ssw-6k_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

Commission File Number 1-32591  

 

SEASPAN CORPORATION

(Exact name of Registrant as specified in its Charter)

 

Unit 2, 2nd Floor

Bupa Centre

141 Connaught Road West

Hong Kong

China

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F      Form 40-F  

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(1).     Yes      No  

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101 (b)(7).     Yes      No  

 

 


Item 1 — Information Contained in this Form 6-K Report

Attached as Exhibit I is Seaspan Corporation’s report on Form 6-K, or this Report, for the quarter ended June 30, 2018. This Report is hereby incorporated by reference into: the Registration Statement of Seaspan Corporation filed with the Securities and Exchange Commission, or the SEC, on May 30, 2008 on Form F-3D (Registration No. 333-151329), the Registration Statement of Seaspan Corporation filed with the SEC on March 31, 2011 on Form S-8 (Registration No. 333-173207), the Registration Statement of Seaspan Corporation filed with the SEC on June 20, 2013 on Form S-8 (Registration No. 333-189493), the Registration Statement of Seaspan Corporation filed with the SEC on April 24, 2012 on Form F-3 (Registration No. 333-180895), as amended on March 22, 2013, the Registration Statement of Seaspan Corporation filed with the SEC on April 29, 2014 on Form F-3 (Registration No. 333-195571), as amended on March 3, 2017 and April 19, 2017, the Registration Statement of Seaspan Corporation filed with the SEC on November 28, 2014 on Form F-3 (Registration No. 333-200639), as amended on March 3, 2017 and April 19, 2017, the Registration Statement of Seaspan Corporation filed with the SEC on November 28, 2014 on Form S-8 (Registration No. 333-200640), the Registration Statement of Seaspan Corporation filed with the SEC on March 12, 2015 on Form F-3D (Registration No. 333-202698), the Registration Statement of Seaspan Corporation filed with the SEC on May 23, 2016 on Form F-3 (Registration No. 333-211545), as amended on March 3, 2017, March 7, 2017 and April 19, 2017, the Registration Statement of Seaspan Corporation filed with the SEC on June 24, 2016 on Form S-8 (Registration No. 333-212230) and the Registration Statement of Seaspan Corporation filed with the SEC on April 13, 2018 on Form F-3D (Registration No. 333-224291), the Registration Statement of Seaspan Corporation filed with the SEC on May 3, 2018 on Form F-3/A (Registration No. 333-224288), as amended on May 7, 2018 and the Registration Statement of Seaspan Corporation filed with the SEC on June 15, 2018 on Form F-4 (Registration No. 333-225681).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

SEASPAN CORPORATION

 

 

 

 

Date:  August 6, 2018

By:

 

/s/ Ryan Courson

 

 

 

Ryan Courson

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 

 

 


EXHIBIT I

SEASPAN CORPORATION
REPORT ON FORM 6-K FOR THE QUARTER ENDED JUNE 30, 2018

INDEX

 

PART I — FINANCIAL INFORMATION

1

 

 

Item 1 — Interim Consolidated Financial Statements (Unaudited)

1

 

 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

59

 

 

PART II — OTHER INFORMATION

61

 

 

Item 1 — Legal Proceedings

61

 

 

Item 1A — Risk Factors

61

 

 

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

64

 

 

Item 3 — Defaults Upon Senior Securities

64

 

 

Item 4 — Mine Safety Disclosures

64

 

 

Item 5 — Other Information

64

Item 6 — Exhibits

64

 

Unless we otherwise specify, when used in this Report, the terms “Seaspan”, the “Company”, “we”, “our” and “us” refer to Seaspan Corporation and its subsidiaries. References to our “Manager” are to Seaspan Management Services Limited and its wholly-owned subsidiaries which provide us with all of our technical, administrative and strategic services.

 

References to shipbuilders are as follows:

 

Shipbuilder

 

Reference

Jiangsu New Yangzi Shipbuilding Co., Ltd.

 

New Jiangsu

Jiangsu Yangzi Xinfu Shipbuilding Co., Ltd.

 

Jiangsu Xinfu

 

 

 

ii


References to customers are as follows:

 

Customer

 

Reference

ANL Singapore Pte. Ltd.(1)

 

ANL

APL Co. Pte. Ltd.(1)

 

APL

CMA CGM S.A.

 

CMA CGM

Cheng Lie Navigation Co., Ltd.(1)

 

CNC

China Shipping Container Lines (Asia) Co., Ltd.(2)(3)

 

CSCL Asia

COSCO Shipping Lines Co., Ltd.(3)(4)

 

COSCON

COSCO (Cayman) Mercury Co., Ltd.(5)

COSCO Shipping Lines (Europe) GmbH (5)

 

COSCO Mercury

COSCO Europe

New Golden Sea Shipping Pte. Ltd.(5)

 

COSCO New Golden Sea

Hapag-Lloyd AG

 

Hapag-Lloyd

Kawasaki Kisen Kaisha Ltd.(6)

 

K-Line

Maersk Line A/S(7)

MCC Transport Singapore Pte. Ltd. (8)

 

Maersk

MCC

MSC Mediterranean Shipping Company S.A.

 

MSC

Mitsui O.S.K. Lines, Ltd.(6)

VASI Shipping Pte. Ltd.

 

MOL

VASI

Yang Ming Marine Transport Corp.

 

Yang Ming Marine

_____________________

 

(1)

A subsidiary of CMA CGM.

 

(2)

A subsidiary of China Shipping Container Lines Co., Ltd., or CSCL.

 

(3)

While we continue to charter our vessels to CSCL Asia and COSCON, CSCL Asia and COSCON merged their container shipping businesses in March 2016.  

 

(4)

A subsidiary of China COSCO Holdings Company Limited.

 

(5)

A subsidiary of COSCON.

 

(6)

On April 1, 2018, MOL, K-Line and Nippon Yusen Kabushiki Kaisha integrated their container shipping businesses under a new joint venture company, Ocean Network Express Pte. Ltd.

 

(7)

A subsidiary of A.P. Moller-Maersk A/S.

 

(8)

A subsidiary of Maersk

We use the term “twenty-foot equivalent unit”, or TEU, the international standard measure of containers, in describing the capacity of our containerships, which are also referred to as our “vessels”. We identify the classes of our vessels by the approximate average TEU capacity of the vessels in each class. However, the actual TEU capacity of a vessel may differ from the approximate average TEU capacity of the vessels in such vessel’s class.

The information and the unaudited consolidated financial statements in this Report should be read in conjunction with the consolidated financial statements and related notes and the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 20-F for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission, or the SEC, on March 6, 2018, or our 2017 Annual Report.  Unless otherwise indicated, all amounts in this Report are presented in U.S. dollars, or USD. We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles, or U.S. GAAP.

 

 

 

 

iii


SEASPAN CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1 — INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEASPAN CORPORATION

Interim Consolidated Balance Sheets

(Unaudited)

(Expressed in thousands of United States dollars, except number of shares and par value amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

269,070

 

 

$

253,176

 

Short-term investments

 

 

2,400

 

 

 

104

 

Accounts receivable (note 3)

 

 

14,372

 

 

 

11,678

 

Loans to affiliate (note 3)

 

 

 

 

 

36,100

 

Prepaid expenses and other

 

 

42,702

 

 

 

44,869

 

Fair value of financial instruments  (note 17)

 

 

277

 

 

 

 

Gross investment in lease (note 4)

 

 

44,348

 

 

 

35,478

 

 

 

 

373,169

 

 

 

381,405

 

Vessels (note 5)

 

 

6,037,798

 

 

 

4,537,216

 

Deferred charges (note 6)

 

 

60,624

 

 

 

62,020

 

Gross investment in lease (note 4)

 

 

839,987

 

 

 

687,896

 

Goodwill

 

 

75,321

 

 

 

75,321

 

Other assets

 

 

166,648

 

 

 

134,284

 

 

 

$

7,553,547

 

 

$

5,878,142

 

Liabilities, Puttable Preferred Shares and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

101,375

 

 

$

63,220

 

Current portion of deferred revenue (note 7)

 

 

55,929

 

 

 

55,367

 

Current portion of long-term debt (note 8)

 

 

663,294

 

 

 

257,800

 

Current portion of long-term obligations under capital lease (note 9)

 

 

47,588

 

 

 

43,912

 

Current portion of other long-term liabilities (note 10)

 

 

37,562

 

 

 

23,635

 

 

 

 

905,748

 

 

 

443,934

 

Deferred revenue (note 7)

 

 

393,779

 

 

 

328,681

 

Long-term debt (note 8)

 

 

3,182,448

 

 

 

2,192,833

 

Long-term obligations under capital lease (note 9)

 

 

615,992

 

 

 

595,016

 

Other long-term liabilities (note 10)

 

 

193,188

 

 

 

199,386

 

Fair value of financial instruments (note 17)

 

 

123,733

 

 

 

168,860

 

Total liabilities

 

 

5,414,888

 

 

 

3,928,710

 

 

 

 

 

 

 

 

 

 

Puttable preferred shares; $0.01 par value; 1,986,449 shares issued and outstanding

       (2017 - nil) (notes 2 and 11)

 

 

47,256

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Share capital (note 11):

 

 

 

 

 

 

 

 

Preferred shares; $0.01 par value; 150,000,000 shares authorized;

   32,872,706 shares issued and outstanding (2017 – 32,872,706)

 

 

 

 

 

 

 

 

Class A common shares; $0.01 par value; 400,000,000 shares authorized;

   137,283,264 shares issued and outstanding (2017 – 131,664,101)

 

 

1,702

 

 

 

1,646

 

Treasury shares

 

 

(371

)

 

 

(377

)

Additional paid in capital

 

 

2,862,936

 

 

 

2,752,988

 

Deficit

 

 

(749,752

)

 

 

(781,137

)

Accumulated other comprehensive loss

 

 

(23,112

)

 

 

(23,688

)

 

 

 

2,091,403

 

 

 

1,949,432

 

 

 

$

7,553,547

 

 

$

5,878,142

 

Basis of presentation and going concern (note 1(a))

Commitments and contingencies (note 15)

Subsequent events (note 19)

See accompanying notes to interim consolidated financial statements.

 

1


SEASPAN CORPORATION

Interim Consolidated Statements of Operations

(Unaudited)

(Expressed in thousands of United States dollars, except per share amounts)

 

 

 

 

Three months ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

281,662

 

 

$

204,609

 

 

$

506,438

 

 

$

405,930

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ship operating

 

 

58,766

 

 

 

44,823

 

 

 

108,315

 

 

 

90,430

 

Depreciation and amortization

 

 

62,107

 

 

 

49,798

 

 

 

116,032

 

 

 

99,744

 

General and administrative

 

 

9,073

 

 

 

7,486

 

 

 

16,346

 

 

 

14,975

 

Operating leases

 

 

32,329

 

 

 

28,148

 

 

 

63,523

 

 

 

54,658

 

Expenses related to customer bankruptcy

 

 

 

 

 

 

 

 

 

 

 

1,013

 

 

 

 

162,275

 

 

 

130,255

 

 

 

304,216

 

 

 

260,820

 

Operating earnings

 

 

119,387

 

 

 

74,354

 

 

 

202,222

 

 

 

145,110

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and amortization of deferred financing fees

 

 

57,266

 

 

 

28,261

 

 

 

96,247

 

 

 

56,729

 

Interest income

 

 

(495

)

 

 

(1,193

)

 

 

(1,765

)

 

 

(2,365

)

Undrawn credit facility fees

 

 

84

 

 

 

635

 

 

 

295

 

 

 

1,265

 

Acquisition related gain on contract settlement

 

 

 

 

 

 

 

 

(2,430

)

 

 

 

Change in fair value of financial instruments (note 17)

 

 

(5,927

)

 

 

13,610

 

 

 

(25,249

)

 

 

17,027

 

Equity income on investment

 

 

 

 

 

(1,642

)

 

 

(1,216

)

 

 

(2,529

)

Other expenses

 

 

446

 

 

 

6,399

 

 

 

611

 

 

 

6,676

 

 

 

 

51,374

 

 

 

46,070

 

 

 

66,493

 

 

 

76,803

 

Net earnings

 

$

68,013

 

 

$

28,284

 

 

$

135,729

 

 

$

68,307

 

Earnings per share (note 12):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common share, basic

 

$

0.36

 

 

$

0.11

 

 

$

0.73

 

 

$

0.33

 

Class A common share, diluted

 

$

0.34

 

 

$

0.11

 

 

$

0.71

 

 

$

0.33

 

 

See accompanying notes to interim consolidated financial statements.

 

2


SEASPAN CORPORATION

Interim Consolidated Statements of Comprehensive Income

(Unaudited)

(Expressed in thousands of United States dollars)

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings

 

$

68,013

 

 

$

28,284

 

 

$

135,729

 

 

$

68,307

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified to net earnings during the period

   relating to cash flow hedging instruments (note 17 (c))

 

 

276

 

 

 

662

 

 

 

576

 

 

 

2,138

 

Comprehensive income

 

$

68,289

 

 

$

28,946

 

 

$

136,305

 

 

$

70,445

 

 

See accompanying notes to interim consolidated financial statements.

 

 

 

3


SEASPAN CORPORATION

Interim Consolidated Statements of Puttable Preferred Shares and Shareholders’ Equity

(Unaudited)

(Expressed in thousands of United States dollars, except number of shares)

Six months ended June 30, 2018 and year ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Series D puttable

 

 

 

Number of

 

 

 

puttable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

Total

 

 

preferred shares

 

 

 

common

 

 

 

preferred

 

 

Common

 

 

Preferred

 

 

Treasury

 

 

paid-in

 

 

 

 

 

 

comprehensive

 

 

shareholders'

 

 

Shares

 

Amount

 

 

 

shares

 

 

 

shares

 

 

shares

 

 

shares

 

 

shares

 

 

capital

 

 

Deficit

 

 

loss

 

 

equity

 

Balance, December 31, 2016

 

 

$

 

 

 

 

105,722,646

 

 

 

 

32,751,629

 

 

$

1,057

 

 

$

328

 

 

$

(367

)

 

$

2,580,274

 

 

$

(807,496

)

 

$

(26,547

)

 

$

1,747,249

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

175,237

 

 

 

 

 

 

175,237

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,859

 

 

 

2,859

 

Preferred shares issued

 

 

 

 

 

 

 

 

 

 

 

121,077

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

2,956

 

 

 

 

 

 

 

 

 

 

 

2,957

 

Class A common shares issued

 

 

 

 

 

 

 

19,550,000

 

 

 

 

 

 

 

196

 

 

 

 

 

 

 

 

 

121,152

 

 

 

 

 

 

 

 

 

121,348

 

Fees and expenses in connection

   with issuance of common and preferred shares

   shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,649

)

 

 

 

 

 

 

 

 

(2,649

)

Dividends on Class A common

   shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(83,615

)

 

 

 

 

 

(83,615

)

Dividends on preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64,416

)

 

 

 

 

 

(64,416

)

Shares issued through dividend

   reinvestment program

 

 

 

 

 

 

 

3,300,537

 

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

21,752

 

 

 

 

 

 

 

 

 

21,785

 

Share-based compensation expense

   (note 13):

   Restricted Class A common

      shares, phantom share

      units, stock appreciation

      rights, restricted stock units

      and performance stock units

 

 

 

 

 

 

 

1,246,604

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

17,307

 

 

 

 

 

 

 

 

 

17,320

 

Other share-based compensation

 

 

 

 

 

 

 

1,846,892

 

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

12,196

 

 

 

(847

)

 

 

 

 

 

11,367

 

Treasury shares

 

 

 

 

 

 

 

(2,578

)

 

 

 

 

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

(10

)

Balance, December 31, 2017, carried forward

 

 

$

 

 

 

 

131,664,101

 

 

 

 

32,872,706

 

 

$

1,317

 

 

$

329

 

 

$

(377

)

 

$

2,752,988

 

 

$

(781,137

)

 

$

(23,688

)

 

$

1,949,432

 

 

See accompanying notes to consolidated financial statements.

 

4

 


 

SEASPAN CORPORATION

Interim Consolidated Statements of Puttable Preferred Shares and Shareholders’ Equity (Continued)

(Unaudited)

(Expressed in thousands of United States dollars, except number of shares)

Six months ended June 30, 2018 and year ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Series D puttable

 

 

 

Number of

 

 

puttable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

Total

 

 

preferred shares

 

 

 

common

 

 

preferred

 

 

Common

 

 

Preferred

 

 

Treasury

 

 

paid-in

 

 

 

 

 

 

comprehensive

 

 

shareholders'

 

 

Shares

 

Amount

 

 

 

shares

 

 

shares

 

 

shares

 

 

shares

 

 

shares

 

 

capital

 

 

Deficit

 

 

loss

 

 

equity

 

Balance, December 31, 2017,

   carried forward

 

 

$

 

 

 

 

131,664,101

 

 

 

32,872,706

 

 

$

1,317

 

 

$

329

 

 

$

(377

)

 

$

2,752,988

 

 

$

(781,137

)

 

$

(23,688

)

 

$

1,949,432

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

135,729

 

 

 

 

 

 

135,729

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

576

 

 

 

576

 

Class A common shares issued

 

 

 

 

 

 

 

2,514,996

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

13,883

 

 

 

 

 

 

 

 

 

13,908

 

Preferred shares issued (note 2)

 

1,986,449

 

 

47,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants issued (note 11 (c))

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77,561

 

 

 

 

 

 

 

 

 

77,561

 

Fees and expenses in

   connection with issuance of

   common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

(30

)

Dividends on Class A common

   shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50,658

)

 

 

 

 

 

(50,658

)

Dividends on preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,872

)

 

 

 

 

 

(52,872

)

Accretion of preferred shares

   with holder put option

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(582

)

 

 

 

 

 

(582

)

Shares issued through dividend

   reinvestment program

 

 

 

 

 

 

 

2,008,034

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

14,665

 

 

 

 

 

 

 

 

 

14,685

 

Share-based compensation expense

   (note 13):

Restricted Class A common

   shares, phantom share

   units, stock appreciation

   rights, restricted stock units

   and performance stock units

 

 

 

 

 

 

 

190,873

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

1,427

 

 

 

 

 

 

 

 

 

1,429

 

Other share-based

   compensation

 

 

 

 

 

 

 

906,258

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

2,442

 

 

 

(232

)

 

 

 

 

 

2,219

 

Treasury shares

 

 

 

 

 

 

 

(998

)

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Balance, June 30, 2018

 

1,986,449

 

$

47,256

 

 

 

 

137,283,264

 

 

 

32,872,706

 

 

$

1,373

 

 

$

329

 

 

$

(371

)

 

$

2,862,936

 

 

$

(749,752

)

 

$

(23,112

)

 

$

2,091,403

 

 

See accompanying notes to interim consolidated financial statements.

 

 

 

 

5


 

SEASPAN CORPORATION

Interim Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in thousands of United States dollars)

 

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cash from (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

68,013

 

 

$

28,284

 

 

$

135,729

 

 

$

68,307

 

Items not involving cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

62,107

 

 

 

49,798

 

 

 

116,032

 

 

 

99,744

 

Share-based compensation (note 13)

 

 

923

 

 

 

1,989

 

 

 

1,550

 

 

 

3,870

 

Amortization of deferred financing fees, debt discount and fair value of long term debt

 

 

4,478

 

 

 

3,185

 

 

 

8,557

 

 

 

6,213

 

Amounts reclassified from other comprehensive loss

   to interest expense

 

 

86

 

 

 

401

 

 

 

174

 

 

 

1,680

 

Unrealized change in fair value of financial

   instruments

 

 

(18,310

)

 

 

(1,037

)

 

 

(48,909

)

 

 

(13,185

)

Acquisition related gain on contract settlement

 

 

 

 

 

 

 

 

(2,430

)

 

 

 

Equity income on investment

 

 

 

 

 

(1,642

)

 

 

(1,216

)

 

 

(2,529

)

Operating leases

 

 

(5,350

)

 

 

(5,500

)

 

 

(11,809

)

 

 

(10,767

)

Amortization of acquired revenue contracts

 

 

6,250

 

 

 

 

 

 

7,359

 

 

 

 

Other

 

 

(4

)

 

 

6,389

 

 

 

11

 

 

 

6,467

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,138

)

 

 

3,692

 

 

 

1,867

 

 

 

9,205

 

Lease receivable

 

 

11,056

 

 

 

 

 

 

21,918

 

 

 

 

Prepaid expenses and other

 

 

7,074

 

 

 

1,442

 

 

 

8,047

 

 

 

(6,340

)

Other assets and deferred charges

 

 

(531

)

 

 

294

 

 

 

(8,239

)

 

 

(1,536

)

Accounts payable and accrued liabilities

 

 

(11,788

)

 

 

(11,955

)

 

 

(14,087

)

 

 

(6,281

)

Deferred revenue

 

 

(6,864

)

 

 

(11,757

)

 

 

(29,992

)

 

 

(13,056

)

Other long-term liabilities

 

 

(3,801

)

 

 

 

 

 

(3,801

)

 

 

 

Fair value of financial instruments

 

 

1,991

 

 

 

(1,284

)

 

 

1,991

 

 

 

(2,575

)

Cash from operating activities

 

 

113,192

 

 

 

62,299

 

 

 

182,752

 

 

 

139,217

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares issued, net of issuance costs

 

 

 

 

 

33,362

 

 

 

 

 

 

57,266

 

Draws on credit facilities

 

 

225,600

 

 

 

 

 

 

325,600

 

 

 

 

Repayment of credit facilities

 

 

(71,165

)

 

 

(75,627

)

 

 

(134,744

)

 

 

(171,157

)

Fairfax notes and warrants issued

 

 

 

 

 

 

 

 

250,000

 

 

 

 

Draws on long-term obligations under capital lease

 

 

 

 

 

 

 

 

46,964

 

 

 

 

Repayment of long-term obligations under capital lease

 

 

(12,264

)

 

 

(6,508

)

 

 

(23,307

)

 

 

(12,873

)

Senior unsecured notes repurchased, including related expenses

 

 

 

 

 

(2,665

)

 

 

 

 

 

(3,122

)

Financing fees

 

 

(7,983

)

 

 

(2,314

)

 

 

(13,115

)

 

 

(2,314

)

Dividends on common shares

 

 

(9,484

)

 

 

(6,433

)

 

 

(18,809

)

 

 

(45,711

)

Dividends on preferred shares

 

 

(18,394

)

 

 

(16,103

)

 

 

(34,960

)

 

 

(32,208

)

Net proceeds from sale-leaseback of vessel

 

 

 

 

 

90,753

 

 

 

 

 

 

90,753

 

Cash from (used in) financing activities

 

 

106,310

 

 

 

14,465

 

 

 

397,629

 

 

 

(119,366

)

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for vessels

 

 

(281,107

)

 

 

(84,453

)

 

 

(301,013

)

 

 

(96,361

)

Short-term investments

 

 

(2,400

)

 

 

 

 

 

(2,296

)

 

 

308

 

Other assets

 

 

(80

)

 

 

(53

)

 

 

2,711

 

 

 

44

 

Loans to affiliate (note 3)

 

 

 

 

 

(790

)

 

 

(427

)

 

 

(1,585

)

Repayments of loans to affiliate (note 3)

 

 

 

 

 

18,068

 

 

 

 

 

 

21,233

 

Acquisition of GCI (note 2)

 

 

 

 

 

 

 

 

(333,581

)

 

 

 

Cash acquired from GCI acquisition (note 2)

 

 

 

 

 

 

 

 

70,121

 

 

 

 

Cash used in investing activities

 

 

(283,587

)

 

 

(67,228

)

 

 

(564,485

)

 

 

(76,361

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

(64,085

)

 

 

9,536

 

 

 

15,896

 

 

 

(56,510

)

Cash and cash equivalents and restricted cash, beginning of period

 

 

347,217

 

 

 

315,914

 

 

 

267,236

 

 

 

381,960

 

Cash and cash equivalents and restricted cash, end of period

 

$

283,132

 

 

$

325,450

 

 

$

283,132

 

 

$

325,450

 

Supplemental cash flow information (note 14)

See accompanying notes to interim consolidated financial statements.

