | | Oct. 2023 |
| Waregem | | 38,115 | | | 2014 | | 50% | | Time-charter | | An international fertilizer company | | Jan. 2024 |
| Warinsart | | 38,115 | | | 2014 | | 50% | | Time-charter | | An international energy company | | Feb. 2024 |
| Warisoulx | | 38,115 | | | 2015 | | 50% | | Time-charter | | An international trading company | | Jul. 2023 |
| Kaprijke | | 38,500 | | | 2015 | | 50% | | Time-charter | | An international fertilizer company | | Dec. 2025 |
| Knokke | | 38,500 | | | 2016 | | 50% | | Time-charter | | An international energy company | | Apr. 2024 |
| Kontich | | 38,500 | | | 2016 | | 50% | | Time-charter | | An international energy company | | Aug. 2023(1) |
| Kortrijk | | 38,500 | | | 2016 | | 50% | | Time-charter | | An international trading company | | Jan. 2025(1) |
| Kallo | | 38,500 | | | 2017 | | 50% – Finance lease(2) | | Time-charter | | An international fertilizer company | | Mar. 2025(1) |
| Kruibeke | | 38,500 | | | 2017 | | 50% – Finance lease(2) | | Time-charter | | An international trading company | | Feb. 2024 |
| Kapellen | | 38,500 | | | 2018 | | 50% – Finance lease(2) | | Time-charter | | An international trading company | | Jun. 2023 |
| Koksijde | | 38,500 | | | 2018 | | 50% – Finance lease(2) | | Time-charter | | An international energy company | | Dec. 2024 |
| Wepion | | 38,200 | | | 2018 | | 50% | | Time-charter | | An international fertilizer company | | Jan. 2026(1) |
| | 1,235,783 | | | | | | | | | | | |
(1)The charterer has one option to extend the term for an additional one year.
(2)Exmar LPG BVBA, in which we have a 50% ownership interest, is the lessee for these obligations related to finance leases and will be required to purchase the vessel after the end of the lease terms for a fixed price.
(3)The charter expiration date includes a three-month extension exercised by the charterer, which may exercise an additional three options each for three-month extension periods.
(4)We are the lessee for these obligations related to finance leases and will be required to purchase the vessel after the end of the lease terms for a fixed price.
(5)We are the lessee for these obligations related to finance leases and have an option to repurchase the vessel after the end of the lease terms for a fixed price.
(6)The charterer has two options to extend the term for additional periods of six months and one year, respectively.
(7)The charterer has one option to extend the term for an additional five years.
(8)The charterer has one option to extend the term for an additional two years.
(9)The vessel was sold and delivered to its buyer in March 2023.
(10)The vessel was sold and is expected to be delivered to its buyer in April 2023.
The following table provides information about our NGL carrier newbuildings under construction as of December 31, 2022. Charters for these vessels typically commence upon delivery of the vessels.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vessel | | Capacity | | Scheduled Delivery Date | | Shipyard(1) | | Our Ownership | | Charterer | | Length of
Charter |
| | | (cubic meters) | | | | | | | | | | |
| Equity-Accounted | | | | | | | | | | | | |
| H8387 | | 45,000 | | | Dec. 2024 | | HMD | | 50% | | N/A | | N/A |
| H8388 | | 45,000 | | | Mar. 2025 | | HMD | | 50% | | N/A | | N/A |
| | 90,000 | | | | | | | | | | | |
(1)Hyundai Mipo Dockyard Co., Ltd.
No NGL customer accounted for 10% or more of our consolidated voyage revenues during any of 2022, 2021 or 2020. The loss of any significant customer or a substantial decline in the amount of services requested by a significant customer could harm our business, financial condition and results of operations.
Business Strategies
Our primary long-term business objective is to expand our core businesses globally in order to service our customers' growing gas transportation requirements which we believe will add long-term value for our unitholders. We may evaluate and explore adjacent liquified gas markets, renewable markets, and other maritime opportunities. Our operating cash flows remain largely stable and growing, supported by a large and well-diversified portfolio of fee-based contracts with high-quality counterparties.
We intend to achieve our long-term business objective, as stated above, by executing the following strategies:
•Provide superior customer service by maintaining high reliability, safety, environmental and quality standards. LNG and NGL project operators seek LNG and NGL transportation partners that have a reputation for high reliability, safety, environmental and quality standards. We seek to leverage our operational expertise to create a sustainable competitive advantage with consistent delivery of superior customer service.
•Expand our LNG and NGL business globally. We seek to capitalize on opportunities emerging from the global expansion of the LNG and NGL sectors by selectively targeting:
•projects that involve medium to long-term, fixed-rate charters;
•cost-effective LNG and NGL newbuilding contracts;
•joint ventures and partnerships with companies that may provide increased access to opportunities in attractive LNG and NGL importing and exporting geographic regions;
•strategic vessel and business acquisitions; and
•specialized projects in adjacent areas of the business.
•Evaluate and explore adjacent liquified gas markets, renewables, and other maritime opportunities. To continue the growth of our Company, we may evaluate and seek to enter into specialized projects in adjacent areas of our business, including other liquified gas markets, renewable markets, and other maritime opportunities.
Safety, Management of Ship Operations and Administration
We internally manage our ship operations, other than the vessels owned or chartered-in by our joint ventures with Exmar, which are commercially and technically managed by Exmar, our six multi-gas carriers, which are technically and commercially managed by external ship managers, two of the Angola LNG Carriers, which are commercially and technically managed by NYK Energy Transport (Atlantic) Ltd. and five of our LNG carriers, which are chartered-out to Shell Tankers (Singapore) Private Ltd. and technically managed by a subsidiary of Royal Dutch Shell Plc. Safety and Environmental Compliance are our top operational priorities. We operate our vessels in a manner intended to protect the safety and health of our employees, and to minimize the impact on the environment and society. We seek to effectively manage risk in the organization using a three-tiered approach at an operational, management and corporate level, designed to provide a clear line of sight throughout the organization. All of our operational employees receive training in the use of risk tools and the management system. We also have an approved competency management system in place to ensure our seafarers continue their professional development and are competent before being promoted to more senior roles.
We believe in continuous improvement, which has seen our safety and environmental culture develop over a significant time period. Health, Safety and Environmental Program milestones include the roll-out of the Environmental Leadership Program (2005), Safety in Action (2007), Quality Assurance and Training Officer Program (2008), Operational Leadership - The Journey (2010), E-Colours (2014), Significant Incident Potential (2015), Navigation Handbook (2016), Risk Tool Handbook (2017), Safety Management System upgrade (2018), Fleet Training Officer (FTO) Program (2021), Care Culture (2021) and The Seven Standards (2022).
We are certified under the standards reflected in International Standards Organization’s (or ISO) 9001 for Quality Assurance, ISO 14001 for Environment Management Systems, ISO 45001 for Occupational Health and Safety Management Systems, and the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention (or ISM Code) on a fully integrated basis. As part of our compliance with the ISM Code, all of our vessels’ safety management certificates are maintained through annual internal audits performed by our certified internal auditors and periodical external audits performed by the classification society DNV. Subject to satisfactory completion of these internal and external audits, certification is valid for five years.
We produce a publicly available sustainability report which reflects the efforts, achievements, results and challenges faced by us relating to several key related matters, including emissions, climate change, corporate social responsibility, diversity and health, safety environment and quality. We recognize the significance of ESG considerations and in 2020 set an ESG strategy foundation which is intended to direct our efforts and performance in the years ahead. Our ESG strategy is focused on three broad areas: allocating capital to support the global energy transition; operating our existing fleets as safely and efficiently as possible; and further strengthening our ESG profile. We set annual ESG targets for the organization, which our ESG Department closely monitor.
In addition to our operational experience, our in-house global shore staff provides a full range of technical, commercial and business development services for our LNG and NGL operations. The staff also provides administrative support to our operations in finance, accounting and human resources. We believe this arrangement affords a safe, efficient and cost-effective operation. Vessel management services are provided by our teams located in various offices around the world. These include critical vessel management functions such as:
•vessel maintenance (including repairs and dry docking) and certification;
•crewing by competent seafarers;
•procurement of stores, bunkers and spare parts;
•management of emergencies and incidents;
•supervision of shipyard and projects during construction of newbuildings, conversions, lay-up and recycling;
•terminal support;
•insurance; and
•financial management services.
These functions are supported by onboard and onshore systems for maintenance, inventory, purchasing and budget management.
We believe that the generally uniform design of some of our existing and newbuilding vessels and the adoption of common equipment standards provide operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair, and spare parts ordering.
Risk of Loss, Insurance and Risk Management
The operation of any ocean-going vessel, or LNG facility, carries an inherent risk of catastrophic marine disasters, death or injury of persons and property losses caused by adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, the transportation of LNG and NGL is subject to the risk of spills and to business interruptions due to political circumstances in foreign countries, hostilities, labor strikes, sanctions and boycotts, whether relating to us or any of our joint venture partners, suppliers or customers. The occurrence of any of these events may result in loss of revenues or increased costs.
We carry hull and machinery (marine and war risks) and protection and indemnity insurance, and other liability insurance, coverage to protect against most of the accident-related risks involved in the conduct of our business. Hull and machinery insurance covers loss of or damage to a vessel due to marine perils such as collision, grounding and weather. Protection and indemnity insurance indemnifies us against liabilities incurred while operating vessels, including injury to our crew or third parties, cargo loss and pollution. The current maximum amount of our coverage for pollution is $1 billion per vessel per incident. We also carry insurance policies covering war risks (including piracy and terrorism) and, for some of our LNG carriers, loss of revenues resulting from vessel off-hire time due to a marine casualty.
We believe that our current insurance coverage is adequate to protect against most of the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage. However, we cannot guarantee that all covered risks are adequately insured against, that any particular claim will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental regulations have resulted in increased costs for, and may result in the lack of availability of, insurance against risks of environmental damage or pollution.
In our operations, we use thorough risk management program that includes, among other things, risk analysis tools, maintenance and assessment programs, a seafarers' competence training program, seafarers' workshops and membership in emergency response organizations.
We have achieved certification under the standards reflected in ISO 9001 for Quality Assurance, ISO 14001 for environment management systems, ISO 45001:2018, and the IMO’s ISM Code on a fully integrated basis.
Flag, Classification, Audits and Inspections
Our vessels are registered with reputable flag states, and the hull and machinery of all of our vessels have been “Classed” by one of the major classification societies and members of International Association of Classification Societies Ltd.: Bureau Veritas, Lloyd’s Register of Shipping, the American Bureau of Shipping or DNV.
The applicable classification society certifies that the vessel’s design and build conform to the applicable Class rules and meets the requirements of the applicable rules and regulations of the country of registry of the vessel and the international conventions to which that country is a signatory. The classification society also verifies throughout the vessel’s life that it continues to be maintained in accordance with those rules. In order to validate this, the vessels are surveyed by the classification society, in accordance to the classification society rules, which in the case of our vessels follows a comprehensive five-year special survey cycle, renewed every fifth year. During each five-year period, the vessel undergoes annual and intermediate surveys, the scrutiny and intensity of which is primarily dictated by the age of the vessel.
In addition to class surveys, the vessel’s flag state also verifies the condition of the vessel during annual flag state inspections, either independently or by additional authorization to class. Also, port state authorities of a vessel’s port of call are authorized under international conventions to undertake regular and spot checks of vessels visiting their jurisdiction.
Processes followed onboard are audited by either the flag state or classification society acting on behalf of the flag state to ensure that they meet the requirements of the ISM Code. We also follow an internal process of internal audits undertaken annually at each office and vessel.
We follow a comprehensive inspection and audit regime supported by our sea staff, shore-based operational and technical specialists and members of our Fleet Training Officer (FTO) program. We typically carry out two internal inspections and one internal audit annually, which helps ensure us that:
•our vessels and operations adhere to our operating standards;
•the structural integrity of the vessel is being maintained;
•machinery and equipment is being maintained to give reliable service;
•we are optimizing performance in terms of speed and fuel consumption; and
•our vessels' appearance supports our brand and meets customer expectations.
Our customers also often carry out vetting inspections under the Ship Inspection Report Program, which is a significant safety initiative introduced by the Oil Companies International Marine Forum to specifically address concerns about sub-standard vessels. The inspection results permit charterers to screen a vessel to ensure that it meets their general and specific risk-based shipping requirements.
We believe that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will generally lead to greater scrutiny, inspection and safety requirements on all vessels in the oil tanker, LNG and NGL carrier markets and will accelerate the scrapping or phasing out of older vessels throughout these markets.
Overall, we believe that our, well-maintained and high-quality vessels provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality of service.
Regulations
General
Our business and the operation of our vessels are significantly affected by international conventions and national, state and local laws and regulations in the jurisdictions in which our vessels operate, as well as in the country or countries of their registration. Because these conventions, laws and regulations change frequently, we cannot predict the ultimate cost of compliance or their impact on the resale price or useful life of our vessels. Additional conventions, laws, and regulations may be adopted that could limit our ability to do business or increase the cost of our doing business, and that may materially affect our operations. We are required by various governmental and quasi-governmental agencies to obtain permits, licenses and certificates with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits, licenses and certificates required for the operations of the vessels we own will depend on a number of factors, we believe that we will be able to continue to obtain all permits, licenses and certificates material to the conduct of our operations.
International Maritime Organization
The IMO is the United Nations’ agency for maritime safety and prevention of pollution. IMO regulations relating to pollution prevention for oil tankers have been adopted by many of the jurisdictions in which our tanker fleet operates. Under IMO regulations and subject to limited exceptions, a tanker must be of double-hull construction in accordance with the requirements set out in these regulations or be of another approved design ensuring the same level of protection against oil pollution. All of our gas carriers are double-hulled.
Many countries, but not the United States, have ratified and follow the liability regime adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (or CLC). Under this convention, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil (e.g. crude oil, fuel oil, heavy diesel oil or lubricating oil), subject to certain defenses. The right to limit liability to specified amounts that are periodically revised is forfeited under the CLC when the spill is caused by the owner’s actual fault or when the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative regimes or common law governs, and liability is imposed either on the basis of fault or in a manner similar to the CLC.
IMO regulations also include the International Convention for Safety of Life at Sea (or SOLAS), including amendments to SOLAS implementing the International Ship and Port Facility Security Code (or ISPS), the ISM Code, the International Convention on Load Lines of 1966, and, specifically with respect to LNG and NGL carriers, the International Code for Construction and Equipment of Ships Carrying Liquefied Gases in Bulk (or the IGC Code) and International Code for Ships operating in Polar Waters (or the Polar Code). SOLAS provides rules for the construction of and the equipment required for commercial vessels and includes regulations for their safe operation. Flag states which have ratified the convention and the treaty generally employ the classification societies, which have incorporated SOLAS requirements into their class rules, to undertake surveys to confirm compliance.
SOLAS and other IMO regulations concerning safety, including those relating to treaties on the training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations. Non-compliance with IMO regulations, including SOLAS, the ISM Code, ISPS Code, IGC Code and Polar Code may subject us to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to or detention in some ports. For example, the USCG 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. The ISM Code requires vessel operators to obtain a safety management certification for each vessel they manage, evidencing the shipowner’s development and maintenance of an extensive safety management system. Each of the existing vessels in our fleet is currently ISM Code-certified, and we obtain for each newbuilding a safety management certificate on delivery.
LNG and NGL carriers are also subject to regulation under the IGC Code. Each LNG and NGL carrier must obtain a certificate of compliance evidencing that it meets the requirements of the IGC Code, including requirements relating to its design and construction. Each of our LNG and NGL carriers is currently IGC Code compliant, and each of the shipbuilding contracts for our LNG carrier newbuildings and for the NGL carrier newbuildings requires IGC Code compliance prior to delivery. Amendments to the IGC Code, aligning wheelhouse window fire-rating requirements with those in SOLAS chapter II-2, were adopted in 2016 and became effective on January 1, 2020.
Annex VI of the IMO’s International Convention for the Prevention of Pollution from Ships (or MARPOL) (or Annex VI) sets limits on sulfur oxide (or SOx) and nitrogen oxide (or NOx) emissions from ship exhausts and prohibits emissions of ozone depleting substances, emissions of volatile compounds from cargo tanks and the incineration of specific substances. Annex VI also includes a world-wide cap on the sulfur content of fuel oil and allows for special "emission control areas" (or ECAs) to be established with more stringent controls on sulfur emissions.
Annex VI provides for a three-tier reduction in NOx emissions from marine diesel engines, with the final tier (or Tier III) to apply to engines installed on vessels constructed on or after January 1, 2016 and which operate in the North American ECA or the U.S. Caribbean Sea ECA as well as ECAs designated in the future by the IMO. Tier III limits are 80% below Tier I, and these cannot be achieved without additional means such as Selective Catalytic Reduction. In October 2016 the IMO’s Marine Environment Protection Committee (or MEPC) approved the designation of the North Sea (including the English Channel) and the Baltic Sea as ECAs for NOx emissions; these ECAs and the related amendments to Annex VI of MARPOL (with some exceptions) entered into effect on January 1, 2019. This requirement is applicable for new ships constructed on or after January 1, 2021 if they visit the Baltic or the North Sea (including the English Channel) and requires the future trading area of a ship to be assessed at the contract stage. There are exemption provisions to allow ships with only Tier II engines, to navigate in a NOx Tier III ECA if the ship is departing from a shipyard where the ship is newly built or visiting a shipyard for conversion/repair/maintenance without loading/unloading cargoes.
Effective January 1, 2020, Annex VI imposes a global limit for sulfur in fuel oil used on board ships of 0.50% m/m (mass by mass), regardless of whether a ship is operating outside a designated ECA. The ECA limit of 0.10% will still apply, as will any applicable local regulations. Effective March 1, 2020, the carriage of non-compliant fuel is prohibited. To comply with the 2020 global sulfur limit for fuel, ships must utilize different fuels containing low or very low sulfur (e.g., low sulfur fuel oil, very low sulfur fuel oil, low sulfur marine gas oil (or LSMGO), biofuels or other compliant fuels such as LNG), or utilize exhaust gas cleaning systems, known as “scrubbers.” Amendments to the information to be included in bunker delivery notes relating to the supply of marine fuel oil to ships fitted with alternative mechanisms to address sulfur emission requirements (e.g. scrubbers) became effective January 1, 2019. At present, we have not installed any scrubbers on our existing gas fleet (nor do we have plans to). All of our LNG vessels are in compliance with 2020 global sulfur fuel regulations. Our fuel strategy is to use LNG as primary fuel (except the Q-Flex LNG vessels) and compliance fuels as secondary fuel.
As of March 1, 2018, amendments to Annex VI impose new requirements on ships of 5,000 gross tonnage and above to collect fuel oil consumption data for ships, as well as certain other data including proxies for transport work. Amendments to MARPOL Annex VI that makes the data collection system for fuel oil consumption of ships mandatory were adopted at the 70th session of the MEPC held in October 2016 and entered into force on March 1, 2018. The amendments require operators to update the vessels' Ship Energy Efficiency Management Plan (or SEEMP) to include a part II describing the ship specific methodology that will be used for collecting and measuring data for fuel oil consumption, distance travelled, hours underway, ensuring data quality is maintained and the processes that will be used to report the data to the Administration. This has been verified as compliant on all ships for calendar year 2021. The verification of data collected for the 2022 calendar year is ongoing.
IMO regulations required that, as of January 1, 2015, all vessels operating within ECAs worldwide recognized under MARPOL Annex VI must comply with 0.1% sulfur requirements. In addition, LSMGO is more expensive than HFO, and this impacts the costs of operations. In general, our charterers are required under our contracts to bear the cost of fuel. However, on occasion we may be exposed to increased fuel costs in our spot trading vessels, although our competitors bear a similar cost increase as this is a regulatory item applicable to all vessels. All required vessels in our fleet trading to and within regulated low sulfur areas are able to comply with fuel requirements.
The IMO has issued guidance regarding protecting against acts of piracy off the coast of Somalia. We comply with these guidelines.
IMO Guidance for countering acts of piracy and armed robbery is published by the IMO’s Maritime Safety Committee (or MSC). MSC.1/Circ.1339 (Piracy and armed robbery against ships in waters off the coast of Somalia) outlines Best Management Practices (or BMP) for protection against Somalia based Piracy. Specifically, MSC.1/Circ.1339 provides guidance to Shipowners and ship operators, shipmasters and crews on preventing and suppressing acts of piracy and armed robbery and was adopted by the IMO through Resolution MSC.324(89). The BMP is a joint industry publication by BIMCO, ICS, IGP&I Clubs, INTERTANKO and OCIMF VIQ Version 7 as the latest. Our fleet follows the guidance within BMP 5 when transiting in other regions with recognized threat levels for piracy and armed robbery, including West Africa.
