EAGLE BULK SHIPPING The following is a discussion of the Company's financial condition and results of operations for the three and nine months endedSeptember 30, 2022 and 2021. This section should be read in conjunction with the condensed consolidated financial statements included elsewhere in this report and the notes to those financial statements and the audited consolidated financial statements and the notes to those financial statements for the fiscal year endedDecember 31, 2021 , which were included in our Form 10-K, filed with theSEC onMarch 14, 2022 (the "Form 10-K"). For further discussion regarding our results of operations for the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 please refer to Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Quarterly Report on Form 10-Q for the three and nine months endedSeptember 30, 2021 . The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements."
Business Overview
Eagle Bulk Shipping Inc. ("Eagle" or the "Company") is aU.S. based fully integrated shipowner-operator providing global transportation solutions to a diverse group of customers including miners, producers, traders, and end users. Headquartered inStamford, Connecticut , with offices inSingapore andCopenhagen , Eagle focuses exclusively on the versatile mid-size drybulk vessel segment and owns one of the largest fleets of Supramax/Ultramax vessels in the world. The Company performs all management services in-house such as strategic, commercial, operational, technical, and administrative services, and employs an active management approach to fleet trading with the objective of optimizing revenue performance and maximizing earnings on a risk-managed basis. Typical cargoes we transport include both major bulk cargoes, such as iron ore, coal and grain, and minor bulk cargoes such as fertilizer, steel products, petcoke, cement, and forest products. As ofSeptember 30, 2022 , we owned and operated a modern fleet of 52 Supramax/Ultramax dry bulk vessels. We chartered-in five Ultramax vessels which have a remaining lease term of approximately one year each. In addition, the Company charters in third-party vessels on a short to medium term basis.
Our owned fleet totals 52 vessels, with an aggregate carrying capacity of 3.14
million dwt and an average age of 9.9 years as of
We carry out the commercial and strategic management of our fleet through our indirectly wholly-owned subsidiary,Eagle Bulk Management LLC , aMarshall Islands limited liability company, which maintains its principal executive offices inStamford, Connecticut . We own each of our vessels through separate wholly-ownedMarshall Islands limited liability companies.
Corporate Information
We maintain our principal executive offices at300 First Stamford Place , 5th Floor,Stamford, Connecticut 06902. Our telephone number at that address is (203) 276-8100. Our website address is www.eagleships.com. Information contained on or accessible through our website does not constitute part of this Quarterly Report on Form 10-Q. Business Strategy We believe our balance sheet allows us the flexibility to opportunistically make investments in the drybulk segment that will drive shareholder growth. In order to accomplish this, we intend to: •Maintain a highly efficient and quality fleet in the drybulk segment. •Maintain a revenue strategy that takes advantage of a rising rate environment and at the same time mitigate risk in a declining rate environment. •Maintain a cost structure that allows us to be competitive in all economic cycles without sacrificing safety or maintenance. •Continue to grow our relationships with our charterers and vendors. •Continue to invest in our on-shore operations and development of processes. 1
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Our financial performance is based on the following key elements of our business strategy:
(1)Concentration in one vessel category: Supramax/Ultramax drybulk vessels, which we believe offer certain size, operational and geographical advantages relative to other classes of drybulk vessels, such as Handysize, Panamax and Capesize vessels.
(2)An active owner-operator model where we seek to operate our own fleet and develop contractual relationships directly with cargo interests. These relationships and the related cargo contracts have the dual benefit of providing greater operational efficiencies and act as a balance to the Company's naturally long position to the market. Notwithstanding the focus on voyage chartering, we consistently monitor the drybulk shipping market and, based on market conditions, will consider taking advantage of long-term time charters at higher rates when appropriate.
(3)Maintain high quality vessels and improve standards of operation through improved standards and procedures, crew training and repair and maintenance procedures.