 

 

 

 

 

6

 


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

1.       Significant accounting policies:

 

(a)  

Basis of presentation and going concern:

These consolidated financial statements have been prepared by management on a going concern basis, which contemplates that the Company will be able to continue operations for the foreseeable future and will be able to realize its assets and settle its liabilities in the normal course of operations.

At June 30, 2018, the Company has a working capital deficiency of $532,579,000 which includes $337,925,000 of senior unsecured notes maturing in April 2019. The working capital deficiency may increase in future periods as described below. These factors indicate that a material uncertainty exists that casts substantial doubt about the Company’s ability to continue as a going concern. In order to alleviate this uncertainty, the Company will rely, in part, upon the continued financial support of Fairfax Financial Holdings Ltd. and its affiliates (“Fairfax”), which includes not exercising the debenture put right and the successful closing of the agreements described below. The Company also expects to further address this deficiency through cash generated from operations and additional sources of funds in the capital markets to the extent available.

On February 14, 2018 and March 13, 2018, the Company and Fairfax entered into agreements for a total $500,000,000 investment in debentures, $250,000,000 in each agreement, and warrants to purchase a total of 76,923,078 Class A common shares of the Company, 38,461,539 in each agreement, for an aggregate total purchase price of $500,000,000 (note 8(e)). The March 13, 2018 agreement will be funded, and the warrants issued, in January 2019 subject to closing conditions.

On May 31, 2018, the Company and Fairfax entered into agreements to invest an additional $500,000,000 of equity in the Company through the exercise of the warrants issued in February 2018 (note 11) and the warrants to be issued in January 2019 under the March 13, 2018 agreement. On July 16, 2018, Fairfax exercised 38,461,539 warrants at an exercise price of $6.50 per share from its February 14, 2018 agreement. The gross proceeds of $250,000,000 were partially used to redeem the Company’s outstanding Series F preferred shares (note 19(a) and 19(b)). Under the terms of the May 31, 2018 agreement, expected to close in January 2019, Fairfax will immediately exercise all of the warrants that are issuable under the March 13, 2018 agreement.

The May 31, 2018 agreements which closed July 16, 2018 provide Fairfax with the right to put each of the February 14, 2018 and March 13, 2018 debentures on their applicable anniversary dates subject to submitting an annual put right notice commencing 150 days and ending 120 days prior to each applicable anniversary date. As the right to put the debentures is solely within the control of Fairfax, the February 14, 2018 debentures will be reclassified from long-term liabilities to current liabilities as of July 16, 2018.  Upon funding of the March 13, 2018 debentures and exercise of the March 13, 2018 warrants upon closing in January 2019, the debentures will be classified as a current liability.

Fairfax owns 22% of the class A common shares outstanding as at August 3, 2018 and is considered a related party. Fairfax will own an additional 38,461,539 common shares if the warrants from the March 13, 2018 investment are exercised.

These consolidated financial statements do not include the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary were the going concern assumption inappropriate, and these adjustments could be material.

 

 

 

 

7

 


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

1.       Significant accounting policies (continued):

 

(b)  

Recently adopted accounting pronouncements:

 

Revenue recognition

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, that introduced a new five-step revenue recognition model to determine how an entity should recognize revenue related to the transfer of goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.  

The Company’s revenue is comprised primarily of time charter revenue and interest income from leasing.  The time charter revenue includes a lease element, which is evaluated under Accounting Standards Codification (“ASC”) 840 “Leases”, and a service element, which is evaluated under ASU 2014-09.  Under previous accounting standards, service revenue was recognized when the amounts were fixed or determinable, services had been rendered and collectability was reasonably assured.  Under ASU 2014-09, recognition of such service revenue occurs when the services are provided and the performance obligations are satisfied.  The Company evaluated the service revenue under ASU 2014-09 and determined that the amounts recognized and the pattern of recognition are substantially the same as the previous revenue standard. The Company adopted ASU 2014-09 using the modified retrospective method and applied the new standard only to contracts not completed as of January 1, 2018.  There is no impact on the Company’s consolidated financial statements.

Definition of a Business

Effective January 1, 2018, the Company adopted ASU 2017-01, “Clarifying the Definition of a Business”, which provides a new framework for determining whether transactions should be accounted for as acquisitions of assets or businesses.  The Company analyzed its March 13, 2018 acquisition of Greater China Intermodal Investments LLC (“GCI”) under this standard (see note 2).

Statement of Cash Flows – Restricted Cash

Effective January 1, 2018, the Company adopted ASU 2016-18, “Statement of Cash Flows – Restricted Cash”, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash.  In addition, the amounts of restricted cash and nature of the restrictions are required to be disclosed.  The Company’s consolidated statements of cash flows and supplemental cash flow note reflect the changes as required.

Equity-linked financial instruments with down round features

Effective January 1, 2018, the Company elected to early adopt ASU 2017-11, which changes the classification analysis of certain equity-linked financial instruments with down round features.  When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.  The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  There is no impact on the Company’s consolidated financial statements.

 

 

 

 

 

 

8


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

1.       Significant accounting policies (continued):

 

(c)

Recent accounting pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases”, which requires lessees to recognize all leases, including operating leases, with a term greater than 12 months on the balance sheet, for the rights and obligations created by those leases.  The accounting for lessors will remain largely unchanged from the existing accounting standards.  The standard is effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years.  

Under ASU 2016-02, each lease agreement will be evaluated to identify the lease components and non-lease components at lease inception. The total consideration in the lease agreement will be allocated to the lease and non-lease components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis). Sale-type and direct financing leases will be accounted for as financing transactions with the lease payments being allocated to principal and interest utilizing the effective interest rate method.

In July 2018, the FASB issued ASU 2018-11, “Leases – Targeted Improvements” that allows lessors to elect, as a practical expedient, to not separate lease and non-lease components and allows these components to be accounted for as a single lease component if both (i) the timing and pattern of transfer to the lessee of the lease component and the related non-lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease.  In addition, a company is permitted to use its effective date as the date of initial application.  Therefore, a company electing this option will not restate comparative period financial information, will not make the new required lease disclosures in comparative periods beginning before the effective date and will recognize its cumulative effect transition adjustment as of the effective date.  Under the practical expedient mentioned above, it is expected that time charter revenue and service revenue will be presented under a single lease component presentation. The amendments have the same effective date as ASC 2016-02.

The Company intends to adopt ASU 2016-02 on January 1, 2019 whereby a cumulative effect adjustment will be made as of that day with no retrospective effect.  The Company also intends to elect to apply the package of practical expedients such that for any expired or existing leases it will not reassess lease classification, initial direct costs or whether any expired or existing contracts are or contain leases.

The adoption of ASU 2016-02 will result in a change in the accounting method for certain of the Company’s sale-leaseback transactions and office leases.  Under ASU 2016-02, the Company will recognize a right-of-use asset and a lease liability on the balance sheet for these sale-leaseback transactions and office leases based on the present value of the future minimum lease payments, whereas currently no right-of-use asset or lease liability is recognized.  The existing deferred gain related to the sale-leaseback transactions will be eliminated through a credit directly to retained earnings.  The impact on the Company’s consolidated financial statements will be an increase to its assets and liabilities. The Company is currently determining the impact on its statement of operations.

 

 

 

 

 

 

9


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

1.       Significant accounting policies (continued):

The adoption of ASU 2016-02 will require the Company to complete its lease classification assessment at lease commencement rather than when a lease is entered into.  Historically, for charters that were negotiated concurrently with the construction of the related vessels, the fair value of the constructed asset was presumed to be its newbuilding cost. If such charters were classified as direct financing leases at the time the lease was entered into, no gain or loss was recognized subsequently on commencement of the charter.  On adoption of ASU 2016-02, the fair value of the vessel will be determined based on information available at the lease commencement date, rather than lease inception date, and any difference in the fair value of the vessel upon commencement of the charter and its carrying value will be recognized as a gain or loss upon commencement of the charter.

2.       Acquisition of Greater China Intermodal Investments LLC:

On March 13, 2018, the Company acquired the remaining 89.2% that it did not own of GCI from affiliates of The Carlyle Group and the minority owners of GCI. GCI’s fleet of 18 containerships, including two newbuilds, was comprised of 10000 TEU and 14000 TEU eco-class vessels.  

The aggregate purchase price was $498,050,000, comprised of:

Cash

 

$

331,904

 

1,986,449 of the Company's Series D preferred shares

 

 

47,158

 

2,514,996 of the Company's Class A common shares

 

 

13,908

 

Settlement of intercompany balances

 

 

41,279

 

Carrying value of previously held equity interest

 

 

61,891

 

Transaction fees

 

 

1,910

 

Aggregate purchase price

 

$

498,050

 

Under the Agreement and Plan of Merger (the “Merger Agreement”), $10,000,000 was deposited in escrow for settlement of potential indemnifiable damages.  If there are no claims for indemnification, the escrowed amount will be released within two business days after March 13, 2019.

The value of the Company’s Series D preferred shares and Class A common shares was determined based on the closing market price of those shares on March 13, 2018, which was the date the acquisition closed. As the initial holders of the 1,986,449 Series D preferred shares have a right commencing on September 13, 2019 and ending on October 13, 2019 to cause the Company to repurchase any of these shares they hold at that time for a price of $24.84 per share, these Series D preferred shares are recorded as temporary equity.

The Company incurred $1,910,000 of acquisition-related costs that have been capitalized as a cost of the net assets acquired.

The Company accounted for the transaction as an asset acquisition as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable group of similar identifiable assets.

Accordingly, the consideration has been allocated on a relative fair value basis to the assets acquired and liabilities assumed.  

 

 

 

 


 

10


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

2.       Acquisition of Greater China Intermodal Investments LLC (continued):

The following table summarizes the fair value of the identifiable assets acquired and liabilities assumed;

 

Cash and cash equivalents

 

$

70,121

 

Current assets

 

 

5,316

 

Vessels

 

 

1,369,628

 

Vessels under construction

 

 

28,924

 

Other assets

 

 

107,407

 

Total assets acquired

 

 

1,581,396

 

Debt assumed

 

 

1,038,081

 

Current liabilities

 

 

31,115

 

Other long-term liabilities

 

 

14,150

 

Net assets acquired

 

$

498,050

 

The Company purchased identifiable intangible assets (time charters) with an estimated useful life of 5.3 years and is recorded in Other Assets.

3.       Related party transactions:

 

(a)

Prior to March 13, 2018, the Company had a 10.8% equity interest in GCI.  The Company purchased the remaining 89.2% interest in GCI on March 13, 2018 (see note 2) and consolidated GCI from the date of acquisition.

The Company had $293,000 (December 31, 2017 – $318,500) due from other related parties included in accounts receivable

 

(b)

The Company incurred the following income or expenses with related parties:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Fees incurred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

5,265

 

 

$

 

 

$

8,092

 

 

$

 

Arrangement fees

 

 

 

 

 

1,872

 

 

 

 

 

 

1,872

 

Transaction fees

 

 

 

 

 

989

 

 

 

 

 

 

1,054

 

Income earned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

790

 

 

 

427

 

 

 

1,585

 

Management fees

 

 

 

 

 

1,077

 

 

 

914

 

 

 

2,140

 

The income or expenses with related parties relate to amounts paid to or received from individuals or entities that are associated with the Company or the Company’s directors or officers and these transactions are governed by pre-arranged contracts.

In February 2018, the Company issued to certain affiliates of Fairfax, in a private placement, $250,000,000 aggregate principal of 5.50% senior notes due 2025 (“Fairfax Notes”) and warrants (“Fairfax Warrants”) (note 11) to purchase 38,461,539 of the Company’s Class A common shares for an aggregate issue price of $250,000,000. The Fairfax Notes are guaranteed by certain of the Company’s subsidiaries. The proceeds of the Fairfax Notes and Fairfax Warrants were allocated to each security on a relative fair value basis.  The indenture relating to the Fairfax Notes provides that, subject to certain limitations, the Fairfax investors will have the right to designate a maximum of two members to our board of directors.  Fairfax became a related party as a result of this private placement.  Interest expense relates to interest expense on the Fairfax Notes.


 

11


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

3.       Related party transactions (continued):

In 2017, transaction fees were paid to the Company’s former chief executive officer (“former CEO”) in connection with services he provided related to new build contracts and purchase or sale contracts, and these fees were capitalized to vessels. Transaction fees were paid in the Company’s common shares, certain of which were paid in 2018 and contractually entered into while he was employed by the Company (note 13(b)). The former CEO’s employment ended on December 31, 2017 and as of that date he was no longer a related party.

Interest income was earned on loans to affiliate, prior to March 13, 2018. Management fees were earned from GCI for the management of GCI’s vessels, prior to March 13, 2018, and are included in revenue.

 

4.       Gross investment in lease:

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Gross investment in lease

 

$

884,335

 

 

$

723,374

 

Current portion

 

 

(44,348

)

 

 

(35,478

)

 

 

$

839,987

 

 

$

687,896

 

 

In April 2015, the Company entered into an agreement with MSC to bareboat charter five 11000 TEU vessels for a 17-year term, beginning from the vessel delivery dates. Pursuant to the Company’s right of first refusal agreement with GCI, the Company retained three of the vessels and GCI acquired the remaining two vessels. In June 2016, two of the five 11000 TEU vessels and associated bareboat charter contracts were acquired by the Company from GCI. At the end of each 17-year bareboat charter term, MSC has agreed to purchase each vessel for $32,000,000. Each transaction is considered a direct financing lease and accounted for as a disposition of vessels upon delivery of each vessel.

In 2017, four of the five 11000 TEU vessels delivered and commenced their 17-year bareboat charters. In January 2018, the fifth 11000 TEU vessel delivered and commenced its 17-year bareboat charter.

 

5.      Vessels:

 

 

 

 

 

 

 

Accumulated

 

 

Net book

 

June 30, 2018

 

Cost

 

 

depreciation

 

 

value

 

Vessels

 

$

7,866,015

 

 

$

1,828,217

 

 

$

6,037,798

 

 

 

 

 

 

 

 

Accumulated

 

 

Net book

 

December 31, 2017

 

Cost

 

 

depreciation

 

 

value

 

Vessels

 

$

6,116,091

 

 

$

1,725,237

 

 

$

4,390,854

 

Vessels under construction

 

 

146,362

 

 

 

 

 

 

146,362

 

Vessels

 

$

6,262,453

 

 

$

1,725,237

 

 

$

4,537,216

 

 

During the three and six months ended June 30, 2018, the Company capitalized interest costs of $256,000 and $769,000, respectively, (June 30, 2017 - $2,926,000 and $5,786,000) to vessels under construction.

 

12


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

6.     Deferred charges:

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

Dry-docking

 

 

fees

 

 

Total

 

December 31, 2017

 

$

42,536

 

 

$

19,484

 

 

$

62,020

 

Cost incurred

 

 

8,239

 

 

 

27

 

 

 

8,266

 

Amortization expensed

 

 

(8,554

)

 

 

(1,108

)

 

 

(9,662

)

June 30, 2018

 

$

42,221

 

 

$

18,403

 

 

$

60,624

 

 

7.      Deferred revenue:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Deferred revenue on time charters

 

$

21,669

 

 

$

26,907

 

Deferred interest on lease receivable

 

 

428,039

 

 

 

355,451

 

Other deferred revenue

 

 

 

 

 

1,690

 

Deferred revenue

 

 

449,708

 

 

 

384,048

 

Current portion

 

 

(55,929

)

 

 

(55,367

)

Deferred revenue

 

$

393,779

 

 

$

328,681

 

 

 

8.      Long-term debt:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Long-term debt:

 

 

 

 

 

 

 

 

Revolving credit facilities(a)(c)

 

$

821,500

 

 

$

854,121

 

Term loan credit facilities(b)(c)

 

 

2,457,673

 

 

 

1,196,016

 

Senior unsecured notes(d)

 

 

417,925

 

 

 

417,925

 

Senior notes due 2025(e)

 

 

174,335

 

 

 

 

Deferred financing fees

 

 

(25,691

)

 

 

(17,429

)

Long-term debt

 

 

3,845,742

 

 

 

2,450,633

 

Current portion

 

 

(663,294

)

 

 

(257,800

)

Long-term debt

 

$

3,182,448

 

 

$

2,192,833

 

 

(a)

Revolving facilities

In February 2018, the Company cancelled its $120,000,000 364-day, unsecured revolving loan facility, which had not been drawn.

At June 30, 2018, the one month average LIBOR was 2.1% (December 31, 2017 – 1.5%) and the margins ranged between 0.5% and 0.9% (December 31, 2017 – 0.5% and 1.4%) for revolving credit facilities. The weighted average rate of interest, including the margin, for our revolving credit facilities was 2.7% at June 30, 2018 (December 31, 2017 – 2.2%). Interest payments are made monthly.

 

 

 

13


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

8.       Long-term debt (continued):

 

(b)

Term loan credit facilities

In March 2018, the Company entered into a secured term loan facility for $100,000,000 which bears interest at LIBOR plus a margin.  The facility is secured by 11 vessels currently owned by the Company which were previously unencumbered.

As part of the acquisition of GCI on March 13, 2018, the Company assumed long-term debt which was recorded at its fair value of $1,038,081,000 (see note 2).  The assumed long-term debt consists primarily of 12 term loans to finance the 16 operating vessels.  The term loans bear interest at LIBOR plus a margin.  

In April 2018, the Company entered into a secured term loan facility for up to $120,000,000 to finance two 10000 TEU vessels that were delivered in May 2018.  The loan bears interest at LIBOR plus a margin.

At June 30, 2018, the one month, three month and six month average LIBOR was 2.1%, 2.3% and 2.4%, respectively (December 31, 2017 – 1.6%, 1.5% and 1.5%, respectively) and the margins ranged between 0.4% and 4.8% (December 31, 2017 – 0.4% and 4.8%) for term loan credit facilities.

For certain of our term loan credit facilities with a total principal outstanding of $71,901,000, interest is calculated based on the Export-Import Bank of Korea (KEXIM) rate plus 0.7% per annum.

For one of our unsecured term loan facilities with a total principal outstanding of $29,000,000, interest is a fixed rate of 7.0%.

The weighted average rate of interest, including the margin, was 4.6% at June 30, 2018 (December 31, 2017 – 3.6%) for term loan credit facilities. Interest payments are made in monthly, quarterly or semi-annual payments.

Waivers

For one of the Company’s term loan credit facilities, the Company initially obtained a waiver from the lender extending the grace period for securing acceptable replacement charters for two of the vessels to the fourth quarter of 2017. In September 2017, the Company received another waiver from the lender which extends the grace period for securing replacement charters to October 2020. If either of the vessels remains unemployed for a consecutive period of more than 90 days, then the waiver will be terminated.  For four GCI vessels financed by the same lender, a similar waiver was received by GCI.

For another one of the Company’s term loan credit facilities, the Company entered into a supplement to the loan agreement with the lender for one vessel, extending the grace period for securing an acceptable replacement charter for the vessel to the fourth quarter of 2018. In March 2018, the Company entered into another supplement to the loan agreement with the lender to remove the requirement to secure an acceptable replacement charter by the fourth quarter of 2018. In connection with this supplement to the loan agreement the Company prepaid $10,000,000 of the loan balance in March 2018. The final maturity of this facility is December 2022.

 

(c)

Credit facilities – other terms

 

As of June 30, 2018, our credit facilities, including those of GCI, are secured by first-priority mortgages granted on 76 of our vessels, together with other related security, such as assignments of shipbuilding contracts and refund guarantees for the vessels, assignments of time charters and earnings for the vessels, assignments of insurances for the vessels and assignments of management agreements for the vessels.

 

 

14


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

8.       Long-term debt (continued):

The Company may prepay certain amounts outstanding without penalty, other than breakage costs in certain circumstances. In certain circumstances a prepayment may be required as a result of certain events, including the sale or loss of a vessel, a termination or expiration of a charter (and the inability to enter into a charter suitable to lenders within a period of time).  The amount that must be prepaid may be calculated based on the loan to market value. In these circumstances, valuations of our vessels are conducted on a “without charter” basis as required under the credit facility agreement.

Each credit facility, other than credit facilities of GCI’s subsidiaries, contains financial covenants requiring the Company to maintain minimum liquidity, tangible net worth, interest coverage ratios, interest and principal coverage ratios, and debt-to-assets ratios, as defined. For GCI, each borrower under each facility is a special purpose entity and subsidiary of GCI.  Each facility is guaranteed by GCI and as the guarantor, GCI must meet certain consolidated financial covenants under these term loan facilities including maintaining certain minimum tangible net worth, cash requirements and debt to asset ratios.  Some of the facilities also have an interest and principal coverage ratio requirement for the subsidiary borrower.  The Company was in compliance with these covenants at June 30, 2018.

 

(d)

Senior unsecured notes

In March 2017, the Company entered into a repurchase plan for up to $10,000,000 of its senior unsecured notes which mature in April 2019.  During the six months ended June 30, 2018, the Company did not repurchase any senior unsecured notes.

 

(e)

Senior notes due 2025

In February 2018, the Company issued to certain affiliates of Fairfax, in a private placement, $250,000,000 aggregate principal of 5.50% senior notes due 2025 and warrants (note 11) to purchase 38,461,539 of the Company’s Class A common shares for an aggregate issue price of $250,000,000. The Fairfax Notes are guaranteed by certain of the Company’s subsidiaries. The proceeds of the Fairfax Notes and Fairfax Warrants were allocated to each security on a relative fair value basis.

In March 2018, the Company entered into a subscription agreement with Fairfax pursuant to which the Company will sell and Fairfax will purchase $250,000,000 aggregate principal of 5.50% interest bearing debentures and warrants to purchase 38,461,539 Class A common shares of the Company for an aggregate purchase price of $250,000,000 (the “Second Fairfax Investment”). The Second Fairfax Investment is expected to close in January 2019, subject to customary closing conditions.

 

9.      Long-term obligations under capital lease:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Long-term obligations under capital lease

 

 

672,496

 

 

 

648,840

 

Deferred financing fees

 

 

(8,916

)

 

 

(9,912

)

Long-term obligations under capital lease

 

 

663,580

 

 

 

638,928

 

Current portion

 

 

(47,588

)

 

 

(43,912

)

Long-term obligations under capital lease

 

$

615,992

 

 

$

595,016

 

 

15


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

10.      Other long-term liabilities:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Deferred gain on sale-leasebacks

 

 

192,134

 

 

 

203,737

 

Other

 

 

38,616

 

 

 

19,284

 

Other long-term liabilities

 

 

230,750

 

 

 

223,021

 

Current portion

 

 

(37,562

)

 

 

(23,635

)

Other long-term liabilities

 

$

193,188

 

 

$

199,386

 

 

11.      Puttable preferred shares and share capital:

Common shares:

At its April 2018 annual general meeting, the Company amended its number of authorized Class A common shares from 200,000,000 to 400,000,000 common shares.

In November 2017, the Company entered into a second equity distribution agreement under which the Company may, from time to time, issue Class A common shares in ATM offerings for up to $100,000,000. During the three and six months ended June 30, 2018, the Company did not issue any Class A common shares under the ATM offerings.