The IMO's Ballast Water Management Convention entered into force on September 8, 2017. The convention stipulates two standards for discharged ballast water. The D-1 standard covers ballast water exchange while the D-2 standard covers ballast water treatment. The convention requires the implementation of either the D-1 or D-2 standard. There will be a transitional period from the entry into force to the IOPP renewal survey in which ballast water exchange (reg. D-1) can be employed. The IMO’s MEPC agreed to a compromise on the implementation dates for the D-2 discharge standard: ships constructed on or after September 8, 2017 must comply with the D-2 standard upon delivery. Existing ships should be D-2 compliant on the first IOPP renewal following entry into force if the survey is completed on or after September 8, 2019, or a renewal IOPP survey was completed on or after September 8, 2014 but prior to September 8, 2017. Ships should be D-2 compliant on the second IOPP renewal survey after September 8, 2017 if the first renewal survey after that date was completed prior to September 8, 2019 and if the previous two conditions are not met. Vessels will be required to meet the discharge standard D-2 by installing an approved BWTS. Besides the IMO convention, ships sailing in U.S. waters are required to employ a type-approved BWTS which is compliant with USCG regulations. The USCG has approved a number of BWTSs both nationally and internationally, out of which Alfa Laval (Sweden), Ocean Saver (Norway), Techcross, and De Nora are under our approved list for retrofit. We estimate that the installation of approved BWTS may cost between $2 million and $3 million per vessel.
The IMO has also adopted the Polar Code which deals with matters regarding the design, construction, equipment, operation, search and rescue and environmental protection in relation to ships operating in waters surrounding the two poles. The Polar Code includes both safety and environmental provisions. The Polar Code and related amendments entered into force in January 2017. The Polar Code is mandatory for new vessels built after January 1, 2017. For existing ships, this code will be applicable from the first intermediate or renewal survey, whichever occurs first, beginning on or after January 1, 2018. All our vessels trading in this area are fully compliant with the Polar Code.
MARPOL Annex I also states that oil residue may be discharged directly from the sludge tank to the shore reception facility through standard discharge connections. They may also be discharged to the incinerator or to an auxiliary boiler suitable for burning the oil by means of a dedicated discharge pump. Amendments to Annex I expand on the requirements for discharge connections and piping to ensure residues are properly disposed of. Annex I is applicable for existing vessels with a first renewal survey beginning on or after January 1, 2017.
Amendments to MARPOL Annex V were adopted at the 70th session of the MEPC held in October 2016 and entered into force on March 1, 2018. The changes include criteria for determining whether cargo residues are harmful to the marine environment and a new Garbage Record Book (or GRB) format with a new garbage category for e-waste. Solid bulk cargo as per regulation VI/1-1.2 of SOLAS, other than grain, shall now be classified as per the criteria in the new Appendix I of MARPOL Annex V, and the shipper shall then declare whether or not the cargo is harmful to the marine environment. A new form of the GRB has been included in Appendix II to MAROL Annex V. The GRB is now divided into two parts: Part I - for all garbage other than cargo residues, applicable to all ships. PART II - for cargo residues only applicable to ships carrying solid bulk cargo. These changes are reflected in the vessels latest revised GRB.
MSC.338(91) adopted amendments to SOLAS Regulation II-2/10 to clarify that a minimum of two-way portable radiotelephone apparatus for each fire party for fire-fighters' communication shall be carried on board. These radio devices shall be of explosion proof type or intrinsically safe type. As per MSC.338(91), requirements have also been highlighted for audio and visual indicators for breathing apparatus which will alert the user before the volume of the air in the cylinder has been reduced to no less than 200 liters. All of our vessels are in compliance with these requirements.
Cyber-related risks are operational risks that are appropriately assessed and managed in accordance with the safety management requirements of the ISM Code. Cyber risks are required to be appropriately addressed in our safety management system no later than the first annual verification of our Document of Compliance after January 1, 2021. As of July 16, 2021, verification audits of our Document of Compliance have been completed and we are in compliance with IMO Resolution MSC.428(98) requirement for maritime cyber risk management.
The Maritime Labour Convention (or MLC) 2006 was adopted by the International Labour Conference at its 94th (Maritime) Session (2006), establishing minimum working and living conditions for seafarers. The convention entered into force August 20, 2013, with further amendments approved by the International Labour Conference at its 103rd Session (2014). The MLC establishes a single, coherent instrument embodying all up-to-date standards of existing international maritime labour conventions and recommendations, as well as the fundamental principles to be found in other international labour conventions. All of our maritime labour contracts comply with the MLC.
The IMO continues to review and introduce new regulations and as such, it is difficult to predict what additional requirements, if any, may be adopted by the IMO and what effect, if any, such regulations might have on our operations.
EU
The EU has adopted legislation that: bans from European waters manifestly sub-standard vessels (defined as vessels that have been detained twice by EU port authorities, in the preceding two years); creates obligations on the part of EU member port states to inspect minimum percentages of vessels using these ports annually; provides for increased surveillance of vessels posing a high risk to maritime safety or the marine
environment; and provides the EU with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of negligent societies.
Two regulations that are part of the implementation of the Port State Control Directive, came into force on January 1, 2011 and introduce a ranking system (published on a public website and updated daily) displaying shipping companies operating in the EU with the worst safety records. The ranking is judged upon the results of the technical inspections carried out on the vessels owned by a particular shipping company. Those shipping companies that have the most positive safety records are rewarded by subjecting them to fewer inspections, while those with the most safety shortcomings or technical failings recorded upon inspection will in turn be subject to a greater frequency of official inspections to their vessels.
The EU has, by way of Directive 2005/35/EC, which has been amended by Directive 2009/123/EC, created a legal framework for imposing criminal penalties in the event of discharges of oil and other noxious substances from ships sailing in its waters, irrespective of their flag. This relates to discharges of oil or other noxious substances from vessels. Minor discharges shall not automatically be considered as offences, except where repetition leads to deterioration in the quality of the water. The persons responsible may be subject to criminal penalties if they have acted with intent, recklessly or with serious negligence and the act of inciting, aiding and abetting a person to discharge a polluting substance may also lead to criminal penalties.
The EU has adopted a Directive requiring the use of low sulfur fuel. Since January 1, 2015, vessels have been required to burn fuel with sulfur content not exceeding 0.1% while within EU member states’ territorial seas, exclusive economic zones and pollution control zones that are included in SOx ECAs. Other jurisdictions have also adopted similar regulations.
All ships above 5,000 gross tonnage calling EU waters are required to comply with EU-MRV regulations. These regulations came into force on July 1, 2015 and aim to reduce GHG emissions within the EU. It requires ships carrying out maritime transport activities to or from European Economic Area ports to monitor and report information including verified data on their CO2 emissions from January 1, 2018. Data collection takes place on a per voyage basis and started from January 1, 2018. The reported CO2 emissions, together with additional data (e.g. cargo, energy efficiency parameters), are to be verified by independent verifiers and sent to a central database, managed by the European Maritime Safety Agency (or EMSA). Seapeak has signed an agreement with DNV for monitoring, verification and reporting as required by this regulation. We use Veslink forms which have a smooth interface with the DNV system. The reporting period for the 2021 calendar year has been completed, and emission reports for the vessels which have carried out EU voyages have been submitted in the THETIS database. Based on emission reports submitted in THETIS, a document of compliance has been issued and placed on board.
The EU Ship Recycling Regulation entered into force on December 30, 2013. It aims to prevent, reduce and minimize accidents, injuries and other negative effects on human health and the environment when ships are recycled, and the hazardous waste they contain is removed. The legislation applies to all ships flying the flag of an EU country and to vessels with non-EU flags that call at an EU port or anchorage. It sets out responsibilities for shipowners and for recycling facilities both in the EU and in other countries. Each new ship is required to have on board an inventory of the hazardous materials (such as asbestos, lead or mercury) it contains in either its structure or equipment. The use of certain hazardous materials is forbidden. Before a ship is recycled, its owner must provide the company carrying out the work with specific information about the vessel and prepare a ship recycling plan. Recycling may only take place at facilities listed on the EU ‘List of facilities’.
The EU Ship Recycling Regulation generally entered into force on December 31, 2018, with certain provisions applicable from December 31, 2020. Compliance timelines are as follows: EU-flagged newbuildings were required to have onboard a verified Inventory of Hazardous Materials (or IHM) with a Statement of Compliance by December 31, 2018, existing EU-flagged vessels are required to have onboard a verified IHM with a Statement of Compliance by December 31, 2020, non-EU-flagged vessels calling at EU ports are also required to have onboard a verified IHM with a Statement of Compliance latest by December 31, 2020. We contracted a class-approved HazMat expert company to assist in the preparation of an IHM and obtaining Statements of Compliance for our vessels. The EU Commission adopted a European List of approved ship recycling facilities, as well as four further decisions dealing with certification and other administrative requirements set out in the EU Ship Recycling Regulation. In 2014, the Council Decision 2014/241/EU authorized EU countries having ships flying their flag or registered under their flag to ratify or to accede to the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships. The Hong Kong Convention is not yet ratified.
China
China had established new ECAs in Pearl River Delta, Yangtze River Delta and Bohai Sea, which came into force from January 1, 2016. The Hainan ECA came into force from January 1, 2019. From January 1, 2019, all the ECAs have merged, and the scope of Domestic Emission Controls Areas (or DECAs) will be extended to 12 nautical miles from the coastline, covering the Chinese mainland territorial coastal areas as well as the Hainan Island territorial coastal waters. From January 1, 2019, all vessels navigating within the Chinese mainland territorial coastal DECAs and at berths will be required to use marine fuel with sulfur content of maximum 0.50% m/m. As per the new regulation, ships can also use alternative methods such as an Exhaust Gas Scrubber, LNG or other clean fuel that reduces the SOx to the same level or lower than the maximum required limits of sulfur when using fossil fuel in the DECA areas or when at berth. All the vessels without an exhaust gas cleaning system entering the emission control area are only permitted to carry and use the compliant fuel oil specified by the new regulation.
From July 1, 2019, vessels engaged on international voyages (except tankers) that are equipped to connect to shore power must use shore power if they berth for more than 3 hours in berths with shore supply capacity in the coastal control areas (for inland river control area, berth for more than 2 hours).
From January 1, 2020, all vessels navigating within the Chinese mainland territorial coastal DECAs should use marine fuel with a maximum 0.5% m/m sulfur cap. All the vessels entering China inland waterway emission control area are to use the fuel oil with sulfur content not exceeding 0.1% m/m. Any vessel using or carrying non-compliant fuel oil due to the non-availability of compliant fuel oil is to submit a fuel oil non-availability report to the China Maritime Safety Administration (or CMSA) of the next arrival port before entering waters under the jurisdiction of China.
From March 1, 2020, all vessels entering waters under the jurisdiction of the People’s Republic of China are prohibited from carrying fuel oil of sulfur content exceeding 0.50% m/m on board ships. Any vessel carrying non-compliant fuel oil in the waters under the jurisdiction of China is to:
•discharge the non-compliant fuel oil; or
•as permitted by the CMSA of calling port, to retain the non-compliant fuel oil on board with a commitment letter stating it will not be used in waters under the jurisdiction of China.
United States
The United States has enacted an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills, including discharges of oil cargoes, bunker fuels or lubricants, primarily through the Oil Pollution Act of 1990 (or OPA 90) and the Comprehensive Environmental Response, Compensation and Liability Act (or CERCLA). OPA 90 affects all owners, bareboat charterers, and operators whose vessels trade to the United States or its territories or possessions or whose vessels operate in United States waters, which include the U.S. territorial sea and 200-mile exclusive economic zone around the United States. CERCLA applies to the discharge of “hazardous substances” rather than “oil” and imposes strict joint and several liability upon the owners, operators or bareboat charterers of vessels for cleanup costs and damages arising from discharges of hazardous substances. We believe that petroleum products, LNG and NGL should not be considered hazardous substances under CERCLA, but additives to oil or lubricants used on LNG or NGL carriers might fall within its scope.
Under OPA 90, vessel owners, operators and bareboat charters are “responsible parties” and are jointly, severally, and strictly liable (unless the oil spill results solely from the act or omission of a third party, an act of God or an act of war and the responsible party reports the incident and reasonably cooperates with the appropriate authorities) for all containment and cleanup costs and other damages arising from discharges or threatened discharges of oil from their vessels. These other damages are defined broadly to include:
•natural resources damages and the related assessment costs;
•real and personal property damages;
•net loss of taxes, royalties, rents, fees and other lost revenues;
•lost profits or impairment of earning capacity due to property or natural resources damage;
•net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards; and
•loss of subsistence use of natural resources.
OPA 90 limits the liability of responsible parties in an amount it periodically updates. The liability limits do not apply if the incident was proximately caused by violation of applicable U.S. federal safety, construction or operating regulations, including IMO conventions to which the United States is a signatory, or by the responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the oil removal activities. Liability under CERCLA is also subject to limits unless the incident is caused by gross negligence, willful misconduct, or a violation of certain regulations. We currently maintain for each of our vessel's pollution liability coverage in the maximum coverage amount of $1 billion per incident. A catastrophic spill could exceed the coverage available, which could harm our business, financial condition, and results of operations.
Under OPA 90, with limited exceptions, all newly built or converted tankers delivered after January 1, 1994 and operating in U.S. waters must be double-hulled. All of our tankers are double-hulled.
OPA 90 also requires owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility in an amount at least equal to the relevant limitation amount for such vessels under the statute. The USCG has implemented regulations requiring that an owner or operator of a fleet of vessels must demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having the greatest maximum limited liability under OPA 90 and CERCLA. Evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance, guaranty or an alternate method subject to approval by the USCG. Under the self-insurance provisions, the shipowner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the USCG regulations by using self-insurance for certain vessels and obtaining financial guaranties from a third party for the remaining vessels. If other vessels in our fleet trade into the United States in the future, we expect to obtain guaranties from third-party insurers.
OPA 90 and CERCLA permit individual U.S. states to impose their own liability regimes with regard to oil or hazardous substance pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited strict liability for spills. Several coastal states, such as California and Alaska, require state-specific evidence of financial responsibility and vessel response plans. We intend to comply with all applicable state regulations in the ports where our vessels call.
Owners or operators of vessels, including tankers operating in U.S. waters, are required to file vessel response plans with the USCG, and their tankers are required to operate in compliance with their USCG approved plans. Such response plans must, among other things:
•address a “worst case” scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources to respond to a “worst case discharge”;
•describe crew training and drills; and
•identify a qualified individual with full authority to implement removal actions.
All our vessels have USCG approved vessel response plans. In addition, we conduct regular oil spill response drills in accordance with the guidelines set out in OPA 90. The USCG has announced it intends to propose similar regulations requiring certain vessels to prepare response plans for the release of hazardous substances. Similarly, we also have California Vessel Contingency Plans on board vessels which are likely to call ports in State of California.
OPA 90 and CERCLA do not preclude claimants from seeking damages resulting from the discharge of oil and hazardous substances under other applicable law, including maritime tort law. Such claims could include attempts to characterize the transportation of LNG or NGL aboard a vessel as an ultra-hazardous activity under a doctrine that would impose strict liability for damages resulting from that activity. The application of this doctrine varies by jurisdiction.
The U.S. Clean Water Act (or the Clean Water Act) also prohibits the discharge of oil or hazardous substances in U.S. navigable waters and imposes strict liability in the form of penalties for unauthorized discharges. The Clean Water Act imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90 and CERCLA discussed above.
The United States Environmental Protection Agency (“EPA”) has enacted rules requiring ballast water discharges and other discharges incidental to the normal operation of certain ships within United States waters to be authorized under the Ship General Permit for Discharges Incidental to the Normal Operation of Ships (“VGP”). To be covered by the VGP, owners of certain ships (typically based on ship length) must submit a Notice of Intent (“NOI”) at least 30 days before the ship operates in United States waters. In March 2013, the EPA published a new VGP that included numeric effluent limits for ballast water expressed as the maximum concentration of living organisms in ballast water. The VGP also imposed a variety of changes for non-ballast water discharges including more stringent “Best Management Practices” for discharges of oil-to-sea interfaces in an effort to reduce the toxicity of oil leaked into U.S. waters. The 2013 VGP was issued with an effective period of December 19, 2013 to December 18, 2018. The Vessel Incidental Discharge Act, (“VIDA”), enacted on December 4, 2018, requires the EPA and Coast Guard to develop new performance standards and enforcement regulations and extends the 2013 VGP provisions until new regulations are final and enforceable. We have submitted NOIs for our fleet and intend to submit NOIs for our ships in the future, where required, and do not believe that the costs associated with obtaining and complying with the VGP or issuing NOIs will have a material impact on our operations.
Since January 1, 2014, the California Air Resources Board has required that vessels that burn fuel within 24 nautical miles of California burn fuel in such area with 0.1% sulfur content or less.
Various states in the United States, including California, have implemented additional regulations relating to the environment and operation of vessels. California Biofouling Management Plan requirements are as follows: developing and maintaining a Biofouling Management Plan, developing and maintaining a Biofouling Record Book, mandatory biofouling management of the vessel’s wetted surfaces, mandatory biofouling management for vessels that undergo an extended residency period (e.g. remain in the same location for 45 or more days). All vessel calling at California water were required to submit the "Annual Marine Invasive Reporting Form" by October 1, 2017 and should have CA-Biofouling management plan after a vessel’s first regularly scheduled out-of-water maintenance (e.g. dry dock) after January 1, 2018, or upon delivery on or after January 1, 2018.
New Zealand
New Zealand's Craft Risk Management Standard requirements are based on the IMO's guidelines for the control and management of ships' biofouling to minimize the transfer of invasive aquatic species.
Marine pests and diseases brought in on vessel hulls (or biofouling) are a threat to New Zealand's marine resources. From May 15, 2018, all vessels arriving in New Zealand will need to have a clean hull. Vessels staying up to 20 days and only visiting designated ports (places of first arrival) will be allowed a slight amount of biofouling. Vessels staying longer and visiting other places will only be allowed a slime layer and goose barnacles.
Republic of Korea
The Korean Ministry of Oceans and Fisheries announced an air quality control program that defines selected South Korean ports and areas as ECAs. The ECAs cover Korea’s five major port areas: Incheon, Pyeongtaek & Dangjin, Yeosu & Gwangyang, Busan and Ulsan. From September 1, 2020, ships at berth or at anchor in the new Korean ECAs must burn fuel with a maximum sulfur content of 0.10%. Ships must switch to compliant fuel within one hour of mooring/anchoring and burn compliant fuel until not more than one hour before departure. From January 1, 2022, the requirements have expanded, and the 0.10% sulfur limit will apply at all times while operating within the ECAs.
A Vessel Speed Reduction Program has also been introduced as a part of an air quality control program on voluntary compliance basis to certain types of ships (Crude, Chemical and LNG carriers) calling at ports Busan, Ulsan, Yeosu, Gwangyang and Incheon.
India
On October 2, 2019, the Government of India urged its citizens and government agencies to take steps towards phasing out single-use plastics (or SUP). As a result, all shipping participants operating in Indian waters are required to contribute to the Indian government’s goal of phasing out SUPs.
The Directorate General of Shipping, India (or DGS) has mandated certain policies as a result, and in order to comply with these required policies, all cargo vessels are required as of January 31, 2020 to prepare a vessel-specific Ship Execution Plan (or SEP) detailing the inventory of all SUP used on board the vessel and which has not been exempted by DGS. This SEP will be reviewed to determine the prohibition of SUP on the subject vessel.
Vessels will be allowed to use an additional 10% of SUP items in the SEP that have not been prohibited. Amendments to the finalized SEP are discouraged save for material corrections.
Foreign vessels visiting Indian ports are not allowed to use prohibited items while at a place or port in India. However, these items are allowed to be on board provided they are stored at identified locations. SEPs are also required to detail the prevention steps that will be implemented during a vessel’s call at an Indian port to prevent unsanctioned usage of SUPs. This includes the preparation and use of a deck and official log entry identifying all SUP items on board the vessel.
GHG Regulation
In February 2005, the Kyoto Protocol to the United Nations Framework Convention on Climate Change (or the Kyoto Protocol) took effect. Pursuant to the Kyoto Protocol, adopting countries are required to implement national programs to reduce emissions of GHGs. In December 2009, more than 27 nations, including the United States, entered into the Copenhagen Accord. The Copenhagen Accord is non-binding but is intended to pave the way for a comprehensive, international treaty on climate change. In December 2015 the Paris Agreement was adopted by a large number of countries at the 21st Session of the Conference of Parties (commonly known as COP 21, a conference of the countries which are parties to the United Nations Framework Convention on Climate Change; the COP is the highest decision-making authority of this organization). The Paris Agreement, which entered into force on November 4, 2016, deals with GHG emission reduction measures and targets from 2020 in order to limit the global temperature increases to well below 2o Celsius above pre-industrial levels. Although shipping was ultimately not included in the Paris Agreement, it is expected that the adoption of the Paris Agreement may lead to regulatory changes in relation to curbing GHG emissions from shipping.
In July 2011, the IMO adopted regulations imposing technical and operational measures for the reduction of GHG emissions. These new regulations formed a new chapter in MARPOL Annex VI and became effective on January 1, 2013. The new technical and operational measures imposed by these new regulations include the “Energy Efficiency Design Index” (or the EEDI), which is mandatory for newbuilding vessels, and SEEMP which is mandatory for all vessels. In October 2016, the IMO’s MEPC adopted updated guidelines for the calculation of the EEDI. In October 2014, the IMO’s MEPC agreed in principle to develop a system of data collection regarding fuel consumption of ships. In October 2016, the IMO adopted a mandatory data collection system under which vessels of 5,000 gross tonnage and above are to collect fuel consumption and other data and to report the aggregated data so collected to their flag state at the end of each calendar year. The new requirements entered into force on March 1, 2018.