We continuously evaluate potential transactions that we believe will be accretive to earnings, enhance shareholder value or are in the best interests of the Company, including without limitation, business combinations, the acquisition of vessels or related businesses, repayment or refinancing of existing debt, the issuance of new securities, share and debt repurchases or other transactions. Business Outlook COVID-19 InMarch 2020 , theWorld Health Organization (the "WHO") declared COVID-19 to be a pandemic. The COVID-19 pandemic has had, and continues to have, widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Governments have implemented measures in an effort to contain the virus, such as social distancing, mask and vaccine mandates, travel restrictions, COVID testing guidelines and quarantine regulations. Some of our vessels experienced delays in drydocking as well as an increase in related drydocking costs as a result of protocols regarding COVID-19, as well as limitations in labor. We also experienced loss of revenues due to a number of off-hire days relating to crew changes and quarantine restrictions as a number of our crew members tested positive for COVID-19. Our vessel operating expenses, specifically crew change costs, COVID testing and quarantine related costs, continue to be negatively impacted by COVID-19. Global economic activity levels as well as the demand for dry bulk cargoes may be negatively impacted by COVID-19. We have instituted measures to reduce the risk of spread of COVID-19 for our crew members on our vessels as well as our onshore offices inStamford, Connecticut ,Singapore , andCopenhagen . However, if the COVID-19 pandemic continues to impact the global economy on a prolonged basis, or if related vaccine availability or efficacy materially decreases, the drybulk market rate environment and our vessel values may deteriorate and our operations and cash flows may be negatively impacted.
The impact of recent developments in
InFebruary 2022 , as a result of the invasion ofUkraine byRussia , economic sanctions were imposed bythe United States , theEuropean Union , theUnited Kingdom and a number of other countries on Russian financial institutions, businesses and individuals, as well as certain regions within the Donbas region ofUkraine . This conflict has become a multi-month war and humanitarian crisis. While it is difficult to estimate the impact of the war and current or future sanctions on the Company's business and financial position, these events and related sanctions could adversely impact the Company's operations. In the near term, we have seen, and expect to continue to see, increased volatility in the region due to these geopolitical events.The Black Sea region is a major export market for grains with theUkraine andRussia exporting a combined 15% of the global seaborne grain trade. In addition, the volatility of market prices for fuel have increased as a result of related supply disruptions from the war inUkraine . While uncertainty remains with respect to the ultimate impact of the war, we have seen, and anticipate continuing to see, significant changes in trade flows. A reduction or stoppage of grain out of theBlack Sea or cargoes fromRussia has, and will continue to, negatively impact the markets in those areas. In addition, increased volatility in fuel prices may increase or decrease the Company's operations and liquidity. At the same time, we have seen an increase in ton miles as end users find alternative sources for cargo. For more information regarding the risks relating to economic sanctions as a result ofRussia's invasion ofUkraine as well as the impact on retaining and sourcing our crew, see Part I, Item 1A, "Risk Factors" of our Form 10-K. 2 --------------------------------------------------------------------------------
Fleet Management
The management of our fleet includes the following functions:
•Strategic management. We locate and obtain financing and insurance for the purchase and sale of vessels. •Commercial management. We obtain employment for our vessels and manage our relationships with charterers. •Technical management. We have established an in-house technical management function to perform day-to-day operations and maintenance of our vessels.
Commercial and Strategic Management
We carry out the commercial and strategic management of our fleet through our indirectly wholly-owned subsidiary,Eagle Bulk Management LLC , aMarshall Islands limited liability company, which maintains its principal executive offices inStamford, Connecticut . We also have offices inSingapore andCopenhagen, Denmark , through which we provide round the clock management services to our owned and chartered-in fleet. We currently have 95 shore-based personnel, including our senior management team and our office staff,who either directly or through these subsidiaries, provide the following services: •commercial operations and technical supervision; •safety monitoring; •vessel acquisition; and •financial, accounting and information technology services.
Technical Management
Technical management includes managing day-to-day vessel operations, performing general vessel maintenance, ensuring regulatory and classification society compliance, supervising the maintenance and general efficiency of vessels, arranging our hire of qualified officers and crew, arranging and supervising drydocking and repairs, purchasing supplies, spare parts and new equipment for vessels, appointing supervisors and technical consultants, and providing technical support.
