DIAMOND S SHIPPING INC. The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition ofDiamond S Shipping Inc. ("we," "us," "our," "DSSI" or the "Company"). This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K (the "2020 Annual Report") for the year endedDecember 31, 2020 , filed with theSEC onMarch 16, 2021 and as thereafter amended onApril 30, 2021 , and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under "Cautionary Note on Forward-Looking Statements".
Business Overview
Diamond S Shipping Inc. was formed onNovember 14, 2018 under the laws of the Republic of theMarshall Islands for the purpose of receiving, via contribution from CPLP, CPLP's crude and product tanker business and combining that business with the business and operations ofDSS LP pursuant to the Transaction Agreement. For a description of the Transaction Agreement and related Merger, please see Note 1 - Business and Basis of Presentation in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We provide seaborne transportation of crude oil, refined petroleum, and other products in the international shipping industry. As ofDecember 31, 2021 , through our wholly owned subsidiaries, we owned and operated 62 tanker vessels: 11 Suezmax crude carriers, one Aframax crude carrier and 50 MR product carriers. As of the same date, we also controlled and operated two Suezmax vessels through a joint venture.
Factors to Consider When Evaluating the Company's Results
Announced Merger
OnMarch 31, 2021 ,DSSI and International Seaways, Inc. ("INSW") issued a joint press release announcing the execution of an Agreement and Plan of Merger, datedMarch 30, 2021 (the "Merger Agreement"), pursuant to which INSW will, upon the terms and subject to the conditions set for in the Merger Agreement, merge with DSSI in a stock-for-stock transaction (the "Announced Merger"). Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Announced Merger (the "Effective Time"), each common share of DSSI (the "Diamond S Common Shares") issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 0.55375 of a share of common stock of INSW ("INSW Common Stock"). The aforementioned 0.55375 exchange ratio set forth in the Merger Agreement will result in INSW shareholders owning approximately 55.75% of the outstanding shares of INSW Common Stock following the Effective Time and DSSI shareholders owning approximately 44.25% of the outstanding shares of INSW Common Stock following the Effective Time. 27 Table of Contents The Announced Merger is expected to close in the third quarter of 2021, subject to the satisfaction or waiver of certain conditions, including (i) the authorization of the Merger Agreement by the affirmative vote of the holders of a majority of all outstanding shares of Diamond S Common Shares entitled to vote thereon? (ii) the authorization of the INSW shares to be issued as merger consideration in the Announced Merger by the affirmative vote of the holders of a majority of the shares of INSW Common Stock present and entitled to vote thereon? (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act? (iv) the absence of any law or order preventing the consummation of the Announced Merger? (v) the effectiveness of a registration statement on Form S-4 in connection with the issuance of INSW Common Stock as merger consideration, which will include a prospectus and a joint proxy statement relating to the INSW special shareholder meeting to approve the issuance of INSW Common Stock as merger consideration and the DSSI special shareholder meeting to approve the Announced Merger and absence of any stop order or proceedings by theSEC ? (vi) the approval of the shares of INSW Common Stock to be issued as merger consideration in the Announced Merger for listing on the NYSE; and (vii) execution, delivery and effectiveness of amended and restated loan agreements for two of DSSI's existing credit facilities entered into in 2019 (the "A&R Debt Agreements") to amend the terms of such credit facilities to more closely mirror the terms of INSW's credit facilities and the continued effectiveness of each A&R Debt Agreement and the consents of DSSI's lenders under its existing credit facilities to the Announced Merger and waiver of any event of default that would arise as a result of the Announced Merger. The obligation of each of DSSI and INSW to consummate the Announced Merger is also conditioned on, among other things, the truth and correctness of the representations and warranties made by the other party as of the closing date (subject to certain "materiality" and "material adverse effect" qualifiers) and material compliance by the other party with pre-closing covenants. The foregoing description of the Merger Agreement is qualified in its entirety by the full text of the Merger Agreement, which is attached hereto as Exhibit 2.3 hereto. For more information on the Announced Merger, please see our Form 8-K/A filed with theSEC onApril 7, 2021 .
The COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") outbreak a pandemic. In response to the ongoing outbreak, many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented measures to combat the outbreak, such as quarantines and travel restrictions. Such measures have, and will likely continue to, negatively affect the global economy. In addition, the COVID-19 pandemic has resulted in increased vessel expenses, primarily due to crewing related matters and logistical challenges for delivery of services and materials to vessels. The extent to which COVID-19 will materially impact the Company's results of operations and financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including, among others, new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, or any resurgence or mutation of the virus, the availability of vaccines and their global deployment, the development of effective treatments, the imposition of effective public safety and other protective measures and the public's response to such measures. There continues to be a high level of uncertainty relating to how the pandemic will evolve, how governments and consumers will react and progress the approval and distribution of vaccines. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer period of time in response to the outbreak, it may have a material adverse effect on the Company's future results of operation and financial condition.
OnJune 15, 2020 , the Company entered into an agreement with Dampskibsselskabet Norden A/S ("Norden"). During the term of this agreement, the Company and Norden have agreed to use commercially reasonable efforts to identify new projects in the product tanker industry that they may jointly pursue and develop. Pursuant to this agreement, the Company agreed to initially contribute 28 of its MR vessels to theNorient Product Pool (the "Pool"). This agreement will terminate upon the occurrence of certain events, including when the Company no longer has vessels operating in the Pool. As ofMarch 31, 2021 , 28 of the Company's vessels are operating in the Pool. Credit Facilities
For a description of the Company's credit agreements, please see Note 8 - Long-Term Debt in the unaudited condensed consolidated financial statements included herein.
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Vessel Dispositions
In December 2020 , our Board of Directors approved selling the Aias and Amoureux,
both 2008-built Suezmax vessels. We reached an agreement to sell the Aias and
Amoureux for $22.6 million and $22.5 million , respectively, less a 1% broker
commission payable to a third party. In January and February 2021 , we completed
the sale of the Aias and Amoureux, respectively.
Share Repurchase Program
OnMarch 4, 2020 , our Board of Directors approved a share repurchase program, providing authorization to repurchase up to$50 million of our common shares, effective for a period of one year, which has now expired. Shares we repurchased under this program could have been purchased in the open market or in privately negotiated transactions, at times and prices that we considered to be appropriate. Under the share repurchase program, we repurchased 137,289 shares for a total of$1.4 million .
Other Trends and Factors Affecting the Company's Future Results of Operations
The principal factors that have affected our results of operations, and may in the future affect results of operations, are the economic, regulatory, financial, credit, political and governmental conditions prevailing in the tanker market and shipping industry generally and in the countries and markets in which our vessels are chartered. The world economy has experienced significant economic and political upheavals in recent history. In addition, credit supply has been constrained and financial markets have been particularly turbulent. Protectionist trends, global growth and demand for the seaborne transportation of goods, including oil and oil products and overcapacity and deliveries of newly-built vessels have affected, and may further affect, the tanker market and shipping industry in general and the business, financial condition, results of operations and cash flows of the Company. Some of the key factors that have affected our business, financial condition, results of operations and cash flows, and may in the future affect our business, financial condition, results of operations and cash flows, include the following:
? uncertainties as to the timing of the Announced Merger;
the ability of DSSI and INSW to receive the required regulatory and shareholder
? approvals for the Announced Merger (and the risks that such approvals may
result in the imposition of conditions that could adversely affect the combined