All vessels are required to submit fuel consumption data to their respective administration/registered organizations for onward submission to the IMO for analysis and to help with decision-making on future measures. The amendments require operators to update the vessels SEEMP to include descriptions of the ship-specific methodology that will be used for collecting and measuring data for fuel oil consumption, distance travelled, hours underway and processes that will be used to report the data to the Administration, in order to ensure data quality is maintained.
The vessels were verified as compliant before December 31, 2018, with the first data collection period being for the 2019 calendar year. A Confirmation of Compliance was issued by the administration/registered organization, which must be kept on board the ship.
Amendments to the International Convention for the Prevention of Pollution from Ships (or MARPOL) Annex VI entered into force on November 1, 2022. From January 1, 2023 it is mandatory for all ships to calculate their attained Energy Efficiency Existing Ship Index (or EEXI) to measure their energy efficiency and to initiate the collection of data for the reporting of their annual operational carbon intensity indicator (or CII) and CII rating. This means that the first annual reporting will be completed in 2023, with initial ratings given in 2024.The measures are part of IMO's commitment under its 2018 Initial Strategy on Reduction of GHG Emissions from Ships to reduce carbon intensity from all ships by 40% by 2030 compared to 2008. We have calculated the EEXI and Engine Power Limiter (or EPL) values for our vessels. Further, we are exploring alternatives to optimize the emissions output of our vessels, including through the use of applying low friction paints or by installing energy saving devices on board our vessels, such as Mewis ducts.
The EU has adopted Regulation (EU) 2015/757 on the monitoring, reporting and verification (or MRV) of CO2 emissions from vessels (or the MRV Regulation), which entered into force on July 1, 2015. The MRV Regulation aims to quantify and reduce CO2 emissions from shipping. It lists the requirements on the MRV of carbon dioxide emissions and requires shipowners and operators to annually monitor, report and verify CO2 emissions for vessels larger than 5,000 gross tonnage calling at any EU and EFTA (Norway and Iceland) port (with a few exceptions, such as fish-catching or fish-processing vessels). Data collection takes place on a per voyage basis and started January 1, 2018. The reported CO2 emissions, together with additional data, such as cargo and energy efficiency parameters, are to be verified by independent verifiers and sent to a central inspection database hosted by EMSA to collate all the data applicable to the EU region. Companies responsible for the operation of large ships using EU ports are required to report their CO2 emissions.
On July 14, 2022, the European Commission presented its proposal to revise the current European Union Emissions Trading System (or EU ETS). The proposal modifies and aligns the existing EU ETS target of 43% GHG emission reduction by 2030 (vs 2005 levels) with the Fit for 55 Package goal, aiming for at least 55% GHG emission reduction for the whole EU economy by 2030 (vs 1990 levels). Following the usual political procedure, both the EU Council and the European Parliament adopted their initial reactions to the proposal of the European Commission in June 2022. With the first step of the political process achieved, the inter-institutional negotiations between the European Parliament, Council and Commission officially began on July 11, 2022. For the maritime industry, the emissions emitted by transport maritime will be integrated in the current EU ETS as from 2025. It will include CO2 emissions of most large vessels. Coverage will be progressive, starting in 2025 with 40% of the emissions emitted in 2024 and aiming to achieve full coverage of intra-EU voyages by 2027. From 2026, non-CO2 emissions such as nitrous oxide (or N2O), soot and methane could also be included in the system. From 2027, the scope may be extended to ships over 400 gross tonnages (or GT), pending a revision in 2026. Offshore vessels over 5000 GT will be included in the EU ETS from 2027. The EU policymakers have also recognised a list of exemptions and measures to avoid carbon leakage. Maritime transport is a sector that will not receive free allocation nor be protected by CBAM. This means that the EU ETS Directive will require the publication of a list of neighboring transshipment ports to avoid evasive behavior of carbon requirements. The agreement also recognizes exemptions for ice class ships (such as our ARC7 vessels), small islands, outermost EU regions and public service journeys between Greece and Cyprus.
In the United States, the EPA issued an “endangerment finding” regarding GHGs under the U.S. Clean Air Act. While this finding in itself does not impose any requirements on our industry, it authorizes the EPA to regulate directly GHG emissions through a rule-making process. In addition, climate change initiatives are being considered in the United States Congress and by individual states. Any passage of new climate control legislation or other regulatory initiatives by the IMO, EU, the United States or other countries or states where we operate that restrict emissions of GHG could have a significant financial and operational impact on our business that we cannot predict with certainty at this time.
Many financial institutions that lend to the maritime industry have adopted the Poseidon Principles, which establish a framework for assessing and disclosing the climate alignment of ship finance portfolios. The Poseidon Principles set a benchmark for the banks who fund the maritime sector,
which is based on the IMO GHG strategy. IMO has approved an initial GHG strategy in April 2018 to reduce GHG emissions generated from shipping activity, which represents a significant shift in climate ambition for a sector that currently accounts for 2%-3% of global carbon dioxide emissions. As a result, the Poseidon Principles have enabled financial institutions to align their ship finance portfolios with responsible environmental behavior and incentivize international shipping’s decarbonization.
Vessel Security
The ISPS was adopted by the IMO in December 2002 in the wake of heightened concern over worldwide terrorism and became effective on July 1, 2004. The objective of ISPS is to enhance maritime security by detecting security threats to ships and ports and by requiring the development of security plans and other measures designed to prevent such threats. Each of the existing vessels in our fleet currently complies with the requirements of ISPS and Maritime Transportation Security Act of 2002 (U.S. specific requirements). Procedures are in place to inform the relevant reporting regimes such as Maritime Security Council Horn of Africa, the Maritime Domain Awareness for Trade - Gulf of Guinea, and the Information Fusion Center whenever our vessels are calling in the Indian Ocean Region, or West Coast of Africa or SE Asia high-risk areas respectively. In order to mitigate the security risk, security arrangements are required for vessels which travel through these high-risk areas.
C. Organizational Structure
Our sole common unitholder is Stonepeak and its affiliates.
Please read Exhibit 8.1 to this Annual Report for a list of our subsidiaries as at December 31, 2022.
D.Property, Plant and Equipment
Other than our vessels and our 30% interest, through the Bahrain LNG Joint Venture, in an LNG receiving and regasification terminal, we do not have any material property.
Please see “Item 4 – Information on the Company: Our Fleet and Our Charters” for a description of our vessels, and “Item 18 – Financial Statements: Note 5 – Chartered-in Vessels" and "Note 10 – Long-Term Debt” for information about major encumbrances against our vessels.
E. Taxation of the Company
United States Taxation
The following is a discussion of material U.S. federal income tax considerations applicable to us effective January 1, 2019. This discussion is based upon provisions of the Code, legislative history, applicable U.S. Treasury Regulations (or Treasury Regulations), judicial authority and administrative interpretations, all as in effect on the date of this Annual Report, and which are subject to change, possibly with retroactive effect, or are subject to different interpretations. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below.
Election to be Taxed as a Corporation. We elected to be taxed as a corporation for U.S. federal income tax purposes effective January 1, 2019. As such, we are subject to U.S. federal income tax on our income to the extent it is from U.S. sources or otherwise is effectively connected with the conduct of a trade or business in the United States as discussed below.
Taxation of Operating Income. We expect that substantially all of our gross income and the gross income of our corporate subsidiaries will be attributable to the transportation of LNG, NGL, ammonia and related products. For this purpose, gross income attributable to transportation (or Transportation Income) includes income derived from, or in connection with, the use (or hiring or leasing for use) of a vessel to transport cargo, or the performance of services directly related to the use of any vessel to transport cargo, and thus includes income from time-charters.
Fifty percent (50%) of Transportation Income that either begins or ends, but that does not both begin and end, in the United States (or U.S. Source International Transportation Gross Income) is considered to be derived from sources within the United States. Transportation Income that both begins and ends in the United States (or U.S. Source Domestic Transportation Gross Income) is considered to be 100% derived from sources within the United States. Transportation Income exclusively between non-U.S. destinations is considered to be 100% derived from sources outside the United States. Transportation Income derived from sources outside the United States generally is not subject to U.S. federal income tax.
Based on our current operations and the operations of our subsidiaries, most of our Transportation Income is from sources outside the United States and not subject to U.S. federal income tax. Unless the exemption from U.S. taxation under Section 883 of the Code (or the Section 883 Exemption) applies, our U.S. Source International Transportation Gross Income or U.S. Source Domestic Transportation Gross Income is generally subject to U.S. federal income taxation under either the net basis and branch profits taxes or the 4% gross basis tax, each of which is discussed below, unless the Section 883 Exemption applies.
The Section 883 Exemption. In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations thereunder (or the Section 883 Regulations), it will not be subject to the net basis and branch profits taxes or the 4% gross basis tax described below on its U.S. Source International Transportation Gross Income. The Section 883 Exemption does not apply to U.S. Source Domestic Transportation Gross Income.
A non-U.S. corporation (including an entity electing to be taxed as a corporation for U.S. federal income tax purposes) will qualify for the Section 883 Exemption if, among other things, it (i) is organized in a jurisdiction outside the United States that grants an exemption from tax to U.S. corporations on international Transportation Gross Income (or an Equivalent Exemption), (ii) meets one of three ownership tests (or Ownership
Tests) described in the Section 883 Regulations, and (iii) meets certain substantiation, reporting and other requirements (or the Substantiation Requirements).
We are organized under the laws of the Republic of the Marshall Islands. The U.S. Treasury Department has recognized the Republic of the Marshall Islands as a jurisdiction that grants an Equivalent Exemption. We also believe that we will be able to satisfy the Substantiation Requirements necessary to qualify for the Section 883 Exemption. Consequently, beginning with respect to our taxable year ending in 2022, our U.S. Source International Transportation Gross Income (including for this purpose, our share of any such income earned by our subsidiaries that have properly elected to be treated as partnerships or disregarded as entities separate from us for U.S. federal income tax purposes) will be exempt from U.S. federal income taxation provided we satisfy one of the Ownership Tests. Beginning with respect to our taxable year ending in 2022, we believe that we satisfy one of the applicable Ownership Tests. As such, beginning with respect to our taxable year ending in 2022, we believe the Section 883 Exemption will apply and we will not be taxed on our U.S. Source International Transportation Gross income.
Net Basis Tax and Branch Profits Tax. If the Section 883 Exemption does not apply, our U.S. Source International Transportation Gross Income may be treated as effectively connected with the conduct of a trade or business in the United States (or Effectively Connected Income) if we have a fixed place of business in the United States and substantially all of our U.S. Source International Transportation Gross Income is attributable to regularly scheduled transportation or, in the case of income derived from bareboat charters, is attributable to a fixed place of business in the United States. Based on our current operations, none of our potential U.S. Source International Transportation Gross Income is attributable to regularly scheduled transportation or is derived from bareboat charters attributable to a fixed place of business in the United States. As a result, we do not anticipate that any of our U.S. Source International Transportation Gross Income will be treated as Effectively Connected Income. However, there is no assurance that we will not earn income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of business in the United States in the future, which will result in such income being treated as Effectively Connected Income. U.S. Source Domestic Transportation Gross Income generally will be treated as Effectively Connected Income. However, we do not anticipate that a material amount of our income has been, or will be, U.S. Source Domestic Transportation Gross Income.
Any income we earn that is treated as Effectively Connected Income would be subject to U.S. federal corporate income tax (which statutory rate as of the end of 2022 was 21%) and a 30% branch profits tax imposed under Section 884 of the Code. In addition, a branch interest tax could be imposed on certain interest paid or deemed paid by us.
On the sale of a vessel that has produced Effectively Connected Income, we generally would be subject to the net basis and branch profits taxes with respect to our gain recognized up to the amount of certain prior deductions for depreciation that reduced Effectively Connected Income. Otherwise, we would not be subject to U.S. federal income tax with respect to gain realized on the sale of a vessel, provided the sale is considered to occur outside of the United States under U.S. federal income tax principles.
The 4% Gross Basis Tax. If the Section 883 Exemption does not apply and we are not subject to the net basis and branch profits taxes described above, we will be subject to a 4% U.S. federal income tax on our gross U.S. Source International Transportation Gross Income, without benefit of deductions. Beginning with our taxable year ending in 2022, we expect the Section 883 Exemption to be applicable to us. However, if the Section 883 Exemption does not apply, we expect the amount of our liability for U.S. federal income tax on our U.S. Source International Transportation Gross Income would have been approximately $1.7 million. If Section 883 Exemption does not apply, the amount of such tax for which we are liable in any year will depend upon the amount of income we earn from voyages into or out of the United States in such year, however, which is not within our complete control.
Marshall Islands Taxation
Because we and our controlled affiliates do not, and we do not expect that we and our controlled affiliates will, conduct business, operations, or transactions in the Republic of the Marshall Islands, neither we nor our controlled affiliates are subject to income, capital gains, profits or other taxation under current Marshall Islands law, other than taxes, fines, or fees due to (i) the incorporation, dissolution, continued existence, merger, domestication (or similar concepts) of legal entities registered in the Republic of the Marshall Islands, (ii) filing certificates (such as certificates of incumbency, merger, or redomiciliation) with the Marshall Islands registrar, (iii) obtaining certificates of good standing from, or certified copies of documents filed with, the Marshall Islands registrar, (iv) compliance with Marshall Islands law concerning vessel ownership, such as tonnage tax, or (v) non-compliance with economic substance regulations or requests made by the Marshall Islands Registrar of Corporations relating to our books and records and the books and records of our subsidiaries. As a result, distributions by controlled affiliates to us are not subject to Marshall Islands taxation.
Other Taxation
We and our subsidiaries are subject to taxation in certain non-U.S. jurisdictions because we or our subsidiaries are either organized, or conduct business or operations, in such jurisdictions. In other non-U.S. jurisdictions, we and our subsidiaries rely on statutory exemptions from tax. However, we cannot assure that any statutory exemptions from tax on which we or our subsidiaries rely will continue to be available as tax laws in those jurisdictions may change or we or our subsidiaries may enter into new business transactions relating to such jurisdictions, which could affect our or our subsidiaries' tax liability. Please read “Item 18 – Financial Statements: Note 11 – Income Tax.”
Item 4A.Unresolved Staff Comments
Not applicable.
Item 5.Operating and Financial Review and Prospects
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. In addition, please refer to Item 5 in our Annual Report on Form 20-F for the year ended December 31, 2021 for our discussion and analysis comparing financial condition and results of operations from 2021 to 2020.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Seapeak LLC is an international provider of marine transportation services focusing on LNG and NGL. Our primary strategy focuses on servicing customers through our fleet of vessels under medium to long-term, fixed-rate charters. We may evaluate and enter into adjacent liquefied gas markets, renewable markets, and other maritime opportunities. In executing our strategy, we may engage in vessel or business acquisitions or enter into joint ventures and partnerships with companies that provide increased access to emerging opportunities from global expansion of the LNG and NGL sectors.
SIGNIFICANT DEVELOPMENTS IN 2022 AND EARLY 2023
Evergas Acquisition
On December 29, 2022, we completed the acquisition of 100% of the equity interests in Greenship Gas Trust and Greenship Gas Manager Pte. Ltd. and their subsidiaries (collectively, Evergas) from affiliates of Jaccar Holdings (or Jaccar) in an all-cash transaction including the assumption of indebtedness. We financed the cash purchase price with existing cash and by borrowing $180.0 million under our existing revolving credit facility, which matures in December 2023. As part of the acquisition, we assumed the existing financing obligations of Evergas, none of which matures until 2025. Evergas owns and operates two Very Large Ethane Carriers (or VLECs) and eight Semi-Refrigerated/Multi-gas carriers that were built between 2015 and 2020. These vessels are employed on fixed-rate time-charter contracts to Ineos Group Limited that expire between 2027 and 2031. Evergas also in-charters six pressurized LPG carriers under bareboat charter contracts scheduled to end in December 2024. We consider Evergas to be a natural complement to our NGL business operations.
LNG Carrier Newbuildings
In November 2022, we entered into shipbuilding contracts with Samsung Heavy Industries Co., Ltd. for the construction of five, 174,000-cubic meter MEGA propulsion LNG carrier newbuildings. These LNG carriers will be constructed for a fully built-up of cost of $1.2 billion and first installment payments totaling $215.5 million were paid between December 2022 and February 2023. We financed the first installment payments by way of equity contributions from Stonepeak of $129.3 million in December 2022 and $86.1 million in February 2023. We also economically hedged a portion of the interest rate exposure on the expected debt financing for the remaining newbuilding installment payments (please see “Item 18 – Financial Statements: Note 21 – Subsequent Events" for details).
Concurrently, we secured 10-year fixed-rate charter contracts with two three-year extension options for the five LNG carrier newbuildings, which are expected to commence throughout 2027 upon deliveries of the vessels.
Stonepeak Transaction
On October 4, 2021, we (then known as Teekay LNG Partners L.P.) entered into an agreement and plan of merger (or the Merger Agreement) with Teekay GP L.L.C., an investment vehicle (or Acquiror) managed by Stonepeak, and a wholly-owned subsidiary of Acquiror (or Merger Sub). On January 13, 2022, Stonepeak completed its acquisition of us, with Merger Sub merging with and into us, and with us surviving the merger as a subsidiary of Stonepeak (or the Merger). Please read "Item 18 – Financial Statements: Note 1 – Summary of Significant Accounting Policies – Basis of Presentation" for additional information about this transaction.
LNG Carrier Charter Contracts
In November 2022, we secured a fixed-rate charter contract for the Seapeak Hispania LNG carrier to operate as a floating storage unit until June 2024 with two one-year extension options. The charter contract commenced in December 2022.
In October 2022, the charterer of the Macoma LNG carrier exercised its three-year extension option at a fixed rate, which commences in October 2023.
In July 2022, the Seapeak Polar LNG carrier commenced a fixed-rate charter contract until March 2023 with a two-month extension option, which was exercised in February 2023.
In July 2022, the Seapeak Oak LNG carrier commenced a ten-year, fixed-rate charter contract.
In January 2022, the charterer of the Seapeak Creole LNG carrier exercised its one-year extension option at a fixed rate, which commenced in April 2022. In February 2023, the Seapeak Creole commenced a 23-year, fixed-rate charter contract.
MALT LNG Carriers Charter Contracts
Two of the six LNG carriers in our 50%- owned joint venture with Marubeni Corporation (or the MALT Joint Venture), the Seapeak Arwa and Seapeak Marib, are subject to long-term charters expiring in 2029 with YLNG, a consortium led by Total SA. Due to the political situation in Yemen, YLNG decided to temporarily close operation of its LNG plant in Yemen in 2015. As a result, commencing January 1, 2016, the MALT Joint Venture agreed to successive deferral arrangements with YLNG pursuant to which a portion of the charter payments were deferred. Concurrently with the expiration of the deferral arrangement, in April 2019, the MALT Joint Venture entered into a suspension agreement with YLNG pursuant to which the MALT Joint Venture and YLNG agreed to suspend the two charter contracts for a period of up to three years from the date of the agreement. In January 2022, the MALT Joint Venture entered into the Second Suspension Agreement with YLNG to further extend the charter deferral period for up to three additional years until April 2025. Should the LNG plant in Yemen resume operations during the term of the Second Suspension Agreement, YLNG will be required to repay the applicable deferred amounts plus interest over a period of installments. However, there are no
assurances if or when the LNG plant will resume operations, or if YLNG will repay, or be able to repay, all or any portion of the deferred amounts. Pursuant to the Second Suspension Agreement, the MALT Joint Venture is permitted to directly charter the Seapeak Arwa and Seapeak Marib for its own account to third parties.
In December 2022, the charterer of the Seapeak Methane exercised its one-year extension option at a fixed-rate, which commences in April 2023.
In November 2022, the MALT Joint Venture secured a nine-month fixed-rate charter contract with three nine-month extension options exercisable by the MALT Joint Venture for the Seapeak Marib LNG carrier, which is expected to commence in mid-2023, once the vessel redelivers from its current charter contract.
In January 2022, the MALT Joint Venture secured nine-month fixed-rate charter contracts with three nine-month extension options exercisable by the MALT Joint Venture for the Seapeak Arwa and Seapeak Magellan, which commenced in May 2022 and June 2022, respectively.
Vessel and Equity-Accounted Investment Sales
In February 2023, we sold the Seapeak Arctic LNG carrier for net proceeds of $14.9 million.
In November 2022, we agreed to sell the Seapeak Unikum and the Seapeak Vision multi-gas carriers for net proceeds of $25.3 million and $25.7 million, respectively. The Seapeak Unikum was delivered to its buyer in March 2023 and the Seapeak Vision is expected to be delivered to its buyer in April 2023.
In September 2022, we sold our 50% interest in the Excalibur Joint Venture, which owns one LNG carrier, for net proceeds of $8.8 million.
In June 2022, we sold the Sonoma Spirit multi-gas carrier for net proceeds of $10.0 million.
COVID-19 Pandemic
Although global demand for LNG and NGL has remained relatively stable, the COVID-19 pandemic or similar public health threats may result in reduced demand for LNG and NGL in the future. As our business primarily is the transportation of LNG and NGL on behalf of our customers, any significant decrease in demand for the cargo we transport could adversely affect demand for our vessels and services. However, as our business model is to employ our vessels primarily on long-term, fee-based charter contracts, we do not expect to experience any significant near-term impact on our results of operations or financial condition absent, among other things, customer defaults or crew health issues.