Value of Assets and Cash Requirements
The replacement costs of comparable new vessels may be above or below the book value of our fleet. The market value of our fleet may be below book value when market conditions are weak and exceed book value when markets conditions are strong. Customary with industry practice, we may consider asset redeployment, which at times may include the sale of vessels at less than their book value. The Company's results of operations and cash flow may be significantly affected by future charter markets. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based upon our interim unaudited condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP and the rules and regulations of theSEC , which apply to interim financial statements. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, expenses and warrants 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 and conditions. Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. As the discussion and analysis of our financial condition and results of operations are based upon our interim unaudited condensed consolidated financial statements, they do not include all of the information on critical accounting policies normally included in consolidated financial statements. Accordingly, a detailed description of these critical accounting policies should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 14, 2022 . There have been no material changes from the "Critical Accounting Policies" previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Use of Estimates The preparation of the condensed consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at 3
-------------------------------------------------------------------------------- the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company are the residual value of vessels, the useful lives of vessels, the value of stock-based compensation, the fair value of operating lease right-of-use assets, and the fair value of derivatives. Actual results could differ from those estimates.
Results of Operations for the three and nine months ended
Fleet Data
We believe that the measures for analyzing future trends in our results of operations consist of the following:
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Ownership Days 4,831 4,697 14,424 13,407
Chartered-in Days 1,000 563 3,102 1,718
Available Days 5,588 4,931 16,701 14,403
Operating Days 5,574 4,908 16,662 14,308
Fleet Utilization (%) 99.7 % 99.5 % 99.8 % 99.3 %
In order to understand our discussion of our results of operations, it is important to understand the meaning of the following terms used in our analysis and the factors that influence our results of operations.
•Ownership days: We define ownership days as the aggregate number of days in a period during which each vessel in our fleet has been owned by us. Ownership days are an indicator of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during a period.
•Chartered-in days: We define chartered-in days as the aggregate number of days in a period during which the Company chartered-in vessels.
•Available days: We define available days as the number of our ownership days and chartered-in days less the aggregate number of days that our vessels are off-hire due to vessel familiarization upon acquisition, repairs, vessel upgrades or special surveys and other reasons which prevent the vessel from performing under the relevant charter party such as surveys, medical events, stowaway disembarkation, etc. The shipping industry uses available days to measure the number of days in a period during which vessels should be capable of generating revenues. During the nine months endedSeptember 30, 2022 , the Company completed drydock for eight vessels. •Operating days: We define operating days as the number of our available days in a period less the aggregate number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues. •Fleet utilization: We calculate fleet utilization by dividing the number of our operating days during a period by the number of our available days during the period. The shipping industry uses fleet utilization to measure a company's efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled repairs or repairs under guarantee, vessel upgrades, special surveys or vessel positioning. Our fleet continues to perform at very high utilization rates.
TCE (Non-GAAP Measure)
Shipping revenues are highly sensitive to patterns of supply and demand for
vessels of the size and design configurations owned and operated by a company
and the trades in which those vessels operate. In the drybulk sector of the
shipping industry, rates for the transportation of drybulk cargoes such as ores,
grains, steel, fertilizers, and similar commodities, are determined by market
forces such as the supply and demand for such commodities, the distance that
cargoes must be transported, and the number of vessels expected to be available
at the time such cargoes need to be transported. The demand for shipments is
significantly affected by the state of the global economy and the conditions of
certain geographical areas. The number of vessels is affected by newbuilding
deliveries and by the removal of existing vessels from service, principally
because of scrapping.
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The mix of charters between spot or voyage charters and mid-term time charters
also affects revenues. Because the mix between voyage charters and time charters
significantly affects shipping revenues and voyage expenses, vessel revenues are
benchmarked based on time charter equivalent ("TCE"), which is a non-GAAP
measure.
TCE is a non-GAAP financial measure that is commonly used in the shipping
industry primarily to compare daily earnings generated by vessels on time
charters with daily earnings generated by vessels on voyage charters, because
charter hire rates for vessels on voyage charters are generally not expressed in
per-day amounts while charter hire rates for vessels on time charters generally
are expressed in such amounts. The Company defines TCE as revenues, net less
voyage expenses and charter hire expenses, adjusted for realized gains(losses)
on FFAs and bunker swaps, the subtotal of which is divided by the number of
owned available days. Owned available days is the number of our ownership days
less the aggregate number of days that our vessels are off-hire due to vessel
familiarization upon acquisition, repairs, vessel upgrades or special surveys.
The shipping industry uses available days to measure the number of days in a
period during which vessels should be capable of generating revenues. TCE
provides additional meaningful information in conjunction with Revenues, net,
the most directly comparable GAAP measure, because it assists Company management
in making decisions regarding the deployment and use of its vessels and in
evaluating their performance. The Company's calculation of TCE may not be
comparable to those reported by other companies. The Company calculates relative
performance by comparing TCE against the Baltic Supramax Index ("BSI") adjusted
for commissions and fleet makeup.
