Philly Tankers
Condensed Consolidated Financial Statements
For the fourthquarter and full yearended 31 December 2016
2 June 2017
Notes to the condensed interim consolidated financial statements for thefourthquarter and full year2016
- Accounting Principles
BACKGROUND AND BASIS FOR PREPARATION
Philly Tankers AS (PTAS or the Company) was formed on 10 June 2014 to be the holding company of Philly Tankers LLC (PTLLC), a Jones Act shipping company.
PTAS is domiciled in Oslo, Norway. PTLLC is domiciled in Wilmington, Delaware, USA.
This interim report has not been subject to audit or review by independent auditors.
The consolidated 2015 annual financial statements of PTAS, which include a detailed description of accounting policies and significant estimates, are posted on the NOTC A-List found on the following website under the ticker symbol PHILLY.
These condensed interim consolidated financial statements reflect all adjustments, in the opinion of PTAS’s Board, that are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the three-month and year-to-date periods are not necessarily indicative of the results that may be expected for any subsequent quarter or year.
STATEMENT OF COMPLIANCE
These condensed interim consolidated financial statements of PTAS have been prepared based on International Financial Reporting Standards (IFRS) as adopted by the European Union IAS 34 Interim Financial Reporting. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the audited consolidated financial statements of PTAS as of and for the year ended 31 December 2015.
SIGNIFICANT ACCOUNTING PRINCIPLES
The accounting polices applied by PTAS in these condensed interim consolidated financial statements are substantially the same as those applied by PTAS in its consolidated financial statements for the year ended 31 December 2015.
There have not been any new IFRS standards or interpretations which were effective 1 January 2016 that have had a significant impact on Q4 2016 or the year-to-date period.
USE OF ESTIMATES
The preparation of condensed interim financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense in the financial statements. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates.
- Share capital and equity
At 31December2016, PTAS had 127,500shares, consisting of 127,499 Class A shares and 1 Class B share, at a par value of NOK 1 per share, which is the average number of shares used in the calculation of income per share for the periods presented. The Class A shares carry one vote per share. The Class B share carries 5,103 votes. Otherwise, the Class A shares and the Class B share are equal. For further information on the shares and voting rights, preferences and restrictions, please refer to the PTAS Articles of Association posted on the NOTC A-List found on the following website under the ticker symbol PHILLY.
- Related party transactions
Philly Shipyard ASA (PHLY), through its subsidiaries, owns 53.7% of PTAS. The Company believes that related party transactions are made on terms equivalent to those that prevail in arm’s length transactions.
The Company had zero accreted interest incomefor Q4 2016 (USD 303thousandfor Q4 2015) and USD 72 thousandof accreted interest income for the full year ending 31 December 2016 (USD 1.81 millionfor the full year ending 31 December 2015). See note 4 regarding the note receivable from APSI Tanker Holdings II, LLC (ATH II), a wholly-owned indirect subsidiary of PHLY.
See note 5 regarding the shipbuilding contracts and option agreement with Philly Shipyard, Inc. (PSI), a wholly-owned direct subsidiary of PHLY.
PTLLC has entered into an administrative services agreement with PSI whereby PSI will supply certain administrative services to PTLLC. Total related costs were USD 30 thousand for Q4 2016 (USD 30 thousand for Q4 2015) and USD 120 thousand for the full year ending 31December 2016 (USD 120 thousand for the full year ending 31 December 2015).
- Note receivable
On 16 June 2014, PTLCC received a non-interest bearing promissory note issued by ATH II with a face value of USD 58.0 million in exchange for 62,475 units of PTLLC. On 9 July 2014, ATH II contributed these units of PTLLC to PTAS in exchange for an equal number of shares of PTAS, consisting of 62,474 class A shares and 1 class B share, and USD 5.525 million in cash recorded as a distribution from share premium. The principal amount of this note was reduced dollar-for-dollar as PSI investedits own funds into the construction of Hulls 025 and 026, the first two vessels under contract between PSI and PTLLC. As this note was issued as an interest-free instrument, the Company discounted its value and imputed interest income on the discounted amount at the rate of 3.49% per annum. The full amount was due and payable on the earlier of the date of delivery of Hull 026 or 30 November 2018. The dollar-for-dollar reductions commenced in the third quarter of 2015 with a total reduction of the full USD 58.0 million through 31December 2016.
- Commitments and contingencies
In 2014, PTLLC entered into a pair of shipbuilding contracts with PSI for the construction and sale of two 50,000 dwt product tankers with deliveries in 2016 and 2017, designated as Hulls 025 and 026. In addition, in 2014, PSI granted PTLLC an optionto purchase two identical product tankers with deliveries in 2017, designated as Hulls 027 and 028.In February 2015, PTLLC secured long-term charter contracts with a domestic end-user for Hulls 025 and 026. In July 2015, PTLLC declared its option for Hulls 027 and 028.