For the year ended December 31, 2022, we did not experience any material business interruptions or material negative impact on our cash flows as a result of the COVID-19 pandemic. However, the pandemic has been a contributing factor to (a) the non-cash $51.0 million write-down of our seven multi-gas vessels during the year ended 2020 (as described in "Item 18 – Financial Statements: Note 19a – Write-down of Vessels"), and (b) certain logistical challenges relating to crew changes across our fleet. We continue to monitor the potential impact of the COVID-19 pandemic on us and our industry, including counterparty risk associated with our vessels under contract and the impact on vessel impairments. We have also introduced a number of measures to protect the health and safety of the crews on our vessels and our onshore staff. Additionally, we have been proactive in providing our crew access to vaccines, with approximately 90% of our crew vaccinated against COVID-19. Please read "Item 3 - Risk Factors" of this Annual Report for information about potential effects of the coronavirus on our business.
Russian Invasion of Ukraine
The disruption in the energy markets caused by, and the sanctions announced in response to, Russia's invasion of Ukraine may adversely impact our business given Russia’s role as a major global exporter of crude oil and natural gas. Our business could be harmed by trade tariffs, trade embargoes, asset freezes, entity designations or other economic sanctions by the United States, the EU, the United Kingdom or other countries against Russia, Russian companies or the Russian energy sector and harmed by any retaliatory measures by Russia in response. While much uncertainty remains regarding the global impact of Russia’s ongoing invasion of Ukraine, it is possible that the hostilities could adversely affect our business, financial condition, results of operations and cash flows. Furthermore, it is possible that third parties with whom we have charter contracts or business arrangements may be impacted by events in Russia and Ukraine, which could adversely affect our operations and financial condition. To date, we have not experienced any material adverse operational or financial impact as a result of the Russian invasion of Ukraine.
IMPORTANT FINANCIAL AND OPERATIONAL TERMS AND CONCEPTS
We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:
Voyage Revenues. Voyage revenues currently include revenues from charters accounted for under operating, and direct financing and sales-type leases. Voyage revenues are affected by hire rates and the number of calendar-ship-days a vessel operates. Voyage revenues are also affected by the mix of business between time and voyage charters. Hire rates for voyage charters are more volatile than for time charters, as they are typically tied to prevailing market rates at the time of a voyage.
Voyage Expenses. Voyage expenses are all expenses unique to a particular voyage, including any fuel expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the customer under time charters and by us under voyage charters.
Net Voyage Revenues. Net voyage revenues represents income from vessel operations before vessel operating expenses, time-charter hire expenses, depreciation and amortization, general and administrative expenses, write-down and gain on sales of vessels, and restructuring charges.
This is a non-GAAP financial measure; for more information about this measure, please read "Item 5 - Operating and Financial Review and Prospects - Non-GAAP Financial Measures".
Vessel Operating Expenses. Under all types of charters and contracts for our vessels, except for bareboat charters, we are responsible for vessel operating expenses, which include crewing, ship management services, repairs and maintenance, insurance, stores, lube oils and communication expenses. The two largest components of our vessel operating expenses are crew costs and repairs and maintenance. We expect these expenses to increase as our fleet matures and to the extent that it expands.
Income from Vessel Operations. To assist us in evaluating our operations by segment, we analyze the income we receive from each segment after deducting operating expenses, but prior to the inclusion or deduction of equity income, interest expense, interest income, realized and unrealized derivative gains or losses on non-designated derivative instruments, foreign currency exchange gains or losses, other expense and income tax expense. For more information, please read “Item 18 – Financial Statements: Note 4 – Segment Reporting.”
Dry docking. We must periodically dry dock each of our vessels for inspection, repairs and maintenance and any modifications required to comply with industry certification or governmental requirements. Generally, we dry dock each of our vessels every two and a half years to five years, depending upon the type of vessel and its age. We capitalize certain costs incurred during dry docking and amortize those costs on a straight-line basis from the completion of a dry docking to the estimated completion of the next dry docking. We include in capitalized dry docking those costs incurred as part of the dry docking to meet classification and regulatory requirements. We expense costs related to routine repairs and maintenance performed during dry docking. The number of dry dockings undertaken in a given period and the nature of the work performed determine the level of dry-docking expenditures.
Depreciation and Amortization. Our depreciation and amortization expense typically consists of the following three components:
•charges related to the depreciation of the historical cost of our fleet (less an estimated residual value) over the estimated useful lives of our vessels;
•charges related to the amortization of dry-docking expenditures over the useful life of the dry dock; and
•charges related to the amortization of the fair value of time-charters acquired over the expected remaining terms of the charters.
Revenue Days. Revenue days are the total number of calendar days our vessels were in our possession during a period less the total number of off-hire days during the period associated with major repairs, dry dockings or special or intermediate surveys. Consequently, revenue days represents the total number of days available for the vessel to earn revenue. Idle days, which are days when the vessel is available to earn revenue, yet is not employed, are included in revenue days. We use revenue days to explain changes in our net voyage revenues between periods.
Calendar-Ship-Days. Calendar-ship-days are equal to the total number of calendar days that our vessels were in our possession during a period. As a result, we use calendar-ship-days primarily in explaining changes in vessel operating expenses and depreciation and amortization.
Utilization. Utilization is an indicator of the use of our fleet during a given period and is determined by dividing our revenue days by our calendar-ship-days for the period.
SUMMARY FINANCIAL DATA
Set forth below is summary consolidated financial and other data of Seapeak LLC and its subsidiaries for fiscal years 2022 and 2021, which have been derived from our consolidated financial statements. The following table should be read together with, and is qualified in its entirety by reference to, the consolidated financial statements and the accompanying notes for the years ended December 31, 2022 and 2021 (which are included herein).
| | | | | | | | | | | | | | | | |
| (in thousands of U.S. Dollars, except unit, per unit and fleet data) | | Year Ended
December 31,
2022
$ | | Year Ended
December 31,
2021
$ | | |
GAAP Financial Comparison: GAAP Financial Comparison: | | | | | | |
| Income Statement Data: | | | | | | |
| Voyage revenues | | 624,480 | | | 597,831 | | | |
| Income from vessel operations | | 177,349 | | | 246,455 | | | |
| Equity income | | 118,432 | | | 115,399 | | | |
| Net income | | 241,553 | | | 255,548 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Balance Sheet Data (at end of period): | | | | | | |
| Cash and cash equivalents | | 215,738 | | | 92,069 | | | |
| Restricted cash | | 50,208 | | | 49,988 | | | |
Vessels and equipment(1) | | 3,442,996 | | | 2,831,530 | | | |
| Investment in and advances to equity-accounted joint ventures, net | | 1,244,264 | | | 1,153,874 | | | |
Net investments in direct financing and sales-type leases, net(2) | | 486,687 | | | 495,368 | | | |
| Total assets | | 5,768,695 | | | 4,798,585 | | | |
Total debt(3) | | 3,101,525 | | | 2,648,632 | | | |
| Total equity | | 2,361,758 | | | 1,929,023 | | | |
| | | | | | |
Non GAAP Financial Comparison:(4) | | | | | | |
| Net voyage revenues | | 589,871 | | | 569,641 | | | |
| EBITDA | | 507,194 | | | 505,917 | | | |
| | | | | | |
| | | | | | |
Fleet Data: | | | | | | |
Average number of vessels:(5) | | | | | | |
| Consolidated – LNG Carriers | | 22.0 | | | 23.0 | | | |
| Equity-Accounted – LNG Carriers | | 24.0 | | | 25.0 | | | |
| Consolidated – NGL Carriers | | 6.6 | | | 7.0 | | | |
| Equity-Accounted – NGL Carriers | | 19.8 | | | 22.4 | | | |
| | | | | | |
(1)Vessels and equipment consists of (a) our vessels, at cost less accumulated depreciation, (b) vessels related to finance leases, at cost less accumulated depreciation, and (c) operating lease right-of-use assets.
(2)Certain of our external charters have been accounted for as direct financing and sales-type leases. As a result, the vessels associated with the external charters accounted for as direct financing and sales-type leases are not included as part of vessels and equipment. Please see "Item 18 – Financial Statements: Note 6 – Revenue – Net Investments in Direct Financing."
(3)Total debt represents the current portion of long-term debt and long-term debt, and the current and long-term portions of obligations related to finance leases.
(4)Net voyage revenues and EBITDA are non-GAAP financial measures. An explanation of the usefulness and purpose of each measure as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP, are contained with the section “Non-GAAP Financial Measures” at the end of this Item 5 - Operating and Financial Review and Prospects.
(5)Average number of vessels is based on the period during the year that our vessels were in our possession, excluding any vessels under construction. In addition, the average number of vessels for our consolidated LNG fleet includes the charter-in contract of the Seapeak Magellan from the MALT Joint Venture from September 2018 until the end of June 2022. The average number of vessels for our consolidated NGL fleet includes 10 wholly-owned vessels and six vessels chartered-in, that were acquired as part of the acquisition of Evergas on December 29, 2022. The average number of vessels for our equity-accounted NGL fleet includes the three vessels chartered-in by our Exmar LPG Joint Venture.
RESULTS OF OPERATIONS
Items You Should Consider When Evaluating Our Results of Operations
Some factors that have affected our historical financial performance and may affect our future performance are listed below:
•The size of our fleet changes. Our historical results of operations reflect changes in the size and composition of our fleet due to certain vessel deliveries and sales, including within our equity-accounted joint ventures. Please read “Liquefied Natural Gas Segment”, "Natural Gas Liquid Segment" below and “Significant Developments in 2022 and Early 2023” above for further details about certain prior and future vessel deliveries, acquisitions and sales.
•The amount and timing of dry docking of our vessels can affect our revenues between periods. Our vessels are off-hire at various times due to scheduled and unscheduled maintenance. During 2022 and 2021, we had 167 and 279 scheduled off-hire days, respectively, relating to the dry docking of our vessels which are consolidated for accounting purposes. In addition, certain of our consolidated vessels had unplanned off-hire of 81 days in 2022 and 156 days in 2021 relating to repairs. The financial impact from these periods of off-hire, if material, is explained in further detail below.
•Vessel operating and other costs are facing industry-wide inflationary cost pressures. We continue to maintain our operating expense increases at or below inflationary levels. However, certain of our time-charter contracts contain a variable component based on actual vessels operating expenses incurred or adjust annually for inflation, which are both intended to protect us from increases in vessel operating expenses.
•Our financial results are affected by fluctuations in the fair value of our derivative instruments. The change in fair value of our derivative instruments is included in our net income as our derivative instruments and the majority of the derivative instruments held by our equity-accounted joint ventures are not designated as hedges for accounting purposes. These changes may fluctuate significantly as interest rates and foreign currency exchange rates fluctuate relating to our interest rate swaps and cross currency swaps. Please read “Item 18 – Financial Statements: Note 13 – Derivative Instruments and Hedging Activities.” The unrealized gains or losses relating to changes in fair value of our derivative instruments do not impact our cash flows.
•Our financial results are affected by fluctuations in currency exchange rates. Under GAAP, all foreign currency-denominated monetary assets and liabilities (including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, advances from affiliates, and long-term debt) are revalued and reported based on the prevailing exchange rate at the end of the period. These foreign currency translations fluctuate based on the strength of the U.S. Dollar relative mainly to the Euro and NOK and are included in our results of operations. The translation of all foreign currency-denominated monetary assets and liabilities at each reporting date results in unrealized foreign currency exchange gains or losses but do not currently impact our cash flows.
•Certain of our consolidated and equity-accounted vessels earned revenues based partly on spot market rates. One LNG carrier, two LPG carriers, certain of our wholly-owned multi-gas carriers, and certain of our LPG carriers in our 50%-owned Exmar LPG Joint Venture were either trading or are currently trading in the spot market or have a component of their charter rate linked to spot market rates. Volatility of spot rates will affect our results from period to period.
•We do not control access to cash flow generated by our investments in equity-accounted joint ventures. We do not have control over the operations of, nor do we have any legal claim to the revenue and expenses of our investments in, our equity-accounted joint ventures. Consequently, the cash flow generated by our investments in equity-accounted joint ventures may not be available for use by us in the period that such cash flows are generated.
Year Ended December 31, 2022 versus Year Ended December 31, 2021
Liquefied Natural Gas Segment
As at December 31, 2022, our liquefied natural gas segment fleet, included 51 LNG carriers (including five LNG carriers under construction), and one LNG regasification terminal in Bahrain, in which our interests ranged from 20% to 100%.
The following table compares our liquefied natural gas segment’s operating results, revenue days, calendar-ship-days and utilization for 2022 and 2021 and compares its net voyage revenues (which is a non-GAAP financial measure) for the years ended December 31, 2022 and 2021 to income from vessel operations, the most directly comparable GAAP financial measure. With the exception of equity income and vessels under construction, all data in this table only includes the 22 LNG carriers as at December 31, 2022 and 2021, that are accounted for under the consolidation method of accounting, the ship management and corporate services we provide to certain of our equity-accounted joint ventures and the Seapeak Magellan chartered-in from the MALT Joint Venture until June 2022. A comparison of the results from vessels and assets accounted for under the equity method is described later in this section under "Equity Income."
| | | | | | | | | | | |
| (in thousands of U.S. Dollars, except for days and percentages) | Year Ended December 31, | % Change |
| 2022 | 2021 |
| Voyage revenues | 575,433 | 550,496 | 4.5 |
| Voyage expenses | (11,358) | (7,183) | 58.1 |
Net voyage revenues(1) | 564,075 | 543,313 | 3.8 |
| Vessel operating expenses | (175,306) | (105,038) | 66.9 |
| Time-charter hire expenses | (9,396) | (23,487) | (60.0) |
| Depreciation and amortization | (121,719) | (123,786) | (1.7) |
General and administrative expenses(2) | (24,214) | (37,668) | (35.7) |
| Write-down of vessels | (52,004) | — | 100.0 |
| Restructuring charges | (2,551) | (2,958) | (13.8) |
| Income from vessel operations | 178,885 | 250,376 | (28.6) |
| Equity income | 94,897 | 100,925 | (6.0) |
| Operating Data: | | | |
| Calendar-Ship-Days (B) | 8,185 | 8,395 | (2.5) |
| Less: | | | |
| Scheduled dry-docking days | 167 | 222 | (24.8) |
| Unscheduled off-hire and idle days | 463 | 86 | 438.4 |
| Revenue Days (A) | 7,555 | 8,087 | (6.6) |
| Utilization (A)/(B) | 92.3% | 96.3% | |
(1)This is a non-GAAP financial measure; for more information about this measure, please read "Item 5 - Operating and Financial Review and Prospects - Non-GAAP Financial Measures".
(2)Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of resources). See the discussion under "Other Operating Results" below.
Our liquefied natural gas segment’s total calendar-ship-days decreased to 8,185 days in 2022 from 8,395 days in 2021. The decrease in total calendar-ship-days is due to the redelivery of the Seapeak Magellan LNG carrier to the MALT Joint Venture at the end of its in-charter contract in June 2022.
Net Voyage Revenues. Net voyage revenues increased by $20.8 million in 2022 compared to 2021, primarily as a result of:
•an increase of $74.8 million due to the reimbursement of seafarers costs (offset in operating expenses) and ship management and corporate service revenues from certain of our equity-accounted joint ventures following our acquisition of certain restructured subsidiaries from Teekay Corporation (or the Teekay Subsidiaries) on January 13, 2022 in connection with the Stonepeak Transaction (see "Item 18 - Financial Statements: Note 1 - Basis of Presentation"); and
•an increase of $5.7 million due to higher rates earned on the Seapeak Hispania LNG carrier related to a short-term charter contract during the fourth quarter of 2022;
partially offset by:
•a decrease of $18.6 million due to layup of the Seapeak Arctic and the Seapeak Polar LNG carriers following redelivery from their charterers in April 2022 and the Seapeak Polar earning a lower charter rate upon commencement of a new charter contract in July 2022;
•a decrease of $17.2 million due to the redelivery of the Seapeak Magellan LNG carrier in June 2022;
•a decrease of $14.3 million due to 42 off hire and idle days for a scheduled dry docking and repositioning of the Seapeak Vancouver LNG carrier during the first quarter of 2022 and the vessel earning a lower charter rate upon redeployment in March 2022;
•a decrease of $6.4 million due to higher off hire days for unscheduled repairs and crew changes on certain of our LNG carriers during 2022 compared to 2021; and
•a decrease of $5.9 million due to the Seapeak Creole LNG carrier earning a lower charter rate during the second half of 2022 upon commencement of a new charter contract.
Vessel Operating Expenses. Vessel operating expenses increased by $70.3 million in 2022 compared to 2021, primarily as a result of seafarers costs incurred for LNG carriers in certain of our equity-accounted joint ventures (offset in net voyage revenues) following our acquisition of the Teekay Subsidiaries on January 13, 2022 (see "Item 18 - Financial Statements: Note 1 - Summary of Significant Accounting Policies – Basis of Presentation").
Time-Charter Hire Expense. Time-charter hire expense decreased by $14.1 million in 2022 compared to 2021 due to the redelivery of the Seapeak Magellan LNG carrier to the MALT Joint Venture at the end of its in-charter contract in June 2022.
Write-down of Vessels. During 2022, two of our LNG carriers, the Seapeak Arctic and Seapeak Polar, were written down to their estimated fair values, as a result of changes in our expectation of these vessels' future opportunities subsequent to the completion of their time-charter contracts in April 2022. These two 1988-built 88,000 cubic meter specialized LNG carriers were both placed into layup in Far East Asia based on their near-term commercial prospects. In July 2022, the Seapeak Polar commenced a fixed-rate charter contract until March 2023 with a two-month extension option, which was exercised in February 2023. In December 2022, we recorded a further $8.0 million write-down on the Seapeak Arctic to its estimated sales proceeds of $15.1 million.
Equity Income. Equity income decreased to $94.9 million in 2022 compared to $100.9 million in 2021, primarily as a result of:
•a decrease of $82.4 million due to an impairment charge recorded on our investment in the MALT Joint Venture in December 2022, partially offset by higher charter rates earned on new time-charter contracts and extension options for certain vessels in the MALT Joint Venture during 2022;
partially offset by:
•an increase of $25.1 million related to lower unrealized credit loss provisions recorded in certain of our equity-accounted joint ventures primarily due to higher estimated charter-free vessel fair values in 2022 for vessels servicing time-charter contracts accounted for as direct financing or sales-type leases;
•an increase of $24.0 million due to an impairment charge recorded on our investment in the Excalibur Joint Venture in 2021 and a gain on the sale of our 50% interest in the Excalibur Joint Venture in September 2022, partially offset by the redelivery of the Excalibur LNG carrier, which had been idle since completion of its time-charter contract in December 2021;
•an increase of $22.4 million primarily due to unrealized gains on non-designated derivative instruments as a result of an increase in long-term forward LIBOR benchmark interest rates during 2022 and removing the hedge accounting designation for interest rate swaps in certain of our equity-accounted joint ventures effective January 1, 2022; and
•an increase of $5.5 million due to higher earnings from our 50%-owned joint venture with China LNG Shipping (Holdings) Limited (or the Yamal LNG Joint Venture) primarily due to an increase in estimated reimbursements of dry docking expenditures as a result of a projected increase in future dry docking costs and lower operational claims in 2022.
Natural Gas Liquid Segment
As at December 31, 2022, our natural gas liquid segment fleet, which consists of LPG, ethane and multi-gas carriers, included 21 NGL carriers in which we own a 50% interest (which includes two NGL carriers under construction) and six wholly-owned NGL carriers. In addition, on December 29, 2022, as part of the Evergas acquisition, we acquired 10 wholly-owned NGL carriers and six chartered-in NGL carriers.
The following table compares our natural gas liquid segment’s operating results, revenue days, calendar-ship-days and utilization for 2022 and 2021, and compares its net voyage revenues (which is a non-GAAP financial measure) for the years ended December 31, 2022 and 2021 to loss from vessel operations, the most directly comparable GAAP financial measure. With the exception of equity income and vessels under construction, all data in this table only includes 16 wholly-owned NGL carriers and six chartered-in NGL carriers that are accounted for under the consolidation method of accounting as at December 31, 2022 (December 31, 2021 - seven wholly-owned NGL carriers) . A comparison of the results from vessels accounted for under the equity method are described below under "Equity Income".
| | | | | | | | | | | |
| (in thousands of U.S. Dollars, except for days and percentages) | Year Ended December 31, | % Change |
| 2022 | 2021 |
| Voyage revenues | 49,047 | 47,335 | 3.6 |
| Voyage expenses | (23,251) | (21,007) | 10.7 |
Net voyage revenues(1) | 25,796 | 26,328 | (2.0) |
| Vessel operating expenses | (16,843) | (19,588) | (14.0) |
| Depreciation and amortization | (6,740) | (7,024) | (4.0) |
General and administrative expenses(2) | (1,256) | (3,372) | (62.8) |
| Write-down and gain on sales of vessels | (2,393) | — | 100.0 |
| Restructuring charges | (100) | (265) | (62.3) |
| Loss from vessel operations | (1,536) | (3,921) | (60.8) |
| Equity income | 23,535 | 14,474 | 62.6 |
| Operating Data: | | | |
| Calendar-Ship-Days (B) | 2,402 | 2,555 | (6.0) |
| Less: | | | |
| Scheduled dry-docking days | — | 57 | (100.0) |
| Unscheduled off-hire and idle days | 231 | 167 | 38.3 |
| Revenue Days (A) | 2,171 | 2,331 | (6.9) |
| Utilization (A)/(B) | 90.4% | 91.2% | |
(1)This is a non-GAAP financial measure; for more information about this measure, please read "Item 5 - Operating and Financial Review and Prospects - Non-GAAP Financial Measures".