The following table represents the reconciliation of TCE, a non-GAAP measure,
from Revenues, net as recorded in the accompanying Condensed Consolidated
Statements of Operations for the three and nine months ended September 30, 2022
and 2021.
For the Three Months Ended For the Nine Months Ended
(In thousands, except owned September 30, September 30,
available days and TCE) 2022 September 30, 2021 2022 September 30, 2021
Revenues, net $ 185,313 $ 183,393 $ 568,406 $ 409,816
Less:
Voyage expenses (40,792) (30,273) (120,710) (81,411)
Charter hire expenses (19,772) (10,724) (63,768) (25,374)
Reversal of one legacy time
charter (1) - - - (854)
Realized gain/(loss) on
FFAs and bunker swaps 4,169 (15,338) 4,764 (21,395)
$ 128,918 $ 127,058 $ 388,692 $ 280,782
Owned available days 4,588 4,368 13,599 12,685
TCE $ 28,099 $ 29,088 $ 28,582 $ 22,135
(1) Represents revenues, net of voyage and charter hire expenses associated with
a 2014 charter-in vessel that is not representative of the Company's current
performance.
Net income
For the three months ended September 30, 2022 , the Company reported net income
of $77.2 million , or basic and diluted income of $5.94 per share and $4.77 per
share, respectively. In the comparable quarter of 2021, the Company reported net
income of $78.3 million , or basic and diluted income of $6.12 per share and
$4.92 per share, respectively.
For the nine months ended September 30, 2022 , the Company reported net income of
$224.7 million , or basic and diluted income of $17.31 per share and $13.86 per
share, respectively. In the comparable period of 2021, the Company reported net
income of $97.4 million , or basic and diluted income of $7.96 per share and
$6.34 per share, respectively.
Revenues
Our revenues are derived from time and voyage charters. Net time and voyage
charter revenues for the three months ended
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voyage charter revenues increased $21.8 million due to an increase in available
days driven by an increase in owned days and chartered-in days, partially offset
by a decrease of $19.9 million due to lower charter rates.
Net time and voyage charter revenues for the nine months ended September 30,
2022 and 2021 were $568.4 million and $409.8 million , respectively. Net time and
voyage charter revenues increased $80.4 million due to higher charter rates and
increased $78.2 million due to an increase in available days driven by increases
in owned days and chartered-in days.
Voyage expenses
To the extent that we employ our vessels on voyage charters, we will incur expenses that include bunkers, port charges, canal tolls and cargo handling operations, as these expenses are borne by the vessel owner on voyage charters. As is common in the shipping industry, we pay commissions ranging from 1.25% to 5.50% to unaffiliated ship brokers associated with the charterers, depending on the number of brokers involved with arranging the charter. Bunkers, port charges, and canal tolls primarily increase in periods during which vessels are employed on voyage charters because these expenses are for the vessel owner's account.
Voyage expenses for the three months ended
Voyage expenses for the nine months endedSeptember 30, 2022 and 2021 were$120.7 million and$81.4 million , respectively. Voyage expenses increased primarily due to an increase in bunker consumption expense of$29.1 million driven by an increase in bunker fuel prices, an increase in port expenses of$8.5 million driven by an increase in fuel surcharges and cost inflation and an increase in broker commissions of$1.7 million driven by an increase in related revenues. Vessel operating expenses Vessel operating expenses for the three months endedSeptember 30, 2022 were$33.1 million compared to$28.1 million in the comparable quarter in 2021. Vessel operating expenses increased primarily due to an increase in repair costs of$3.1 million driven by discretionary upgrades and certain unscheduled necessary repairs, and an increase in crewing costs of$2.1 million driven by crew changes and expenses related to COVID-19 and the war inUkraine . The ownership days for the three months endedSeptember 30, 2022 and 2021 were 4,831 and 4,697, respectively. Vessel operating expenses for the nine months endedSeptember 30, 2022 and 2021 were$88.2 million and$73.3 million , respectively. Vessel operating expenses increased primarily due to an increase in crewing costs of$7.8 million driven by crew changes and expenses related to COVID-19 and the war inUkraine , an increase in the cost of lubes, stores and spares of$3.1 million driven by cost inflation and an increase in repair costs of$2.4 million driven by discretionary upgrades and certain unscheduled necessary repairs. The ownership days for the nine months endedSeptember 30, 2022 and 2021 were 14,424 and 13,407, respectively. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores and related inventory, tonnage taxes, pre-operating costs associated with the delivery of acquired vessels, including providing the newly acquired vessels with initial provisions and stores, and other miscellaneous expenses.