On 10 August 2015, PTLLC entered into definitive agreements with a subsidiary of Kinder Morgan, Inc. (KMI) for the assignment of its shipbuilding contracts for Hulls 025-028 and certain related assets, including its charters for Hulls 025 and 026. PTLLC agreed to assign each of the four contracts and two chartersto KMI immediately prior to delivery of the relevant vessel. Thetransaction was formally approved at an extraordinary general meeting of the shareholders of PTAS on 2 September 2015.
The combined four-vessel purchase price is USD 500.0million less a credit of USD 0.4 million plus USD 0.6 million ofchange orders and actual construction financing costs and is being funded via progress payments made by PTLLC (or KMI on behalf of PTLLC).
In Q1 2015,in exchange for the USD 0.4 million credit described above and other consideration, PTLLC madeUSD 29.6 million of progress payments in cash for Hulls 025 and 026 due in the second half of 2015 to PSI. In connection with the KMI transaction described above, these payments were allocated as deposits on Hulls 027 and 028.
Total deposits made on the three remaining product tankers (Hulls 026-028) by PTLLC through 31 December 2016 amount to USD 68.6 million which consists of USD 39.6 million in cash payments by PTLLC and USD 29.0 million in non-interest bearing promissory notes issued by PTLLC.Upon the issuance of such notes, they were immediately assigned to ATH II and offset against the principal amount of the USD 58.0 million note described in note 4 above. The foregoing amounts exclude USD 42.6 million in cash payments by KMI on behalf of PTLLC in 2016 as deposits made on Hulls 026-028.
As of 31December 2016, PTLLC has unpaid purchase commitments on the three remainingproduct tankers (Hulls 026-028) of approximately USD 307million which is estimated due as follows:
2017:USD 307 million
In connection with the KMI transaction described above, PTLLC agreed to provide certain buyer’s supplies on board the vessels on behalf of KMI. In Q3 2016, PTLLC and KMI amended their agreements to transfer the responsibility for these buyer’s supplies (other than approximately USD 130 thousand of long-lead items of owner furnished equipment per vessel) from PTLLC to APT. As consideration for this transfer, PTLLC agreed to reduce the amount it will receive from KMI at delivery of each vessel by USD 2.0 million. After these amendments, the transaction is valued at a total of USD 560.0 million.
On 30 November 2016, PTLLC closed the sale of its shipbuilding contract and related assets with respect to the first vessel, Hull 025, immediately prior to the delivery of Hull 025 by PSI to KMI. The Company recognized a pre-tax gain on this sale of approximatelyUSD 12.0 million.
- Subsequent events after 31 December 2016
In Q1 2017, PTAS paid USD 39.2 million as dividends, equal to USD 307.45 per share, to the shareholders in the Company as of the date of delivery of Hull 025 (30 November 2016), pursuant to a resolution of the Board of Directors of PTAS on 21 December 2016. The resolution was made pursuant to an authorization granted by the annual general meeting of PTAS on 27 May 2016. The dividends were split in two installments. The first installment of USD 35.0 million was paid on 17 January 2017. The second installment of USD 4.2 million was paid on 14March 2017.The dividends were for accounting purposes taken from the account "paid-in-capital" and for Norwegian tax purposes treated as repayment of paid-in-premium on shares. Any U.S. withholding tax which the Company was obliged to make on behalf of any of its non-U.S. shareholders was set-off in the second dividend payment to such shareholder on 14March 2017.
On 29 March 2017, PTLLC closed the sale of its shipbuilding contract and related assets with respect to the second vessel, Hull 026, immediately prior to the delivery of Hull 026 by PSI to KMI.It is anticipated that the Company’s pre-tax gain on this sale will be approximately USD 12.0 million.
On 18 April 2017, PTAS paid USD 35.0 million as dividends, equal to USD 274.51 per share, to the shareholders in the Company as of the date of delivery of Hull 026 (29 March 2017), pursuant to a resolution of the Board of Directors of PTAS on 11 April 2017. The resolution was made pursuant to an authorization granted by the annual general meeting of PTAS on 27 May 2016. The dividends were for accounting purposes taken from the account “paid-in-capital” and for Norwegian tax purposes treated as repayment of paid-in-premium on shares. Any U.S. withholding tax which the Company was obliged to make on behalf of any of its non-U.S. shareholders was set-off in such dividend payment.
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