(2)Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on estimated use of resources). See the discussion under "Other Operating Results" below.
Our natural gas liquid segment’s total calendar-ship-days were 2,402 days in 2022 compared to 2,555 days in 2021. The decrease in total calendar-ship-days is due to the sale of the Sonama Spirit in June 2022.
Net Voyage Revenues. Net voyage revenues decreased by $0.5 million during 2022 compared to 2021, primarily due to the sale of the Sonoma Spirit in June 2022 and higher off-hire and idle days during 2022; partially offset by higher average rates earned during 2022.
Vessel Operating Expenses. Vessel operating expenses decreased by $2.7 million during 2022 compared 2021 due to higher repairs and maintenance expenditures incurred on certain of our multi-gas carriers in 2021.
Equity Income. Equity income from the Exmar LPG Joint Venture increased by $9.1 million in 2022 compared to 2021, primarily due to higher charter rates earned in 2022 compared to 2021 and gains on the sales of the Brussels and Eupen LPG carriers during 2022; partially offset by gains on the sales of the Touraine and Temse LPG carriers during 2021 and fewer revenue days in 2022 as a result of these sales.
Other Operating Results
The following table compares our other operating results for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | | |
| | | For the Year Ended |
| (in thousands of U.S. Dollars) | | December 31, 2022 | | December 31, 2021 |
| General and administrative expenses | | (25,470) | | (41,040) |
| Restructuring charges | | (2,651) | | (3,223) |
| Interest expense | | (137,129) | | (118,618) |
| Realized and unrealized gain on non-designated derivative instruments | | 65,668 | | 8,523 |
| Foreign currency exchange gain | | 25,478 | | 8,612 |
| Other expense | | (8,192) | | (3,882) |
| Income tax expense | | (8,185) | | (6,886) |
| Other comprehensive income | | 94,416 | | 52,851 |
| | | | |
General and Administrative Expenses. General and administrative expenses were $25.5 million in 2022, as compared to $41.0 million in 2021. The decrease primarily relates to costs incurred in 2021 in connection with the Stonepeak Transaction.
Restructuring Charges. Restructuring charges were $2.7 million and $3.2 million in 2022 and 2021, respectively. The restructuring charges primarily related to costs incurred in connection with the reorganization and realignment of employees as a result of the Stonepeak Transaction.
Interest Expense. Interest expense was $137.1 million in 2022, as compared to $118.6 million for 2021. Interest expense primarily reflects interest incurred on our long-term debt and obligations related to finance leases. The increase in interest expense was primarily due to an increase in LIBOR during 2022.
Realized and Unrealized Gain on Non-designated Derivative Instruments. Net realized and unrealized gains on non-designated derivative instruments were $65.7 million and $8.5 million for 2022 and 2021, respectively. Please see “Item 18 – Financial Statements: Note 13 – Derivative Instruments and Hedging Activities" for details of our current derivative positions and a breakdown of realized and unrealized gains (losses) relating to these non-designated interest rate swap agreements. We have entered into interest rate swaps which exchange a receipt of floating interest for a payment of fixed interest to reduce exposure to interest rate variability on certain of our outstanding U.S. Dollar-denominated and Euro-denominated floating rate debt. Our interest rate swaps typically require settlements every three months and the receipt of floating interest is based on the prevailing LIBOR rate at the beginning of the settlement period. Realized gains (losses) during a period reflect prevailing LIBOR rates that are higher (lower) than the average fixed rates of our interest rate swaps. Unrealized gains (losses) will primarily reflect an increase (decrease) in the long-term LIBOR yield curve during each relevant period. Realized and unrealized gain on non-designated derivative instruments for 2022 increased from 2021, primarily due to increasing LIBOR rates during 2022.
Foreign Currency Exchange Gain. Foreign currency exchange gains were $25.5 million and $8.6 million for 2022 and 2021, respectively. These foreign currency exchange gains were primarily due to the relevant period-end revaluation of our NOK-denominated debt and our Euro-denominated term loans for financial reporting purposes into U.S. Dollars, net of the realized and unrealized gains and losses on our cross currency swaps. Gains and losses on NOK-denominated and Euro-denominated monetary liabilities reflect a stronger (gains) or weaker (losses) U.S. Dollar against the NOK and Euro on the date of revaluation or settlement compared to the rate in effect at the beginning of the period. Our cross currency swaps economically hedge all of the foreign currency and interest rate exposure on our NOK-denominated debt. Our Euro-denominated debt was used to purchase two vessels that are on long-term charters which entitle us to payment of charter-hire in Euros. As such, our Euro-denominated debt is being repaid with these fixed Euro charter hire receipts and consequently our Euro currency exposure is limited by this arrangement.
Other Expense. Other expense increased to $8.2 million for 2022, from $3.9 million for 2021. The increase in other expense was primarily due to $18.0 million in fees relating to professional services provided in connection with the Stonepeak Transaction during the first quarter of 2022; partially offset by a decrease in unrealized credit loss provisions as a result of higher estimated charter-free vessel fair values during in 2022 for certain of our LNG vessels, which are servicing time-charter contracts accounted for as direct financing leases, and the impact of such declines on our expectation of the value of such vessels upon completion of their existing charter contracts.
Income Tax Expense. Income tax expense increased to $8.2 million for 2022, from $6.9 million for 2021 primarily due to changes in current and deferred tax balances related to the change in timing of deductions in the Tangguh Joint Venture, in which we have a 70% ownership interest.
Other Comprehensive Income. Other comprehensive income was $94.4 million in 2022 compared to $52.9 million in 2021. The change in other comprehensive income for 2022 was primarily due to an increase in LIBOR in 2022 and the resulting increase in the value of interest rate swaps accounted for using hedge accounting in certain of our equity-accounted joint ventures and to a lesser extent, removing the hedge accounting designation for interest rate swaps held in the RasGas II Joint Venture and in certain of our equity-accounted joint ventures effective January 1, 2022.
Year Ended December 31, 2021 versus Year Ended December 31, 2020
For a discussion of our operating results for the year ended December 31, 2021 compared with the year ended December 31, 2020, please see "Item 5 – Operating and Financial Review and Prospects" in our Annual Report on Form 20-F for the year ended December 31, 2021.
Liquidity and Capital Resources
Sources and Uses of Capital
We generate cash flows from the charters that our vessels service. Our business strategy is to employ a substantial majority of our vessels on fixed-rate contracts primarily with large energy companies and their transportation subsidiaries. However, some of the vessels in our NGL segment operate on short-term time-charters or in the spot market, which can contribute to volatility of our net operating cash flow. Variability in our net operating cash flows also reflects, among other factors: changes in interest rates; fluctuations in working capital balances; the timing and the amount of dry-docking expenditures; repairs and maintenance activities; the number of vessels in service and vessel acquisitions or vessel dispositions; and the timing of dividends received or return of capital from equity-accounted investments. The number of vessel dry dockings tends to vary each period depending on our vessels' maintenance schedules and required maintenance.
Our equity-accounted joint ventures are generally required to distribute all available cash to their owners. However, we do not have full control over the operations of, nor do we have any legal claim to the revenue and expenses of our investments in our equity-accounted joint ventures. Consequently, the cash flow generated by our investments in equity-accounted joint ventures may not be available for use by us in the period that such cash flows are generated. The timing and amount of dividends distributed by our equity-accounted joint ventures are affected by the timing and amounts of debt repayments in the joint ventures, capital requirements of the joint ventures, as well as any cash reserves maintained in the joint ventures for operations, capital expenditures, dry-docking expenditures and/or as required under financing agreements.
Our sources of funds include borrowings from debt facilities, borrowings from obligations related to finance leases, equity contributions from our sole common unitholder, net proceeds from the issuances of debt and, to a lesser extent, the proceeds from vessel sales. Certain of these sources of funds are described in "Item 18 – Financial Statements: Note 5 – Chartered-in Vessels, Note 10 – Long-Term Debt and Note 16 - Total Capital".
Our primary uses of cash include the payment of operating expenses, dry-docking expenditures, costs associated with modifications to our vessels, committed capital expenditures, debt service costs, interest rate swap and cross currency swap settlements, scheduled repayments of long-term
debt, scheduled repayments of our obligations related to finance leases, our quarterly distributions, including payments of distributions on our Series A and Series B Preferred Units, and funding any preferred unit repurchases we may undertake, as well as funding our other working capital requirements. In addition, we use cash to acquire or build vessels to grow the size of our fleet or make investments in our equity-accounted joint ventures for them to acquire or build vessels. The timing of any newbuilding vessel orders or vessel acquisition activity may vary significantly from year to year.
Our revolving credit facility, term loans and obligations related to finance leases are described in "Item 18 – Financial Statements: Note 5 – Chartered-in Vessels and Note 10 – Long-Term Debt." Our revolving credit facility, term loans and obligations related to finance leases contain covenants and other restrictions typical of debt financing secured by vessels, which restrict the vessel-owning or lessee subsidiaries from:
•incurring or guaranteeing indebtedness;
•changing ownership or structure, including mergers, consolidations, liquidations and dissolutions;
•paying dividends or distributions if they are in default;
•making capital expenditures in excess of specified levels;
•making certain negative pledges and granting certain liens;
•selling, transferring, assigning or conveying assets;
•making certain loans and investments; and
•entering into a new line of business.
Certain of our debt facilities and obligations related to finance leases require us to maintain financial covenants. If we do not meet these financial covenants, the lender or lessor may limit our ability to borrow additional funds under our credit facilities and accelerate the repayment of our revolving credit facilities, term loans and obligations related to finance leases, which would have a significant impact on our short-term liquidity requirements. The terms of and compliance with these financial covenants are described in further detail in "Item 18 – Financial Statements: Note 5 – Chartered-in Vessels and Note 10 – Long-Term Debt" included in this Report. Certain of our debt facilities and obligations related to finance leases require us to make interest payments based on LIBOR, NIBOR, EURIBOR or SOFR. Significant increases in interest rates could adversely affect results of operations and our ability to service our debt; however, as part of our strategy to minimize financial risk, we use interest rate swaps and cross currency swaps to reduce our exposure to market risk from changes in interest rates. Our current positions are described in further detail in "Item 18 - Financial Statements: Note 13 – Derivative Instruments and Hedging Activities" and the extent of our exposure to changes in interest rates is described in further detail in "Item 11 – Quantitative and Qualitative Disclosures About Market Risk”.
In addition to our debt and finance lease obligations, we also guarantee our proportionate share of certain loan facilities and obligations on interest rate swaps for certain of our equity-accounted joint ventures. As at December 31, 2022, this proportionate share, based on the aggregate principal amount of the loan facilities and fair value of the interest rate swaps, was $1.1 billion. As at December 31, 2022, with the exception of debt service coverage ratio breaches for two of the vessels in the Angola Joint Venture, all of our equity-accounted joint ventures were in compliance with all covenants relating to these loan facilities that we guarantee. The Angola Joint Venture expects to obtain a waiver for the covenant requirements that were not met at December 31, 2022, with such waiver being valid until the next compliance test at June 30, 2023, similar to the waivers obtained in March 2022 and October 2022.
Cash Flows
The following table summarizes our consolidated cash and cash equivalents provided by (used for) operating, financing and investing activities for the periods presented:
| | | | | | | | |
| (in thousands of U.S. Dollars) | Year Ended December 31, |
| | 2022 | 2021 |
| Net cash flow from operating activities | 276,777 | 198,858 |
| Net cash flow from (used for) financing activities | 127,175 | (283,771) |
| Net cash flow used for investing activities | (280,063) | (30,973) |
Net Operating Cash Flow
Net cash flow from operating activities increased by $77.9 million to $276.8 million in 2022 from $198.9 million in 2021, primarily due to: $47.7 million increase in cash distributions received from our equity-accounted joint ventures; $46.6 million due to the timing of settlements of non-cash working capital in 2022 compared to 2021; and $33.8 million as a result of the termination of an interest rate swap agreement during 2021. These increases in cash from operating activities were partially offset by: $18.6 million due to the layup of the Seapeak Arctic and Seapeak Polar following redelivery from their charterers in April 2022; $18.0 million in fees relating to professional services provided in connection with the Stonepeak Transaction during 2022; and $14.1 million due to additional off-hire related to scheduled drydockings and unscheduled off-hire on certain of our LNG carriers during 2022.
Net Financing Cash Flow
Net cash flow from financing activities increased by $410.9 million to $127.2 million in 2022 compared to net cash flow used for financing activities of $283.8 million in 2021. The change was primarily due to: $180.0 million in proceeds from the drawdown of our existing revolving credit facility in December 2022 as partial funding for our acquisition of Evergas; a $129.3 million equity contribution from Stonepeak during 2022 in connection with funding the first installment payments for three of the five LNG carrier newbuildings we ordered in November 2022; and a $98.6 million decrease in cash distributions paid as a result of not paying common unit distributions during 2022 subsequent to the Stonepeak Transaction.
Net Investing Cash Flow
Net cash flow used for investing activities increased by $249.1 million to $280.1 million in 2022 from $31.0 million in 2021 primarily due to: a $238.4 million increase for the portion of the purchase price paid on closing for the acquisition of Evergas in December 2022 and $86.1 million of newbuilding installment payments for three of the five LNG carrier newbuildings in 2022. These increases in cash used for investing activities were partially offset by: a $21.3 million increase in repayments to us on advances to the Exmar LPG Joint Venture during 2022; a $20.0 million decrease in cash expenditures for vessels and equipment in 2022; $15.3 million of cash and restricted cash acquired as part of the acquisition of Evergas in December 2022; $10.0 million of proceeds from the sale of the Sonoma Spirit in June 2022; and $8.8 million of proceeds from the sale of our 50% interest in the Excalibur Joint Venture in September 2022.
Liquidity
Our primary sources of liquidity are cash and cash equivalents, net operating cash flow provided by our operations, cash distributions we receive from our equity-accounted joint ventures, our undrawn credit facilities and capital raised through financing transactions. Our cash management policies have a primary objective of minimizing both the probability of loss and return volatility, as well as ensuring that securities purchased can be sold readily and efficiently. A secondary objective is ensuring an appropriate return. The nature and extent of amounts that can be borrowed under our revolving credit facilities is described in "Item 18 - Financial Statements: Note 10 - Long-term Debt" of this Annual Report.
Our total liquidity, which consists of cash, cash equivalents and the undrawn portion of our credit facilities, was $260.7 million as at December 31, 2022, compared to $327.5 million as at December 31, 2021, a decrease of $66.8 million. This decrease was primarily due to refinancing one of our two revolving credit facilities which was scheduled to mature in September 2022 with a new term loan in July 2022. Cash and cash equivalents increased by $123.7 million, as detailed in "Item 18 - Financial Statements: Consolidated Statements of Cash Flows" excluding an increase in restricted cash of $0.2 million.
The following table summarizes our contractual obligations as at December 31, 2022, excluding those of our equity-accounted joint ventures. We expect our liquidity at December 31, 2022 combined with the operating cash flow we expect to generate from customer contracts in place at December 31, 2022, the proceeds received from Stonepeak in February 2023 to fund certain newbuilding installments and the proceeds from our expected debt refinancing of our revolving credit facility which matures in December 2023, which refinancing we consider probable based on our history of refinancing similar debt, will be sufficient to pay our obligations coming due in the next 12 months. Our ability to pay our obligations, refinance our long-term debt and finance leases coming due subsequent to December 31, 2022 will depend on, among other things, our ability to continue to service our long-term charter contracts, our financial condition and the condition of credit markets in the months leading up to the maturity dates. We may expand the size of our fleet through the acquisition of new or second-hand vessels or through the construction of additional new vessels. Our ability to continue to expand the size of our fleet over the long-term is dependent upon our ability to generate operating cash flow, obtain long-term bank borrowings, sale-leaseback financings and other debt, as well as our ability to raise debt or equity financing.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Beyond
2027 |
| | | (in millions of U.S. Dollars) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| U.S. Dollar long-term debt | | 1,041.5 | | | 337.6 | | | 107.3 | | | 82.9 | | | 302.6 | | | 29.8 | | | 181.3 | |
Euro long-term debt (1) | | 82.3 | | | 55.7 | | | 26.6 | | | — | | | — | | | — | | | — | |
Norwegian Kroner long-term debt (1) | | 290.7 | | | 86.7 | | | — | | | 102.0 | | | 102.0 | | | — | | | — | |
Commitments related to finance leases (2) | | 2,099.1 | | | 211.3 | | | 206.6 | | | 231.3 | | | 440.5 | | | 359.3 | | | 650.1 | |
Commitments related to operating leases (3) | | 177.4 | | | 35.9 | | | 35.4 | | | 25.3 | | | 25.0 | | | 24.9 | | | 30.9 | |
Newbuilding installments/shipbuilding supervision (4) | | 1,059.0 | | | 100.5 | | | 15.1 | | | 59.2 | | | 244.2 | | | 640.0 | | | — | |
| Totals | | 4,750.0 | | | 827.7 | | | 391.0 | | | 500.7 | | | 1,114.3 | | | 1,054.0 | | | 862.3 | |
1.Euro-denominated and NOK-denominated obligations are presented in U.S. Dollars and have been converted using the prevailing exchange rates as of December 31, 2022.
2.Includes, in addition to lease payments, amounts we are required to pay to purchase the leased vessels at the end of their respective lease terms.
3.We have corresponding leases whereby we are the lessor and expect to receive approximately $132.9 million under these leases from 2023 to 2029.
4.During November 2022, we entered into contracts with Samsung Heavy Industries Co., Ltd. for the construction of five 174,000-cubic meter M-type, Electronically Controlled, Gas Admission propulsion LNG carriers, which are scheduled for deliveries throughout 2027. In February 2023, we issued common units to Stonepeak for total net proceeds of $86.2 million, which we used to partially fund the scheduled 2023 newbuilding installments and costs; we intend to finance the remaining estimated newbuilding costs with our existing liquidity and future operating cash flow, as well as long-term debt financing to be arranged for the vessels prior to their scheduled deliveries.
In addition to the commitments in the table above, our equity-accounted joint ventures have commitments to fund newbuilding and other construction contract costs all of which are non-recourse to us. See "Item 18 - Financial Statements: Note 14 – Commitments and Contingencies" included in this Annual Report.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (or GAAP), which requires us to make estimates in the application of our accounting policies based on our best assumptions, judgments and opinions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements, because they inherently involve significant judgments and uncertainties. For a further description of our material accounting policies, please read “Item 18 – Financial Statements: Note 1 – Summary of Significant Accounting Policies.”
Vessel Depreciation
Description. The carrying value of each of our vessels represents its original cost at the time of delivery or purchase less depreciation and impairment charges. We depreciate the original cost, less an estimated residual value, of our vessels on a straight-line basis over each vessel’s estimated useful life. The carrying values of our vessels may not represent their market value at any point in time because the market prices of second-hand vessels tend to fluctuate with changes in charter rates, the cost of newbuildings, among other factors. Both charter rates and newbuilding costs tend to be cyclical in nature.
Judgments and Uncertainties. For the years ended December 31, 2022, 2021, and 2020, depreciation was calculated using an estimated useful life of 35 years for LNG carriers, commencing the date the vessel is delivered from the shipyard, or a shorter period if regulations prevent us from operating the vessels for those periods of time. The estimated useful life of our vessels involves an element of judgment, which takes into account design life, commercial considerations and regulatory restrictions.
Other Information. The actual life of a vessel may be different than the estimated useful life, with a shorter actual useful life resulting in an increase in depreciation expense. A longer actual useful life will result in a decrease in depreciation expense. Had we depreciated our LNG carriers using an estimated useful life of 30 years instead of 35 years effective December 31, 2021, our depreciation for the year ended December 31, 2022 would have increased by $31.5 million.
Vessel Impairment
Description. We review vessels and equipment for impairment whenever events or circumstances indicate the carrying value of an asset, including the carrying value of the charter contract, if any, under which the vessel is employed, may not be recoverable. This occurs when the asset’s carrying value is greater than the future undiscounted cash flows the asset is expected to generate over its remaining useful life. If the estimated future undiscounted cash flows of an asset exceed the asset’s carrying value, no impairment is recognized. If the estimated future undiscounted cash flows of an asset are less than the asset’s carrying value and the fair value of the asset is less than its carrying value, the asset is written down to its fair value. The estimated fair value is determined using discounted cash flows or appraised values. In cases where an active second-hand sale and purchase market does not exist, we use a discounted cash flow approach to estimate the fair value of an impaired vessel. In cases where an active second-hand sale and purchase market exists, an appraised value is used to estimate the fair value of an impaired vessel. An appraised value is generally the amount we would expect to receive if we were to sell the vessel. Such appraisal is normally completed by us and is based on second-hand sale and purchase data, and other information provided by third parties. For a vessel under charter, the discounted cash flows from that vessel may exceed its market value, as market values may assume the vessel is not employed on an existing charter.