Other factors beyond our control, some of which may affect the shipping industry in general, may cause the operating expenses of our vessels to increase, including, for instance, developments relating to market prices for crew, insurance and petroleum-based lubricants and supplies.
Charter hire expenses
The charter hire expenses for the three months endedSeptember 30, 2022 were$19.8 million compared to$10.7 million in the comparable quarter in 2021. Charter hire expenses increased$8.3 million primarily due to an increase in chartered-in days and increased$0.7 million due to an increase in charter hire rates due to improvement in the charter hire market. The total chartered-in days for the three months endedSeptember 30, 2022 were 1,000 compared to 563 for the comparable quarter in the prior year. Between 2017 and 2021, the Company entered into a series of agreements to charter five Ultramax vessels on a long term basis. The minimum chartered-in periods ranged between one and four years with an option to extend the duration between three and 24 months. All five vessels were chartered-in as ofSeptember 30, 2022 . 6 -------------------------------------------------------------------------------- The charter hire expenses for the nine months endedSeptember 30, 2022 and 2021 were$63.8 million and$25.4 million , respectively. Charter hire expenses increased$20.4 million primarily due to an increase in chartered-in days and increased$18.0 million due to an increase in charter hire rates due to improvement in the charter hire market. The total chartered-in days for the nine months endedSeptember 30, 2022 and 2021 were 3,102 and 1,718, respectively.
Depreciation and amortization
Depreciation and amortization for the three months endedSeptember 30, 2022 and 2021 was$15.4 million and$13.6 million , respectively. Depreciation and amortization for the three months endedSeptember 30, 2022 includes$11.9 million of vessel and other fixed assets depreciation and$3.5 million of deferred drydock costs amortization. Comparable amounts for the three months endedSeptember 30, 2021 were$11.4 million of vessel and other fixed assets depreciation and$2.2 million of deferred drydock costs amortization. Depreciation and amortization increased$1.3 million due to the impact of thirteen drydocks completed since the third quarter of 2021 and increased$0.5 million due to an increase in the cost base of our owned fleet due to the capitalization of BWTS on our vessels and the acquisition of three vessels in the second half of 2021, offset in part by the sale of one vessel in the third quarter of 2022. Depreciation and amortization for the nine months endedSeptember 30, 2022 and 2021 was$45.2 million and$39.2 million , respectively. Depreciation and amortization for the nine months endedSeptember 30, 2022 includes$35.5 million of vessel and other fixed asset depreciation and$9.7 million of deferred drydock costs amortization. Comparable amounts for the nine months endedSeptember 30, 2021 were$33.0 million of vessel and other fixed asset depreciation and$6.2 million of deferred drydock costs amortization. Depreciation and amortization increased$3.5 million due to the impact of 13 drydocks completed since the third quarter of 2021 and increased$2.6 million due to an increase in the cost base of our owned fleet due to the acquisition of nine vessels in 2021 and the capitalization of BWTS on our vessels, offset in part by the sale of one vessel in the third quarter of 2021 and the sale of one vessel in the third quarter of 2022. 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 from the date of initial delivery from the shipyard to the original owner. Furthermore, we estimate the residual values of our vessels to be$300 per lightweight ton, which we believe is common in the drybulk shipping industry. Drydocking relates to our regularly scheduled maintenance program necessary to preserve the quality of our vessels as well as to comply with international shipping standards and environmental laws and regulations. Management anticipates that vessels are to be drydocked every two and a half years for vessels older than 15 years and every five years for vessels younger than 15 years, accordingly, these expenses are deferred and amortized over these respective periods.