Preferred shares:

At June 30, 2018, the Company had the following preferred shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidation preference

 

 

 

Shares

 

 

Dividend rate

 

Redemption by Company

 

 

June 30,

 

 

December 31,

 

Series

 

Authorized

 

 

Issued

 

 

per annum

 

permitted on or after

 

 

2018

 

 

2017

 

A

 

 

315,000

 

 

 

 

 

 

 

 

                   —

 

 

$

 

 

$

 

B

 

 

260,000

 

 

 

 

 

 

 

 

                   —

 

 

 

 

 

 

 

C

 

 

40,000,000

 

 

 

 

 

 

 

 

                   —

 

 

 

 

 

 

 

D

 

 

20,000,000

 

 

 

7,017,313

(1)

 

 

7.95

%

January 30, 2018(2)

 

 

 

175,433

(1)

 

 

125,772

 

E

 

 

15,000,000

 

 

 

5,415,937

 

 

 

8.25

%

February 13, 2019(2)

 

 

 

135,398

 

 

 

135,398

 

F

 

 

20,000,000

 

 

 

5,600,000

 

 

 

10.50

%

January 1, 2018(3)

 

 

 

140,000

 

 

 

140,000

 

G

 

 

15,000,000

 

 

 

7,800,800

 

 

 

8.20

%

June 16, 2021(2)

 

 

 

195,020

 

 

 

195,020

 

H

 

 

15,000,000

 

 

 

9,025,105

 

 

 

7.875

%

August 11, 2021(2)

 

 

 

225,628

 

 

 

225,628

 

R

 

 

1,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      __________

 

(1)

Includes 1,986,449 puttable preferred shares with a liquidation preference of $49,661,000.

 

(2)

Redeemable by the Company, in whole or in part, at a redemption price of $25.00 per share plus unpaid dividends. The preferred shares are not convertible into common shares and are not redeemable by the holder.

 

(3)

The Series F preferred shares can be converted to Class A common shares at a conversion price of $18.00 per share.  The Company has the right to call the Series F preferred shares at par plus any accumulated and unpaid dividends any time and exercised that right to redeem all of the Series F preferred shares on July 23, 2018.

 

16


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

11.     Puttable preferred shares and share capital (continued):

Dividends:

In June 2018, the Company declared a quarterly dividend of $0.125 per common share. The dividend was paid on July 30, 2018 to all shareholders of record as of July 10, 2018.

The Company also declared quarterly dividends of $0.496875, $0.515625, $0.65625, $0.512500 and $0.492188 per Series D, Series E, Series F, Series G and Series H preferred share, respectively, representing a total distribution of $18,395,000. The dividends were paid on July 30, 2018 to all shareholders of record on July 27, 2018.

Warrants:

The Fairfax Warrants entitle the holder to purchase one share of the Company’s Class A common shares          at an exercise price of $6.50.   Each warrant is exercisable within seven years and the exercise price of the Fairfax Warrants is subject to customary anti-dilution adjustments.  The Company can elect to require early exercise of the warrants, at any time after February 14, 2022, if the volume weighted average price of the Company’s Class A common shares, averaged over a 20-day period, equals or exceeds twice the exercise price of the Fairfax Warrants at that time.  The proceeds of the Fairfax Notes and Fairfax Warrants were allocated to each security on a relative fair value basis.

 

12.     Earnings per share (“EPS”):

 

 

Three months ended June 30, 2018

 

 

Three months ended June 30, 2017

 

 

Earnings

(numerator)

 

 

Shares

(denominator)

 

 

Per share

amount

 

 

Earnings

(numerator)

 

 

Shares

(denominator)

 

 

Per share

amount

 

Net earnings

$

68,013

 

 

 

 

 

 

 

 

 

 

$

28,284

 

 

 

 

 

 

 

 

 

Less preferred share dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series D

 

(3,922

)

 

 

 

 

 

 

 

 

 

 

(2,475

)

 

 

 

 

 

 

 

 

Series E

 

(2,793

)

 

 

 

 

 

 

 

 

 

 

(2,769

)

 

 

 

 

 

 

 

 

Series F

 

(3,675

)

 

 

 

 

 

 

 

 

 

 

(2,433

)

 

 

 

 

 

 

 

 

Series G

 

(3,998

)

 

 

 

 

 

 

 

 

 

 

(3,997

)

 

 

 

 

 

 

 

 

Series H

 

(4,442

)

 

 

 

 

 

 

 

 

 

 

(4,430

)

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings attributable to

   common shareholders

$

49,183

 

 

 

137,311,000

 

 

$

0.36

 

 

$

12,180

 

 

 

113,963,000

 

 

$

0.11

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

475,000

 

 

 

 

 

 

 

 

 

 

17,000

 

 

 

 

 

Fairfax warrants

 

 

 

 

8,324,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings attributable to

   common shareholders

$

49,183

 

 

 

146,110,000

 

 

$

0.34

 

 

$

12,180

 

 

 

113,980,000

 

 

$

0.11

 

 

 

17


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

12.     Earnings per share (“EPS”) (continued):

 

 

 

Six months ended June 30, 2018

 

 

Six months ended June 30, 2017

 

 

Earnings

(numerator)

 

 

Shares

(denominator)

 

 

Per share

amount

 

 

Earnings

(numerator)

 

 

Shares

(denominator)

 

 

Per share

amount

 

Net earnings

$

135,729

 

 

 

 

 

 

 

 

 

 

$

68,307

 

 

 

 

 

 

 

 

 

Less preferred share dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series D

 

(6,753

)

 

 

 

 

 

 

 

 

 

 

(4,950

)

 

 

 

 

 

 

 

 

Series E

 

(5,585

)

 

 

 

 

 

 

 

 

 

 

(5,538

)

 

 

 

 

 

 

 

 

Series F

 

(7,350

)

 

 

 

 

 

 

 

 

 

 

(4,865

)

 

 

 

 

 

 

 

 

Series G

 

(7,996

)

 

 

 

 

 

 

 

 

 

 

(7,995

)

 

 

 

 

 

 

 

 

Series H

 

(8,884

)

 

 

 

 

 

 

 

 

 

 

(8,860

)

 

 

 

 

 

 

 

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings attributable to

   common shareholders

$

99,161

 

 

 

135,664,000

 

 

$

0.73

 

 

$

36,099

 

 

 

110,362,000

 

 

$

0.33

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

301,000

 

 

 

 

 

 

 

 

 

 

44,000

 

 

 

 

 

Fairfax warrants

 

 

 

 

4,162,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings attributable to

   common shareholders

$

99,161

 

 

 

140,127,000

 

 

$

0.71

 

 

$

36,099

 

 

 

110,406,000

 

 

$

0.33

 

 

 

(1)

The conversion of convertible Series F preferred shares and unexercised warrants are not included in the computation of diluted EPS when their effects are anti-dilutive.

13.     Share-based compensation:

A summary of the Company’s outstanding restricted shares, phantom share units, stock appreciation rights (“SARs”) and restricted stock units as of and for the six months ended June 30, 2018 is presented below:

 

 

Restricted shares

 

 

Phantom share units

 

 

Stock appreciation rights

 

 

Restricted stock units

 

 

Number of

shares

 

 

W.A. grant

date FV

 

 

Number of

units

 

 

W.A. grant

date FV

 

 

Number of

SARs

 

 

W.A. grant

date FV

 

 

Number of

units

 

 

W.A. grant

date FV

 

December 31, 2017

 

94,533

 

 

$

8.89

 

 

 

727,001

 

 

$

13.60

 

 

 

485,974

 

 

$

3.40

 

 

 

71,184

 

 

$

7.80

 

Granted

 

164,326

 

 

 

7.19

 

 

 

30,000

 

 

 

6.86

 

 

 

 

 

 

 

 

 

109,248

 

 

 

9.73

 

Vested

 

(119,509

)

 

 

8.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80,155

)

 

 

9.37

 

Cancelled

 

(53,608

)

 

 

7.10

 

 

 

(50,000

)

 

 

6.86

 

 

 

 

 

 

 

 

 

(4,247

)

 

 

7.21

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

 

(485,974

)

 

 

3.40

 

 

 

 

 

 

 

June 30, 2018

 

85,742

 

 

$

7.28

 

 

 

707,001

 

 

$

13.79

 

 

$

 

 

$

 

 

 

96,030

 

 

$

8.71

 

In January 2018, the Company granted the Chief Executive Officer (“CEO”) stock options to acquire 500,000 Class A common shares at an exercise price of $7.20 per share. The stock options vest equally on each of the first five anniversaries of the CEO’s start date in January 2018 and expire on January 8, 2028.

During the three and six months ended June 30, 2018, the Company amortized $808,000 and $1,435,000 respectively (June 30, 2017 - $1,922,000 and $3,766,000) in share-based compensation expense related to the above share-based compensation awards.

 

18


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

13.      Share-based compensation (continued):

At June 30, 2018, there was (i) $2,333,000 (December 31, 2017 – $4,178,000) of total unamortized compensation costs relating to unvested share-based compensation awards, which are expected to be recognized over a weighted-average period of 23 months and (ii) 2,041,846 (December 31, 2017 – 2,952,896) shares remaining for issuance under the Company’s Stock Incentive Plan, as amended.

 

(a)

Restricted shares and phantom share units:

Class A common shares are issued on a one-for-one basis in exchange for the cancellation of vested restricted shares and phantom share units. The restricted shares generally vest over one year and the phantom share units generally vest over three years. During the six months ended June 30, 2018, the fair value of restricted shares vested was $1,018,000 (June 30, 2017 – $880,000).

As vested outstanding phantom share units are only exchanged for common shares upon written notice from the holder, the phantom share units that are exchanged for common shares may include units that vested in prior periods. At June 30, 2018, 650,335 (December 31, 2017 – 587,001) of the outstanding phantom share units were vested and available for exchange by the holder.

 

(b)

Other share-based awards:

During the three and six months ended June 30, 2018, the Company incurred no arrangement fees. During the three and six months ended June 30, 2017, the Company incurred arrangement fees of $1,872,000 and $1,872,000, respectively, all of which were paid in Class A common shares.

During the three and six months ended June 30, 2018, the Company incurred $1,758,000 and $2,325,000, respectively, (June 30, 2017 – $989,000 and $1,054,000) in transaction fees that were capitalized to vessels, all of which were paid in Class A common shares. The number of shares issued under each of these arrangements is based on volume weighted-average share prices as defined in the underlying agreements.  

 

 

19


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

14.      Supplemental cash flow information:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest paid

 

$

49,076

 

 

$

26,616

 

 

$

87,068

 

 

$

54,619

 

Interest received

 

 

401

 

 

 

1,329

 

 

 

1,244

 

 

 

4,681

 

Undrawn credit facility fee paid

 

 

220

 

 

 

621

 

 

 

430

 

 

 

1,263

 

Non-cash transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend reinvestment

 

 

7,520

 

 

 

7,265

 

 

 

14,685

 

 

 

7,682

 

Arrangement and transaction fees

   settled in shares

 

 

1,758

 

 

 

2,861

 

 

 

2,325

 

 

 

2,991

 

Capital contribution through

   settlement of loans to affiliate

 

 

 

 

 

3,889

 

 

 

 

 

 

6,667

 

Offset of swaption against swap

   liability termination

 

 

 

 

 

 

 

 

 

 

 

10,852

 

Repayment of debt from sale-

   leaseback transaction proceeds

 

 

 

 

 

53,248

 

 

 

 

 

 

53,248

 

Dividends declared and not paid

 

 

35,559

 

 

 

 

 

 

35,559

 

 

 

 

Issuance of Class A common

   shares on acquisition (note 2)

 

 

 

 

 

 

 

 

13,908

 

 

 

 

Issuance of Series D preferred

   shares on acquisition (note 2)

 

 

 

 

 

 

 

 

47,158

 

 

 

 

Settlement of loans to affiliate,

   accrued interest and other

   intercompany balances on

   acquisition (note 2)

 

 

 

 

 

 

 

 

38,849

 

 

 

 

Settlement of GCI transaction fees

   paid by the Company (note 2)

 

 

 

 

 

 

 

 

15,224

 

 

 

 

Carrying value of previously held

   equity in GCI settled on

   acquisition (note 2)

 

 

 

 

 

 

 

 

61,891

 

 

 

 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the amounts shown in the consolidated statements of cash flows:

 

 

June 30,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

269,070

 

 

$

305,592

 

Restricted cash included in other assets

 

 

14,062

 

 

 

19,858

 

Total cash, cash equivalents and restricted cash shown in the consolidated

   statements of cash flows

 

$

283,132

 

 

$

325,450

 

Restricted cash included in other assets represents amounts required to be set aside by contractual agreement for two of the Company’s capital leases. The restriction will be removed on termination of the charter agreements.

 

20


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

15.      Commitments and contingencies:

 

(a)

At June 30, 2018, the minimum future revenues to be received on committed time-charter party agreements and interest income from direct financing leases are as follows:

 

Remainder of 2018

 

$

563,994

 

2019

 

 

1,015,769

 

2020

 

 

947,681

 

2021

 

 

840,294

 

2022

 

 

698,261

 

Thereafter

 

 

1,219,985

 

 

 

$

5,285,984

 

 

The minimum future revenues are based on 100% utilization, relate to committed time-charter party agreements currently in effect and assume no renewals or extensions.

 

 

(b)

At June 30, 2018, the commitment under operating leases for vessels is $1,340,819,000 for the remainder of 2018 to 2029 and for office space is $8,190,000 for the remainder of 2018 to 2024. Total commitments under these leases are as follows:

 

Remainder of 2018

 

$

78,233

 

2019

 

 

156,142

 

2020

 

 

155,618

 

2021

 

 

155,386

 

2022

 

 

149,405

 

Thereafter

 

 

654,225

 

 

 

$

1,349,009

 

16.      Concentrations:

The Company’s revenue is derived from the following customers:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

2017

 

COSCON(1)

 

$

84,209

 

 

$

78,457

 

 

$

166,349

 

$

155,552

 

Yang Ming

 

 

63,669

 

 

 

34,229

 

 

 

106,066

 

 

66,293

 

MOL

 

 

42,864

 

 

 

30,961

 

 

 

75,984

 

 

61,298

 

CSCL Asia(1)

 

 

18,509

 

 

 

21,407

 

 

 

35,386

 

 

45,064

 

Other

 

 

72,411

 

 

 

39,555

 

 

 

122,653

 

 

77,723

 

 

 

$

281,662

 

 

$

204,609

 

 

$

506,438

 

$

405,930

 

 

 

(1)

While the Company continues to charter vessels separately to CSCL Asia and COSCON, CSCL Asia and COSCON merged their container shipping business in March 2016.

 

21


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

17.     Financial instruments:

 

(a)

Fair value:

The carrying values of cash and cash equivalents, short-term investments, restricted cash, accounts receivable, loans to affiliate and accounts payable and accrued liabilities approximate their fair values because of their short term to maturity. As of June 30, 2018, the fair value of the Company’s revolving and term loan credit facilities, excluding deferred financing fees is $3,190,000,000 (December 31, 2017 - $1,940,215,000) and the carrying value is $3,279,000,000 (December 31, 2017 - $2,050,137,000). As of June 30, 2018, the fair value of the Company’s long-term obligations under capital lease, excluding deferred financing fees, is $683,449,000 (December 31, 2017 - $653,007,000) and the carrying value is $672,496,000 (December 31, 2017 - $648,840,000). The fair value of the revolving and term loan credit facilities and long-term obligations under capital lease, excluding deferred financing fees, are estimated based on expected principal repayments and interest, discounted by relevant forward rates plus a margin appropriate to the credit risk of the Company. Therefore, the Company has categorized the fair value of these financial instruments as Level 3 in the fair value hierarchy.

As of June 30, 2018, the fair value of the Company’s senior unsecured notes is $424,314,000 (December 31, 2017 – $423,184,000) and the carrying value is $417,925,000 (December 31, 2017 – $417,925,000). The fair value of senior unsecured notes is calculated based on a quoted price that is readily and regularly available in an active market. Therefore, the Company has categorized the fair value of these financial instruments as Level 1 in the fair value hierarchy.

As of June 30, 2018, the fair value and carrying value of the Company’s senior notes due 2025 is $174,335,000 (December 31, 2017 – nil). The fair value of senior notes due 2025 is based on the relative fair values of the senior notes and the related warrants. Therefore, the Company has categorized the fair value of these financial instruments as Level 3 in the fair value hierarchy.

The Company’s interest rate derivative financial instruments are re-measured to fair value at the end of each reporting period. The fair values of the interest rate derivative financial instruments have been calculated by discounting the future cash flow of both the fixed rate and variable rate interest rate payments. The discount rate was derived from a yield curve created by nationally recognized financial institutions adjusted for the associated credit risk. The fair values of the interest rate derivative financial instruments are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized the fair value of these derivative financial instruments as Level 2 in the fair value hierarchy.

 

 

 

 

 

 

 

 

 

 

22


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

17.     Financial instruments (continued):

 

(b)

Interest rate derivative financial instruments:

As of June 30, 2018, the Company had the following outstanding interest rate derivatives:

 

Fixed per

annum rate

swapped

for LIBOR

 

 

Notional

amount as of

June 30, 2018

 

 

Maximum

notional

amount(1)

 

 

Effective date

 

Ending date

 

5.8700%

 

 

$

566,984

 

 

$

566,984

 

 

August 31, 2017

 

November 28, 2025

(2)

5.4200%

 

 

 

376,421

 

 

 

376,421

 

 

September 6, 2007

 

May 31, 2024

 

5.6000%

 

 

 

128,400

 

 

 

128,400

 

 

June 23, 2010

 

December 23, 2021

(3)

3.2675%

 

 

 

72,736

 

 

 

72,736

 

 

September 8, 2015

 

September 8, 2020

 

3.0900%

 

 

 

71,320

 

 

 

71,320

 

 

June 5, 2015

 

June 5, 2020

 

1.6000%

 

 

 

45,208

 

 

 

45,208

 

 

April 7, 2014

 

March 20, 2019

 

 

 

(1)

Over the term of the interest rate swaps, the notional amounts increase and decrease. These amounts represent the peak notional amounts over the remaining term of the swap.

 

(2)

Swap counterparty has an early termination right in August 2019 which may require the Company to settle the swap earlier than the termination date.

 

(3)

Prospectively de-designated as an accounting hedge in 2008.

If interest rates remain at their current levels, the Company expects that $30,565,000 would be settled in cash in the next 12 months on interest rate swaps maturing after June 30, 2018. The amount of the actual settlement may be different depending on the interest rate in effect at the time settlements are made.  

 

(c)

Fair value of asset and liability derivatives:

The following provides information about the Company’s derivatives:

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Fair value of financial instruments asset

 

$

277

 

 

$

 

 

 

Fair value of financial instruments liability

 

 

123,733

 

 

 

168,860

 

 

23


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

 

17.     Financial instruments (continued):

The following table provides information about gains and losses included in net earnings and reclassified from accumulated other comprehensive loss (“AOCL”) into earnings:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Gain (loss) on derivatives recognized in net

   earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of financial

   instruments

 

 

$      5,927

 

 

$

(13,610

)

 

$

25,249

 

 

$

(17,027

)

Loss reclassified from AOCL to net

   earnings(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(86

)

 

 

(401

)

 

 

(174

)

 

 

(1,680

)

Depreciation and amortization

 

 

(190

)

 

 

(261

)

 

 

(402

)

 

 

(458

)

 

 

(1)

The effective portion of changes in unrealized loss on interest rate swaps was recorded in accumulated other comprehensive income until September 30, 2008 when these contracts were de-designated as accounting hedges. The amounts in accumulated other comprehensive income will be recognized in earnings when and where the previously hedged interest is recognized in earnings.

The estimated amount of AOCL expected to be reclassified to net earnings within the next 12 months is approximately $1,072,000.

 

 

24


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.     Guarantor financial information:    

The Fairfax Notes are guaranteed by the following wholly owned subsidiaries of the Company, each a “Guarantor”:

 

Seaspan 140 Ltd.  

 

Seaspan Holding 140 Ltd.  

 

Seaspan (Asia) Corporation

 

Seaspan Containership 2180 Ltd.

 

Seaspan Containership 2181 Ltd.

 

Seaspan Holdco I Ltd.

 

Seaspan Holdco II Ltd.

 

Seaspan Holdco III Ltd.

 

Seaspan Holdco IV Ltd.

 

Seaspan Investment I Ltd.

 

Seaspan Ship Management Ltd.

 

Seaspan Crew Management Ltd.

 

Seaspan Management Services Limited

 

Seaspan Advisory Services Limited

 

The guarantees are full and unconditional and joint and several, subject to certain customary release provisions including (1) the sale, exchange or transfer of a Guarantor in accordance with the terms of the Fairfax Notes (2) upon the legal defeasance or covenant defeasance or discharge of obligations under the Fairfax Notes and (3) merger or consolidation of a Guarantor with Seaspan Corporation or another Guarantor   For the purposes of the following footnote, Seaspan Corporation is referred to as “Issuer”.  The following supplemental combining and condensed consolidating financial information reflects the Issuer’s separate account, the combined accounts of the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries, the combining and consolidating adjustments and eliminations and the Issuer’s consolidated
accounts for the dates and periods indicated.  For purposes of the following combining and consolidating information, the Issuer’s investment in its subsidiaries and the Guarantor subsidiaries’ investments in their subsidiaries include their proportionate interest in the net assets of the subsidiaries.