Judgments and Uncertainties. In periods where events or circumstances indicate the carrying value of a vessel may not be recoverable and estimates of future undiscounted cash flows are determined, our estimates of future cash flows will involve assumptions about future charter rates, vessel utilization, operating expenses, dry-docking expenditures, vessel residual values and the remaining estimated life of our vessels. Our estimated charter rates are based on rates under existing vessel contracts and market rates at which we expect we can re-charter our vessels. Such market rates are based on a 10-year historical industry average of charter rates taking into account the propulsion type and size of the vessel, except for LNG carriers with a steam turbine propulsion system in which case a five-year historical industry average is used due to this type of vessel being less efficient than newer vessels and management viewing the five-year historical average as more representative of the future outlook for this type of vessel.
Our estimates of vessel utilization, including estimated off-hire time, are based on historical experience. Our estimates of operating expenses and dry-docking expenditures are based on historical operating and dry-docking costs and our expectations of future inflation and operating requirements. Vessel residual values are a product of a vessel’s lightweight tonnage and an estimated scrap rate. The remaining estimated lives of our vessels used in our estimates of future cash flows are consistent with those used in the calculation of depreciation.
In our experience, certain assumptions relating to our estimates of future cash flows are more predictable by their nature, including estimated revenue under existing contract terms and on-going operating costs. Certain assumptions relating to our estimates of future cash flows require more judgment and are inherently less predictable, such as future charter rates beyond the firm period of existing contracts as well as the probability of vessel sales. We believe that the assumptions used to estimate future cash flows of our vessels are reasonable at the time they are made. We can make no assurances, however, as to whether our estimates of future cash flows, particularly future vessel charter rates or vessel values, will be accurate.
Other Information. If we conclude that a vessel or equipment is impaired, we recognize a loss in an amount equal to the excess of the carrying value of the asset over its fair value at the date of impairment. The written-down amount becomes the new lower cost basis and will result in a lower annual depreciation expense in periods subsequent to the vessel impairment. Consequently, any changes in our estimates of future undiscounted cash flows may result in a different conclusion as to whether a vessel or equipment is impaired, leading to a different impairment amount, including no impairment, and a different future annual depreciation expense.
Our business model is to employ our vessels on fixed-rate contracts primarily with large energy companies and their transportation subsidiaries. These contracts generally have original terms between five to 25 years in length. Consequently, while the market value of a vessel may decline below its carrying value, the carrying value of a vessel may still be recoverable based on the future undiscounted cash flows the vessel is expected to obtain from servicing its existing contract and future contracts.
The following table presents the aggregate market values and carrying values of certain of our vessels that we have determined have a market value that is less than their carrying value as of December 31, 2022. We have excluded those assets operating on charter contracts where the remaining term is significant and the estimated future undiscounted cash flows relating to such charter contracts are sufficiently greater than the carrying value of the vessels such that we consider it unlikely an impairment would be recognized in 2023. While the market values of these vessels may be below their carrying values, no impairment has been recognized on any of these vessels as the estimated future undiscounted cash flows relating to such vessels are greater than their carrying values.
We would consider the vessels reflected in the following table to be at a higher risk of future impairment compared to other vessels in our fleet. The recognition of an impairment in the future may be more likely for those vessels that have estimated future undiscounted cash flows marginally greater than their respective carrying values. Vessels with estimated future cash flows significantly greater than their respective carrying values would likely only be impaired in the next 12 months if we decided to dispose of a vessel instead of continuing to operate it. In deciding whether to dispose of a vessel, we determine whether it is economically preferable to sell a vessel or continue to operate it. This assessment includes an estimation of the net proceeds expected to be received if a vessel is sold in its existing condition compared to the present value of the vessel’s estimated future revenue, net of operating costs. Such estimates are based on the terms of its existing charter, charter market outlook, estimated future vessel values and estimated operating costs, given a vessel’s type, condition and age. In addition, we typically do not dispose of a vessel that is servicing an existing customer contract.
| | | | | | | | | | | | | | | | | | | | |
Reportable Segment
(in thousands of U.S. Dollars, except number of vessels)
| | Number of Vessels | | Market Values(1)
$ | | Carrying Values
$ |
| Liquefied Natural Gas Segment | | 7 | | 374,480 | | 668,469 |
(1)Market values are primarily determined using reference to second-hand market comparable values as at December 31, 2022. Since vessel values can be volatile, our estimates of market value may not be indicative of either the current or future prices we could obtain if we sold any of the vessels.
As at December 31, 2022, there were no events or circumstances indicating that the carrying value of the vessels in the table above may not be recoverable.
Impairment of Investments in Equity-Accounted Joint Ventures
Description. We evaluate our investments in equity-accounted joint ventures for impairment when events or circumstances indicate that the carrying value of such investments may have experienced an other-than-temporary decline in value below its carrying value. If this is the case, the carrying value of the investment in equity-accounted joint venture is written down to its estimated fair value and the resulting impairment is recognized in our consolidated statement of income.
Judgments and Uncertainties. The process of evaluating the potential impairment of investments in equity-accounted joint ventures requires significant judgment in determining whether the estimated value of an investment in an equity-accounted joint venture has declined below its carrying value and if so, whether this is an other-than-temporary decline in value. Such judgments include, among other things, estimates of future charter rates, operating expenses and vessel values, timing of vessels sales, discount rates and deliveries and future growth prospects. In determining whether an impairment of an equity method investment is other-than-temporary, factors to consider include the length of time and extent to which the fair value of the investment is less than its carrying value; the financial condition and near-term prospects of the equity method investee, including recent operating losses or specific events that may negatively influence the future earnings potential of the investee; and the intent and ability of the holder to retain its investment in the investee for a period of time sufficient to allow for any anticipated recovery in market value. As at December 31, 2022, we conducted an impairment test for our investment in the MALT Joint Venture and determined that its estimated fair value had declined below its carrying value and that this decline below its carrying value was other-than-temporary. Therefore, we recognized a $86.9 million impairment of our investment in the MALT Joint Venture.
Other Information. If we determine that an investment in an equity-accounted joint venture is impaired, we recognize a loss in an amount equal to the excess of the carrying value of the investment over its estimated fair value at the date of impairment. The written-down amount becomes the new lower cost basis of the investment. In addition, we may assign the impairment to individual assets held by the equity-accounted joint venture, such as vessels and equipment, and this would result in an increase in our proportionate share of comprehensive earnings of the joint venture in future periods due to lower depreciation expense of the vessels and equipment of the equity-accounted joint venture. Consequently, differences in conclusions about whether an investment in an equity-accounted joint venture is impaired and the amount of such impairment may result in a different impairment amount, including no impairment, and a different equity income (loss) in future periods. Had we determined that the decline in the estimated fair value of our investment in the MALT Joint Venture was not below its carrying value or was not other-than-temporary, an impairment of $86.9 million would not have been recognized during the year ended December 31, 2022.
In addition, we used a discounted cash flow approach to value our investment in the MALT Joint Venture. Significant judgment and uncertainties were involved in determining the revenue that the vessels will be able to earn for periods beyond the expiry of the existing customer contracts as well as the discount rate used. We used a per vessel per day revenue rate of $70,300 (based on a 10-year historical average) for periods beyond the expiry of the existing customer contracts and a discount rate of 8%. If the per vessel per day revenue rate assumption would have increased (decreased) by $10,000, the impairment of $86.9 million for the year ended December 31, 2022 would have decreased (increased) by $18.9 million. Holding the per vessel per day revenue rate assumption constant, if the discount rate of 8% was increased (decreased) by 1%, the impairment of $86.9 million for the year ended December 31, 2022 would have increased (decreased) by $17.5 million.
Valuation of Derivative Instruments
Description. Our risk management policies permit the use of derivative financial instruments to manage interest rate risk, and foreign exchange risk. Changes in fair value of derivative financial instruments that are not designated as cash flow hedges for accounting purposes are recognized in earnings.
Judgments and Uncertainties. A substantial majority of the fair value of our derivative instruments and the change in fair value of our derivative instruments from period to period result from our use of interest rate and cross currency swap agreements. The fair value of our derivative instruments is the estimated amount that we would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of both us and the swap counterparties. The estimated amount is the present value of estimated future cash flows, being equal to the difference between the benchmark interest rate and the fixed rate in the interest rate and cross currency swap agreement, multiplied by the notional principal amount of the interest rate and cross currency swap agreement at each interest reset date.
The fair value of our interest and cross currency swap agreements at the end of each period is most significantly affected by the interest rate implied by the benchmark interest yield curve, including its relative steepness, and forward foreign currency exchange rates. Interest rates and foreign currency exchange rates have experienced significant volatility in recent years in both the short and long term. While the fair value of our interest and cross currency swap agreements is typically more sensitive to changes in short-term rates, significant changes in the long-term benchmark interest and foreign currency exchange rates also materially impact our interest and cross currency swap agreements.
The fair value of our interest and cross currency swap agreements is also affected by changes in our specific credit risk included in the discount factor. We discount our interest rate swap agreements with reference to the credit default swap spreads of similarly rated global industrial companies and by considering any underlying collateral. The process of determining credit worthiness requires significant judgment in determining which source of credit risk information most closely matches our risk profile.
The benchmark interest rate yield curve and our specific credit risk are expected to vary over the life of the interest and cross currency swap agreements. The larger the notional amount of the interest rate and cross currency swap agreements outstanding and the longer the remaining duration of the interest rate and cross currency swap agreements, the larger the impact of any variability in these factors will be on the fair value of our interest and cross currency swaps. We economically hedge the interest rate exposure on a significant amount of our long-term debt and for long durations. As such, we have historically experienced, and we expect to continue to experience, material variations in the period-to-period fair value of our derivative instruments.
Other Information. Although we measure the fair value of our derivative instruments utilizing the inputs and assumptions described above, if we were to terminate the agreements at the reporting date, the amount we would pay or receive to terminate the derivative instruments may differ from our estimate of fair value. If the estimated fair value differs from the actual termination amount, an adjustment to the carrying amount of the applicable derivative asset or liability would be recognized in earnings for the current period. Such adjustments could be material. See “Item 18 – Financial Statements: Note 13 – Derivative Instruments and Hedging Activities” for the effects on the change in fair value of our derivative instruments on our consolidated statements of income and statements of comprehensive income.
Credit Losses
We apply a credit loss methodology which utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for net investments in direct financing and sales-type leases, loans to equity-accounted joint ventures, guarantees of secured loan facilities of equity-accounted joint ventures, non-operating lease accounts receivables, contracts assets and other receivables at the time the financial asset is originated or acquired. The expected credit losses are subsequently adjusted each period for changes in expected lifetime credit losses.
A substantial majority of our exposure to potential credit losses relates to our direct financing and sales-type leases, including those within our equity-accounted joint ventures. See "Item 18 – Financial Statements: Note 3b – Financial Instruments" for a description of these direct financing and sales-type leases.
Judgments and Uncertainties. GAAP gives entities the flexibility to select an appropriate method to measure the estimate of expected credit losses. That is, entities are permitted to use estimation techniques that are practical and relevant to their circumstances, as long as they are applied consistently over time and aim to faithfully estimate expected credit losses. We have determined the credit loss provision related to the lease receivable component of the net investment in direct financing and sales-type leases using an internal historical loss rate method. We concluded that using a loss rate method which is primarily based on internal historical data is inherently more representative than primarily using external data, which may include all industries, or all oil and gas or all marine transportation, which are not as comparable. In addition, a substantial majority of our customers are private single-purpose entities or subsidiaries or joint ventures of larger listed-entities that do not publish financial information nor do they have published credit ratings determined by credit rating agencies. In the limited circumstances where relevant and reliable external data is available and where judged to be appropriate, we have considered such data in making adjustments to our internally derived loss rate. Judgment is required to determine the applicability and reliability of the external data used. The credit loss provision for the residual value component of net investment in direct financing and sales-type leases is based on the current estimated fair value of the vessel as depreciated to the end of the charter contract as compared to the expected carrying value, with such potential gain or loss on maturity being included in the credit loss provision in increasing magnitude on a straight-line basis the closer the contract is to its maturity. Given the volatility in vessel values, the selection of the method to estimate the credit loss provision for the residual value component involves judgment.
We believe that the assumptions used to estimate our expected credit losses are reasonable at the time they are made. We can make no assurances, however, as to whether our estimates will be accurate.
In addition to the judgment used in selecting the methods to measure the credit loss provision, there is also judgment used in applying the methods. We have used judgment in determining whether or not the risk characteristics of a specific direct financing lease or sales-type lease at the measurement date are consistent with those used to measure the internal historical loss rate, and to determine whether we expect current conditions and reasonable and supportable forecasts to differ from the conditions that existed to measure the internal historical loss rate. In
addition, judgment has been used to determine the internal historical loss rate, as it is based in part on estimates of the occurrence or non-occurrence of future events which will dictate the amount of recoveries earned or additional losses incurred associated with known losses incurred to date. Judgment has also been used to determine the adjustment required to the internal historical loss rate, in those circumstances where relevant and reliable external data was identified. Furthermore, the current estimated fair value of the vessels used in our estimate of expected credit losses for direct financing and sales-type leases has been determined based on appraised values, such appraised values are normally completed by us using second-hand sale and purchase data and other information provided by third parties. Judgment is used when vessels sold are different in age, size and technical specifications compared to our vessels. Since vessel values can be volatile, our estimates of residual value may not be indicative of either the current or future prices we could obtain if we sold any of the vessels.
Other Information. To the extent the methods, and judgments used in applying these methods, that we use to measure our estimate of expected credit losses results in a credit loss provision that is different from actual results, our credit loss provision at the end of each period and the change in the credit loss provision in each period will be different than what would have otherwise been. As at December 31, 2022, 2021 and 2020, the unadjusted historical loss rates were 1.3%, 1.8% and 1.9%, respectively. The decline in the unadjusted historical loss rate in 2022 was the result of us not incurring any loss events in 2022 as well as an increase in LNG carrier charter rates in 2022. Had we used the same unadjusted historical loss rate in 2022 that was used in 2021, our 2022 net income before non-controlling interest and total equity would have decreased by $9.5 million. In addition, if we had increased (decreased) our estimates of the residual value of the vessels by 5%, our 2022 net income before non-controlling interest and total equity would have increased by $9.2 million or decreased by $8.1 million.
Non-GAAP Financial Measures
Net Voyage Revenues
Net voyage revenues is a non-GAAP financial measure. Consistent with general practice in the shipping industry, we use net voyage revenues as a measure of equating revenues generated from voyage charters to revenues generated from time-charters, which assists us in making operating decisions about the deployment of our vessels and their performance. Since, under time-charters, the charterer pays the voyage expenses, whereas under voyage charters, the shipowner pays these expenses, we include voyage expenses in net voyage revenues. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the shipowner, pay the voyage expenses, we typically pass the approximate amount of these expenses on to our customers by charging higher rates under the contract or billing the expenses to them. As a result, although voyage revenues from different types of contracts may vary, the net voyage revenues are generally comparable across the different types of contracts. We principally use net voyage revenues because it provides more meaningful information to us than voyage revenues. Net voyage revenues is also widely used by investors and analysts in the shipping industry for comparing financial performance between companies and to industry averages.
How we use net voyage revenues and the reasons for such use may be unique to the shipping industry. Given that net voyage revenues is a measure which deducts certain operating expenses from revenue, this metric may be more commonly viewed as an alternative measure of gross profit. Viewed in this context, income from operations would be the most directly comparable GAAP financial measure and net voyage revenues has been defined as income from vessel operations before restructuring charges, write-down and (gain) on sales of vessels, general and administrative expenses, depreciation and amortization, time-charter hire expenses and vessel operating expenses.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
(in thousands of U.S. Dollars) | LNG
Segment
$ | NGL
Segment
$ | Total
$ | | LNG
Segment
$ | NGL
Segment
$ | Total
$ |
| | | | | | | |
Income (loss) from vessel operations | 178,885 | | (1,536) | | 177,349 | | | 250,376 | | (3,921) | | 246,455 | |
Restructuring charges | 2,551 | | 100 | | 2,651 | | | 2,958 | | 265 | | 3,223 | |
Write-down and gain on sales of vessels | 52,004 | | 2,393 | | 54,397 | | | — | | — | | — | |
General and administrative expenses | 24,214 | | 1,256 | | 25,470 | | | 37,668 | | 3,372 | | 41,040 | |
Depreciation and amortization | 121,719 | | 6,740 | | 128,459 | | | 123,786 | | 7,024 | | 130,810 | |
Time-charter hire expenses | 9,396 | | — | | 9,396 | | | 23,487 | | — | | 23,487 | |
Vessel operating expenses | 175,306 | | 16,843 | | 192,149 | | | 105,038 | | 19,588 | | 124,626 | |
Net voyage revenues | 564,075 | | 25,796 | | 589,871 | | | 543,313 | | 26,328 | | 569,641 | |
EBITDA
EBITDA is a non-GAAP financial measure. EBITDA represents net income before interest, taxes and depreciation and amortization. EBITDA is used as a supplemental financial performance measure by management and by external users of our financial statements, such as investors. EBITDA assists our management and security holders by increasing the comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our industry that provide EBITDA information. We believe that including EBITDA benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength and health in assessing whether to continue to hold our equity or any debt securities, as applicable.
EBITDA should not be considered as an alternative to net income, operating income, or any other measure of financial performance presented in accordance with GAAP. EBITDA excludes certain items that affect net income.
The following table reconciles our historical consolidated EBITDA to net income:
| | | | | | | | | | | | | | | | |
(in thousands of U.S. Dollars) | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | |
Reconciliation of “EBITDA” to “Net income”: | | | | | | |
Net income | | 241,553 | | | 255,548 | | | |
Depreciation and amortization | | 128,459 | | | 130,810 | | | |
Interest expense, net of interest income | | 128,997 | | | 112,673 | | | |
Income tax expense | | 8,185 | | | 6,886 | | | |
EBITDA | | 507,194 | | | 505,917 | | | |
Item 6.Directors, Senior Management and Employees
Our Board and our executive officers oversee and supervise our operations. All Board members are appointed only by holders of a majority of our outstanding common units, other than a limited right for our preferred unitholders to elect a director if six quarterly distributions on the preferred units are in arrears. Otherwise, no common or preferred unitholder has any management power or control over our business or affairs. The Board currently includes three non-independent directors who also serve as officers, directors or employees of Stonepeak and its affiliates. Consequently, these directors may encounter situations in which their fiduciary obligations to Stonepeak or its other affiliates, on the one hand, and any obligation to us or our preferred unitholders, on the other hand, are in conflict.
Directors and Executive Officers of Seapeak LLC
The following table provides information about the Board and executive officers of Seapeak LLC, as at the date of this Annual Report. Directors are appointed to serve until their successors are appointed or until they resign or are removed. The business address of each of our directors listed below is c/o 2000, 550 Burrard Street, Vancouver, B.C., Canada, V6C 2K2. Ages of the individuals are as of December 31, 2022.
| | | | | | | | | | | | | | |
| Name | | Age | | Position |
| James Wyper | | 33 | | Director and Chair |
| Hajir Naghdy | | 48 | | Director |
| Blake Dwyer | | 29 | | Director |
| Barry Curtis | | 64 | | Director (1) |
| Lisa Krueger | | 59 | | Director (2) |
| Mark Kremin | | 52 | | President and Chief Executive Officer, Director |
| Scott Gayton | | 48 | | Chief Financial Officer |
| Andres Luna | | 66 | | Vice President, Commercial |
| Chris McDade | | 42 | | Vice President, Operations |
Nathan Kim | | 39 | | General Counsel |
(1)Chair of Audit Committee and member of Conflicts Committee.
(2)Chair of Conflicts Committee and member of Audit Committee.
Certain biographical information about each of these individuals included in the table above is set forth below:
James Wyper has been a director of Seapeak LLC and the Chair of the Board since January 2022. Mr. Wyper is a Senior Managing Director with Stonepeak Infrastructure Partners and is responsible for the firm’s investments in transportation, logistics and LNG. He is a member of the boards of directors of Venture Global Calcasieu Pass, Lineage Logistics, TRAC Intermodal, Lonestar Holdings, and Oregon Trail Ventures, and formerly was a director of Carlsbad Desalination Project, Tidewater Holdings, and Golar Power Ltd. Prior to joining Stonepeak, Mr. Wyper was a member of Credit Suisse’s global energy group, where he focused on the power and renewables sectors.
Hajir Naghdy has been a director of Seapeak LLC since January 2022. Mr. Naghdy is a Senior Managing Director with Stonepeak Infrastructure Partners, responsible for the firm’s investments and operations in the Asia-Pacific region, and he is also a member of the Stonepeak Executive Committee. Prior to joining Stonepeak, Mr. Naghdy was employed at Macquarie Capital for 19 years. He started with Macquarie in Sydney in 1999 and moved to Korea in 2000, as a founding member of the team which established Macquarie’s first infrastructure funds management business in Asia. Mr. Naghdy played a leading role in 12 of the first 14 investments made by the Macquarie Korean Infrastructure Fund (formerly the Korea Road Infrastructure Fund) between 2002 and 2005. He has played numerous roles across Asia and the Middle East in Macquarie’s infrastructure business. Prior to joining Stonepeak, Mr. Naghdy was Head of Macquarie Capital in Asia and the Middle East. In this role, he led and established Macquarie Capital’s renewable energy investing business in the region.
Blake Dwyer has been a director of Seapeak LLC since January 2022. Mr. Dwyer is a Principal with Stonepeak Infrastructure Partners. Prior to joining Stonepeak, Mr. Dwyer was a member of the Energy Group at J.P. Morgan, where he focused on the power, utilities, and renewable energy sectors.