General and administrative expenses
Our general and administrative expenses include onshore vessel administration related expenses, such as legal and professional expenses, administrative and other expenses including payroll and expenses relating to our executive officers and office staff, office rent and expenses, directors' fees, and directors and officers insurance. General and administrative expenses also include stock-based compensation expenses. General and administrative expenses for the three months endedSeptember 30, 2022 and 2021 were$9.7 million and$7.9 million , respectively. General and administrative expenses include stock-based compensation of$1.4 million and$0.8 million for the three months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses increased$0.7 million due to higher stock-based compensation expense and increased$0.5 million due to an increase in compensation and benefits. General and administrative expenses for the nine months endedSeptember 30, 2022 and 2021 were$29.6 million and$23.6 million , respectively. These general and administrative expenses include stock-based compensation of$4.5 million and$2.2 million for the nine months endedSeptember 30, 2022 and 2021, respectively. General and administrative expenses increased$2.3 million due to higher stock-based compensation expense, increased$1.7 million due to an increase in compensation and benefits, and increased$1.0 million due to higher professional fees. Other operating expense Other operating expense for the three months endedSeptember 30, 2022 and 2021 was$2.5 million and$0.8 million , respectively. Other operating expense for the three months endedSeptember 30, 2022 was primarily comprised of costs associated with a corporate transaction that did not materialize. Other operating expense for the three months endedSeptember 30, 2021 was primarily comprised of costs incurred relating to a 2021 U.S. government investigation into an allegation that one of our vessels may have improperly disposed of ballast water that entered the engine room bilges during a repair. The Company posted a surety 7
-------------------------------------------------------------------------------- bond as security for any fines and penalties. Other operating expense consists of expenses incurred relating to this incident, which include legal fees, surety bond expenses, vessel offhire, crew changes and travel costs. Other operating expense for the nine months endedSeptember 30, 2022 and 2021 was$2.6 million and$2.3 million , respectively. Other operating expense for the nine months endedSeptember 30, 2022 was primarily comprised of costs associated with a corporate transaction that did not materialize. Other operating expense for the nine months endedSeptember 30, 2021 was primarily comprised of costs incurred relating to a 2021 U.S. government investigation into an allegation that one of our vessels may have improperly disposed of ballast water that entered the engine room bilges during a repair. The Company posted a surety bond as security for any fines and penalties. Other operating expense consists of expenses incurred relating to this incident, which include legal fees, surety bond expenses, vessel offhire, crew changes and travel costs.
Interest expense
Interest expense for the three months endedSeptember 30, 2022 and 2021 was$4.2 million and$8.5 million , respectively. Interest expense decreased$1.4 million due to lower effective interest rates and decreased$1.4 million due to lower outstanding principal balances, each as a result of the refinancing of the Company's debt in the fourth quarter of 2021 and decreased$1.4 million due to lower amortization of debt discounts and deferred financing costs primarily as a result of the Company's adoption of ASU 2020-06. Interest expense for the nine months endedSeptember 30, 2022 and 2021 was$13.0 million and$25.6 million , respectively. Interest expense decreased$4.6 million due to lower outstanding principal balances and decreased$4.4 million due to lower effective interest rates, each as a result of the refinancing of the Company's debt in the fourth quarter of 2021 and decreased$3.8 million due to lower amortization of debt discounts and deferred financing costs primarily as a result of the Company's adoption of ASU 2020-06. The Company entered into interest rate swaps inOctober 2021 to fix the interest rate exposure on the Global Ultraco Debt Facility term loan. As a result of these swaps, which average 87 basis points, the Company's interest rate exposure is fully fixed insulating the Company from the rising interest rate environment. Amortization of debt issuance costs is included in interest expense. These financing costs relate to costs associated with our various outstanding debt facilities. For the three months endedSeptember 30, 2022 and 2021, the amortization of debt issuance costs was$0.5 million and$2.0 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, the amortization of debt issuance costs was$1.6 million and$5.4 million , respectively. Interest expense for the three and nine months endedSeptember 30, 2021 includes$1.1 million and$3.2 million , respectively, of amortization of the equity component of the Convertible Bond Debt. The Company adopted ASU 2020-06 as ofJanuary 1, 2022 under the modified retrospective approach and therefore, as ofJanuary 1, 2022 , the Convertible Bond Debt no longer requires bifurcation and separate accounting of an equity component. Refer to Note 2, Recent Accounting Pronouncements, to the condensed consolidated financial statements for further information.