 

The following tables present consolidated financial information related to the guarantees of the Fairfax Notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):  

 

 

June 30, 2018

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

150,510

 

 

$

38,215

 

 

$

80,345

 

 

$

 

 

$

269,070

 

Short-term investments

 

 

 

 

 

 

 

 

2,400

 

 

 

 

 

 

2,400

 

Accounts receivable

 

 

76,742

 

 

 

44,841

 

 

 

3,564

 

 

 

(110,775

)

 

 

14,372

 

Prepaid expenses and other

 

 

21,814

 

 

 

31,323

 

 

 

9,869

 

 

 

(20,304

)

 

 

42,702

 

Gross investment in lease

 

 

44,348

 

 

 

 

 

 

 

 

 

 

 

 

44,348

 

Fair value of financial instruments

 

 

 

 

 

 

 

 

277

 

 

 

 

 

 

277

 

 

 

 

293,414

 

 

 

114,379

 

 

 

96,455

 

 

 

(131,079

)

 

 

373,169

 

Vessels

 

 

3,890,314

 

 

 

299,625

 

 

 

2,239,398

 

 

 

(391,539

)

 

 

6,037,798

 

Deferred charges

 

 

57,921

 

 

 

1,208

 

 

 

397

 

 

 

1,098

 

 

 

60,624

 

Gross investment in lease

 

 

839,987

 

 

 

 

 

 

 

 

 

 

 

 

839,987

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

75,321

 

 

 

75,321

 

Intercompany accounts receivable and payable

 

 

 

 

 

(5,937

)

 

 

5,181

 

 

 

756

 

 

 

 

Investment in subsidiary

 

 

902,192

 

 

 

539,735

 

 

 

 

 

 

(1,441,927

)

 

 

 

Other assets

 

 

57,095

 

 

 

16,833

 

 

 

21,308

 

 

 

71,412

 

 

 

166,648

 

 

 

$

6,040,923

 

 

$

965,843

 

 

$

2,362,739

 

 

$

(1,815,958

)

 

$

7,553,547

 

Liabilities, Puttable Preferred Shares and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

92,787

 

 

$

43,867

 

 

$

57,988

 

 

$

(93,267

)

 

$

101,375

 

Current portion of deferred revenue

 

 

50,594

 

 

 

21,603

 

 

 

5,335

 

 

 

(21,603

)

 

 

55,929

 

Current portion of long-term debt

 

 

542,796

 

 

 

 

 

 

120,498

 

 

 

 

 

 

663,294

 

Current portion of long-term obligations

   under capital lease

 

 

40,860

 

 

 

6,728

 

 

 

 

 

 

 

 

 

47,588

 

Current portion of other long-term

   liabilities

 

 

23,864

 

 

 

 

 

 

 

 

 

13,698

 

 

 

37,562

 

 

 

 

750,901

 

 

 

72,198

 

 

 

183,821

 

 

 

(101,172

)

 

 

905,748

 

Deferred revenue

 

 

393,779

 

 

 

 

 

 

 

 

 

 

 

 

393,779

 

Long-term debt

 

 

1,986,644

 

 

 

 

 

 

1,181,817

 

 

 

13,987

 

 

 

3,182,448

 

Long-term obligations under capital lease

 

 

465,950

 

 

 

150,042

 

 

 

 

 

 

 

 

 

615,992

 

Other long-term liabilities

 

 

182,436

 

 

 

13,971

 

 

 

209,598

 

 

 

(212,817

)

 

 

193,188

 

Fair value of financial instruments

 

 

122,554

 

 

 

 

 

 

1,179

 

 

 

 

 

 

123,733

 

Total liabilities

 

 

3,902,264

 

 

 

236,211

 

 

 

1,576,415

 

 

 

(300,002

)

 

 

5,414,888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puttable preferred shares

 

 

47,256

 

 

 

 

 

 

 

 

 

 

 

 

47,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share capital

 

 

1,702

 

 

 

41,789

 

 

 

526,532

 

 

 

(568,321

)

 

 

1,702

 

Treasury shares

 

 

(371

)

 

 

 

 

 

 

 

 

 

 

 

(371

)

Additional paid in capital

 

 

2,862,936

 

 

 

551,388

 

 

 

109,488

 

 

 

(660,876

)

 

 

2,862,936

 

Retained earnings (deficit)

 

 

(749,752

)

 

 

136,455

 

 

 

150,304

 

 

 

(286,759

)

 

 

(749,752

)

Accumulated other comprehensive loss

 

 

(23,112

)

 

 

 

 

 

 

 

 

 

 

 

(23,112

)

 

 

 

2,091,403

 

 

 

729,632

 

 

 

786,324

 

 

 

(1,515,956

)

 

 

2,091,403

 

 

 

$

6,040,923

 

 

$

965,843

 

 

$

2,362,739

 

 

$

(1,815,958

)

 

$

7,553,547

 

 

26


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

December 31, 2017

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

146,328

 

 

$

77,712

 

 

$

29,136

 

 

$

 

 

$

253,176

 

Short-term investments

 

 

 

 

 

104

 

 

 

 

 

 

 

 

 

104

 

Accounts receivable

 

 

37,303

 

 

 

25,347

 

 

 

 

 

 

(50,972

)

 

 

11,678

 

Loans to affiliate

 

 

36,100

 

 

 

 

 

 

 

 

 

 

 

 

36,100

 

Prepaid expenses and other

 

 

29,037

 

 

 

30,348

 

 

 

938

 

 

 

(15,454

)

 

 

44,869

 

Gross investment in lease

 

 

35,478

 

 

 

 

 

 

 

 

 

 

 

 

35,478

 

 

 

 

284,246

 

 

 

133,511

 

 

 

30,074

 

 

 

(66,426

)

 

 

381,405

 

Vessels

 

 

3,918,672

 

 

 

286,342

 

 

 

332,202

 

 

 

 

 

 

4,537,216

 

Deferred charges

 

 

58,397

 

 

 

1,889

 

 

 

1,734

 

 

 

 

 

 

62,020

 

Gross investment in lease

 

 

687,896

 

 

 

 

 

 

 

 

 

 

 

 

687,896

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

75,321

 

 

 

75,321

 

Intercompany accounts receivable and payable

 

 

(11,594

)

 

 

11,189

 

 

 

405

 

 

 

 

 

 

 

Investment in subsidiary

 

 

474,713

 

 

 

59,902

 

 

 

 

 

 

(534,615

)

 

 

 

Other assets

 

 

57,757

 

 

 

79,574

 

 

 

7,370

 

 

 

(10,417

)

 

 

134,284

 

 

 

$

5,470,087

 

 

$

572,407

 

 

$

371,785

 

 

$

(536,137

)

 

$

5,878,142

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

35,307

 

 

$

75,125

 

 

$

2,789

 

 

$

(50,001

)

 

$

63,220

 

Current portion of deferred revenue

 

 

54,578

 

 

 

16,104

 

 

 

140

 

 

 

(15,455

)

 

 

55,367

 

Current portion of long-term debt

 

 

239,858

 

 

 

 

 

 

17,942

 

 

 

 

 

 

257,800

 

Current portion of long-term obligations under capital lease

 

 

28,534

 

 

 

15,378

 

 

 

 

 

 

 

 

 

43,912

 

Current portion of other long-term liabilities

 

 

23,635

 

 

 

 

 

 

 

 

 

 

 

 

23,635

 

 

 

 

381,912

 

 

 

106,607

 

 

 

20,871

 

 

 

(65,456

)

 

 

443,934

 

Deferred revenue

 

 

327,641

 

 

 

1,040

 

 

 

 

 

 

 

 

 

328,681

 

Long-term debt

 

 

2,001,504

 

 

 

 

 

 

191,329

 

 

 

 

 

 

2,192,833

 

Long-term obligations under capital lease

 

 

445,279

 

 

 

149,737

 

 

 

 

 

 

 

 

 

595,016

 

Other long-term liabilities

 

 

195,459

 

 

 

15,273

 

 

 

 

 

 

(11,346

)

 

 

199,386

 

Fair value of financial instruments

 

 

168,860

 

 

 

 

 

 

 

 

 

 

 

 

168,860

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Share capital

 

 

1,646

 

 

 

41,789

 

 

 

33,299

 

 

 

(75,088

)

 

 

1,646

 

Treasury shares

 

 

(377

)

 

 

 

 

 

 

 

 

 

 

 

(377

)

Additional paid in capital

 

 

2,752,988

 

 

 

158,418

 

 

 

109,488

 

 

 

(267,906

)

 

 

2,752,988

 

Retained earnings (deficit)

 

 

(781,137

)

 

 

99,543

 

 

 

16,798

 

 

 

(116,341

)

 

 

(781,137

)

Accumulated other comprehensive loss

 

 

(23,688

)

 

 

 

 

 

 

 

 

 

 

 

(23,688

)

 

 

 

1,949,432

 

 

 

299,750

 

 

 

159,585

 

 

 

(459,335

)

 

 

1,949,432

 

 

 

$

5,470,087

 

 

$

572,407

 

 

$

371,785

 

 

$

(536,137

)

 

$

5,878,142

 

 

27


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

Six months ended June 30, 2018

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue

 

$

421,309

 

 

$

133,343

 

 

$

95,321

 

 

$

(143,535

)

 

$

506,438

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ship operating

 

 

118,574

 

 

 

98,530

 

 

 

17,376

 

 

 

(126,165

)

 

 

108,315

 

Depreciation and amortization

 

 

86,928

 

 

 

7,062

 

 

 

26,619

 

 

 

(4,577

)

 

 

116,032

 

General and administrative

 

 

17,185

 

 

 

9,966

 

 

 

1,195

 

 

 

(12,000

)

 

 

16,346

 

Operating leases

 

 

54,335

 

 

 

2,685

 

 

 

6,503

 

 

 

 

 

 

63,523

 

 

 

 

277,022

 

 

 

118,243

 

 

 

51,693

 

 

 

(142,742

)

 

 

304,216

 

Operating earnings

 

 

144,287

 

 

 

15,100

 

 

 

43,628

 

 

 

(793

)

 

 

202,222

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and

   amortization of deferred

   financing fees

 

 

69,171

 

 

 

4,123

 

 

 

23,110

 

 

 

(157

)

 

 

96,247

 

Interest income

 

 

(1,490

)

 

 

(205

)

 

 

(70

)

 

 

 

 

 

(1,765

)

Undrawn credit facility fees

 

 

295

 

 

 

 

 

 

 

 

 

 

 

 

295

 

Acquisition related gain on contract settlement

 

 

 

 

 

(2,430

)

 

 

 

 

 

 

 

 

(2,430

)

Change in fair value of financial instruments

 

 

(25,092

)

 

 

115

 

 

 

(272

)

 

 

 

 

 

(25,249

)

Equity income on investment

 

 

(34,508

)

 

 

(23,760

)

 

 

 

 

 

57,052

 

 

 

(1,216

)

Other expense (income)

 

 

182

 

 

 

347

 

 

 

82

 

 

 

 

 

 

611

 

 

 

 

8,558

 

 

 

(21,810

)

 

 

22,850

 

 

 

56,895

 

 

 

66,493

 

Net earnings (loss)

 

$

135,729

 

 

$

36,910

 

 

$

20,778

 

 

$

(57,688

)

 

$

135,729

 

 

28


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

Six months ended June 30, 2017

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue

 

$

390,422

 

 

$

131,587

 

 

$

21,365

 

 

$

(137,444

)

 

$

405,930

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ship operating

 

 

117,965

 

 

 

92,456

 

 

 

5,453

 

 

 

(125,444

)

 

 

90,430

 

Depreciation and amortization

 

 

86,237

 

 

 

6,529

 

 

 

6,978

 

 

 

-

 

 

 

99,744

 

General and administrative

 

 

18,923

 

 

 

7,975

 

 

 

77

 

 

 

(12,000

)

 

 

14,975

 

Operating leases

 

 

46,100

 

 

 

2,499

 

 

 

6,059

 

 

 

 

 

 

54,658

 

Expenses related to customer bankruptcy

 

 

543

 

 

 

 

 

 

470

 

 

 

 

 

 

1,013

 

 

 

 

269,768

 

 

 

109,458

 

 

 

19,037

 

 

 

(137,444

)

 

 

260,820

 

Operating earnings

 

 

120,654

 

 

 

22,128

 

 

 

2,328

 

 

 

 

 

 

145,110

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and amortization of deferred financing fees

 

 

47,473

 

 

 

3,838

 

 

 

5,418

 

 

 

 

 

 

56,729

 

Interest income

 

 

(2,230

)

 

 

(134

)

 

 

(1

)

 

 

 

 

 

(2,365

)

Undrawn credit facility fees

 

 

1,265

 

 

 

 

 

 

 

 

 

 

 

 

1,265

 

Change in fair value of financial instruments

 

 

16,635

 

 

 

392

 

 

 

 

 

 

 

 

 

17,027

 

Equity income on investment

 

 

(17,245

)

 

 

(5,926

)

 

 

 

 

 

20,642

 

 

 

(2,529

)

Other expense (income)

 

 

6,449

 

 

 

227

 

 

 

 

 

 

 

 

 

6,676

 

 

 

 

52,347

 

 

 

(1,603

)

 

 

5,417

 

 

 

20,642

 

 

 

76,803

 

Net earnings (loss)

 

$

68,307

 

 

$

23,731

 

 

$

(3,089

)

 

$

(20,642

)

 

$

68,307

 

 

 

 

 

 

Six months ended June 30, 2018

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Net earnings (loss)

 

 

135,729

 

 

 

36,910

 

 

 

20,778

 

 

 

(57,688

)

 

 

135,729

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified to net earnings during the year

   relating to cash flow hedging instruments

 

 

576

 

 

 

 

 

 

 

 

 

 

 

 

576

 

Comprehensive income (loss)

 

 

136,305

 

 

 

36,910

 

 

 

20,778

 

 

 

(57,688

)

 

 

136,305

 

 

29


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

Six months ended June 30, 2017

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

Net earnings (loss)

 

 

68,307

 

 

 

23,731

 

 

 

(3,089

)

 

 

(20,642

)

 

 

68,307

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified to net

   earnings during the year

   relating to cash flow hedging

   instruments

 

 

2,138

 

 

 

 

 

 

 

 

 

 

 

 

2,138

Comprehensive income (loss)

 

 

70,445

 

 

 

23,731

 

 

 

(3,089)

 

 

 

(20,642

)

 

 

70,445

 

 

 

Three months ended June 30, 2018

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue

$

214,228

 

 

$

67,514

 

 

$

74,483

 

 

$

(74,563

)

 

$

281,662

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ship operating

 

58,430

 

 

 

50,595

 

 

 

12,935

 

 

 

(63,194

)

 

 

58,766

 

Depreciation and amortization

 

42,227

 

 

 

3,456

 

 

 

21,002

 

 

 

(4,578

)

 

 

62,107

 

General and administrative

 

8,598

 

 

 

5,699

 

 

 

777

 

 

 

(6,001

)

 

 

9,073

 

Operating leases

 

27,648

 

 

 

1,378

 

 

 

3,303

 

 

 

 

 

 

32,329

 

 

 

136,903

 

 

 

61,128

 

 

 

38,017

 

 

 

(73,773

)

 

 

162,275

 

Operating earnings

 

77,325

 

 

 

6,386

 

 

 

36,466

 

 

 

(790

)

 

 

119,387

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and

     amortization of deferred

     financing fees

 

37,416

 

 

 

2,153

 

 

 

17,853

 

 

 

(156

)

 

 

57,266

 

Interest income

 

(353

)

 

 

(73

)

 

 

(69

)

 

 

 

 

 

(495

)

Undrawn credit facility fees

 

84

 

 

 

 

 

 

 

 

 

 

 

 

84

 

Change in fair value of financial instruments

 

(5,510

)

 

 

10

 

 

 

(427

)

 

 

 

 

 

(5,927

)

Equity income on investment

 

(22,405

)

 

 

(19,102

)

 

 

 

 

 

41,507

 

 

 

 

Other expense

 

80

 

 

 

270

 

 

 

96

 

 

 

 

 

 

446

 

 

 

9,312

 

 

 

(16,742

)

 

 

17,453

 

 

 

41,351

 

 

 

51,374

 

Net earnings (loss)

$

68,013

 

 

$

23,128

 

 

$

19,013

 

 

$

(42,141

)

 

$

68,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

Three months ended June 30, 2017

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue

$

195,439

 

 

$

66,526

 

 

$

11,541

 

 

$

(68,897

)

 

$

204,609

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ship operating

 

59,418

 

 

 

45,544

 

 

 

2,758

 

 

 

(62,897

)

 

 

44,823

 

Depreciation and amortization

 

43,039

 

 

 

3,249

 

 

 

3,510

 

 

 

 

 

 

49,798

 

General and administrative

 

9,445

 

 

 

3,976

 

 

 

65

 

 

 

(6,000

)

 

 

7,486

 

Operating leases

 

23,823

 

 

 

1,264

 

 

 

3,061

 

 

 

 

 

 

28,148

 

Expenses related to customer bankruptcy

 

72

 

 

 

 

 

 

(72

)

 

 

 

 

 

 

 

 

135,797

 

 

 

54,033

 

 

 

9,322

 

 

 

(68,897

)

 

 

130,255

 

Operating earnings

 

59,642

 

 

 

12,493

 

 

 

2,219

 

 

 

 

 

 

74,354

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and amortization of deferred financing fees

 

23,568

 

 

 

1,947

 

 

 

2,746

 

 

 

 

 

 

28,261

 

Interest income

 

(1,121

)

 

 

(72

)

 

 

 

 

 

 

 

 

(1,193

)

Undrawn credit facility fees

 

635

 

 

 

 

 

 

 

 

 

 

 

 

635

 

Change in fair value of financial instruments

 

13,398

 

 

 

212

 

 

 

 

 

 

 

 

 

13,610

 

Equity income (loss) on investment

 

(11,372

)

 

 

(3,285

)

 

 

 

 

 

13,015

 

 

 

(1,642

)

Other expense

 

6,250

 

 

 

149

 

 

 

 

 

 

 

 

 

6,399

 

 

 

31,358

 

 

 

(1,049

)

 

 

2,746

 

 

 

13,015

 

 

 

46,070

 

Net earnings (loss)

$

28,284

 

 

$

13,542

 

 

$

(527

)

 

$

(13,015

)

 

$

28,284

 

 

 

 

Three months ended June 30, 2018

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Net earnings (loss)

 

68,013

 

 

 

23,128

 

 

 

19,013

 

 

 

(42,141

)

 

 

68,013

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified to net

   earnings during the year

   relating to cash flow hedging

   instruments

 

276

 

 

 

 

 

 

 

 

 

 

 

 

276

 

Comprehensive income (loss)

 

68,289

 

 

 

23,128

 

 

 

19,013

 

 

 

(42,141

)

 

 

68,289

 

 

31


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

Three months ended June 30, 2017

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Net earnings (loss)

 

28,284

 

 

 

13,542

 

 

 

(527

)

 

 

(13,015

)

 

 

28,284

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified to net

   earnings during the year relating

   to cash flow hedging instruments

 

662

 

 

 

 

 

 

 

 

 

 

 

 

662

 

Comprehensive income (loss)

 

28,946

 

 

 

13,542

 

 

 

(527

)

 

 

(13,015

)

 

 

28,946

 

 

32


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Cash provided from (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

$

135,729

 

 

$

36,914

 

 

$

20,777

 

 

$

(57,691

)

 

$

135,729

 

Items not involving cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

86,928

 

 

 

7,062

 

 

 

26,619

 

 

 

(4,577

)

 

 

116,032

 

Share-based compensation

 

1,550

 

 

 

 

 

 

 

 

 

 

 

 

1,550

 

Amortization of deferred financing fees, debt discount and fair value of long-term debt

 

8,592

 

 

 

 

 

 

1,229

 

 

 

(1,264

)

 

 

8,557

 

Amounts reclassified from other

   comprehensive loss to interest expense

 

174

 

 

 

 

 

 

 

 

 

 

 

 

174

 

Unrealized change in fair value of financial

   instruments

 

(46,306

)

 

 

 

 

 

(2,603

)

 

 

 

 

 

(48,909

)

Acquisition related gain on contract settlement

 

 

 

 

(2,430

)

 

 

 

 

 

 

 

 

(2,430

)

Operating leases

 

(11,809

)

 

 

 

 

 

 

 

 

 

 

 

(11,809

)

Equity income on investment

 

(34,508

)

 

 

(23,760

)

 

 

 

 

 

57,052

 

 

 

(1,216

)

Amortization of acquired revenue contracts

 

7,359

 

 

 

 

 

 

 

 

 

 

 

 

7,359

 

Other

 

6

 

 

 

5

 

 

 

 

 

 

 

 

 

11

 

Change in non-cash operating working capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(16,915

)

 

 

(19,494

)

 

 

997

 

 

 

37,279

 

 

 

1,867

 

Lease receivable

 

21,918

 

 

 

 

 

 

 

 

 

 

 

 

21,918

 

Prepaid expenses and other

 

7,223

 

 

 

(975

)

 

 

(3,051

)

 

 

4,850

 

 

 

8,047

 

Other assets and deferred charges

 

(8,239

)

 

 

 

 

 

 

 

 

 

 

 

(8,239

)

Accounts payable and accrued liabilities

 

23,506

 

 

 

(32,935

)

 

 

2,084

 

 

 

(6,742

)

 

 

(14,087

)

Deferred revenue

 

(28,236

)

 

 

4,459

 

 

 

(67

)

 

 

(6,148

)

 

 

(29,992

)

Fair value of financial instruments

 

 

 

 

 

 

 

1,991

 

 

 

 

 

 

1,991

 

Other long-term liabilities

 

(3,801

)

 

 

 

 

 

(5,213

)

 

 

5,213

 

 

 

(3,801

)

Intercompany accounts payable and accounts receivable

 

2,409

 

 

 

17,126

 

 

 

(4,776

)

 

 

(14,759

)

 

 

 

Cash from (used in) operating activities

 

145,580

 

 

 

(14,028

)

 

 

37,987

 

 

 

13,213

 

 

 

182,752

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fairfax notes and warrants issued

 

250,000

 

 

 

 

 

 

 

 

 

 

 

 

250,000

 

Draws on credit facilities

 

205,600

 

 

 

 

 

 

120,000

 

 

 

 

 

 

325,600

 

Repayment of credit facilities

 

(89,040

)

 

 

 

 

 

(45,704

)

 

 

 

 

 

(134,744

)

Draws on long-term obligations under capital lease

 

46,964

 

 

 

 

 

 

 

 

 

 

 

 

46,964

 

Repayment on long-term obligations under capital lease

 

(14,597

)

 

 

(8,710

)

 

 

 

 

 

 

 

 

(23,307

)

Financing fees

 

(7,720

)

 

 

380

 

 

 

(5,443

)

 

 

(332

)

 

 

(13,115

)

Dividends on common shares

 

(18,809

)

 

 

 

 

 

 

 

 

 

 

 

(18,809

)

Dividends on preferred shares

 

(34,960

)

 

 

 

 

 

 

 

 

 

 

 

(34,960

)

Advances from related parties

 

3,801

 

 

 

2,430

 

 

 

15,224

 

 

 

(21,455

)

 

 

 

Cash from (used in) financing activities

 

341,239

 

 

 

(5,900

)

 

 

84,077

 

 

 

(21,787

)

 

 

397,629

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for vessels

 

(142,690

)

 

 

(19,415

)

 

 

(137,910

)

 

 

(998

)

 

 

(301,013

)

Short-term investments

 

 

 

 

104

 

 

 

(2,400

)

 

 

 

 

 

(2,296

)

Other assets

 

(5,562

)

 

 

 

 

 

8,273

 

 

 

 

 

 

2,711

 

Loans to affiliate

 

(427

)

 

 

 

 

 

 

 

 

 

 

 

(427

)

Acquisition of GCI

 

(333,581

)

 

 

 

 

 

 

 

 

 

 

 

(333,581

)

Cash acquired from GCI acquisition

 

 

 

 

 

 

 

70,121

 

 

 

 

 

 

70,121

 

Advances to related parties

 

(377

)

 

 

(257

)

 

 

(8,938

)

 

 

9,572

 

 

 

 

Cash used in investing activities

 

(482,637

)

 

 

(19,568

)

 

 

(70,854

)

 

 

8,574

 

 

 

(564,485

)

Increase (decrease) in cash and cash equivalents

 

4,182

 

 

 

(39,496

)

 

 

51,210

 

 

 

 

 

 

15,896

 

Cash and cash equivalents, beginning of period

 

146,328

 

 

 

85,601

 

 

 

35,307

 

 

 

 

 

 

267,236

 

Cash and cash equivalents, end of period

$

150,510

 

 

$

46,105

 

 

$

86,517

 

 

$

 

 

$

283,132

 

 

33


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

Six months ended June 30, 2017

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-guarantors

 

 

Eliminations

 

 

Consolidated

 

Cash from (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

68,307

 

 

$

23,731

 

 

$

(3,089

)

 

$

(20,642

)

 

$

68,307

 

Items not involving cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

86,237

 

 

 

6,529

 

 

 

6,978

 

 

 

 

 

 

99,744

 

Share-based compensation

 

 

3,870

 

 

 

 

 

 

 

 

 

 

 

 

3,870

 

Amortization of deferred financing fees

 

 

6,213

 

 

 

 

 

 

 

 

 

 

 

 

6,213

 

Amounts reclassified from other

   comprehensive loss to interest expense

 

 

1,680

 

 

 

 

 

 

 

 

 

 

 

 

1,680

 

Unrealized change in fair value of financial

   instruments

 

 

(13,240

)

 

 

55

 

 

 

 

 

 

 

 

 

(13,185

)

Equity income on investment

 

 