company or the expected benefits of the transaction);
? the occurrence of events that may give rise to a right of to terminate the
Merger Agreement;
the possibility that, following the consummation of the Announced Merger, costs
? or difficulties related to the integration of DSSI's and INSW's operations will
be greater than expected;
the risk that stockholder litigation in connection with the Announced Merger
? may affect the timing or occurrence of the contemplated transaction or result
in significant costs of defense, indemnification and liability;
? levels of oil product demand and inventories;
? supply and demand for crude oil and oil products;
? charter hire levels (under time and bareboat charters) and the ability to
re-charter vessels at competitive rates as their current charters expire;
? developments in vessel values, which may affect compliance with covenants under
credit facilities and/or debt refinancing;
? compliance with covenants in credit facilities, including covenants relating to
the maintenance of vessel value ratios;
? the level of debt and the related interest expense and amortization of
principal;
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? access to debt and equity and the cost of capital required to acquire
additional vessels;
? supply and order-book of tanker vessels;
? the ability to increase the size of the fleet and make additional acquisitions
that are accretive to earnings;
the ability of the commercial and chartering operations to successfully employ
? vessels at economically attractive rates, particularly as charters expire and
the fleet expands;
? the continuing demand for crude oil and oil products from
and
the ability to comply with new maritime regulations, the more restrictive
? regulations for the transport of certain products and cargoes and the increased
costs associated therewith;
changes in fuel prices, including as a result of the imposition of sulfur oxide
? emissions limits in 2020 under new regulations adopted by the IMO (for those
vessels that are not retrofitted with scrubbers);
? the effective and efficient technical management of the vessels;
? the costs associated with upcoming drydocking of vessels;
? the ability to obtain and maintain major international oil company approvals
and to satisfy technical, health, safety and compliance standards;
? the strength of and growth in the number of the customer relationships,
especially with major international oil companies and major commodity traders;
? the prevailing spot market rates and the number of vessels operating in the
spot market;
? changes in laws, treaties or regulations applicable to the Company, including
regulations relating to environmental compliance; and
? the ability to acquire and sell vessels at satisfactory prices.
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Operating Data
The following table represents the operating data for the three months ended
For the Three Months Ended
March 31,
2021 2020 Change % Change
(In Thousands, Except Per Share and Share Data)
Revenue:
Voyage revenue $ 48,801 $ 187,652 $ (138,851) (74.0) %
Time charter revenue 14,851 22,073 (7,222) (32.7) %
Pool revenue 24,068 - 24,068 -
Total revenue 87,720 209,725 (122,005) (58.2) %
Operating expenses:
Voyage expenses 33,050 74,681 (41,631) (55.7) %
Vessel expenses 41,962 41,536 426 1.0 %
Depreciation and amortization expense 28,051 28,760 (709) (2.5) %
General and administrative expenses 6,518 8,124 (1,606) (19.8) %
Other corporate expenses 4,780 - 4,780 -
Total operating expenses 114,361 153,101 (38,740) (25.3) %
Operating (loss) income (26,641) 56,624 (83,265) (147.0) %
Other (expense) income:
Total other expense - Net (6,169) (11,043) 4,874 44.1 %
Net (loss) income (32,810) 45,581 (78,391) (172.0) %
Less: Net income attributable to
noncontrolling interest 832 537 295 54.9 %
Net (loss) income attributable to Diamond S
Shipping Inc. $ (33,642) $
45,044
Net (loss) earnings per share - basic$ (0.84) $
1.13
Weighted average common shares outstanding - basic 39,974,360 39,891,346 83,014 0.2 % Weighted average common shares outstanding - diluted 39,974,360 40,159,966 (185,606) (0.5) % Results of Operations
Three months ended
Total revenue Total revenue decreased by$122.0 million to$87.7 million during the three months endedMarch 31, 2021 as compared to$209.7 million for the three months endedMarch 31, 2020 . The$122.0 million decrease was principally due to weaker market conditions in the product tanker segment. The global consumption of petroleum products has experienced considerable demand destruction as a result of the global pandemic. In addition, the unwinding of the floating storage cycle effectively increased the supply of available ships.