Barry Curtis has been a director of Seapeak LLC since January 2022 and serves as the Chair of the Audit Committee and member of the Conflicts Committee. Mr. Curtis recently retired after 23 years as a Deloitte partner. Mr. Curtis served as Deloitte’s National Managing Partner - Private Equity for 12 years, and as Chief Risk Officer for M&A and as a member of the broader firm’s Operating Risk Committee for six years. He also has extensive experience in global M&A, having worked with leading private equity firms and corporations on their buy-side and sell-side transactions, as well as on portfolio company financial reporting, audit and risk management matters. Prior to joining Deloitte, Mr. Curtis spent four years as Chief Financial Officer of two privately-held businesses, as well as having served as a director and as the audit committee chair for Ernst Home Centers, a then publicly-traded NYSE-listed company. He began his career and spent ten years at PWC, the last three years as an audit partner. Mr. Curtis is a Certified Public Accountant.
Lisa Krueger has been a director of Seapeak LLC since April 2022 and serves as the Chair of the Conflicts Committee and member of the Audit Committee. Ms. Krueger has 35 years of diverse experience in the energy industry and has served as a member of the board of directors of Fluence Energy Inc. since September 2021. Ms. Krueger previously served as Executive Vice President and President of the US strategic business unit of The AES Corporation and President and CEO of Essential Power LLC. Prior to joining Essential Power LLC, Ms. Krueger was a senior officer at First Solar and held several executive-level positions with Dynegy Inc. and Illinois Power Company.
Mark Kremin was appointed as President and Chief Executive Officer of the Company in 2017 and has served as a director of Seapeak LLC since January 2022. He had previously been appointed as President of Teekay Gas Services in 2015, having acted as its Vice President since 2006. Mr. Kremin joined Teekay Corporation as in-house counsel in 2000, and subsequently held various commercial roles within Teekay Gas. He now represents Seapeak on the boards of directors of joint ventures with partners in Asia, Europe and the Middle East. Mr. Kremin has over 20 years’ experience in shipping. Prior to joining Teekay, he was an attorney in an admiralty law firm in Manhattan. Prior to attending law school in New York City, he worked for a leading owner and operator of container ships.
Scott Gayton was appointed as Chief Financial Officer of the Company in 2018. Mr. Gayton has over 25 years’ of finance and accounting experience, including serving as Chief Financial Officer of Tanker Investments Ltd. from the time of its initial public offering in 2014 until its sale in 2017. Mr. Gayton joined Teekay Corporation in 2001 and has worked in progressively more senior roles in Finance and Accounting. In 2013 he was promoted to Vice President, Finance where he supported Teekay’s strategy and capital markets transactions. He now represents Seapeak on the boards of directors of joint ventures with partners in Asia, Europe and the Middle East. Prior to joining Teekay, he worked as a Chartered Professional Accountant in the Vancouver, Canada office of Ernst & Young LLP.
Andres Luna was appointed as Vice President, Business Development, of the Company in 2004 and has over 40 years’ of experience in the shipping industry. He currently represents the Company on the boards of joint ventures with partners in Europe, Asia and the Middle East. Mr. Luna previously served as Chief Executive Officer of Naviera Tapias S.A. from July 2000 until its acquisition by Teekay Corporation in April 2004. He has been in the shipping business since his graduation as a naval architect from Madrid University in 1981.
Chris McDade was appointed as Vice President, Operations, of the Company in 2020 and has over 24 years’ experience in the LNG shipping industry as well as upstream operations with Exploration and Production. In 2016, he joined the Company as LNG Assurance Manager followed by roles as Director, Marine HR and Fleet Director for Teekay Gas Services. Mr. McDade represents the Company on the boards of joint ventures with partners in Europe, Asia and the Middle East. Before joining the Company, he worked for an oil major as a senior officer on LNG vessels before moving into upstream operations working on major LNG/FPSO projects in West Africa and Australia.
Nathan Kim was appointed as General Counsel of the Company in 2022. He previously worked for Teekay Corporation starting in 2014, most recently as Associate General Counsel since 2017, in which position he provided primary legal oversight for LNG business activities, including new projects, financings, dispute resolution and operational matters. Prior to that, he practiced law in Vancouver, Canada.
Compensation of Executive Officers and Directors
During 2022, our five executive officers and two independent directors received, in the aggregate, $3.8 million of cash compensation for their services, plus reimbursement of their out-of-pocket expenses, excluding any long-term incentive plan awards issued directly by our board of directors, which plan is described below. We do not compensate our non-independent directors for their service as directors. Each independent director is fully indemnified by us for actions associated with being a director to the extent permitted under Marshall Islands law.
Long-Term Incentive Plan
In 2022, Seapeak introduced a Long-Term Incentive Plan (or LTI Plan) for its eligible employees. Each target award under the LTI Plan is payable in cash and vests in three equal installments over a three-year period. The vested amounts are scheduled to be paid out in April of each year with the first vested installment payable in April 2023.
Board Practices
Our Board currently consists of six members. Directors are appointed to serve until their successors are appointed or until they resign or are removed.
There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
The Board has the following two committees: Audit Committee and Conflicts Committee. The membership of these committees and the function of each of the committees are described below. Each of the committees is currently comprised of independent members and operates under a written
charter adopted by the Board. The committee charters for the Audit Committee and the Conflicts Committee are available under “Governance” from the home page of our web site at www.seapeak.com. During 2022, the Board held seven meetings and each director attended all Board meetings. The members of the Audit Committee and the Conflicts Committee attended all meetings.
Audit Committee. The Audit Committee must be comprised of at least one director. Each member must meet the independence standards of the NYSE and the SEC. This committee currently comprises of Barry Curtis (Chair) and Lisa Krueger. The Board has determined that Mr. Curtis and Ms. Krueger qualify as audit committee financial experts.
The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of:
•the integrity of our consolidated financial statements;
•our compliance with legal and regulatory requirements;
•the independent auditors’ qualifications and independence; and
•the performance of our internal audit function and independent auditors.
Conflicts Committee. The Conflicts Committee must be comprised of at least one director and currently comprises of Lisa Krueger (Chair) and Barry Curtis. The Conflicts Committee members may not be (a) securityholders, officers or employees of Stonepeak, (b) officers, directors or employees of any affiliate of Stonepeak (other than a member of our Board) or (c) holders of any ownership interest in us or our subsidiaries other than common or preferred units, and members must meet the heightened NYSE and SEC director independence standards applicable to audit committee membership.
The Conflicts Committee:
•reviews specific matters that the Board believes may involve conflicts of interest; and
•determines if the resolution of the conflict of interest is fair and reasonable to us.
Any matters approved by the Conflicts Committee will be conclusively deemed to be fair and reasonable to us, approved by all of our members, and not a breach by our Board of any duties it may owe us or our members. The Board is not obligated to seek approval of the Conflicts Committee on any matter and may determine the resolution of any conflict of interest itself and in accordance with our Limited Liability Company Agreement.
The Board's Role in Oversight of Environmental, Social and Corporate Governance
Our Corporate Governance Guidelines outline the Board’s role in oversight of our health, safety and environmental performance and our performance on sustainability and diversity efforts. In addition, the Board is responsible for evaluating and overseeing compliance with our policies, practices and contributions made in fulfillment of our social responsibilities and commitment to sustainability.
Crewing and Staff
As of December 31, 2022, approximately 2,480 seagoing staff served on our consolidated and equity-accounted for vessels that were managed by subsidiaries of Seapeak and 316 staff served on-shore in technical, commercial and administrative roles in various countries, compared to approximately 1,970 seagoing staff and seven on-shore staff as of December 31, 2021 and approximately 2,100 seagoing staff and 19 on-shore staff as of December 31, 2020. The increase of on-shore staff in 2022 is primarily due to our acquisition of certain restructured subsidiaries from Teekay Corporation on January 13, 2022 in connection with the Stonepeak Transaction, which previously provided us, through service agreements, with technical, commercial and administrative services. Certain subsidiaries of Seapeak employ the crews, who serve on the vessels pursuant to agreements with the subsidiaries, and Seapeak subsidiaries also provide on-shore advisory, operational and administrative support to our operating subsidiaries pursuant to service agreements. Please read “Item 7 – Major Common Unitholders and Related Party Transactions.”
We regard attracting and retaining motivated seagoing personnel as a top priority. We offer our seafarers competitive employment packages and comprehensive benefits and opportunities for personal and career development, which relates to a philosophy of promoting internally. Seapeak has entered into a Collective Bargaining Agreement with the Filipino and Indonesian seafarers union, an affiliate of the International Transport Workers’ Federation (or ITF), and a Special Agreement with ITF London, which cover substantially all of the officers and seafarers that operate our Bahamian-flagged vessels. Our Spanish officers and seafarers for our Spanish-flagged vessels are covered by a collective bargaining agreement with Spain’s Union General de Trabajadores and Comisiones Obreras, and the Filipino crew members employed on our Spanish-flagged LNG carriers are covered by the Collective Bargaining Agreement with the Philippine Seafarer’s Union. We believe our relationships with these labor unions are good.
Our commitment to training is fundamental to the development of the highest caliber of seafarers for our marine operations. We have agreed to allow our personnel to participate in its training programs. Our cadet training approach is designed to balance academic learning with hands-on training at sea. Seapeak has a cadet program which takes in cadets from a number of countries including Croatia, India, Indonesia, Ireland, Latvia, Philippines, Spain and the United Kingdom. On completion of the relevant college phase training continues on-board one of our vessels. Seapeak also has a career development plan that we follow, which was designed to ensure a continuous flow of qualified officers who are trained on its vessels and familiarized with its operational standards, systems and policies. We believe that high-quality crewing and training policies will play an increasingly important role in distinguishing larger independent shipping companies that have in-house or affiliate capabilities from smaller companies that must rely on outside ship managers and crewing agents on the basis of customer service and safety. As such, we have an LNG training facility in Glasgow that serves this purpose.
Unit Ownership
As at the date of this Annual Report, our directors and officers do not own or have rights to acquire any of our common units.
Item 7. Major Common Unitholders and Related Party Transactions
Major Common Unitholders
As at the date of this Annual Report, our sole common unitholder is Stonepeak Limestone Holdings L.P., which is 100% owned by investment vehicles managed by Stonepeak.
We are not aware of any arrangements the operation of which may at a subsequent date result in a change in control of the Company.
Related Party Transactions
a)Our Board currently includes four non-independent directors who also serve as officers, directors or employees of Stonepeak and its affiliates or the Company. See “Item 6. Directors, Senior Management and Employees.”
b)Please read “Item 18 – Financial Statements: Note 12 – Related Party Transactions” for additional information about these and various other related-party transactions.
Item 8.Financial Information
A.Consolidated Financial Statements and Other Financial Information
Consolidated Financial Statements and Notes
Please see “Item 18 – Financial Statements” for additional information required to be disclosed under this Item.
Legal Proceedings
From time to time we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business. These claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any legal proceedings or claims that we believe may have, individually or in the aggregate, a significant adverse effect on us, other than those set forth below or in "Item 18 – Financial Statements: Note 14 – Commitments and Contingencies."
B.Significant Changes
Please read “Item 5 – Operating and Financial Review and Prospects: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Developments in 2022 and early 2023” and “Item 18 – Financial Statements: Note 21 – Subsequent Events” for descriptions of significant changes that have occurred since December 31, 2022.
Item 9.The Offer and Listing
Our Series A and Series B Preferred Units are listed on the NYSE under the symbols "SEAL PRA" and "SEAL PRB", respectively.
Item 10.Additional Information
Memorandum and Articles of Association
Our Certificate of Formation has been filed as Exhibit 1.3 to our Report on Form 6-K (File No. 1-32479), filed with the SEC on February 25, 2022, and our Limited Liability Company Agreement has been filed as Exhibit 1.4 to our Report on Form 6-K (File No. 1-32479), filed with the SEC on February 25, 2022, and are each hereby incorporated by reference into this Annual Report.
The rights, preferences and restrictions attaching to each class of our units are described in the Exhibit 2.2 to this Annual Report on Form 20-F entitled "Description of Securities Registered Under Section 12 of the Exchange Act", and hereby incorporated by reference into this Annual Report.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by the laws of the Republic of The Marshall Islands or by our Limited Liability Company Agreement.
Material Contracts
Attached or incorporated by reference as exhibits to this Annual Report are contracts we consider to be material and not entered into in the ordinary course. Descriptions of certain credit facilities are included in “Item 18 – Financial Statements: Note 10 – Long-Term Debt.”
Exchange Controls and Other Limitations Affecting Unitholders
We are not aware of any governmental laws, decrees or regulations, including foreign exchange controls, in the Republic of the Marshall Islands that restrict the export or import of capital, or that affect the remittance of distributions, interest or other payments to holders of our securities that are non-resident and not citizens and otherwise not conducting business or transactions in the Marshall Islands.
We are not aware of any limitations on the right of non-resident or foreign owners to hold or vote our securities imposed by the laws of the Republic of the Marshall Islands or our Limited Liability Company Agreement.
Material United States Federal Income Tax Considerations
The following is a discussion of certain material U.S. federal income tax considerations that may be relevant to unitholders. This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (or the Code), legislative history, applicable U.S. Treasury Regulations (the Treasury Regulations), judicial authority and administrative interpretations, all as in effect on the date of this Annual Report, and which are subject to change, possibly with retroactive effect, or are subject to different interpretations. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. Unless the context otherwise requires, references in this section to “we,” “our” or “us” are references to Seapeak LLC.
This discussion is limited to unitholders who hold their units as capital assets for tax purposes. This discussion does not address all tax considerations that may be important to a particular unitholder in light of the unitholder’s circumstances, or to certain categories of unitholders that may be subject to special tax rules, such as:
•dealers in securities or currencies;
•traders in securities that have elected the mark-to-market method of accounting for their securities;
•persons whose functional currency is not the U.S. Dollar;
•persons holding our units as part of a hedge, straddle, conversion or other “synthetic security” or integrated transaction;
•certain U.S. expatriates;
•financial institutions;
•insurance companies;
•persons subject to the alternative minimum tax;
•persons that actually or under applicable constructive ownership rules own 10% or more of our units (by vote or value); and
•entities that are tax-exempt for U.S. federal income tax purposes.
If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our units, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. Partners in partnerships holding our units should consult their tax advisors to determine the appropriate tax treatment of the partnership’s ownership of our units.
This discussion does not address any U.S. estate tax considerations or tax considerations arising under the laws of any state, local or non-U.S. jurisdiction. Each unitholder is urged to consult its tax advisor regarding the U.S. federal, state, local, non-U.S. and other tax consequences of the ownership or disposition of our units.
United States Federal Income Taxation of U.S. Holders
As used herein, the term U.S. Holder means a beneficial owner of our units that is for U.S. federal income tax purposes: (i) a U.S. citizen or U.S. resident alien (or a U.S. Individual Holder), (ii) a corporation or other entity taxable as a corporation, that was created or organized under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate whose income is subject to U.S. federal income taxation regardless of its source, or (iv) a trust that either is subject to the supervision of a court within the United States and has one or more U.S. persons with authority to control all of its substantial decisions or has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
Distributions
We elected to be taxed as a corporation for U.S. federal income tax purposes effective January 1, 2019.
Subject to the discussion of PFICs below, any distributions made by us with respect to our units to a U.S. Holder generally will constitute dividends, which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our current and accumulated earnings and profits allocated to the U.S. Holder’s units, as determined under U.S. federal income tax principles. Distributions in excess of our current and accumulated earnings and profits allocated to the U.S. Holder's units will be treated first as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in our units and thereafter as capital gain, which will be either long-term or short-term capital gain depending upon whether the U.S. Holder has held the units for more than one year. U.S. Holders that are corporations for U.S. federal income tax purposes generally will not be entitled to claim a dividends received deduction with respect to any distributions they receive from us. For purposes of computing allowable foreign tax credits for U.S. federal income tax purposes, dividends received with respect to our units will be treated as foreign source income and generally will be treated as “passive category income.”
Subject to holding period requirements and certain other limitations, dividends received with respect to our units by a U.S. Holder who is an individual, trust or estate (or a Non-Corporate U.S. Holder) will be treated as “qualified dividend income” that is taxable to such Non-Corporate U.S. Holder at preferential capital gain tax rates provided that we are not classified as a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (we intend to take the position that we are not now and have never been classified as a PFIC, as discussed
below). Any dividends received with respect to our units not eligible for these preferential rates will be taxed as ordinary income to a Non-Corporate U.S. Holder.
Special rules may apply to any “extraordinary dividend” paid by us. Generally, an extraordinary dividend is a dividend with respect to a preferred unit if the amount of the dividend is equal to or in excess of 5% of a preferred unitholder’s, adjusted tax basis (or fair market value in certain circumstances) in such preferred unit. In addition, extraordinary dividends include dividends received within a one-year period that, in the aggregate, equal or exceed 20% of a unitholder's adjusted tax basis (or fair market value in certain circumstances). If we pay an “extraordinary dividend” on our units that is treated as “qualified dividend income,” then any loss recognized by a Non-Corporate U.S. Holder from the sale or exchange of such units will be treated as long-term capital loss to the extent of the amount of such dividend.
Certain Non-Corporate U.S. Holders are subject to a 3.8% tax on certain investment income, including dividends. Non-Corporate U.S. Holders should consult their tax advisors regarding the effect, if any, of this tax on their ownership of our units.
Sale, Exchange or Other Disposition of Units
Subject to the discussion of PFICs below, a U.S. Holder generally will recognize capital gain or loss upon a sale, exchange or other disposition of our units in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder’s tax basis in such units. Subject to the discussion of extraordinary dividends above, such gain or loss generally will be treated as (i) long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition, or short term capital gain or loss otherwise and (ii) U.S. source gain or loss, as applicable, for foreign tax credit purposes. Non-Corporate U.S. Holders may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
Certain Non-Corporate U.S. Holders are subject to a 3.8% tax on certain investment income, including capital gains from the sale or other disposition of units. Non-Corporate U.S. Holders should consult their tax advisors regarding the effect, if any, of this tax on their disposition of our units.
Consequences of Possible PFIC Classification
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a PFIC in any taxable year in which, after taking into account the income and assets of the corporation and, pursuant to a “look through” rule, any other corporation or partnership in which the corporation directly or indirectly owns at least 25% of the stock or equity interests (by value) and any partnership in which the corporation directly or indirectly owns less than 25% of the equity interests (by value) to the extent the corporation satisfies an “active partner” test and does not elect out of “look through” treatment, either: (i) at least 75% of its gross income is “passive” income, or (ii) at least 50% of the average value of its assets is attributable to assets that produce or are held for the production of passive income. For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties (other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business). By contrast, income derived from the performance of services does not constitute “passive income.”
There are legal uncertainties involved in determining whether the income derived from our and our look-through subsidiaries' time-chartering activities constitutes rental income or income derived from the performance of services, including legal uncertainties arising from the decision in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), which held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign sales corporation provision of the Code. However, the IRS stated in an Action on Decision (AOD 2010-01) that it disagrees with, and will not acquiesce to, the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would not follow the Tidewater decision in interpreting the PFIC provisions of the Code. Moreover, the market value of our units may be treated as reflecting the value of our assets at any given time. Therefore, a decline in the market value of our units, which is not within our control, may impact the determination of whether we are a PFIC. Nevertheless, based on our and our look-through subsidiaries’ current assets and operations, we intend to take the position that we are not now and have never been a PFIC.
No assurance can be given, however, that the IRS, or a court of law, will accept our position or that we would not constitute a PFIC for any future taxable year if there were to be changes in our or our look-through subsidiaries’ assets, income or operations.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder generally would be subject to different taxation rules depending on whether the U.S. Holder makes a timely and effective election to treat us as a “qualified electing fund” (or a QEF election). As an alternative to making a QEF election, a U.S. Holder should be able to make a “mark-to-market” election with respect to our units, as discussed below.
Taxation of U.S. Holders Making a Timely QEF Election
A U.S. Holder who makes a timely QEF election (or an Electing Holder) must report the Electing Holder’s pro rata share of our ordinary earnings and net capital gain, if any, for each taxable year for which we are a PFIC that ends with or within the Electing Holder’s taxable year, regardless of whether or not the Electing Holder received distributions from us in that year. Such income inclusions would not be eligible for the preferential tax rates applicable to qualified dividend income. The Electing Holder’s adjusted tax basis in our units will be increased to reflect taxed but undistributed earnings and profits. Distributions of earnings and profits that were previously taxed will result in a corresponding reduction in the Electing Holder’s adjusted tax basis in our units and will not be taxed again once distributed. An Electing Holder generally will recognize capital gain or loss on the sale, exchange or other disposition of our units. A U.S. Holder makes a QEF election with respect to any year that we are a PFIC by filing IRS Form 8621 with the U.S. Holder’s timely filed U.S. federal income tax return (including extensions).
If a U.S. Holder has not made a timely QEF election with respect to the first year in the U.S. Holder’s holding period of our units during which we qualified as a PFIC, the U.S. Holder may be treated as having made a timely QEF election by filing a QEF election with the U.S. Holder’s timely filed U.S. federal income tax return (including extensions) and, under the rules of Section 1291 of the Code, a “deemed sale election” to include in income as an “excess distribution” (described below) the amount of any gain that the U.S. Holder would otherwise recognize if the U.S. Holder sold the U.S. Holder’s units on the “qualification date.” The qualification date is the first day of our taxable year in which we qualified as a “qualified electing fund” with respect to such U.S. Holder. In addition to the above rules, under very limited circumstances, a U.S. Holder may make a retroactive QEF election if the U.S. Holder failed to file the QEF election documents in a timely manner. If a U.S. Holder makes a timely QEF election for one of our taxable years, but did not make such election with respect to the first year in the U.S. Holder’s holding period of our units during which we qualified as a PFIC and the U.S. Holder did not make the deemed sale election described above, the U.S. Holder also will be subject to the more adverse rules described below.