(17,245

)

 

 

(5,927

)

 

 

 

 

 

20,643

 

 

 

(2,529

)

Operating leases

 

 

(10,767

)

 

 

 

 

 

 

 

 

 

 

 

(10,767

)

Other

 

 

6,239

 

 

 

285

 

 

 

 

 

 

(57

)

 

 

6,467

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,976

)

 

 

(16,522

)

 

 

(346

)

 

 

33,049

 

 

 

9,205

 

Prepaid expenses and other

 

 

(1,857

)

 

 

(5,470

)

 

 

1,016

 

 

 

(29

)

 

 

(6,340

)

Other assets and deferred charges

 

 

(603

)

 

 

35

 

 

 

(968

)

 

 

-

 

 

 

(1,536

)

Accounts payable and accrued liabilities

 

 

14,003

 

 

 

13,237

 

 

 

(471

)

 

 

(33,050

)

 

 

(6,281

)

Deferred revenue

 

 

(13,031

)

 

 

(6

)

 

 

(47

)

 

 

28

 

 

 

(13,056

)

Fair value of financial instruments

 

 

(2,575

)

 

 

 

 

 

 

 

 

 

 

 

(2,575

)

Intercompany accounts payable and receivable

 

 

5,837

 

 

 

4,235

 

 

 

(12,022

)

 

 

1,950

 

 

 

 

Cash from (used in) operating activities

 

 

126,092

 

 

 

20,182

 

 

 

(8,949

)

 

 

1,892

 

 

 

139,217

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares issued, net of issuance costs

 

 

57,266

 

 

 

 

 

 

 

 

 

 

 

 

57,266

 

Repayment of credit facilities

 

 

(162,559

)

 

 

 

 

 

(8,598

)

 

 

 

 

 

(171,157

)

Repayment of long-term obligations under capital lease

 

 

(4,722

)

 

 

(8,151

)

 

 

 

 

 

-

 

 

 

(12,873

)

Senior unsecured notes repurchased, including related

   expenses

 

 

(3,122

)

 

 

 

 

 

 

 

 

 

 

 

(3,122

)

Net proceeds from sale-leaseback of vessel

 

 

90,753

 

 

 

 

 

 

 

 

 

 

 

 

90,753

 

Financing fees

 

 

(3,150

)

 

 

429

 

 

 

407

 

 

 

 

 

 

(2,314

)

Dividends on common shares

 

 

(45,711

)

 

 

(1,950

)

 

 

 

 

 

1,950

 

 

 

(45,711

)

Dividends on preferred shares

 

 

(32,208

)

 

 

 

 

 

 

 

 

 

 

 

(32,208

)

Advances from related parties

 

 

 

 

 

6,628

 

 

 

20,272

 

 

 

(26,900

)

 

 

 

Cash from (used in) financing activities

 

 

(103,453

)

 

 

(3,044

)

 

 

12,081

 

 

 

(24,950

)

 

 

(119,366

)

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for vessels

 

 

(87,765

)

 

 

(6,590

)

 

 

(2,006

)

 

 

 

 

 

(96,361

)

Short-term investments

 

 

 

 

 

308

 

 

 

 

 

 

 

 

 

308

 

Loans to affiliate

 

 

(1,585

)

 

 

 

 

 

 

 

 

 

 

 

(1,585

)

Repayment of loans to affiliate

 

 

24,011

 

 

 

(2,778

)

 

 

 

 

 

 

 

 

21,233

 

Other assets

 

 

549

 

 

 

(700

)

 

 

137

 

 

 

58

 

 

 

44

 

Dividends received from subsidiary

 

 

1,950

 

 

 

 

 

 

 

 

 

(1,950

)

 

 

 

Capital contribution in subsidiary

 

 

(24,950

)

 

 

 

 

 

 

 

 

24,950

 

 

 

 

Cash from (used in) investing activities

 

 

(87,790

)

 

 

(9,760

)

 

 

(1,869

)

 

 

23,058

 

 

 

(76,361

)

Increase (decrease) in cash and cash equivalents

 

 

(65,151

)

 

 

7,378

 

 

 

1,263

 

 

 

 

 

 

(56,510

)

Cash, cash equivalents and restricted cash, beginning of

   period

 

 

287,301

 

 

 

66,533

 

 

 

28,126

 

 

 

 

 

 

381,960

 

Cash, cash equivalents and restricted cash, end of period

 

$

222,150

 

 

$

73,911

 

 

$

29,389

 

 

$

 

 

$

325,450

 

 

34


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

Three months ended June 30, 2018

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-guarantors

 

 

Eliminations

 

 

Consolidated

 

Cash from (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

68,013

 

 

$

23,132

 

 

$

19,014

 

 

$

(42,146

)

 

$

68,013

 

Items not involving cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

42,226

 

 

 

3,455

 

 

 

21,002

 

 

 

(4,576

)

 

 

62,107

 

Share-based compensation

 

 

923

 

 

 

 

 

 

 

 

 

 

 

 

923

 

Interest expense and amortization of deferred financing fees and warrants

 

 

4,513

 

 

 

 

 

 

1,229

 

 

 

(1,264

)

 

 

4,478

 

Amounts reclassified from other

   comprehensive loss to interest expense

 

 

86

 

 

 

 

 

 

 

 

 

 

 

 

86

 

Unrealized change in fair value of financial instruments

 

 

(15,617

)

 

 

 

 

 

(2,693

)

 

 

 

 

 

(18,310

)

Acquisition -related gain on contract settlement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

(5,907

)

 

 

 

 

 

557

 

 

 

 

 

 

(5,350

)

Equity income on investment

 

 

(22,405

)

 

 

(19,102

)

 

 

 

 

 

41,507

 

 

 

 

Amortization of acquired revenue contracts

 

 

6,250

 

 

 

 

 

 

 

 

 

 

 

 

6,250

 

Other

 

 

(13,997

)

 

 

(4

)

 

 

 

 

 

13,997

 

 

 

(4

)

Change in non-cash operating working capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(28,070

)

 

 

(6,665

)

 

 

(586

)

 

 

33,183

 

 

 

(2,138

)

Gross investment in lease

 

 

11,056

 

 

 

 

 

 

 

 

 

 

 

 

11,056

 

Prepaid expenses and other

 

 

(4,602

)

 

 

11,310

 

 

 

(3,278

)

 

 

3,644

 

 

 

7,074

 

Other assets and deferred charges

 

 

(531

)

 

 

 

 

 

 

 

 

 

 

 

(531

)

Accounts payable and accrued liabilities

 

 

6,173

 

 

 

(7,997

)

 

 

8,734

 

 

 

(18,698

)

 

 

(11,788

)

Deferred revenue

 

 

(7,785

)

 

 

2,441

 

 

 

921

 

 

 

(2,441

)

 

 

(6,864

)

Fair value of financial instruments

 

 

 

 

 

 

 

 

1,991

 

 

 

 

 

 

1,991

 

Other Long-term liabilities

 

 

(3,801

)

 

 

 

 

 

(5,213

)

 

 

5,213

 

 

 

(3,801

)

Intercompany accounts payable and accounts receivable

 

 

22,280

 

 

 

(3,758

)

 

 

(3,761

)

 

 

(14,761

)

 

 

 

Cash from operating activities

 

 

58,805

 

 

 

2,812

 

 

 

37,917

 

 

 

13,658

 

 

 

113,192

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayment of credit facilities

 

 

(45,973

)

 

 

 

 

 

(25,192

)

 

 

 

 

 

(71,165

)

Draws on credit facilities

 

 

105,600

 

 

 

 

 

 

120,000

 

 

 

 

 

 

225,600

 

Repayment on long-term obligations under capital lease

 

 

32,367

 

 

 

(44,631

)

 

 

 

 

 

 

 

 

(12,264

)

Financing fees

 

 

(2,232

)

 

 

195

 

 

 

(5,615

)

 

 

(331

)

 

 

(7,983

)

Dividends on common shares

 

 

(9,484

)

 

 

 

 

 

 

 

 

 

 

 

(9,484

)

Dividends on preferred shares

 

 

(18,394

)

 

 

 

 

 

 

 

 

 

 

 

(18,394

)

Advances from related parties

 

 

(38,143

)

 

 

2,430

 

 

 

14,194

 

 

 

21,519

 

 

 

 

Cash from (used in) financing activities

 

 

23,741

 

 

 

(42,006

)

 

 

103,387

 

 

 

21,188

 

 

 

106,310

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for vessels

 

 

(141,030

)

 

 

(265

)

 

 

(137,910

)

 

 

(1,902

)

 

 

(281,107

)

Short-term investments

 

 

 

 

 

 

 

 

(2,400

)

 

 

 

 

 

(2,400

)

Other assets

 

 

(6,291

)

 

 

 

 

 

6,211

 

 

 

 

 

 

(80

)

Loans to affiliate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of GCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances to related parties

 

 

(377

)

 

 

42,258

 

 

 

(8,937

)

 

 

(32,944

)

 

 

 

Cash used in investing activities

 

 

(147,698

)

 

 

41,993

 

 

 

(143,036

)

 

 

(34,846

)

 

 

(283,587

)

Increase (decrease) in cash and cash equivalents

 

 

(65,152

)

 

 

2,799

 

 

 

(1,732

)

 

 

 

 

 

(64,085

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

215,662

 

 

 

43,306

 

 

 

88,249

 

 

 

 

 

 

347,217

 

Cash, cash equivalents and restricted cash, end of period

 

$

150,510

 

 

$

46,105

 

 

$

86,517

 

 

$

 

 

 

$

283,132

 

 

35


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

18.      Guarantor financial information (continued):

 

 

 

Three months ended June 30, 2017

 

 

 

Parent Issuer

 

 

Guarantors

 

 

Non-guarantors

 

 

Eliminations

 

 

Consolidated

 

Cash from (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

28,284

 

 

$

13,542

 

 

$

(527

)

 

$

(13,015

)

 

$

28,284

 

Items not involving cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

43,039

 

 

 

3,249

 

 

 

3,510

 

 

 

 

 

 

49,798

 

Share-based compensation

 

 

1,989

 

 

 

 

 

 

 

 

 

 

 

 

1,989

 

Amortization of deferred financing fees

 

 

3,185

 

 

 

 

 

 

 

 

 

 

 

 

3,185

 

Amounts reclassified from other

   comprehensive loss to interest expense

 

 

401

 

 

 

 

 

 

 

 

 

 

 

 

401

 

Unrealized change in fair value of financial instruments

 

 

(1,037

)

 

 

 

 

 

 

 

 

 

 

 

(1,037

)

Equity income on investment

 

 

(11,372

)

 

 

(3,285

)

 

 

 

 

 

13,015

 

 

 

(1,642

)

Operating leases

 

 

(5,500

)

 

 

 

 

 

 

 

 

 

 

 

(5,500

)

Other

 

 

6,249

 

 

 

125

 

 

 

 

 

 

15

 

 

 

6,389

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,162

)

 

 

(8,007

)

 

 

122

 

 

 

15,739

 

 

 

3,692

 

Prepaid expenses

 

 

(5,598

)

 

 

6,722

 

 

 

337

 

 

 

(19

)

 

 

1,442

 

Other assets and deferred charges

 

 

1,261

 

 

 

 

 

 

(967

)

 

 

 

 

 

294

 

Accounts payable and accrued liabilities

 

 

5,589

 

 

 

(1,235

)

 

 

(570

)

 

 

(15,739

)

 

 

(11,955

)

Deferred revenue

 

 

(11,732

)

 

 

5

 

 

 

(47

)

 

 

17

 

 

 

(11,757

)

Fair value of financial instruments

 

 

(1,284

)

 

 

 

 

 

 

 

 

 

 

 

(1,284

)

Intercompany accounts payable and receivable

 

 

(4,963

)

 

 

(1,021

)

 

 

4,984

 

 

 

1,000

 

 

 

 

Cash from operating activities

 

 

44,349

 

 

 

10,095

 

 

 

6,842

 

 

 

1,013

 

 

 

62,299

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares issued, net of issuance costs

 

 

33,362

 

 

 

 

 

 

 

 

 

 

 

 

33,362

 

Repayment of credit facilities

 

 

(71,261

)

 

 

 

 

 

(4,366

)

 

 

 

 

 

(75,627

)

Repayment of long-term obligations under capital lease

 

 

(2,389

)

 

 

(4,119

)

 

 

 

 

 

 

 

 

(6,508

)

Senior unsecured notes repurchased, including related expenses

 

 

(2,665

)

 

 

 

 

 

 

 

 

 

 

 

(2,665

)

Proceeds on sale from vessel

 

 

90,753

 

 

 

 

 

 

 

 

 

 

 

 

90,753

 

Financing fees

 

 

(2,733

)

 

 

212

 

 

 

207

 

 

 

 

 

 

(2,314

)

Dividends on common shares

 

 

(6,433

)

 

 

(1,000

)

 

 

 

 

 

1,000

 

 

 

(6,433

)

Dividends on preferred shares

 

 

(16,103

)

 

 

 

 

 

 

 

 

 

 

 

(16,103

)

Advances from related parties

 

 

 

 

 

3,850

 

 

 

 

 

 

(3,850

)

 

 

 

Cash from (used in) financing activities

 

 

22,531

 

 

 

(1,057

)

 

 

(4,159

)

 

 

(2,850

)

 

 

14,465

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditures for vessels

 

 

(83,797

)

 

 

313

 

 

 

(969

)

 

 

 

 

 

(84,453

)

Loans to affiliate

 

 

(790

)

 

 

 

 

 

 

 

 

 

 

 

(790

)

Repayment of loans to affiliate

 

 

18,068

 

 

 

 

 

 

 

 

 

 

 

 

18,068

 

Other assets

 

 

4,185

 

 

 

(4,435

)

 

 

209

 

 

 

(12

)

 

 

(53

)

Dividends received from subsidiary

 

 

1,000

 

 

 

 

 

 

 

 

 

(1,000

)

 

 

 

Capital contribution in subsidiary

 

 

(2,849

)

 

 

 

 

 

 

 

 

2,849

 

 

 

 

Cash from (used in) investing activities

 

 

(64,183

)

 

 

(4,122

)

 

 

(760

)

 

 

1,837

 

 

 

(67,228

)

Increase (decrease) in cash and cash equivalents

 

 

2,697

 

 

 

4,916

 

 

 

1,923

 

 

 

 

 

 

9,536

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

219,453

 

 

 

68,994

 

 

 

27,467

 

 

 

 

 

 

315,914

 

Cash, cash equivalents and restricted cash, end of period

 

$

222,150

 

 

$

73,910

 

 

$

29,390

 

 

$

 

 

$

325,450

 

 


 

36


SEASPAN CORPORATION

Notes to Interim Consolidated Financial Statements

For the three and six months ended June 30, 2018 and 2017

(Unaudited)

(Tabular amounts in thousands of United States dollars, except per share amount and number of shares)

 

 

19.      Subsequent events:

 

(a)

On July 16, 2018, Fairfax exercised 38,461,539 warrants at an exercise price of $6.50 per share.  The Company also issued Fairfax warrants to acquire 25,000,000 Class A common shares at an exercise price of $8.05 per share and amended the terms of the debentures issued in February 2018 to allow Fairfax to call for an early redemption of some or all of the debentures on each anniversary date of issuance.

 

 

(b)

On July 23, 2018, the Company redeemed all of its outstanding Series F preferred shares for $140,000,000 plus accrued dividends of $3,430,000.

 

 

(c)

On July 30, 2018, the Company paid quarterly dividends of $0.496875, $0.515625, $0.512500 and $0.492188 per Series D, Series E, Series G and Series H preferred share, respectively, representing a total distribution of $14,719,000 to all shareholders of record on July 27, 2018.

 

 

(d)

On July 30, 2018, the Company paid a quarterly dividend of $0.125 per common share to all shareholders of record as of July 10, 2018.

 

 

 

 

 

 

 

 

 

37


 

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

We are a leading independent charter owner and manager of containerships, which we charter primarily pursuant to long-term, fixed-rate time charters with major container liner companies. As of June 30, 2018, we operated a fleet of 112 containerships. As of June 30, 2018, the average age of the 112 vessels in our operating fleet was approximately five years, on a TEU-weighted basis.

We primarily deploy our vessels on long-term, fixed-rate time charters to take advantage of the stable cash flow and high utilization rates that are typically associated with long-term time charters. As of June 30, 2018, the charters on the 112 vessels in our operating fleet had an average remaining term of approximately five years, on a TEU-weighted basis, excluding the effect of any charterers’ options to extend certain time charters.

Customers for our operating fleet as at June 30, 2018 were as follows:

 

 

Customers for Current Fleet

 

 

ANL

 

 

APL

 

 

CMA CGM

 

 

CNC

 

 

COSCON

 

 

COSCO Europe

 

 

COSCO Mercury

 

 

COSCO New Golden Sea

 

 

CSCL Asia

 

 

Hapag-Lloyd

 

 

K-Line

 

 

Maersk

MCC

 

 

MSC

 

 

MOL

 

 

Yang Ming Marine

 

 

 

 

Our primary objective is to continue to grow our business through accretive vessel acquisitions as market conditions allow. Please read “Our Fleet” for more information about our vessels and time-charter contracts. Most of our customers’ containership business revenues are derived from the shipment of goods from the Asia Pacific region, primarily China, to various overseas export markets in the United States and in Europe.

 

38


 

Significant Developments

Vessel Acquisitions and Deliveries

In January 2018, we accepted delivery of MSC Yashi B, an 11000 TEU vessel. This vessel was constructed at HHIC – PHIL Inc. and commenced a 17-year fixed-rate bareboat charter with MSC. Upon completion of the bareboat charter period, MSC is obligated to purchase the vessels for a pre-determined amount.

In February 2018, we purchased two second-hand 2006-built geared 2500 TEU vessels and entered into fixed-rate time charters with Maersk.  The time charters are for a term of four years with options to extend up to an additional two years at increasing charter rates.

In May 2018, we accepted delivery of four 10000 TEU vessels, the CMA CGM Mundra, CMA CGM Cochin, CMA CGM Mumbai, and CMA CGM Chennai. These vessels were constructed at New Jiangsu and Jiangsu Xinfu. Upon delivery, each vessel commenced a three-year fixed rate time charter with CMA CGM with an option to extend for up to an additional three years.

Fairfax Investment

On February 14, 2018, we issued to affiliates of Fairfax Financial Holdings Limited (collectively, “Fairfax”), in a private placement for an aggregate purchase price of $250.0 million, an aggregate principal amount of our 5.50% interest bearing, debentures due 2025 (the “Fairfax Notes”), and 38,461,539 warrants, each exercisable for one share of our Class A common shares at an exercise price of $6.50 per share. Each warrant is exercisable within seven years. We can elect to require early exercise of the warrants, at any time after February 14, 2022, if the volume weighted average price of our common shares, averaged over a 20-day period, equals or exceeds twice the exercise price of the Fairfax warrants at that time. For additional information about this private placement, please read our Reports on Form 6-K furnished to the SEC on February 15, 2018 and February 22, 2018.

On March 13, 2018, we entered into a subscription agreement with Fairfax pursuant to which we will sell and Fairfax will purchase $250.0 million aggregate principal of 5.50% interest bearing debentures and warrants to purchase 38,461,539 Class A common shares of the Company at an exercise price of $6.50 per share for an aggregate purchase price of $250,000,000 (the “Second Fairfax Investment”). The Second Fairfax Investment is expected to close in January 2019, subject to customary closing conditions.

In May 2018, Fairfax entered into agreements to invest an additional $500.0 million of equity in Seaspan.  The agreements provide that on July 16, 2018, the date the agreements are expected to close, Fairfax will exercise all of the warrants issued to Fairfax on February 14, 2018, to acquire approximately 38.5 million Class A common shares at an exercise price of $6.50 per share. In addition, Fairfax agreed that in January 2019, it will immediately exercise all of the warrants that are issued to Fairfax in connection with the closing of the Second Fairfax Investment. Upon exercise of the warrants in January 2019, Fairfax will acquire approximately 38.5 million Class A common shares at an exercise price of $6.50 per share, for a total equity investment of $500.0 million

In consideration for Fairfax exercising these warrants in advance of their seven year terms, 2025 and 2026 expirations, Seaspan will issue Fairfax seven year warrants to acquire 25.0 million Class A common shares at an exercise price of $8.05 per share and amend the terms of the debentures that were issued on February 14, 2018 and are expected to be issued January 2019 to allow Fairfax to call for early redemption of some or all of those debentures on each respective anniversary date of issuance to the respective seven year maturity date.

Upon the full exercise of both tranches of warrants and the January 2019 subscription for $250.0 million of debentures, Fairfax’s total investment in Seaspan will increase to $1.0 billion, consisting of $500.0 million of Class A common shares and $500.0 million in debentures.

Acquisition of GCI

On March 13, 2018, we acquired the remaining 89.2% that we did not own of Greater China Intermodal Investments LLC (“GCI”) from affiliates of The Carlyle Group and the minority owners of GCI. GCI’s fleet of 18 modern containerships, including two newbuilding containerships, is comprised of 10000 TEU and 14000 TEU eco-class vessels. For additional information about the acquisition please read our Report on Form 6-K furnished to the SEC, on March 14, 2018.


 

39


 

The aggregate purchase price of $498.1 million includes the following:

 

Cash

 

$

331,904

 

1,986,449 of the Company's Series D preferred shares

 

 

47,158

 

2,514,996 of the Company's Class A common shares

 

 

13,908

 

Settlement of intercompany balances

 

 

41,279

 

Carrying value of previously held equity interest

 

 

61,891

 

Transaction fees

 

 

1,910

 

Aggregate purchase price

 

$

498,050

 

 

Debt Financing

In March 2018, we closed and drew on a secured credit facility for $100.0 million at an interest rate of LIBOR plus a margin. The facility is secured by 11 previously unencumbered vessels currently owned by us.

Vessel Financing

In April 2018, we entered into a secured term loan facility for up to $120.0 million to finance the CMA CGM Chennai and CMA CGM Cochin, and drew on that facility in May 2018 for the full $120.0 million on the respective delivery dates of those vessels.

Dividends

On June 28, 2018, our board of directors declared the following quarterly cash dividends on our common and preferred shares for a total distribution of $31.9 million on July 30, 2018.

 

Security

 

Ticker

 

Dividend per Share

 

 

Period

 

Record Date

 

Payment Date

Class A common shares

 

SSW

 

$

0.125

 

 

April 1, 2018 to

June 30, 2018

 

July 10, 2018

 

July 30, 2018

Series D preferred shares

 

SSW PR D

 

$

0.496875

 

 

April 30, 2018 to

July 29, 2018

 

July 27, 2018

 

July 30, 2018

Series E preferred shares

 

SSW PR E

 

$

0.515625

 

 

April 30, 2018 to

July 29, 2018

 

July 27, 2018

 

July 30, 2018

Series F preferred shares(1)

 

 

$

0.656250

 

 

April 30, 2018 to

July 29, 2018

 

July 27, 2018

 

July 30, 2018

Series G preferred shares

 

SSW PR G

 

$

0.512500

 

 

April 30, 2018 to

July 29, 2018

 

July 27, 2018

 

July 30, 2018

Series H preferred shares

 

SSW PR H

 

$

0.492188

 

 

April 30, 2018 to

July 29, 2018

 

July 27, 2018

 

July 30, 2018

_____________________

(1)

On July 23, 2018, we redeemed all of our outstanding 10.5% Series F preferred shares for $140.0 million plus $3.4 million of accrued dividends

 

Washington Family Participation in Dividend Reinvestment Plan

 

Following the additional investments from Fairfax, which do not participate in the dividend reinvestment plan in respect of its equity holdings, the Board of Directors offered the Washington family the option to discontinue its participation in such plan. After considering this proposal, the Washington family members and their various affiliated entities, who hold shares in us, informed the Board of the Directors that they intend to cease participation in the our dividend reinvestment plan after the second quarter dividend payment date of July 30, 2018.