Voyage Expenses
Voyage expenses primarily consist of bunkers, port expenses, canal dues and commissions. Commissions were paid to shipbrokers for negotiating and arranging charter party agreements on the Company's behalf. Voyage expenses incurred during time charters and while vessels are operating in and pools are paid for by the charterer or pool manager, except for commissions, which were paid for by the Company. Voyage expenses incurred during voyage charters were paid for
by
the Company.
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Voyage expenses decreased by $41.6 million to $33.1 million during the three
months ended March 31, 2021 as compared to $74.7 million for the three months
ended March 31, 2020 . The $41.6 million decrease in voyage expenses was driven
by a reduction in bunker and port costs incurred as a result of entering 28
vessels in the Pool the latter half of 2020.
Vessel Expenses
Vessel expenses include crew wages and associated costs, the cost of insurance premiums, expenses relating to repairs and maintenance, lubricants and spare parts, technical management fees and other miscellaneous expenses. Vessel expenses increased by$0.4 million to$41.9 million during the three months endedMarch 31, 2021 as compared to$41.5 million for the three months endedMarch 31, 2020 . The slight increase of$0.4 million is in line with the vessel operating days for the two quarters which decreased slightly.
Vessel Depreciation and Amortization Expense
We depreciate the cost of our vessels on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value. We estimate the useful life of our vessels to be 25 years, and we estimate the residual value by taking the estimated scrap value of$300 per lightweight ton times the weight of the ship in lightweight tons. We continue to monitor changes in the oil and petroleum product supply chain that might have an impact on the useful operating life of our assets. Depreciation and amortization expense decreased by$0.7 million to$28.1 million during the three months endedMarch 31, 2021 as compared to$28.8 million during the three months endedMarch 31, 2020 . This slight decrease is due to the decrease in the depreciation and amortization expense related to the sale of the Aias and Amoureux in January andFebruary 2021 , respectively, as the vessels were classified as held for sale as ofDecember 31, 2020 , offset by ballast water treatment systems and scrubbers capitalized between the two comparative periods.
General and Administrative Expenses
For the three months endedMarch 31, 2021 and 2020, general and administrative expenses were$6.5 million and$8.1 million , respectively. The$1.6 million decrease was primarily due to a decrease in salary and benefit costs as a result of a reduction in headcount, a decrease in professional fees and a reduction in travel-related costs. Other Corporate Expenses
Other corporate expenses was$4.8 million for the three months endedMarch 31, 2021 , which primarily consist of legal invoices and investment bank opinion fees related to the Announced Merger.
Total Other Expense, net
Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was$6.2 million for the three months endedMarch 31, 2021 compared to$11.0 million for the three months endedMarch 31, 2020 . The decrease of$4.8 million was primarily driven by a$194.2 million decrease in the average debt balance in the two comparative periods, coupled with a decrease in the effective interest rate.
Net Income Attributable to Noncontrolling Interest
The net income attributable to noncontrolling interest was net income of$0.8 million for the three months endedMarch 31, 2021 compared to net income of$0.5 million for the three months endedMarch 31, 2020 . The net income attributable to noncontrolling interest primarily represents a 49% interest inNT Suez Holdco LLC , which owns and operates two Suezmax vessels and is 51%
owned
by the Company.
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Liquidity and Capital Resources
As ofMarch 31, 2021 andDecember 31, 2020 , total cash, cash equivalents and restricted cash were$75.8 million and$104.2 million , including restricted cash of$6.3 million and$6.1 million , respectively. As ofMarch 31, 2021 andDecember 31, 2020 , the Company had$53.0 million and$60.0 million available and undrawn under its credit facilities, respectively.
Generally, the primary sources of funds have been cash from operations and undrawn amounts under credit facilities.
OnDecember 27, 2019 , we refinanced (i) the$460 Million Facility, (ii) the$235 Million Facility, and (iii) the$75 Million Facility with the proceeds of the$525 Million Facility.