A U.S. Holder’s QEF election will not be effective unless we annually provide the U.S. Holder with certain information concerning our income and gain, calculated in accordance with the Code, to be included with the U.S. Holder’s U.S. federal income tax return. We have not provided our U.S. Holders with such information in prior taxable years and do not intend to provide such information in the current taxable year. Accordingly, U.S. Holders will not be able to make an effective QEF election at this time. If, contrary to our expectations, we determine that we are or will be a PFIC for any taxable year, we will provide U.S. Holders with the information necessary to make an effective QEF election with respect to our units.
Taxation of U.S. Holders Making a “Mark-to-Market” Election
If we were to be treated as a PFIC for any taxable year and, as we anticipate, our units were treated as “marketable stock,” then, as an alternative to making a QEF election, a U.S. Holder would be allowed to make a “mark-to-market” election with respect to our units, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made for the first year a U.S. Holder holds or is deemed to hold our units and for which we are a PFIC, the U.S. Holder generally would include as ordinary income in each taxable year that we are a PFIC the excess, if any, of the fair market value of the U.S. Holder’s units at the end of the taxable year over the U.S. Holder’s adjusted tax basis in the units.
The U.S. Holder also would be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the units over the fair market value thereof at the end of the taxable year that we are a PFIC, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in our units would be adjusted to reflect any such income or loss recognized. Gain recognized on the sale, exchange or other disposition of our units in taxable years that we are a PFIC would be treated as ordinary income, and any loss recognized on the sale, exchange or other disposition of our units in taxable years that we are a PFIC would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included in income by the U.S. Holder. Because the mark-to-market election only applies to marketable stock, however, it would not apply to a U.S. Holder’s indirect interest in any of our subsidiaries that were also determined to be PFICs.
If a U.S. Holder makes a mark-to-market election for one of our taxable years and we were a PFIC for a prior taxable year during which such U.S. Holder held our units and for which (i) we were not a QEF with respect to such U.S. Holder and (ii) such U.S. Holder did not make a timely mark-to-market election, such U.S. Holder would also be subject to the more adverse rules described below in the first taxable year for which the mark-to-market election is in effect and also to the extent the fair market value of the U.S. Holder’s units exceeds the U.S. Holder’s adjusted tax basis in the units at the end of the first taxable year for which the mark-to-market election is in effect.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
If we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF election or a “mark-to-market” election for that year (a Non-Electing Holder ) would be subject to special rules resulting in increased tax liability with respect to (i) any “excess distribution” (e.g. the portion of any distributions received by the Non- Electing Holder on our units in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding period for our units), and (ii) any gain realized on the sale, exchange or other disposition of our units. Under these special rules:
•the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for our units;
•the amount allocated to the current taxable year and any taxable year prior to the taxable year we were first treated as a PFIC with respect to the Non-Electing Holder would be taxed as ordinary income in the current taxable year;
•the amount allocated to each of the other taxable years would be subject to U.S. federal income tax at the highest rate of tax in effect for the applicable class of taxpayer for that year; and
•an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.
Additionally, for each year during which a U.S. Holder holds our units, we are a PFIC, and the total value of all PFIC units that such U.S. Holder directly or indirectly holds exceeds certain thresholds, such U.S. Holder will be required to file IRS Form 8621 with its annual U.S. federal income tax return to report its ownership of our units. In addition, if a Non-Electing Holder, who is an individual, dies while owning our units, such Non-Electing Holder’s successor generally would not receive a step-up in tax basis with respect to such units.
U.S. Holders are urged to consult their tax advisors regarding the PFIC rules, including the PFIC annual reporting requirements, as well as the applicability, availability and advisability of, and procedure for, making QEF, Mark-to-Market and other available elections with respect to us, and the U.S. federal income tax consequences of making such elections.
U.S. Return Disclosure Requirements for U.S. Individual Holders
U.S. Individual Holders who hold certain specified foreign financial assets, including stock in a foreign corporation that is not held in an account maintained by a financial institution, with an aggregate value in excess of $50,000 on the last day of a taxable year, or $75,000 at any time during that taxable year, may be required to report such assets on IRS Form 8938 with their U.S. federal income tax return for that taxable year. This reporting requirement does not apply to U.S. Individual Holders who report their ownership of our units under the PFIC annual reporting rules described above. Penalties apply for failure to properly complete and file IRS Form 8938. U.S. Individual Holders are encouraged to consult with their tax advisors regarding the possible application of this disclosure requirement to their investment in our units.
United States Federal Income Taxation of Non-U.S. Holders
A beneficial owner of our units (other than a partnership, including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder is a Non-U.S. Holder.
Distributions
In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on distributions received from us with respect to our units unless the distributions are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States). If a Non-U.S. Holder is engaged in a trade or business within the United States and the distributions are deemed to be effectively connected to that trade or business (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States), the Non-U.S. Holder generally will be subject to U.S. federal income tax on those distributions in the same manner as if it were a U.S. Holder. In addition, a Non-U.S. Holder that is a foreign corporation for U.S. federal income tax purposes may be subject to branch profits tax at a rate of 30% (or lower applicable treaty rate) on the after-tax earnings and profits attributable to such distributions.
Sale, Exchange or Other Disposition of Units
In general, a non-U.S. Holder is not subject to U.S. federal income tax on any gain resulting from the disposition of our units unless (i) such gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States) or (ii) the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year in which such disposition occurs and meets certain other requirements. If a Non-U.S. Holder is engaged in a trade or business within the United States and the disposition of our units is deemed to be effectively connected to that trade or business (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that the Non-U.S. Holder maintains in the United States), the Non-U.S. Holder generally will be subject to U.S. federal income tax on the resulting gain in the same manner as if it were a U.S. Holder. In addition, a Non-U.S. Holder that is a foreign corporation for U.S. federal income tax purposes may be subject to branch profits tax at a rate of 30% (or lower applicable treaty rate) on the after-tax earnings and profits attributable to such gain.
Information Reporting and Backup Withholding
In general, distributions taxable as dividends with respect to, or the proceeds from a sale, redemption or other taxable disposition of, our units held by a Non-Corporate U.S. Holder will be subject to information reporting requirements, unless such distribution taxable as a dividend is paid and received outside the United States by a non-U.S. payor or non-U.S. middleman (within the meaning of the Treasury Regulations), or such proceeds are effected through an office outside the U.S. of a broker that is considered a non-U.S. payor or non-U.S. middleman (within the meaning of the Treasury Regulations). These amounts also generally will be subject to backup withholding if the Non-Corporate U.S. Holder:
•fails to timely provide an accurate taxpayer identification number;
•is notified by the IRS that it has failed to report all interest or distributions required to be shown on its U.S. federal income tax returns; or
•in certain circumstances, fails to comply with applicable certification requirements.
Information reporting and backup withholding generally will not apply to distributions taxable as dividends on our units to a Non-U.S. Holder if such dividend is paid and received outside the United States by a non-U.S. payor or non-U.S. middleman (within the meaning of the Treasury Regulations) or the Non-U.S. Holder properly certifies under penalties of perjury as to its non-U.S. status (generally on IRS Form W-8BEN, W-8BEN-E, W-8ECI, or W-8EXP, as applicable) and certain other conditions are met or the Non-U.S. Holder otherwise establishes an exemption.
Payment of proceeds to a Non-U.S. Holder from a sale, redemption or other taxable disposition of our units to or through the U.S. office of a broker, or through a broker that is considered a U.S. payor or U.S. middleman (within the meaning of the Treasury Regulations), generally will be subject to information reporting and backup withholding, unless the Non-U.S. Holder properly certifies under penalties of perjury as to its non-U.S. status (generally on IRS Form W-8BEN, W-8BEN-E, W-8ECI, or W-8EXP, as applicable) and certain other conditions are met or the Non-U.S. Holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Rather, a Non-Corporate U.S. Holder or Non-U.S. Holder generally may obtain a credit for any amount withheld against its liability for U.S. federal income tax (and obtain a refund of any amounts withheld in excess of such liability) by accurately completing and timely filing a U.S. federal income tax return with the IRS.
Non-United States Tax Considerations
Marshall Islands Taxation
Because we and our subsidiaries do not, and do not expect that we or they will, conduct business, transactions or operations in the Republic of the Marshall Islands, and because all documentation related to issuance of our common and preferred units was and is expected to be executed outside of the Republic of the Marshall Islands, under current Marshall Islands law, holders of our common and preferred units that are not citizens of and do not reside in, maintain offices in, or engage in business, operations, or transactions in the Republic of the Marshall Islands will not be subject to Marshall Islands taxation or withholding on distributions that we make to our unitholders. In addition, such unitholders will not be subject to Marshall Islands stamp, capital gains or other taxes on the purchase, ownership or disposition of our common and preferred units, and they will not be required by the Republic of the Marshall Islands to file a tax return relating to the common or preferred units.
Other Taxation
We and our subsidiaries are subject to taxation in certain non-U.S. jurisdictions because we or our subsidiaries are either organized, or conduct business or operations, in such jurisdictions. In other non-U.S. jurisdictions, we and our subsidiaries rely on statutory exemptions from tax. However, we cannot assure that any statutory exemptions from tax on which we or our subsidiaries rely will continue as tax laws in those jurisdictions may change or we may enter into new business transactions relating to such jurisdictions, which could affect our or our subsidiaries' tax liability. Please read “Item 18 – Financial Statements: Note 11 – Income Tax”.
Canadian Federal Income Tax Considerations
The following discussion is a summary of the material Canadian federal income tax considerations under the Canada Tax Act that we believe are relevant to our unitholders prior to the Conversion who, for the purposes of the Canada Tax Act and the Canada-United States Tax Convention 1980 (or the Canada-U.S. Treaty), were at all relevant times resident in the United States and entitled to all of the benefits of the Canada - U.S. Treaty and who deal at arm’s length with us (or U.S. Resident Holders). This discussion takes into account all proposed amendments to the Canada Tax Act and the regulations thereunder that have been publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof and assumes that such proposed amendments will be enacted substantially as proposed. However, no assurance can be given that such proposed amendments will be enacted in the form proposed or at all.
Prior to the Conversion, we were considered to be a partnership under Canadian federal income tax law and therefore not a taxable entity for Canadian income tax purposes. A U.S. Resident Holder will not be liable to tax under the Canada Tax Act on any income or gains allocated by us to the U.S. Resident Holder in respect of such U.S. Resident Holder’s units, provided that (i) we do not carry on business in Canada for the purposes of the Canada Tax Act and (ii) such U.S. Resident Holder does not hold such units in connection with a business carried on by such U.S. Resident Holder through a permanent establishment in Canada for purposes of the Canada-U.S. Treaty.
A U.S. Resident Holder will not be liable to tax under the Canada Tax Act on any income or gain from the sale, redemption or other disposition of such U.S. Resident Holder’s units, provided that, for purposes of the Canada-U.S. Treaty, such units do not, and did not at any time in the twelve-month period preceding the date of disposition, form part of the business property of a permanent establishment in Canada of such U.S. Resident Holder.
We believe that our activities and affairs prior to the Conversion were conducted in such a manner that we were not carrying on business in Canada and that U.S. Resident Holders should not be considered to be carrying on business in Canada for purposes of the Canada Tax Act or the Canada-U.S. Treaty solely by reason of the acquisition, holding, disposition or redemption of our units. If we carried on business in Canada for purposes of the Canada Tax Act, U.S. Resident Holders would have been considered to be carrying on business in Canada and may have been required to file Canadian tax returns and, subject to any relief provided under the Canada-U.S. Treaty, would have been subject to taxation in Canada on any income that was considered to be attributable to the business carried on by us in Canada. The Canada-U.S. Treaty contains a treaty benefit denial rule which may have the effect of denying relief thereunder from Canadian taxation to U.S. Resident Holders in respect of any income attributable to a business carried on by us in Canada.
Pursuant to the Conversion, we continue to not carry-on business in Canada and we also qualify for an exemption under subsection 250(6) of the Canada Tax Act that deems us not to be resident in Canada for Canadian income tax purposes.
It is the responsibility of each unitholder to investigate the legal and tax consequences, under the laws of pertinent jurisdictions, including Canada, of an investment in us. Accordingly, each unitholder is urged to consult, and depend upon, such unitholder’s tax counsel or other advisor with regard to those matters. Further, it is the responsibility of each unitholder to file all state, local and non-U.S., as well as U.S. federal tax returns, that may be required of such unitholder.
Documents on Display
Documents concerning us that are referred to herein may be inspected at our principal executive offices at 2000, 550 Burrard Street, Vancouver, B.C., Canada, V6C 2K2. Those documents electronically filed via the SEC’s Electronic Data Gathering, Analysis, and Retrieval system may also be obtained from the SEC’s website at www.sec.gov, free of charge.
Item 11.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to the impact of interest rate changes primarily through our borrowings that require us to make interest payments based on LIBOR, EURIBOR, NIBOR or SOFR. Significant increases in interest rates could adversely affect our results of operations and our ability to service our
debt. From time to time, we use interest rate swaps to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our floating-rate debt. Please read "Item 3 – Risk Factors" for more details on the scheduled phasing out of LIBOR as an interest “benchmark”.
We are exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, we only enter into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transactions. In addition, to the extent practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.
The table below provides information about our financial instruments at December 31, 2022, that are sensitive to changes in interest rates, including our long-term debt, obligations related to finance leases and interest rate swaps, but excluding any amounts related to our equity-accounted joint ventures. None of these financial instruments were entered into for trading purposes. For long-term debt and obligations related to finance leases, the table presents principal payments and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected contractual maturity dates. The expected contractual maturity dates do not reflect potential prepayments of long-term debt and obligations related to finance leases as well as the potential exercise of early termination options for certain of our interest rate swaps.
Expected Maturity Date
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | There- after | | Total | | Fair
Value
Liability (Asset) | | Rate(1) |
| | | (in millions of U.S. Dollars, except percentages) |
| Long-Term Debt: | | | | | | | | | | | | | | | | | | |
| Fixed Rate ($U.S.) | | 18.1 | | 18.1 | | 18.1 | | 18.1 | | 18.1 | | 52.0 | | 142.5 | | 134.7 | | 4.3% |
Variable-Rate ($U.S.) (2) | | 319.5 | | 89.2 | | 64.8 | | 284.5 | | 11.7 | | 129.3 | | 899.0 | | 895.4 | | 6.7% |
Variable-Rate (Euro) (3) (4) | | 55.7 | | 26.6 | | — | | — | | — | | — | | 82.3 | | 81.6 | | 3.6% |
Variable-Rate (NOK) (4) (5) | | 86.7 | | — | | 102.0 | | 102.0 | | — | | — | | 290.7 | | 288.4 | | 8.4% |
| Obligations Related to Finance Leases: | | | | | | | | | | | | | | | | | | |
Variable-Rate ($U.S.) (6) | | 54.3 | | 51.8 | | 78.4 | | 72.2 | | 167.7 | | 192.9 | | 617.3 | | 614.1 | | 5.1% |
Fixed-Rate ($U.S.) (6) | | 68.2 | | 72.5 | | 77.7 | | 309.3 | | 151.2 | | 400.9 | | 1,079.8 | | 1,051.0 | | 5.6% |
Average Interest Rate (7) | | 5.6% | | 5.6% | | 5.7% | | 5.7% | | 5.5% | | 5.6% | | 5.6% | | | | |
| Interest Rate Swaps: | | | | | | | | | | | | | | | | | | |
Contract Amount ($U.S.) (8) | | 177.1 | | 186.2 | | 63.1 | | 208.5 | | 185.4 | | 94.1 | | 914.4 | | (51.0) | | 2.1% |
Average Fixed-Pay Rate (2) | | 3.0% | | 3.0% | | 1.4% | | 1.5% | | 1.5% | | 1.8% | | 2.1% | | | | |
Contract Amount (Euro) (4) (9) | | 40.2 | | — | | — | | — | | — | | — | | 40.2 | | 0.3 | | 3.9% |
Average Fixed-Pay Rate (3) | | 3.9% | | — | | — | | — | | — | | — | | 3.9% | | | | |
(1)Rate refers to the weighted-average effective interest rate for our long-term debt and obligations related to finance leases, including the margin we pay on our floating-rate debt and the average fixed pay rate for our interest rate swap agreements. The average interest rate for our obligations related to finance leases is the weighted-average interest rate implicit in our lease obligations at the inception of the leases. The average fixed pay rate for our interest rate swaps excludes the margin we pay on our drawn floating-rate debt, which as of December 31, 2022 ranged from 0.60% to 3.25%. Please read “Item 18 – Financial Statements: Note 10 – Long-Term Debt.”
(2)Interest payments on U.S. Dollar-denominated debt are based on LIBOR and SOFR and U.S. Dollar-denominated interest rate swaps are based on LIBOR.
(3)Interest payments on Euro-denominated debt and interest rate swaps are based on EURIBOR.
(4)Euro-denominated and NOK-denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of December 31, 2022.
(5)Interest payments on our NOK-denominated debt and on our cross currency swaps are based on NIBOR. Our NOK-denominated bonds have been economically hedged with cross currency swaps, to swap all interest and principal payments into U.S. Dollars, with the respective interest payments fixed at a rate ranging from 5.74% to 7.89%, and the transfer of principal locked in at $331 million upon maturities. Please see "Foreign Currency Fluctuations" below and read “Item 18 – Financial Statements: Note 13 – Derivative Instruments and Hedging Activities.”
(6)The amount of obligations related to finance leases represents the present value of minimum lease payments together with our purchase obligation, as applicable.
(7)The average interest rate is the weighted-average interest rate implicit in the obligations related to our fixed-rate finance leases at the inception of the leases.
(8)The average variable receive rate for our U.S. Dollar-denominated interest rate swaps is set at 3-month or 6-month LIBOR. Contract amount for U.S. Dollar-denominated interest rate swaps includes forward-starting swaps with inception dates ranging from October 2023 to April 2024.
(9)The average variable receive rate for our Euro-denominated interest rate swaps is set at 1-month EURIBOR.
Spot Market Rate Risk
Certain of our NGL carriers and certain of our NGL carriers in our 50% owned Exmar LPG Joint Ventures are trading in the spot market. In addition, two of our wholly-owned LNG carriers' charter contracts are ending in 2023 and these vessels may be traded in the spot market if we are unable to obtain charter contracts prior to the expiration of their current charter contracts. Please see “Item 5 – Operating and Financial Review and Prospects: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Developments in 2022 and Early 2023: LNG Carrier Charter Contract". The cyclical nature of the LNG and NGL spot market may cause significant increases or decreases in the revenues we earn from these vessels trading in the spot market.
Foreign Currency Fluctuations
Our functional currency is U.S. Dollars because nearly all of our revenues and most of our operating costs are in U.S. Dollars. Our results of operations are affected by fluctuations in currency exchange rates. The volatility in our financial results due to currency exchange rate fluctuations is attributed primarily to foreign currency revenues and expenses, our Euro-denominated loans and restricted cash deposits and our NOK-denominated bonds. A portion of our voyage revenues are denominated in Euros. A portion of our vessel operating expenses, and general and administrative expenses are denominated in Euros, which is primarily a function of the nationality of our crew and administrative staff. In addition, we have a portion of our capital expenditures denominated in Euros. We have Euro-denominated interest expense and Euro-denominated interest income related to our Euro-denominated loans of 76.9 million Euros ($82.3 million) and Euro-denominated restricted cash deposits of 28.9 million Euros ($30.9 million), respectively, as at December 31, 2022. We also incur NOK-denominated interest expense on our NOK-denominated bonds; however, we entered into cross currency swaps and pursuant to these swaps we receive the principal amount in NOK on the maturity date of the swap, in exchange for payment of a fixed U.S. Dollar amount. In addition, the cross currency swaps exchange a receipt of floating interest in NOK based on NIBOR plus a margin for a payment of U.S. Dollar fixed interest. The purpose of the cross currency swaps is to economically hedge the foreign currency exposure on the payment of interest and principal of our NOK bonds due in 2023 through 2026, and to economically hedge the interest rate exposure. We do not use these financial instruments for trading purposes. We have not designated, for accounting purposes, these cross currency swaps as cash flow hedges of the NOK-denominated bonds due in 2023 through 2026. Please read “Item 18 – Financial Statements: Note 13 – Derivative Instruments and Hedging Activities.” At December 31, 2022, the fair value of the cross currency swaps derivative liabilities was $19.8 million and the change from December 2021 to the reporting period has been reported in foreign currency exchange gain (loss) in the consolidated statements of income. As a result, fluctuations in the Euro and NOK relative to the U.S. Dollar have caused, and are likely to continue to cause, fluctuations in our reported voyage revenues, vessel operating expenses, general and administrative expenses, interest expense, interest income, realized and unrealized gain (loss) on non-designated derivative instruments and foreign currency exchange gain (loss).
Item 12.Description of Securities Other than Equity Securities
Not applicable.