 

Purchase of Class A Common Shares

 

In June 2018, David Sokol, chairman of the Board of Directors, purchased 375,057 Class A common shares in the open market at an average price of $8.50 per share, bringing his total shareholdings to 3,387,121 Class A common shares at June 30, 2018.  

 

40


 

Change in Senior Management  

In April 2018, David Spivak, our Chief Financial Officer (“CFO”), gave notice that he was exercising his right to terminate his employment with us effective June 29, 2018 to pursue other opportunities. Mr. Spivak remained CFO until May 5, 2018, after which Mr. Ryan Courson was appointed CFO.  Mr. Spivak continued with us as Special Advisor to the President and Chief Executive Officer until the end of June 2018.

In April 2018, Mark Chu, our Chief Operating Officer, General Counsel and Corporate Secretary gave notice that he plans to terminate employment with us effective August 31, 2018 to pursue other opportunities. Mr. Chu will remain in his current roles until successors are appointed, and will continue with us through to the end of August to help facilitate a seamless transition.

Amendment to Restated and Amended Articles of Incorporation

At our April 27, 2018 annual general meeting shareholders approved a resolution to amend our articles of incorporation to increase the number of authorized Class A common shares from 200,000,000 to 400,000,000, with corresponding increases in the number of authorized common shares from 225,000,100 to 425,000,100 and in the number of authorized shares of capital stock from 375,000,100 to 575,000,100.

Amendment to Bylaws

On February 22, 2018, our Board of Directors approved an amendment to Section 4.2 of our bylaws to revise the structure of the standing committees of the Board of Directors, such amendment to be effective April 27, 2018 (the “Bylaw Amendment”).  Pursuant to the Bylaw Amendment, the Board of Directors shall have the following standing committees: Audit Committee, Compensation and Governance Committee and Executive Committee.

Recent Developments

Fairfax Investments

On July 16, 2018, in accordance with the agreement signed May 31, 2018, Fairfax exercised 38.5 million warrants at an exercise price of $6.50 per share resulting in us receiving $250.0 million in proceeds. Also in accordance with the May 2018 agreement, we issued Fairfax warrants to acquire 25.0 million Class A common shares at an exercise price of $8.05 per share and the terms of the debentures issued in February 2018 and to be issued in January 2019 were amended to allow Fairfax to call for an early redemption of some or all of the debentures on each anniversary date of issuance. As the right to put the debentures is solely within the control of Fairfax, the outstanding debentures will be reclassified from long-term liabilities to current liabilities as of July 16, 2018.  Upon funding of the additional debentures and exercise of the additional warrants upon closing in January 2019, the additional debentures will also be classified as a current liability.

  Redemption of Series F Preferred Shares

On July 23, 2018, we redeemed all of our outstanding 10.5% Series F preferred shares for $140.0 million plus $3.4 million of accrued dividends.

Controls and Procedures

During the preparation of the interim financial statements for the quarter ended June 30, 2018, the Company’s management identified a material weakness in our internal controls over financial reporting relating to the timely recording of dividends declared and approved by our Board of Directors, which resulted in a $35.6 million understatement of current liabilities and deficit in our earnings press release dated August 1, 2018 (the “Earnings Release”).  A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

The control deficiency did not result in a misstatement of our previously issued annual or quarterly consolidated financial statements, or of other unrelated financial information contained in the Earnings Release.  The dividend accrual has been correctly recorded in our June 30, 2018 financial statements presented in this Form 6-K, and in the corrected earnings press release dated August 6, 2018.

 

41


 

Management is committed to remediating the identified material weakness in a timely manner, with appropriate oversight from our Audit Committee.  Management has immediately initiated compensating controls, is assessing the root cause and will be enhancing and revising the design of existing controls and procedures to ensure dividend transactions are recorded on a timely basis and reported accurately in our published financial statements and earnings press releases.  The identified material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that remediation of this material weakness will be completed prior to the end of fiscal year 2018.

Except as noted above, there has been no change in the Company's internal control over financial reporting as of August 6, 2018, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

 

42


 

Our Fleet

Our Current Fleet

The following table summarizes key facts regarding our 112 operating vessels as of June 30, 2018:

 

Vessel Name

 

Vessel Class

(TEU)

 

Year

Built

 

Charter

Period

Start Date

 

Charterer

 

Length of Charter

 

Daily Charter Rate

 

YM Wish

 

14000

 

2015

 

04/07/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

$46.8

 

YM Wellhead

 

14000

 

2015

 

04/22/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Winner(1)

 

14000

 

2015

 

06/10/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Witness

 

14000

 

2015

 

07/03/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Wellness(1)

 

14000

 

2015

 

08/21/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Warmth(1)

 

14000

 

2015

 

10/16/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Window(1)

 

14000

 

2016

 

05/08/2016

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.5

 

YM Width(1)

 

14000

 

2016

 

05/29/2016

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.5

 

YM Wind(1)

 

14000

 

2017

 

06/02/2017

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.5

 

YM World

 

14000

 

2015

 

04/13/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Wondrous

 

14000

 

2015

 

05/26/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Wholesome

 

14000

 

2015

 

07/23/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Worth

 

14000

 

2015

 

09/17/2015

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.8

 

YM Welcome

 

14000

 

2016

 

08/16/2016

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.5

 

YM Wreath

 

14000

 

2017

 

06/30/2017

 

Yang Ming Marine

 

10 years + one 2-year option

 

46.5

 

MSC Shuba B(1)

 

11000

 

2017

 

08/23/2017

 

MSC

 

17 years

 

24.3

 

MSC Shreya B(1)

 

11000

 

2017

 

09/20/2017

 

MSC

 

17 years

 

24.3

 

MSC Nitya B(1)

 

11000

 

2017

 

09/28/2017

 

MSC

 

17 years

 

24.3

 

MSC Madhu B(1)

 

11000

 

2017

 

12/11/2017

 

MSC

 

17 years

 

24.3

 

MSC Yashi B(1)

 

11000

 

2018

 

01/04/2018

 

MSC

 

17 years

 

24.3

 

COSCO Glory

 

13100

 

2011

 

06/10/2011

 

COSCON

 

12 years

 

55.0

 

COSCO Pride(1)

 

13100

 

2011

 

06/29/2011

 

COSCON

 

12 years

 

55.0

 

COSCO Development

 

13100

 

2011

 

08/10/2011

 

COSCON

 

12 years

 

55.0

 

COSCO Harmony

 

13100

 

2011

 

08/19/2011

 

COSCON

 

12 years

 

55.0

 

COSCO Excellence

 

13100

 

2012

 

03/08/2012

 

COSCON

 

12 years

 

55.0

 

COSCO Faith(1)

 

13100

 

2012

 

03/14/2012

 

COSCON

 

12 years

 

55.0

 

COSCO Hope

 

13100

 

2012

 

04/19/2012

 

COSCON

 

12 years

 

55.0

 

COSCO Fortune

 

13100

 

2012

 

04/29/2012

 

COSCON

 

12 years

 

55.0

 

Seaspan Ganges

 

10000

 

2014

 

03/28/2017

 

Hapag-Lloyd

 

Minimum 22 months and up to two years(2)

 

Market rate

(3)

Seaspan Yangtze

 

10000

 

2014

 

04/11/2017

 

Hapag-Lloyd

 

Minimum 22 months and up to two years(2)

 

Market rate

(3)

Seaspan Zambezi

 

10000

 

2014

 

03/26/2017

 

Hapag-Lloyd

 

Minimum 22 months and up to two years(2)

 

Market rate

(3)

MOL Bravo(1)

 

10000

 

2014

 

07/18/2014

 

MOL

 

8 years + one 2-year option

 

37.5

(4)

MOL Brightness(1)

 

10000

 

2014

 

10/31/2014

 

MOL

 

8 years + one 2-year option

 

37.5

(4)

MOL Breeze(1)

 

10000

 

2014

 

11/14/2014

 

MOL

 

8 years + one 2-year option

 

37.5

(4)

MOL Beacon(1)

 

10000

 

2015

 

04/10/2015

 

MOL

 

8 years + one 2-year option

 

37.5

(4)

MOL Benefactor(1)

 

10000

 

2016

 

03/28/2016

 

MOL

 

8 years + one 2-year option

 

37.5

(4)

 

43


 

MOL Beyond(1)

 

10000

 

2016

 

04/29/2016

 

MOL

 

8 years + one 2-year option

 

37.5

(4)

Maersk Guayaquil

 

10000

 

2015

 

09/21/2015

 

Maersk

 

5 years + two 1-year options

 

37.2

(5)

Maersk Genoa(1)

 

10000

 

2016

 

09/12/2016

 

Maersk

 

5 years + two 1-year options

 

37.2

(5)

Seaspan Thames

 

10000

 

2014

 

04/03/2017

 

Hapag-Lloyd

 

Minimum 22 months and up to two years(2)

 

Market rate

(3)

Seaspan Amazon

 

10000

 

2014

 

04/12/2017

 

Hapag-Lloyd

 

Minimum 22 months and up to two years(2)

 

Market rate

(3)

Seaspan Hudson

 

10000

 

2015

 

03/31/2018

 

Yang Ming Marine

 

2 years + one 1-year option

 

Market rate

(3)

CMA CGM Tuticorin

 

10000

 

2015

 

06/28/2018

 

CMA CGM

 

3 years + option for up to 3 years

 

29.0

 

MOL Brilliance

 

10000

 

2014

 

10/17/2014

 

MOL

 

8 years + one 2-year option

 

37.5

 

MOL Belief

 

10000

 

2015

 

07/03/2015

 

MOL

 

8 years + one 2-year option

 

37.5

 

MOL Beauty

 

10000

 

2015

 

05/01/2015

 

MOL

 

8 years + one 2-year option

 

37.5

 

MOL Bellwether

 

10000

 

2015

 

07/23/2015

 

MOL

 

8 years + one 2-year option

 

37.5

 

Maersk Guatemala

 

10000

 

2015

 

09/03/2015

 

Maersk

 

5 years + two 1-year options

 

37.2

 

Maersk Gibraltar

 

10000

 

2016

 

11/26/2016

 

Maersk

 

5 years + two 1-year options

 

37.2

 

CMA CGM Mundra

 

10000

 

2018

 

05/12/2018

 

CMA CGM

 

3 years + option for up to 3 years

 

29.0

(6)

CMA CGM Cochin

 

10000

 

2018

 

05/14/2018

 

CMA CGM

 

3 years + option for up to 3 years

 

29.0

(6)

CMA CGM Mumbai

 

10000

 

2018

 

05/21/2018

 

CMA CGM

 

3 years + option for up to 3 years

 

29.0

(6)

CMA CGM Chennai

 

10000

 

2018

 

05/28/2018

 

CMA CGM

 

3 years + option for up to 3 years

 

29.0

(6)

CSCL Zeebrugge

 

9600

 

2007

 

03/15/2007

 

CSCL Asia

 

12 years

 

34.5

(7)

CSCL Long Beach

 

9600

 

2007

 

07/06/2007

 

CSCL Asia

 

12 years

 

34.5

(7)

Seaspan Oceania

 

8500

 

2004

 

12/04/2017

 

MSC

 

Minimum 10 months and up to 23 months

 

Market rate

(3)

CSCL Africa

 

8500

 

2005

 

02/25/2018

 

COSCO Mercury

 

Minimum 12 months and up to 14 months

 

Market rate

(3)

COSCO Japan

 

8500

 

2010

 

03/09/2010

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

COSCO Korea

 

8500

 

2010

 

04/05/2010

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

COSCO Philippines

 

8500

 

2010

 

04/24/2010

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

COSCO Malaysia

 

8500

 

2010

 

05/19/2010

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

COSCO Indonesia

 

8500

 

2010

 

07/05/2010

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

COSCO Thailand

 

8500

 

2010

 

10/20/2010

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

COSCO Prince Rupert

 

8500

 

2011

 

03/21/2011

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

COSCO Vietnam

 

8500

 

2011

 

04/21/2011

 

COSCON

 

12 years + three 1-year options

 

42.9

(8)

MOL Emerald

 

5100

 

2009

 

04/30/2009

 

MOL

 

12 years

 

28.9

 

MOL Eminence

 

5100

 

2009

 

08/31/2009

 

MOL

 

12 years

 

28.9

 

MOL Emissary

 

5100

 

2009

 

11/20/2009

 

MOL

 

12 years

 

28.9

 

MOL Empire

 

5100

 

2010

 

01/08/2010

 

MOL

 

12 years

 

28.9

 

Brotonne Bridge(1)

 

4500

 

2010

 

10/25/2010

 

K-Line

 

12 years + two 3-year options

 

34.5

(9)

Brevik Bridge(1)

 

4500

 

2011

 

01/25/2011

 

K-Line

 

12 years + two 3-year options

 

34.5

(9)

Bilbao Bridge(1)

 

4500

 

2011

 

01/28/2011

 

K-Line

 

12 years + two 3-year options

 

34.5

(9)

Berlin Bridge

 

4500

 

2011

 

05/09/2011

 

K-Line

 

12 years + two 3-year options

 

34.5

(9)

Budapest Bridge

 

4500

 

2011

 

08/01/2011

 

K-Line

 

12 years + two 3-year options

 

34.5

(9)

Seaspan Chiwan

 

4250

 

2001

 

12/15/2017

 

CNC

 

Minimum six months and up to eight months

 

Market rate

(3)

Seaspan Hamburg

 

4250

 

2001

 

05/30/2018

 

COSCO New Golden Sea

 

Four months

 

Market rate

(3)

Seaspan Ningbo

 

4250

 

2002

 

01/14/2018

 

COSCO New Golden Sea

 

Minimum three months and up to six months

 

Market rate

(3)

Seaspan Dalian

 

4250

 

2002

 

11/22/2017

 

ANL

 

Minimum four months and up to 12 months

 

Market rate

(3)

Seaspan Felixstowe

 

4250

 

2002

 

05/07/2018

 

COSCO Mercury

 

Five months

 

Market rate

(3)

Seaspan Vancouver

 

4250

 

2005

 

11/24/2017

 

APL

 

Minimum three months and up to 11 months

 

Market rate

(3)

CSCL Sydney

 

4250

 

2005

 

12/26/2017

 

COSCO Mercury

 

Minimum three months and up to seven months

 

Market rate

(3)

CSCL New York

 

4250

 

2005

 

01/28/2018

 

COSCO Mercury

 

Minimum five months and up to nine months

 

Market rate

(3)

CSCL Melbourne

 

4250

 

2005

 

06/18/2018

 

COSCO New Golden Sea

 

Three months

 

Market rate

(3)

CSCL Brisbane

 

4250

 

2005

 

07/18/2017

 

COSCO Mercury

 

Minimum 10 months and up to 12 months

 

Market rate

(3)

 

44


 

Seaspan New Delhi

 

4250

 

2005

 

01/09/2018

 

COSCO New Golden Sea

 

Minimum three months and up to six months

 

Market rate

(3)

Seaspan Dubai(13)

 

4250

 

2006

 

 

 

 

 

Seaspan Jakarta

 

4250

 

2006

 

06/15/2018

 

COSCO Europe

 

Three months

 

Market rate

(3)

Seaspan Saigon

 

4250

 

2006

 

02/01/2018

 

Hapag-Lloyd

 

Minimum six months and up to 9.5 months

 

Market rate

(3)

Seaspan Lahore

 

4250

 

2006

 

08/08/2017

 

MSC

 

Minimum 11 months and up to 13 months

 

Market rate

(3)

Rio Grande Express

 

4250

 

2006

 

02/01/2018

 

Hapag-Lloyd

 

Minimum six months and up to 9.5 months

 

Market rate

(3)

Seaspan Santos

 

4250

 

2006

 

05/25/2018

 

CNC

 

Minimum 10 months and up to 13 months

 

Market rate

(3)

Seaspan Rio de Janeiro

 

4250

 

2007

 

03/17/2018

 

Maersk

 

Minimum five months and up to seven months

 

Market rate

(3)

Seaspan Manila

 

4250

 

2007

 

02/01/2018

 

MCC

 

Minimum three months and up to six months

 

Market rate

(3)

Seaspan Loncomilla(10)

 

4250

 

2009

 

 

 

 

 

Seaspan Lumaco

 

4250

 

2009

 

02/14/2018

 

CMA CGM

 

Minimum six months and up to nine months

 

Market rate

(3)

Seaspan Lingue

 

4250

 

2010

 

01/05/2018

 

CMA CGM

 

Minimum seven months and up to 10 months

 

Market rate

(3)

Seaspan Lebu

 

4250

 

2010

 

01/12/2018

 

CMA CGM

 

Minimum three months and up to six months

 

Market rate

(3)

Seaspan Fraser(1)

 

4250

 

2009

 

03/16/2018

 

CNC

 

Minimum five months and up to six months

 

Market rate

(3)

COSCO Fuzhou

 

3500

 

2007

 

03/27/2007

 

COSCON

 

12 years

 

19.0

 

COSCO Yingkou

 

3500

 

2007

 

07/05/2007

 

COSCON

 

12 years

 

19.0

 

CSCL Panama

 

2500

 

2008

 

05/14/2008

 

CSCL Asia

 

12 years

 

16.9

(11)

CSCL São Paulo

 

2500

 

2008

 

08/11/2008

 

CSCL Asia

 

12 years

 

16.9

(11)

CSCL Montevideo

 

2500

 

2008

 

09/06/2008

 

CSCL Asia

 

12 years

 

16.9

(11)

CSCL Lima

 

2500

 

2008

 

10/15/2008

 

CSCL Asia

 

12 years

 

16.9

(11)

CSCL Santiago

 

2500

 

2008

 

11/08/2008

 

CSCL Asia

 

12 years

 

16.9

(11)

CSCL San Jose

 

2500

 

2008

 

12/01/2008

 

CSCL Asia

 

12 years

 

16.9

(11)

CSCL Callao

 

2500

 

2009

 

04/10/2009

 

CSCL Asia

 

12 years

 

16.9

(11)

CSCL Manzanillo

 

2500

 

2009

 

09/21/2009

 

CSCL Asia

 

12 years

 

16.9

(11)

Guayaquil Bridge

 

2500

 

2010

 

03/08/2010

 

K-Line

 

10 years

 

17.9

 

Calicanto Bridge

 

2500

 

2010

 

05/30/2010

 

K-Line

 

10 years

 

17.9

 

Frisia Hannover

 

2500

 

2006

 

02/05/2018

 

Maersk

 

4 years + option for up to 2 years

 

8.8

(12)

Frisia Loga

 

2500

 

2006

 

02/22/2018

 

Maersk

 

4 years + option for up to 2 years

 

8.8

(12)

_____________________

(1)

This vessel is leased pursuant to a lease agreement, which we used to finance the acquisition of the vessel.

(2)

Hapag-Lloyd extended their initial charter for an additional period for a minimum of 10 months up to a maximum of 12 months.

(3)

Given that the term of the charter is less than three years (excluding any charterers’ option to extend the term), this vessel is being chartered at current market rates.

(4)

MOL has an initial charter of eight years with a charter rate of $37,500 per day for the initial term and $43,000 per day during the two-year option.

(5)

Maersk has an initial charter of five years with a charter rate of $37,150 per day for the initial term, $39,250 per day for the first one-year option and $41,250 per day for the second one-year option.

(6)

CMA CGM has an initial charter of three years with a charter rate of $29,000 per day for the initial term. The charter rate increases for the option period and the rate depends on the duration of the option period.

(7)

CSCL Asia has a charter of 12 years with a charter rate of $34,000 per day for the first six years, increasing to $34,500 per day for the second six years.

(8)

COSCON has an initial charter of 12 years with a charter rate of $42,900 per day for the initial term and $43,400 per day for the three one-year options.

 

45


 

(9)

K-Line has an initial charter of 12 years with a charter rate of $34,250 per day for the first six years, increasing to $34,500 per day for the second six years, $37,500 per day for the first three-year option period and $42,500 per day for the second three-year option period.

(10)

This vessel commenced a short-term charter with CMA CGM in July 2018 at market rates for a minimum of 12 months up to a maximum of 13 months, where the exact period is at CMA CGM’s option.

(11)

CSCL Asia has a charter of 12 years with a charter rate of $16,750 per day for the first six years, increasing to $16,900 per day for the second six years.

(12)

Maersk has an initial charter of four years with a charter rate of $8,800 per day for the first three years and increasing to $9,500 per day for the fourth year and $10,650 per day for the two year option period.

(13)

This vessel commenced a short-term charter with VASI in July 2018 at market rates for a minimum of 40 days up to a maximum of 45 days, where the exact period is at VASI’s option.

The following table indicates the estimated number of owned, leased and managed vessels in our fleet as of June 30, 2018:

 

 

 

Quarter Ended

 

 

 

June 30, 2018

 

Owned and leased vessels, beginning of year

 

 

89

 

Deliveries

 

 

7

 

Acquired(1)

 

 

16

 

Total Fleet

 

 

112

 

Total Capacity (TEU)

 

 

905,900

 

____________________

 

(1)

Our acquisition of GCI on March 13, 2018 included 16 operating vessels and two vessels under construction, which were delivered in May 2018.

 

Three and Six Months Ended June 30, 2018 Compared with Three and Six Months Ended June 30, 2017

The following is a discussion of our financial condition and results of operations for the three and six months ended June 30, 2018. The following provides information about our fleet as of June 30, 2018:

 

Number of vessels in operation

 

 

112

 

Average age of fleet (TEU-weighted basis)

 

5 Years

 

TEU capacity

 

 

905,900

 

Average remaining initial term on outstanding charters (TEU-weighted basis)

 

5 Years

 

 

Our consolidated financial results for the three and six months ended June 30, 2018 and 2017 are summarized below:

 

Financial Summary

(in millions of US dollars)

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

281.7

 

 

$

204.6

 

 

$

506.4

 

 

$

405.9

 

Ship operating expense

 

 

58.8

 

 

 

44.8

 

 

 

108.3

 

 

 

90.4

 

Depreciation and amortization expense

 

 

62.1

 

 

 

49.8

 

 

 

116.0

 

 

 

99.7

 

General and administrative expense

 

 

9.1

 

 

 

7.5

 

 

 

16.3

 

 

 

15.0

 

Operating lease expense

 

 

32.3

 

 

 

28.1

 

 

 

63.5

 

 

 

54.7

 

Interest expense and amortization of deferred

    financing fees

 

 

57.3

 

 

 

28.3

 

 

 

96.2

 

 

 

56.7

 

Change in fair value of financial

   instruments

 

 

(5.9

)

 

 

13.6

 

 

 

(25.2

)

 

 

17.0

 

 

Ownership Days, Operating Days and Vessel Utilization

 

46


 

 

Ownership days are the number of days a vessel is owned and available for charter. Operating days are the number of days a vessel is available to the charterer for use.

 

The primary driver of ownership days are the increases or decreases in number of vessels we own, while the drivers of operating days are the ownership days and the number of days the vessels are off-hire. Ownership and operating days for the three and six months ended June 30, 2018 and 2017 were as follows:  

 

 

 

Three Months Ended

June 30,

 

 

Increase

 

 

Six Months Ended

June 30,

 

 

Increase

 

 

 

2018

 

 

2017

 

 

Days

 

 

%

 

 

2018

 

 

2017

 

 

Days

 

 

%

 

Ownership days(1)

 

 

9,546

 

 

 

8,037

 

 

 

1,509

 

 

 

18.8

%

 

 

17,576

 

 

 

15,954

 

 

 

1,622

 

 

 

10.2

%

Operating days(1)

 

 

9,409

 

 

 

7,895

 

 

 

1,514

 

 

 

19.2

%

 

 

17,186

 

 

 

15,150

 

 

 

2,036

 

 

 

13.4

%

____________________

 

(1)

Ownership and operating days include leased vessels and exclude vessels under bareboat charter.