At
The passage of environmental legislation or other regulatory initiatives have in the past had, and may in the future may have, a significant impact on our operations. Regulatory measures can increase required costs related to operating and maintaining our vessels and may require us to retrofit our vessels with new equipment to comply with new or existing regulations. Among other capital expenditures, in connection with theInternational Maritime Organization's new limits for sulfur oxide emissions effectiveJanuary 1, 2020 , we contracted for the purchase and installation of scrubbers on five of our Suezmax vessels. As ofMarch 31, 2021 , four of these scrubbers have been installed and fully paid, with two of these scrubbers having been installed on the Aias and Amoureux, which were sold and delivered to the buyer in January andFebruary 2021 , respectively. The installation of the fifth scrubber has been cancelled, effectuating a$3.3 million loss due to the cancelled project, which was recorded during the year endedDecember 31, 2020 . We may, in the future, determine to purchase additional scrubbers for installation on other vessels that we own or operate. In addition, with respect to vessels that are not retrofitted with scrubbers, we expect to incur expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel, which expenditures are not expected to be significant or which have not yet been determined. We have installed ballast water treatment systems on 22 of our 62 vessels. We expect to install 16 ballast water treatment systems in 2021, of which we have 16 contracts currently in place with a total contract value of$14.2 million , where$3.4 million has been paid as ofMarch 31, 2021 . InDecember 2020 , we contracted to sell two of our 2008-built Suezmax vessels, the Aias and Amoureux, and delivered the two vessels to the purchaser in January andFebruary 2021 , respectively. The sale of these two vessels generated gross cash proceeds to us of$46.2 million before our repayment of the related debt of$25.3 million on the two vessels. We believe that we have sufficient capital resources to fund our operations and anticipated capital requirements for the next twelve months. However, should market conditions deteriorate beyond third-party forecasts, we would consider a number of liquidity enhancing measures, which could include refinancing a portion of our senior debt, exploring unsecured debt instruments, asset sales and sale-leaseback transactions on certain of our assets.
Cash Flows
The following table summarizes the Company's cash and cash equivalents provided by or used in operating, financing and investing activities for the periods presented below (presented in millions):
For the Three Months Ended
March 31,
2021 2020
Net Cash (Used in) Provided by Operating Activities $ (8.7) $ 70.9
Net Cash Provided by (Used in) Investing Activities 44.5 (1.5)
Net Cash Used in Financing Activities (57.9) (42.1)
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Net cash (used in) provided by operating activities during the three months endedMarch 31, 2021 and 2020 was$(8.7) million and$70.9 million , respectively. The decrease of$79.6 million was mainly attributable to the reduction in total revenue for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , due to the global consumption of petroleum products experiencing considerable demand destruction as a result of the global pandemic, coupled with unwinding of the floating storage cycle effectively increasing the supply of available ships.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by (used in) investing activities during the three months endedMarch 31, 2021 and 2020 was$44.5 million and$(1.5) million respectively. The change in cash provided by (used in) investing activities was primarily due to the$46.2 million in cash proceeds received in conjunction with the sale and delivery of the Aias and Amoureux.
Net cash used in financing activities during the three months endedMarch 31, 2021 and 2020 was$57.9 million and$42.1 million , respectively. The change in cash used in financing activities was primarily due to the$25.3 million of debt repaid during the three months endedMarch 31, 2021 in conjunction with the sale and delivery of the Aias and Amoureux, offset by repaying$5.0 million revolver, and paying$1.4 million to repurchase shares under the share repurchase program.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations and Contingencies
There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , other than entering into contracts to install ballast water treatment systems on three vessels with installation scheduled to occur in 2022. These contracts have a total estimated cost of$2,810 , with payments due throughout 2021 and 2022, as described in Note 15 - Commitments and Contingencies in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Critical Accounting Policies The Company's condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are those that reflect significant judgments or uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company has described below what its management believes are its most critical accounting policies. For a description of all of the Company's significant accounting policies, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - B. Liquidity and Capital Resources - Critical Accounting Policies and Note 2 - Summary of Significant Accounting Policies, each contained in our 2020 Annual Report, and in Note 2 - Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements included herein, for further information.