Realized and unrealized (gain)/loss on derivative instruments, net
Realized and unrealized gain on derivative instruments, net for the three months endedSeptember 30, 2022 was$11.3 million compared to a realized and unrealized loss on derivative instruments, net of$9.0 million for the three months endedSeptember 30, 2021 . The$11.3 million gain is primarily related to$14.3 million in gains earned on our freight forward agreements as a result of the decrease in charter hire rates during the third quarter, offset by$3.0 million in bunker swap losses for the three months endedSeptember 30, 2022 . For the three months endedSeptember 30, 2021 , the Company had$9.4 million in losses on our freight forward agreements due to the sharp increase in charter hire rates during the third quarter of 2021, offset by$0.4 million in bunker swap gains. Realized and unrealized gain on derivative instruments, net for the nine months endedSeptember 30, 2022 was$13.3 million compared to a realized and unrealized loss on derivative instruments, net of$45.6 million for the nine months endedSeptember 30, 2021 . The$13.3 million gain is primarily attributable to$9.4 million in gains earned on our freight forward agreements as a result of the decrease in charter hire rates during 2022 and$3.9 million in bunker swap gains for the nine months endedSeptember 30, 2022 . For the comparable period in the prior year, the Company had$47.9 million in losses on our freight forward agreements due to the sharp increase in charter hire rates in 2021, offset by$2.3 million in bunker swap gains. Refer to Note 5, Derivative Instruments, to the condensed consolidated financial statements for further information. 8 --------------------------------------------------------------------------------
Loss on debt extinguishment
Loss on debt extinguishment for the three and nine months endedSeptember 30, 2022 and 2021 was$4.2 million and$0.1 million , respectively. During the three months endedSeptember 30, 2022 , the Company repurchased$10.0 million in aggregate principal amount of Convertible Bond Debt for$14.2 million in cash and cancelled the repurchased debt. Accordingly, a$4.2 million loss on debt extinguishment was recorded in the Condensed Consolidated Statement of Operations for the three and nine months endedSeptember 30, 2022 .
Effects of Inflation
The Company believes that its business benefits during periods of elevated inflation and positive demand growth, as higher charter rates, and net revenues, more than offset increases in costs relating to vessel operating expenses, drydocking, and general and administrative.
Liquidity and Capital Resources
Nine Months Ended
(In thousands) September 30, 2022 September 30, 2021
Net cash provided by operating activities $ 242,491 $ 120,915
Net cash provided by/(used in) investing activities 4,090 (106,767)
Net cash (used in)/provided by financing activities (135,198) 22,648
Net increase in cash, cash equivalents and restricted cash 111,383 36,796
Cash, cash equivalents and restricted cash at beginning of period
86,222 88,849
Cash, cash equivalents and restricted cash at end of period
$ 197,605 $ 125,645
Net cash provided by operating activities during the nine months endedSeptember 30, 2022 and 2021 was$242.5 million and$120.9 million , respectively. The increase in cash flows provided by operating activities resulted primarily from the increase in revenues due to higher charter hire rates. Net cash provided by investing activities during the nine months endedSeptember 30, 2022 was$4.1 million compared to net cash used in investing activities of$106.8 million for the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , the Company received proceeds from the sale of one vessel for net proceeds of$14.9 million . The proceeds were offset by cash paid totaling$5.7 million for the purchase of ballast water treatment systems on our fleet and the Company paid$4.1 million as an advance for the purchase of one vessel to be delivered in the fourth quarter of 2022. Additionally, the Company paid$0.8 million for vessel improvements and$0.3 million for other fixed assets. Refer to Note 3, Vessels, to the condensed consolidated financial statements for further information. Net cash used in financing activities during the nine months endedSeptember 30, 2022 was$135.2 million compared to net cash provided by financing activities of$22.6 million for the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , the Company repaid$37.4 million of the Global Ultraco Debt Facility. The Company also paid$81.6 million in dividends,$14.2 million to repurchase a portion of our Convertible Bond Debt, and$2.4 million to settle net share equity awards. Our principal sources of funds are operating cash flows, long-term bank borrowings and borrowings under our revolving credit facility. Our principal use of funds is capital expenditures to establish and grow our fleet, maintain the quality of our vessels, comply with international shipping standards and environmental laws and regulations, fund working capital requirements and repay interest and principal on our outstanding loan facilities.