 

Ownership days increased by 1,509 days primarily due to the addition of 16 vessels acquired through the GCI acquisition, which contributed 1,456 days. The remainder of the increase was due to 2018 vessel deliveries and acquisitions and partially offset by vessel disposals.

 

Vessel utilization represents the number of days a vessel is used (operating days) as a percentage of the total days a vessel is available for charter (ownership days).

 

The following table summarizes our vessel utilization by quarter and for the six months ended June 30, 2018 and 2017:

 

 

 

First Quarter

 

 

Second Quarter

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Vessel utilization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ownership Days(1)

 

 

8,030

 

 

 

7,917

 

 

 

9,546

 

 

 

8,037

 

 

 

17,576

 

 

 

15,954

 

Less Off-hire Days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled Off-hire

 

 

(104

)

 

 

 

 

 

 

 

 

 

 

 

(104

)

 

 

 

Unscheduled Off-hire(2)

 

 

(149

)

 

 

(662

)

 

 

(137

)

 

 

(142

)

 

 

(286

)

 

 

(804

)

Operating Days(1)

 

 

7,777

 

 

 

7,255

 

 

 

9,409

 

 

 

7,895

 

 

 

17,186

 

 

 

15,150

 

Vessel Utilization

 

 

96.8

%

 

 

91.6

%

 

 

98.6

%

 

 

98.2

%

 

 

97.8

%

 

 

95.0

%

____________________

 

(1)

Operating and ownership days include leased vessels and exclude vessels under bareboat charter.

 

(2)

Unscheduled off-hire includes days related to vessels being off-charter.

Vessel utilization increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to higher utilization of vessels acquired from GCI and the 2018 deliveries and acquisitions. The increase in utilization for the six months ended June 30, 2018 was also due to a decrease in off-charter days. During the six months ended June 30, 2018, we completed dry-dockings for five 2500 TEU vessels, one 3500 TEU vessel and one 4250 TEU vessel, one of which occurred while the vessel was off-charter.

Revenue

Revenue increased by 37.7% to $281.7 million and by 24.8% to $506.4 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The increases in revenue were primarily due to the additional operating days from the vessel deliveries and acquisition of vessels from the GCI transaction.

The increase in operating days and the related financial impact thereof for the three and six months ended June 30, 2018, relative to the same periods in 2017, is attributable to the following:

 

47


 

 

 

 

Three Months Ended

June 30, 2018

 

 

Six Months Ended

June 30, 2018

 

 

 

Ownership Day Impact

 

 

Operating

Days Impact

 

 

$ Impact

(in millions of US dollars)

 

 

Ownership Day Impact

 

 

Operating

Days Impact

 

 

$ Impact

(in millions of US dollars)

 

Addition of 16 vessels from acquisition of GCI

 

 

1,456

 

 

 

1,456

 

 

$

52.8

 

 

 

1,744

 

 

 

1,744

 

 

$

62.6

 

2018 vessel deliveries and acquisitions

 

 

355

 

 

 

355

 

 

 

6.6

 

 

 

447

 

 

 

447

 

 

 

7.4

 

Full period contribution for 2017 vessel delivery

 

 

62

 

 

 

62

 

 

 

2.8

 

 

 

152

 

 

 

152

 

 

 

6.9

 

Changes in daily charter hire rates and re-charters

 

 

 

 

 

 

 

 

7.9

 

 

 

 

 

 

 

 

 

7.3

 

Unscheduled off-hire

 

 

 

 

 

5

 

 

 

1.3

 

 

 

 

 

 

518

 

 

 

5.5

 

Scheduled off-hire

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(104

)

 

 

(1.8

)

Vessel disposals

 

 

(364

)

 

 

(364

)

 

 

(1.6

)

 

 

(721

)

 

 

(721

)

 

 

(2.0

)

Interest income from leasing

 

 

 

 

 

 

 

 

8.9

 

 

 

 

 

 

 

 

 

17.6

 

Other

 

 

 

 

 

 

 

 

(1.6

)

 

 

 

 

 

 

 

 

(3.0

)

Total

 

 

1,509

 

 

 

1,514

 

 

$

77.1

 

 

 

1,622

 

 

 

2,036

 

 

$

100.5

 

 

Ship Operating Expense

Ship operating expense increased by 31.1% to $58.8 million and by 19.8% to $108.3 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The increases were primarily due to an increase in ownership days from the increase in the number of vessels in our fleet, higher bulk purchasing of vessel stores and spare parts, and an increase in planned maintenance required for certain vessels less than 8500 TEU in size.

Depreciation and Amortization Expense

Depreciation and amortization expense increased by 24.7% to $62.1 million and by 16.3% to $116.0 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017.  The increases were primarily due to an increase in ownership days from the increase in the number of vessels in our fleet.

General and Administrative Expense

General and administrative expense increased by 21.2% to $9.1 million and by 9.2% to $16.3 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The increases were primarily due to transition payments to the former CFO, and additional general and administrative expense related to the acquisition of GCI, partially offset by a decrease in stock-based compensation related to the former chief executive officer.

Operating Lease Expense

Operating lease expense increased by 14.9% to $32.3 million and 16.2% to $63.5 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The increases were primarily due to an increase in LIBOR and the delivery of one vessel in 2017 that was financed through a sale-leaseback transaction.

Interest Expense and Amortization of Deferred Financing Fees

The following table summarizes our borrowings:

 

(in millions of US dollars)

 

June 30,

 

 

 

2018

 

 

2017

 

Long-term debt, excluding deferred financing fees

 

$

3,871.4

 

 

$

2,675.9

 

Long-term obligations under capital lease, excluding deferred

    financing fees

 

 

672.5

 

 

 

485.9

 

Total borrowings

 

 

4,543.9

 

 

 

3,161.8

 

Less: Vessels under construction

 

 

 

 

 

(278.2

)

Operating borrowings

 

$

4,543.9

 

 

$

2,883.6

 

 

48


 

Interest expense and amortization of deferred financing fees increased by $29.0 million and $39.5 million to $57.3 million and $96.2 million for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The increases were primarily due to the debt assumed as part of the acquisition of GCI, an increase in operating debt for delivered vessels, the issuance of the debentures to Fairfax and an increase in LIBOR.

Change in Fair Value of Financial Instruments

The change in fair value of financial instruments resulted in a gain of $5.9 million and $25.2 million for the three and six months ended June 30, 2018, respectively. The gains for these periods were primarily due to the impact of swap settlements and increase in the forward LIBOR curve.

The fair value of interest rate swaps is subject to change based on our company-specific credit risk and that of the counterparty included in the discount factor and the interest rate implied by the current swap curve, including its relative steepness. In determining the fair value, these factors are based on current information available to us. These factors are expected to change through the life of the instruments, causing the fair value to fluctuate significantly due to the large notional amounts and long-term nature of our derivative instruments. As these factors may change, the fair value of the instruments is an estimate and may deviate significantly from the actual cash settlements realized during the term of the instruments. Our valuation techniques have not changed and remain consistent with those followed by other valuation practitioners.

The fair value of our interest rate swaps is most significantly impacted by changes in the yield curve. Based on the current notional amount and tenor of our interest rate swap portfolio, a one percent parallel shift in the overall yield curve would be expected to result in a change in the fair value of our interest rate swaps by approximately $43.0 million. Actual changes in the yield curve are not expected to occur equally at all points and changes to the curve may be isolated to periods of time. This steepening or flattening of the yield curve may result in greater or lesser changes to the fair value of our financial instruments in a particular period than would occur had the entire yield curve changed equally at all points.

The fair value of our interest rate swaps is also impacted by changes in our company-specific credit risk included in the discount factor. We discount our derivative instruments with reference to publicly-traded bond yields for our comparator group in the shipping industry and composite Bloomberg industry yield curves. Based on the current notional amount and tenor of our swap portfolio, a one percent change in the discount factor is expected to result in a change in the fair value of our interest rate swaps of approximately $3.0 million.

All of our interest rate swap agreements were marked-to-market with all changes in the fair value of these instruments recorded in “Change in fair value of financial instruments” in the Statement of Operations.

Please read “Item 11. Quantitative and Qualitative Disclosures About Market Risk” in our 2017 Annual Report for additional information.

Liquidity and Capital Resources

Working Capital

At June 30, 2018, we have a working capital deficiency of $532.6 million which includes $337.9 million of senior unsecured notes maturing in April 2019. The working capital deficiency may increase in future periods.  In order to alleviate this deficiency, we will rely, in part, upon the continued financial support of Fairfax, which includes not exercising the debenture put right and the successful closing of the agreements described below. We also expect to further address this working capital deficiency through cash generated from operations and additional sources of funds in the capital markets to the extent available.

On February 14, 2018 and March 13, 2018, we and Fairfax entered into agreements for a total $500.0 million investment in debentures, $250.0 million in each agreement, and warrants to purchase a total of 76,923,078 of our Class A common shares, 38,461,539 in each agreement, for an aggregate total purchase price of $500.0 million. The March 13, 2018 agreement will be funded, and the warrants issued, in January 2019 subject to closing conditions.

 

49


 

On May 31, 2018, we and Fairfax entered into agreements to invest an additional $500.0 million of equity through the exercise of the warrants issued in February 2018 and the warrants to be issued in January 2019 under the March 13, 2018 agreement. On July 16, 2018, Fairfax exercised 38,461,539 warrants at an exercise price of $6.50 per share from its February 14, 2018 agreement. The gross proceeds of $250.0 million were partially used to redeem our outstanding Series F preferred shares. Under the terms of the May 31, 2018 agreement, upon closing in January 2019, Fairfax will immediately exercise all of the warrants that are issuable under the March 13, 2018 agreement.

The May 31, 2018 agreements which closed July 16, 2018 provide Fairfax with the right to put each of the February 14, 2018 and March 13, 2018 debentures on their applicable anniversary dates subject to submitting an annual put right notice commencing 150 days and ending 120 days prior to each applicable anniversary date. As the right to put the debentures is solely within the control of Fairfax, the February 14, 2018 debentures will be reclassified from long-term liabilities to current liabilities as of July 16, 2018.  Upon funding of the March 13, 2018 debentures and exercise of the March 13, 2018 warrants upon closing in January 2019, the debentures will also be classified as a current liability.

Liquidity

At June 30, 2018, our cash and cash equivalents and short-term investments totaled $271.5 million and our restricted cash totaled $14.1 million. Our primary short-term liquidity needs are to fund our operating expenses, debt repayments, lease payments, payment of our quarterly dividends, repayment of our 6.375% senior unsecured notes which mature in April 2019 (“2019 Notes”) and potential early redemption of the Fairfax Notes. Our medium-term liquidity needs primarily relate to debt repayments, lease payments, potential early redemption of the Fairfax Notes and the redemption of our puttable preferred shares. Our long-term liquidity needs primarily relate to potential future acquisitions, lease payments, debt repayments including repayment of our 7.125% senior unsecured notes due 2027 (“2027 Notes”) and the Fairfax Notes, and the future potential redemption of our preferred shares.

Our Series D preferred shares have an annual dividend rate of 7.95% per $25.00 of liquidation preference per share and our Series D preferred shares are redeemable by us at any time on or after January 30, 2018. Our Series E preferred shares have an annual dividend rate of 8.25% per $25.00 of liquidation preference per share and our Series E preferred shares are redeemable by us at any time on or after February 13, 2019. Our Series F preferred shares have an annual dividend rate of 10.5% per $25.00 of liquidation preference per share and were fully redeemed on July 23, 2018. Our Series G preferred shares have an annual dividend rate of 8.20% per $25.00 of liquidation preference per share and our Series G preferred shares are redeemable by us at any time on or after June 16, 2021. Our Series H preferred shares have an annual dividend rate of 7.875% per $25.00 of liquidation preference per share and our Series H preferred shares are redeemable by us at any time on or after August 11, 2021.

We anticipate that our primary sources of funds for our short-term liquidity needs will be cash, cash from operations, new credit facilities, proceeds from Fairfax’s exercise of the 38.5 million February 2018 warrants on July 16, 2018, proceeds from the issuance of $250.0 million aggregate principal of 5.50% interest bearing debentures to Fairfax and proceeds from Fairfax’s exercise of the 38.5 million January 2019 warrants, both of which are expected to occur in January 2019. We anticipate our medium and long-term sources of funds will be from cash from operations, new credit and lease facilities and capital markets financings.

 

50


 

The following table summarizes our long-term debt and lease obligations as of June 30, 2018:

 

(in millions of US dollars)

 

Amount

Outstanding(1)

 

 

Amount

Committed

 

 

Amount

Available

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facilities

 

$

821.5

 

 

$

821.5

 

 

$

 

Term loan credit facilities

 

 

2,457.7

 

 

 

2,457.7

 

 

 

 

Senior unsecured notes

 

 

417.9

 

 

 

417.9

 

 

 

 

Fairfax notes(2)

 

 

174.3

 

 

 

174.3

 

 

 

 

Total Long-Term Debt

 

$

3,871.4

 

 

$

3,871.4

 

 

$

 

Lease Facilities

 

 

 

 

 

 

 

 

 

 

 

 

COSCO Faith – 13100 TEU vessel (non-recourse to

   Seaspan Corporation)

 

 

62.4

 

 

 

62.4

 

 

 

 

COSCO Pride – 13100 TEU vessel (non-recourse to

   Seaspan Corporation)

 

 

96.6

 

 

 

96.6

 

 

 

 

Leases for three 4500 TEU vessels

 

 

119.2

 

 

 

119.2

 

 

 

 

Leases for five 11000 TEU vessels

 

 

394.3

 

 

 

394.3

 

 

 

 

Total Lease Facilities

 

 

672.5

 

 

 

672.5

 

 

 

 

Total Long-Term Debt and Lease Facilities

 

$

4,543.9

 

 

$

4,543.9

 

 

$

 

_____________________

 

(1)

Includes amounts owed by wholly-owned subsidiaries of Seaspan, a portion of which amounts are non-recourse to Seaspan.

 

(2)

On March 13, 2018, we and Fairfax entered into a subscription agreement where Fairfax agreed to purchase $250.0 million aggregate principal amount of 5.50% debentures and warrants to purchase 38,461,539 Class A common shares.  This transaction is expected to close in January 2019, subject to customary closing conditions.

Our Long-Term Debt

As of June 30, 2018, our revolving credit facilities, term loan credit facilities, our 2019 Notes, our 2027 Notes, and our Fairfax Notes provided for borrowings of up to approximately $3.9 billion, all of which was outstanding. We primarily use our credit facilities to finance the construction and acquisition of vessels.

Revolving Credit Facilities

In February 2018, we cancelled our $120.0 million 364-day, unsecured revolving loan facility which had not been drawn.

Interest payments on our revolving credit facilities are based on LIBOR plus margins, which ranged between 0.5% and 0.9% as of June 30, 2018.

Term Loan Credit Facilities

As part of the acquisition of GCI on March 13, 2018, we assumed long-term debt which was recorded at its fair value of $1.0 billion.  The assumed long-term debt consists primarily of 12 term loan credit facilities to finance the 16 operating vessels.  

In March 2018, we entered into a secured term loan facility for $100.0 million which bears interest at LIBOR plus a margin.  The facility is secured by 11 previously unencumbered vessels currently owned by us.

In April 2018, we entered into a secured term loan facility for up to $120.0 million to finance two 10000 TEU vessels which delivered in the second quarter of 2018.  The loan bears interest at LIBOR plus a margin.

Interest payments on our term loan credit facilities are based on either LIBOR plus margins, which ranged between 0.4% and 4.8% as of June 30, 2018.  For a portion of one of our term loans, interest is calculated based on the reference rate of KEXIM plus a margin, which was 0.7% as of June 30, 2018.  For one of our unsecured term loan facilities, interest is a fixed rate of 7.0%.

 

51


 

Waivers

For one of our term loan credit facilities, we initially obtained a waiver from the lender extending the grace period for securing acceptable replacement charters for two vessels to the fourth quarter of 2017. In September 2017, we received another waiver from the lender which extends the grace period for securing replacement charters to October 2020. If either of the vessels remains unemployed for a consecutive period of more than 90 days, then the waiver will be terminated.  For four GCI vessels financed by the same lender, a similar waiver was received by GCI.

For another one of our term loan credit facilities, we entered into a supplement to the loan agreement with the lender for one vessel, extending the grace period for securing an acceptable replacement charter for the vessel to the fourth quarter of 2018. In March 2018, we entered into another supplement to the loan agreement with the lender to remove the requirement to secure an acceptable replacement charter by the fourth quarter of 2018. In connection with this supplement to the loan agreement we prepaid $10.0 million of the loan balance in March 2018. The final maturity of this facility is December 2022.

General

As of June 30, 2018, our credit facilities are secured by first-priority mortgages granted on 76 of our vessels, together with other related security, such as assignments of shipbuilding contracts and refund guarantees for the vessels, assignments of time charters and earnings for the vessels, assignments of insurances for the vessels and assignments of management agreements for the vessels.

We may prepay certain amounts outstanding without penalty, other than breakage costs in certain circumstances. In certain circumstances a prepayment may be required as a result of certain events, including the sale or loss of a vessel, a termination or expiration of a charter (and the inability to enter into a charter suitable to lenders within a period of time).  The amount that must be prepaid may be calculated based on the loan to market value. In these circumstances, valuations of our vessels are conducted on a “without charter” basis as required under the credit facility agreement.

Each credit facility, other than credit facilities of GCI’s subsidiaries, contains financial covenants requiring us to maintain minimum liquidity, tangible net worth, interest coverage ratios, interest and principal coverage ratios, and debt-to-assets ratios, as defined. For GCI, each borrower under each facility is a special purpose entity and subsidiary of GCI.  Each facility is guaranteed by GCI and as the guarantor, GCI must meet certain consolidated financial covenants under these term loan facilities including maintaining certain minimum tangible net worth, cash requirements and debt to asset ratios.  Some of the facilities also have an interest and principal coverage ratio requirement for the subsidiary borrower. We were in compliance with these covenants at June 30, 2018.

Our Notes

Our 2019 Notes mature on April 30, 2019 and bear interest at a fixed rate of 6.375% per year, payable quarterly in arrears. Our 2027 Notes mature on October 30, 2027 and bear interest at a fixed rate of 7.125% per year, payable quarterly in arrears.  Our 2027 Notes are callable at par plus accrued and unpaid interest, if any, any time after October 10, 2020. Our Fairfax Notes, issued in February 2018, mature on February 14, 2025 and bear interest at a fixed rate of 5.50% per year, payable quarterly in arrears.  Our Fairfax Notes are guaranteed by certain of our subsidiaries.  In the event of certain changes in withholding taxes, at our option, we may redeem our 2019 Notes, 2027 Notes and/or our Fairfax Notes, in each case in whole, but not in part, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest, if any. Upon the occurrence of a Change of Control (as defined in the applicable Notes), each holder of such Notes will have the right to require the Company to purchase all or a portion of such holder’s Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to but excluding the date of purchase. On or after February 14, 2023, we may, at our option at any time, redeem all or any portion of the Fairfax Notes. The redemption price will equal 100% of the principal amount of the Fairfax Notes being redeemed, plus accrued and unpaid interest, if any, to the redemption date and any certain additional amounts.  

 

 

52


 

Our Lease Facilities

We use our lease facilities to finance the construction and acquisition of vessels. Our lease facilities, which do not include our operating leases, are provided by bank financial leasing owners who own our 10 leased vessels. These banks are also granted other related security, such as assignments of time charters and earnings for the vessels, assignments of insurances for the vessels and assignments of management agreements for the vessels.

As of June 30, 2018, our lease facilities provided for borrowings of approximately $672.5 million. Under our lease agreements, we may voluntarily terminate a lease agreement, subject to payment of a termination fee in certain circumstances. We are also required to prepay rental amounts, broken funding costs and other costs to the lessor in certain circumstances, such as a termination or expiry of a charter (where we do not enter into a charter suitable to the lessors within a required period of time). If we default under our lease facilities, our lessors could declare all outstanding amounts to be immediately due and payable and realize on the security granted under the lease facilities.

For additional information about our credit and lease facilities, including, among other things, a description of certain related covenants, please read “Item 5. Operating and Financial Review and Prospects—C. Liquidity and Capital Resources” in our 2017 Annual Report.

Cash Flows

The following table summarizes our sources and uses of cash for the periods presented:

 

(in thousands of US dollars)

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net cash flows from operating activities

 

$

113,192

 

 

$

62,299

 

 

$

182,752

 

 

$

139,217

 

Net cash flows from (used in) in financing activities

 

 

106,310

 

 

 

14,465

 

 

 

397,629

 

 

 

(119,366

)

Net cash flows used in investing activities

 

 

(283,587

)

 

 

(67,228

)

 

 

(564,485

)

 

 

(76,361

)

Operating Cash Flows

Net cash flows from operating activities were $113.2 million and $182.8 million, for the three and six months ended June 30, 2018, an increase of $50.9 million and $43.5 million, respectively, compared to the same periods in 2017. The increase in net cash flows from operating activities for the three and six months ended June 30, 2018, compared to the same periods in 2017, was primarily due to an increase in net earnings excluding non-cash items of $36.3 million and $45.2 million, respectively, and an increase in cash related to changes in working capital of $14.6 million and a decrease of $1.7 million, respectively. The changes in cash related to changes in working capital resulted primarily from non-cash timing differences, which are in the normal course of our operations. The increase in net earnings excluding non-cash items was primarily due to increases in revenue. For further discussion of changes in revenue, operating expenses and interest expense and amortization of deferred financing fees, please read “― Three and Six Months Ended June 30, 2018 Compared with the Three and Six Months Ended June 30, 2017”.

Financing Cash Flows

Net cash flows from financing activities were $106.3 million and $397.6 million for the three and six months ended June 30, 2018, an increase of $91.8 million and $517.0 million in cash from financing activities, respectively, compared to the same periods in 2017.

The increase in cash from financing activities for the three months ended June 30, 2018, compared to the same period of 2017, was primarily due to the proceeds received on the draws on credit facilities partially offset by a reduction in proceeds received from the issuance of common shares and a sale-leaseback financing.

The increase in cash from financing activities for the six months ended June 30, 2018, compared to the same period of 2017, was primarily due to the proceeds received from draws on credit facilities and long-term obligations under capital lease and the issuance of Fairfax notes and Fairfax warrants. These increases were partially offset by increases in financing fees, repayments made on long-term obligations under capital lease and lower cash dividends on our common shares as well as a reduction in proceeds received from the issuance of common shares and a sale-leaseback financing.

 

 

53


 

Investing Cash Flows

Net cash flows used in investing activities were $283.6 million and $564.5 million for the three and six months ended June 30, 2018, an increase of $216.4 million and $488.1 million in cash used, respectively, compared to the same periods in 2017.

The increases in cash from investing activities for the three and six months ended June 30, 2018 were primarily due to higher expenditures incurred for vessels. For the six months ended June 30, 2018, the increase was also due to the acquisition of GCI.

Ongoing Capital Expenditures and Dividends

Ongoing Capital Expenditures

The average age of the vessels in our operating fleet is approximately five years, on a TEU-weighted basis. Capital expenditures primarily relate to our regularly scheduled dry-dockings. During the six months ending June 30, 2018, we completed seven dry-dockings. For the remainder of 2018, we expect two additional vessels to undergo dry-docking.