Revenue Recognition
During the three months endedMarch 31, 2021 and 2020, revenues were generated from fixed rate time charters, spot market voyage charters, spot market-related time charters and pools. 34 Table of Contents We recognize revenues over the term of the time charter when there is a time charter agreement, where the rate is fixed or determinable, service is provided and collection of the related revenue is reasonably assured. We do not recognize revenue during days the vessel is off-hire. Where the time charter contains a profit or loss sharing arrangement, the profit or loss is recognized based on amounts earned or incurred as of the reporting date. For the three months endedMarch 31, 2021 and 2020, pursuant to the new revenue recognition guidance, which was adopted as ofJanuary 1, 2019 , revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Previously, revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by us when the vessels are engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters.
The carrying value of each of the Company's vessels represents its original cost (contract price plus initial expenditures) at the time of delivery or purchase less accumulated depreciation or impairment charges. The carrying values of vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. In recent years changing market conditions resulted in a decrease in charter rates and values of assets. We consider these market developments as indicators of potential impairment of the carrying amount of its assets. In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels' future performance, with the significant assumptions being related to charter rates, fleet utilization, vessels' operating expenses, vessels' capital expenditures and drydocking requirements, vessels' residual value and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect for the duration of their current time charters, without assuming additional profit-sharing. For periods of time where the vessels are not fixed on time charters, we utilize an estimated daily time charter equivalent for its vessels' unfixed days based on the most recent ten year historical one-year time charter average. Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they were made, such assumptions are highly subjective and likely to change, possibly materially, in the future. In recent years, the market values of vessels have experienced particular volatility, with substantial declines in many of the charter-free market value, or basic market value, of various vessel classes. As a result, the market value of our vessels may have declined below their carrying values, even though we did not impair their carrying values under our impairment accounting policy. This is due to management's projection that future undiscounted cash flows expected to be earned by such vessels over their operating lives will exceed such vessels' carrying amounts.
Deferred Drydocking Costs and Amortization
We use the deferral method of accounting for drydocking costs. Under the
deferral method, drydocking costs are deferred and amortized on a straight-line
basis over the useful life of the drydock, which is estimated to be
approximately 30 to 60 months. Management uses judgment when estimating the
period between drydocks performed, which can result in adjustments to the
estimated amortization of drydock expense if drydocks occur earlier or later
than originally estimated. We update our estimate of a vessel's next scheduled
drydock as necessary. If the vessel is disposed of before the next drydock, the
remaining balance in deferred drydock is written-off as a component of the gain
or loss upon disposal of vessels. We defer the costs associated with drydocking
as they occur and amortize these costs on a straight-line basis over the period
between drydocking. Deferred drydocking costs include actual costs incurred at
the drydock yard, cost of travel, lodging and subsistence of our personnel sent
to the drydocking site to supervise, and the cost of hiring a third party to
oversee the drydocking. Expenditures for normal maintenance and repairs, whether
incurred as part of the drydock or not, are expensed as incurred. If the vessel
is drydocked earlier than originally anticipated, any remaining deferred drydock
costs that have not been amortized are expensed at the beginning of the next
drydock.
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Recent Accounting Pronouncements
New Accounting Standards to be Implemented
InFebruary 2016 , the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning afterDecember 15, 2021 , and interim reporting periods within annual reporting periods beginning afterDecember 15, 2022 , with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about our leasing activities. We are currently analyzing our contracts and will then calculate the right-of-use assets and lease liabilities as ofJanuary 1, 2022 based on the present value of our remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases. InJune 2016 , the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326)" ("ASU 2016-13"), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for fiscal years beginning afterDecember 15, 2022 , with early adoption permitted. The adoption of Topic 326 is not expected to have a material impact on the condensed consolidated financial statements.
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