Summary of Liquidity and Capital Resources
As ofSeptember 30, 2022 , our cash and cash equivalents including restricted cash was$197.6 million , compared to$86.2 million atDecember 31, 2021 . The Company had restricted cash of$2.6 million and$0.1 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. 9 --------------------------------------------------------------------------------
In addition, as of
As ofSeptember 30, 2022 , the Company's debt consisted of the Global Ultraco Debt Facility of$250.2 million , net of$7.2 million of debt issuance costs, and the Convertible Bond Debt of$104.1 million , net of$0.7 million of debt discount and issuance costs. As ofSeptember 30, 2022 , the Company was in compliance with all applicable financial covenants under the Global Ultraco Debt Facility. DuringSeptember 2022 , the Company repurchased$10.0 million in aggregate principal amount of Convertible Bond Debt for$14.2 million in cash and cancelled the repurchased debt. The related amount of Convertible Bond Debt was not converted by the holders and no common shares were issued as a result of the repurchase transactions. The related amount of Convertible Bond Debt would have converted into 296,990 common shares (assuming the conversion occurred as ofSeptember 30, 2022 ). From time to time, the Company may, subject to market condition and other factors and to the extent permitted by law, opportunistically repurchase the Convertible Bond Debt in the open market or through privately negotiated transactions. We believe that our current financial resources, improved charter hire rates for the balance of the year and cash generated from operations will be sufficient to meet our ongoing business needs and other obligations over the next twelve months. However, our ability to generate sufficient cash depends on many factors beyond our control including, among other things, the general charter rate environment.
Capital Expenditures
Our capital expenditures relate to the purchase of vessels and capital improvements to our vessels, which are expected to enhance the revenue earning capabilities and safety of the vessels.
In addition to acquisitions that we may undertake in future periods, the other major capital expenditures include funding the Company's program of regularly scheduled drydocking, which is necessary to comply with international shipping standards and environmental laws and regulations. Although the Company has some flexibility regarding the timing of its drydocking, the costs are relatively predictable. The Company anticipates that vessels will be drydocked every five years for vessels younger than 15 years and every two and a half years for vessels older than 15 years. We anticipate that we will fund these costs with cash from operations and that these drydocks will require us to reposition these vessels from a discharge port to shipyard facilities, which will reduce our available days and operating days during that period. Drydocking costs incurred are deferred and amortized to expense on a straight-line basis over the period through the date of the next scheduled drydocking for those vessels. During the nine months endedSeptember 30, 2022 , eight of our vessels completed drydock and we incurred drydocking expenditures of$18.5 million . In the nine months endedSeptember 30, 2021 , six of our vessels completed drydock and we incurred drydocking expenditures of$10.7 million . The following table represents certain information about the estimated costs for anticipated vessel drydockings, ballast water treatment systems, and scrubber installations in the next four quarters, along with the anticipated off-hire days: Projected Costs (1) (in millions) Quarter Ending Off-hire Days(2) BWTS Drydocks Vessel Upgrades(3) December 31, 2022 177 $ 0.3 $ 1.5 $ - March 31, 2023 233 $ 0.1 $ 5.4 $ 0.4 June 30, 2023 186 $ 0.7 $ 3.8 $ 0.4 September 30, 2023 193 $ 0.7 $ 4.0 $ 0.4 (1) Actual costs will vary based on various factors, including where the drydockings are performed. (2) Actual duration of off-hire days will vary based on the age and condition of the vessel, yard schedules and other factors. (3) Vessel upgrades represents capex relating to items such as high-spec low friction hull paint which improves fuel efficiency and reduces fuel costs,NeoPanama Canal chock fittings enabling vessels to carry additional cargo through the newPanama Canal locks, as well as other retrofitted fuel-saving devices. Vessel upgrades are discretionary in nature and evaluated on a business case-by-case basis.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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--------------------------------------------------------------------------------Other Contingencies
We refer you to Note 7, Commitments and Contingencies, to the condensed
consolidated financial statements for a discussion of our contingencies. If an
unfavorable ruling were to occur in these matters, there exists the possibility
of a material adverse impact on our business, liquidity, results of operations,
financial position and cash flows in the period in which the ruling occurs. The
potential impact from legal proceedings on our business, liquidity, results of
operations, financial position and cash flows could change in the future.
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