We must make substantial capital expenditures over the long-term to preserve our capital base, which is comprised of our net assets, in order to continue to refinance our indebtedness and to maintain our dividends. We will likely need to retain additional funds at some time in the future to provide reasonable assurance of maintaining our capital base over the long-term. We believe it is not possible to determine now, with any reasonable degree of certainty, how much of our operating cash flow we should retain in our business and when it should be retained to preserve our capital base. Factors that will impact our decisions regarding the amount of funds to be retained in our business to preserve our capital base, include the following:

 

the remaining lives of our vessels;

 

the returns that we generate on our retained cash flow, which will depend on the economic terms of any future acquisitions and charters, which are currently unknown;

 

future market charter rates for our vessels, particularly when they come off-charter, which are currently unknown;

 

our future operating and interest costs;

 

future operating and financing costs, which are unknown, and our use of foreign currency contracts and interest rate swaps to manage certain currency and interest rate risks; 

 

our future refinancing requirements and alternatives and conditions in the relevant financing and capital markets at that time;

 

capital expenditures to comply with environmental regulations; and

 

unanticipated future events and other contingencies.

Please read “Item 3. Key Information – D. Risk Factors” in our 2017 Annual Report for factors that may affect our future capital expenditures and results.

 

54


 

Dividends

The following table reflects dividends paid or accrued by us for the periods indicated:

 

(in thousands of US dollars, except per share amounts)

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Dividends on Class A common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declared, per share

 

$

0.2500

 

 

$

0.1250

 

 

$

0.3750

 

 

$

0.5000

 

Paid in cash

 

 

9,484

 

 

 

6,433

 

 

 

18,809

 

 

 

45,711

 

Reinvested in common shares through a dividend reinvestment plan

 

 

7,520

 

 

 

7,265

 

 

 

14,685

 

 

 

7,682

 

Accrued

 

 

17,164

 

 

 

 

 

 

17,164

 

 

 

 

 

 

$

34,168

 

 

$

13,698

 

 

$

50,658

 

 

$

53,393

 

Dividends on preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in cash

 

$

18,395

 

 

$

16,103

 

 

$

34,960

 

 

$

32,208

 

Accrued

 

 

18,395

 

 

 

 

 

 

18,395

 

 

 

 

 

 

$

36,790

 

 

$

16,103

 

 

$

53,355

 

 

$

32,208

 

On June 28, 2018, the board of directors declared the cash dividends on our common and preferred shares as indicated above under “Significant Developments—Dividends”.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make estimates in the application of our accounting policies based on our best assumptions, judgments and opinions. Our estimates affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances. 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. For more information about our critical accounting estimates, please read “Item 5. Operating and Financial Review and Prospects—D. Critical Accounting Policies and Estimates” in our 2017 Annual Report.

Recent Accounting Developments

    Leases

In February 2016, the Financial Accounting Standards Board, or FASB,  issued Accounting Standards Update, or ASU, 2016-02, “Leases”, which requires lessees to recognize all leases, including operating leases, with a term greater than 12 months on the balance sheet, for the rights and obligations created by those leases.  The accounting for lessors will remain largely unchanged from the existing accounting standards.  The standard is effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years.  

Under ASU 2016-02, each lease agreement will be evaluated to identify the lease components and non-lease components at lease inception. The total consideration in the lease agreement will be allocated to the lease and non-lease components based on their relative standalone selling prices. Lessors will continue to recognize the lease revenue component using an approach that is substantially equivalent to existing guidance for operating leases (straight-line basis). Sale-type and direct financing leases will be accounted for as financing transactions with the lease payments being allocated to principal and interest utilizing the effective interest rate method.

 

55


 

In July 2018, the FASB issued ASU 2018-11, “Leases – Targeted Improvements” that allows lessors to elect, as a practical expedient, to not separate lease and non-lease components and allows these components to be accounted for as a single lease component if both (i) the timing and pattern of transfer to the lessee of the lease component and the related non-lease component are the same and (ii) the lease component, if accounted for separately, would be classified as an operating lease.  In addition, a company is permitted to use its effective date as the date of initial application.  Therefore, a company electing this option will not restate comparative period financial information, will not make the new required lease disclosures in comparative periods beginning before the effective date and will recognize its cumulative effect transition adjustment as of the effective date.  Under the practical expedient mentioned above, it is expected that time charter revenue and service revenue will be presented under a single lease component presentation. The amendments have the same effective date as ASU 2016-02.

The Company intends to adopt ASU 2016-02 on January 1, 2019 whereby a cumulative effect adjustment will be made as of that day with no retrospective effect.  The Company also intends to elect to apply the package of practical expedients such that for any expired or existing leases it will not reassess lease classification, initial direct costs or whether any expired or existing contracts are or contain leases.

The adoption of ASU 2016-02 will result in a change in the accounting method for the certain of the Company’s sale-leaseback transactions and office leases.  Under ASU 2016-02, the Company will recognize a right-of-use asset and a lease liability on the balance sheet for these sale-leaseback transactions and office leases based on the present value of the future minimum lease payments, whereas currently no right-of-use asset or lease liability is recognized.  The existing deferred gain related to the sale-leaseback transactions will be eliminated through a credit directly to retained earnings.  The impact on the Company’s consolidated financial statements will be an increase to its assets and liabilities.  The Company is currently determining the impact on its statement of operations.

The adoption of ASU 2016-02 will require the Company to complete its lease classification assessment at lease commencement rather than when a lease is entered into.  Historically, for charters that were negotiated concurrently with the construction of the related vessels, the fair value of the constructed asset was presumed to be its newbuilding cost. If such charters were classified as direct financing leases at the time the lease was entered into, no gain or loss was recognized subsequently on commencement of the charter.  On adoption of ASU 2016-02, the fair value of the vessel will be determined based on information available at the lease commencement date, rather than lease inception date, and any difference in the fair value of the vessel upon commencement of the charter and its carrying value will be recognized as a gain or loss upon commencement of the charter.

Off-Balance Sheet Arrangements

At June 30, 2018, we had no off-balance sheet arrangements that have or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

 

 

56


 

FORWARD-LOOKING STATEMENTS

This Report on Form 6-K for the quarter ended June 30, 2018, contains forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act) concerning our operations, cash flows, and financial position, including, in particular, the likelihood of our success in developing and expanding our business. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “projects,” “forecasts,” “will,” “may,” “potential,” “should” and similar expressions are forward‑looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this Report and are not intended to give any assurance as to future results. As a result, you are cautioned not to rely on any forward-looking statements. Forward-looking statements appear in a number of places in this Report. Although these statements are based upon assumptions we believe to be reasonable based upon available information, they are subject to risks and uncertainties. These risks and uncertainties include, but are not limited to:

 

future growth prospects and ability to expand our business;

 

our expectations as to impairments of our vessels, including the timing and amount of currently anticipated impairments;

 

the future valuation of our vessels and goodwill;

 

potential acquisitions, vessel financing arrangements and other investments, and our expected risks and benefits from such transactions;

 

future time charters and vessel deliveries, including future long-term charters for certain existing vessels;

 

estimated future capital expenditures needed to preserve the operating capacity of our fleet including, our capital base, and comply with regulatory standards, our expectations regarding future dry-docking and operating expenses, including ship operating expense and general and administrative expenses;

 

our expectations about the availability of vessels to purchase, the time that it may take to construct new vessels, the delivery dates of new vessels, the commencement of service of new vessels under long-term time charter contracts and the useful lives of our vessels;

 

availability of crew, number of off-hire days and dry-docking requirements;

 

general market conditions and shipping market trends, including charter rates, increased technological innovation in competing vessels and other factors affecting supply and demand;

 

our financial condition and liquidity, including our ability to borrow and repay funds under our credit facilities, to refinance our existing facilities and to obtain additional financing in the future to fund capital expenditures, acquisitions and other general corporate activities;

 

our continued ability to meet our current liabilities as they come due;

 

our ability to remediate any existing material weaknesses in our internal controls over financing reporting;

 

our continued ability to maintain, enter into or renew primarily long-term, fixed-rate time charters with our existing customers or new customers;

 

of long-term contracts and our potential inability to enter into, renew or replace long-term contracts;

 

the introduction of new accounting rules for leasing and exposure to currency exchange rates and interest rate fluctuations;

 

conditions inherent in the operation of ocean-going vessels, including acts of piracy;

 

acts of terrorism or government requisition our containership during periods of war or emergency;

 

adequacy of our insurance to cover losses that result from the inherent operational risks of the shipping industry;

 

lack of diversity in our operations and in the type of vessels in our fleet;

 

conditions in the public equity market and the price of our shares;

 

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our ability to leverage to our advantage our relationships and reputation in the containership industry;

 

compliance with and changes in governmental rules and regulations or actions taken by regulatory authorities, and the effect of governmental regulations on our business;

 

the financial condition of our customers, lenders, refund guarantors and other counterparties and their ability to perform their obligations under their agreements with us;

 

our continued ability to meet specified restrictive covenants and other conditions in our financing and lease arrangements, our Notes and our preferred shares;

 

any economic downturn in the global financial markets and export trade and increase in trade protectionism and potential negative effects of any recurrence of such disruptions on our customers’ ability to charter our vessels and pay for our services;

 

the recent departure of our former chief executive officer and former chief financial officer and the upcoming departure of our current general counsel, secretary and chief operating officer and the ability to retain key employees in the future;

 

some of our directors and investors may have separate interests which may conflict with those of our shareholders and they may be difficult to replace given the anti-takeover provisions in our organizational documents;

 

taxation of our Company and of distributions to our shareholders;

 

our exemption from tax on our U.S. source international transportation income;

 

the ability to bring claims in China and Marshall Island, where the legal systems are not well-developed;

 

potential liability from future litigation; and

 

other factors detailed in this Report and from time to time in our periodic reports.

Forward-looking statements in this Report are estimates and assumptions reflecting the judgment of senior management and involve known and unknown risks and uncertainties. These forward-looking statements 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. Accordingly, these forward-looking statements should be considered in light of various important factors listed above and including, but not limited to, those set forth in “Part II – Other Information – Item 1A – Risk Factors” and “Item 3. Key Information—D. Risk Factors” in our 2017 Annual Report.

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. We expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations, or otherwise. 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.

 

 

 

 

 


 

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ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates and foreign currency fluctuations. We use interest rate swaps to manage interest rate price risks. We do not use interest rate swaps for trading or speculative purposes.

Interest Rate Risk

As of June 30, 2018, our variable-rate credit facilities totaled $3.2 billion, of which we had entered into interest rate swap agreements to fix the rates on a notional principal amount of $1.3 billion. These interest rate swaps have a fair value of $123.7 million in the counterparties’ favor and $0.3 million in our favor.

The tables below provide information about our financial instruments at June 30, 2018 that are sensitive to changes in interest rates. In addition to the disclosures in this interim report, please read notes 10 and 11 to our consolidated financial statements included in our 2017 Annual Report, which provide additional information with respect to our existing credit and lease facilities.

 

 

 

Principal Payment Dates

 

(in thousands of US dollars)

 

Remainder

of 2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

Credit Facilities(1)

 

$

214,701

 

 

$

404,113

 

 

$

340,422

 

 

$

463,565

 

 

$

668,616

 

 

$

1,085,599

 

Lease Facilities(2)

 

 

17,443

 

 

 

40,018

 

 

 

41,184

 

 

 

42,459

 

 

 

43,801

 

 

 

368,432

 

Operating Leases(3)

 

 

77,207

 

 

 

154,325

 

 

 

154,209

 

 

 

154,384

 

 

 

148,324

 

 

 

652,370

 

_____________________

 

(1)

Represents principal payments on amounts drawn on our credit facilities that bear interest at variable rates. We have entered into interest rate swap agreements under certain of our credit facilities to swap the variable interest rates for fixed interest rates. For the purposes of this table, principal payments are determined based on contractual repayments in commitment reduction schedules for each related facility.

 

(2)

Represents payments, excluding amounts representing interest payments, on amounts drawn on our lease facilities that bear interest at variable rates.

 

(3)

Represents payments under our operating leases for certain vessels that we have entered into sale-leaseback transactions where the lease term commenced upon delivery of the vessels. Payments under the operating leases have a variable component based on underlying interest rates.

As of June 30, 2018, we had the following interest rate swaps outstanding:

Fixed Per Annum

Rate Swapped

for LIBOR

 

 

Notional Amount as of

June 30, 2018

(in thousands of US dollars)

 

 

Maximum

Notional Amount(1)

(in thousands of US dollars)

 

 

Effective Date

 

Ending Date

 

5.8700%

 

 

$

566,984

 

 

$

566,984

 

 

August 31, 2017

 

November 28, 2025

(2)

5.4200%

 

 

 

376,421

 

 

 

376,421

 

 

September 6, 2007

 

May 31, 2024

 

5.6000%

 

 

 

128,400

 

 

 

128,400

 

 

June 23, 2010

 

December 23, 2021

(3)

3.2675%

 

 

 

72,736

 

 

 

72,736

 

 

September 8, 2015

 

September 8, 2020

 

3.0900%

 

 

 

71,320

 

 

 

71,320

 

 

June 5, 2015

 

June 5, 2020

 

1.6000%

 

 

 

45,208

 

 

 

45,208

 

 

April 7, 2014

 

March 20, 2019

 

_____________________

 

(1)

Over the term of the interest rate swaps, the notional amounts increase and decrease. These amounts represent the peak notional amount over the remaining term of the swap.

 

(2)

Swap counterparty has an early termination right in August 2019 which may require us to settle the swap early at the earlier termination date.

 

(3)

Prospectively de-designated as an accounting hedge in 2008.

Counterparties to these financial instruments may expose us to credit-related losses in the event of non-performance. As of June 30, 2018, these financial instruments are primarily in the counterparties’ favor. We have considered and reflected the risk of non-performance by us and our counterparties in the fair value of our financial instruments as of June 30, 2018. As part of our consideration of non-performance risk, we perform evaluations of

 

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our counterparties for credit risk through ongoing monitoring of their financial health and risk profiles to identify funding risk or changes in their credit ratings.

Counterparties to these agreements are major financial institutions, and we consider the risk of loss due to non-performance to be minimal. We do not require collateral from these institutions. We do not hold and will not issue interest rate swaps for trading purposes.

 

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PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

None.

Item 1A — Risk Factors

The accompanying financial statements have been prepared assuming that we will continue as a going concern.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of operations. As of June 30, 2018, we had a working capital deficiency of $532.6 million which includes $337.9 million of senior unsecured notes maturing in April 2019. The working capital deficiency may increase in future periods because of the reclassification of the February 14, 2018 Fairfax debentures from long-term liabilities to current liabilities as a result of the put right in such debentures that is described in the notes to our consolidated financial statements for the three and six months ended June 30, 2018. Upon funding of the March 13, 2018 debentures expected in January 2019, these debentures will also be classified as a current liability. Our working capital deficiency indicates that a material uncertainty exists that casts substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern and repay our liabilities is dependent on our ability to generate profitable business operations in the future and/or obtain financing to meet our obligations, including financing through previously disclosed investments by Fairfax and in the capital markets to the extent available.

We have identified a material weakness in our internal controls over financial reporting and cannot assure you that management will be able to remediate the material weakness in a timely manner.

During the preparation of the interim financial statements for the quarter ended June 30, 2018, the Company’s management identified a material weakness in our internal controls over financial reporting relating to the timely recording of dividends declared and approved by our Board of Directors, which resulted in a $35.6 million understatement of current liabilities and deficit in our earnings press release dated August 1, 2018. See Part I – Financial Information—Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations—Controls and Procedures in this Form 6-K for additional information.

Although management has already initiated compensating controls, is assessing the root cause and will be enhancing and revising the design of existing controls and procedures related to dividend transactions, there can be no assurance that management will be able to remediate the material weakness in a timely manner, which could adversely affect our business and the timeliness and accuracy of our financial reporting. Material weaknesses in internal controls over financial reporting could also cause investors to lose confidence in our publicly reported consolidated financial statements, which could have an adverse effect on the trading price of our securities and our ability to raise capital.

Our substantial debt levels and vessel lease obligations may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.

As of June 30, 2018, we had approximately $3.9 billion in aggregate principal amount of debt outstanding under our credit facilities, our 6.375% senior unsecured notes due 2019, our 7.125% senior unsecured notes due 2027 and our 5.50% senior notes due 2025 (collectively, our “Notes”), and capital lease obligations of approximately $672.5 million.

On March 13, 2018, we also entered into a subscription agreement with Odyssey Reinsurance Company, Allied World Assurance Company, Ltd., Northbridge General Insurance Corporation, United States Fire Insurance Company, Zenith Insurance Company and Riverstone Insurance Limited (collectively, the “Fairfax Investors”) for

 

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an additional investment of $250 million in our 5.50% senior notes due 2026 to be issued in January 2019 in a private placement with the Fairfax Investors.

Our level of debt and vessel lease obligations 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, or at all;

 

we may need to use a substantial portion of our cash from operations to make principal and interest payments on our debt or make our lease payments, reducing the funds that would otherwise be available for operation and future business opportunities;

 

our debt level could make us more vulnerable to competitive pressures, a downturn in our business or the economy generally than our competitors with less debt; and

 

our debt level may limit our flexibility in responding to changing business and economic conditions.

Our ability to service our debt and vessel lease obligations will depend upon, among other things, our financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our results of operations are not sufficient to service our current or future indebtedness and vessel lease obligations, we will be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.

We may not be able to timely repay or be able to refinance amounts incurred under our credit facilities, Notes and capital and operating lease arrangements.

We have financed a substantial portion of our fleet and acquisitions with indebtedness incurred under our existing credit facilities, Notes and capital and operating lease arrangements. We have significant normal course payment obligations under our credit facilities, our Notes and capital and vessel operating lease arrangements, both prior to and at maturity, including as of June 30, 2018 and including the assumption of debt in connection with the acquisition of GCI, of approximately $320.9 million in 2018 and an additional $5.4 billion through 2027. In addition, under our credit facilities and capital and operating lease arrangements, a payment may be required in certain circumstances as a result of events such as the sale or loss of a vessel, a termination or expiration of a charter (where we do not enter into a replacement charter acceptable to the lenders within a required period of time) or termination of a shipbuilding contract. The amount that must be paid may be calculated based on the loan to market value ratio or some other ratio that takes into account the market value of the relevant vessel (with the repayment amount increasing if vessel values decrease), or may be the entire amount of the financing in regard to a credit facility or a pre-determined termination sum in the case of a capital or operating lease.

If we are not able to refinance outstanding amounts at an interest rate or on terms acceptable to us, or at all, we will have to dedicate a significant portion of our cash flow from operations to repay such amounts, which could reduce our ability to satisfy payment obligations related to our securities, our credit facilities, Notes and capital and operating lease arrangements or may require us to delay certain business activities or capital expenditures or cease paying dividends. If we are not able to satisfy these obligations (whether or not refinanced) under our credit facilities, Notes or capital or operating lease arrangements with cash flow from operations, we may have to seek to restructure our indebtedness and lease arrangements, undertake alternative financing plans (such as additional debt or equity capital) or sell assets, which may not be available on terms attractive to us or at all. If we are unable to meet our debt or lease obligations, or if we otherwise default under our credit facilities, Notes or capital or operating lease arrangements, the holders of such debt or lessors could declare all outstanding indebtedness to be immediately due and payable and in the case of (i) our credit facilities and capital or operating lease arrangements, foreclose on the vessels securing such indebtedness and (ii) in the 2025 Notes, foreclose on the equity of GCI, which entity is an intermediate holding company that owns the equity of a number of our indirect vessel owning subsidiaries. Additionally, most of our debt instruments contain cross-default provisions, which generally cause a default or event of default under each instrument upon a qualifying default or event of default under any other debt instrument. If we are unable to repay outstanding borrowings when due, holders of our secured debt also have the right to proceed against the collateral granted to them that secures the indebtedness. The market values of our vessels, which fluctuate with market conditions, will also affect our ability to obtain financing or refinancing, as our

 

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vessels serve as collateral for loans. Lower vessel values at the time of any financing or refinancing may reduce the amounts of funds we may borrow.

A decrease in the level of export of goods or an increase in trade protectionism will harm our customers’ business and, in turn, harm our business, results of operations and financial condition.

Most of our customers’ containership business revenue is derived from the shipment of goods from the Asia Pacific region, primarily China, to various overseas export markets, including the United States and Europe. Any reduction in or hindrance to the output of China-based exporters could negatively affect the growth rate of China’s exports and our customers’ business. For instance, the government of China has implemented economic policies aimed at increasing domestic consumption of Chinese-made goods. This may reduce the supply of goods available for export and may, in turn, result in a decrease in shipping demand.

Our international operations expose us to the risk that increased trade protectionism will harm our business. If global economic challenges exist, governments may turn to trade barriers to protect their domestic industries against foreign imports, thereby depressing shipping demand. In particular, the current U.S. administration recently proposed tariffs on a variety of products exported by China.  China has responded in kind which has resulted in further proposals by the current administration to impose tariffs on other Chinese products.  In addition, the current U.S. administration has stated that it may seek to implement more protective trade measures not just with respect to China but with respect to other countries in the Asia Pacific region as well.  Increasing trade protectionism in the markets that our customers serve has caused and may continue to cause an increase in (a) the cost of goods exported from Asia Pacific, (b) the length of time required to deliver goods from the region and (c) the risks associated with exporting goods from the region. Such increases may also affect the quantity of goods to be shipped, shipping time schedules, voyage costs and other associated costs.

Any increased trade barriers or restrictions on global trade, especially trade with China, would harm our customers’ business, results of operations and financial condition and could thereby affect their ability to make timely charter hire payments to us and to renew and increase the number of their time charters with us. This could harm our business, results of operations and financial condition.  

Our continuing compliance with the requirements of the Sarbanes-Oxley Act of 2002 will depend, in part, on our ability to integrate effectively the internal controls and procedures of GCI with our own.

In connection with the acquisition of GCI, we may be required to assess and make any necessary adjustments to GCI’s internal controls and procedures in order to maintain the overall effectiveness of our internal controls and procedures, to ensure that we continue to deliver accurate and timely financial information and to ensure ongoing compliance with Section 404 of the Sarbanes-Oxley Act of 2002. We have not yet completed our evaluation of GCI’s internal controls. Our failure to accomplish this on a timely basis or at all could compromise our compliance with the Sarbanes-Oxley Act of 2002 and the timeliness and accuracy of our financial reporting, which could reduce investor confidence in our publicly reported consolidated financial statements.

We may experience disruption as a result of the recent and pending departures of a number of members of our senior management.

We have recently experienced a number of changes in our senior management. 

 

Our former chief executive officer, Gerry Wang, retired on November 3, 2017 and formally ceased employment on December 31, 2017.  Our new president and chief executive officer, Bing Chen, commenced employment in January 2018.

 

Our current chief financial officer, Mr. David Spivak, terminated his employment with us effective June 29, 2018 to pursue other opportunities. Our new chief financial officer, Mr. Ryan Courson, took title on May 6, 2018.

 

Our general counsel and chief operating officer, Mark Chu, provided notice he is exercising his right to terminate his employment with us effective August 31, 2018.  Mr. Chu will continue with us through to the end of August to facilitate a transition.

 

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Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3 — Defaults Upon Senior Securities

Not Applicable.

Item 4 — Mine Safety Disclosures

Not Applicable.

Item 5 — Other Information

 

Not Applicable.

Item 6 — Exhibits

 

None.

 

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