ITEM 1. BUSINESS
GENERAL
Maritrans Inc. (the "Corporation" or the "Registrant"), together with its predecessor, Maritrans Partners L.P. (the "Partnership"), herein called "Maritrans," has historically served the petroleum and petroleum product industry by using tugs, barges and marine terminal facilities to provide marine transportation and terminalling services along the East and Gulf Coasts of the United States.
STRUCTURE
Current. The Registrant is a Delaware corporation whose common stock ("Common Stock") is publicly traded. The Registrant conducts most of its marine transportation business activities through operating divisions of Maritrans Operating Partners L.P. (the "Operating Partnership") and its managing general partner, Maritrans General Partner Inc., wholly owned subsidiaries of the Registrant. Most of the Registrant's terminalling and distribution services are conducted through subsidiaries of Maritrans Holdings Inc., a wholly owned subsidiary of the Registrant.
Historical. Founded in the 1850's and incorporated in 1928 under the name Interstate Oil Transport Company, Maritrans' predecessor was one of the first tank barge operators in the United States, with a fleet which increased in size and capacity as United States consumption of petroleum products increased. On December 31, 1980, Maritrans' predecessor operations and its tugboat and barge affiliates were acquired by Sonat Inc. ("Sonat"). On April 14, 1987, Maritrans acquired the tug and barge business and related assets from Sonat. On March 31, 1993, the limited partners of the Partnership voted on a proposal to convert the Partnership to corporate form (the "Conversion"). The proposal was approved, and on April 1, 1993, Maritrans Inc., then a newly-formed Delaware corporation, succeeded to all assets and liabilities of the Partnership. The holders of general and limited partnership interests in the Partnership and in the Operating Partnership were issued shares of Common Stock, par value $.01 per share, of the Corporation, representing substantially the same percentage equity interest in the Corporation as they had in the Partnership, directly or indirectly, in exchange for their partnership interest. Each previously held Unit of Limited Partnership Interest in the Partnership was exchanged for one share of Common Stock of the Corporation. For financial accounting purposes, the conversion to corporate form has been treated as a reorganization of affiliated entities, with the assets and liabilities recorded at their histoical costs. In addition, the Partnership recognized a net deferred income tax liability for temporary differences in accordance with Statement of Financial Accounting Standard ("FAS") No. 109, "Accounting for Income Taxes," which resulted in a one-time charge to earnings of $16.6 million in the first quarter of 1993.
Overview. Since 1981, Maritrans and its predecessors have transported annually over 200 million barrels of crude oil and refined petroleum products. Based on its internal research regarding competition, Maritrans believes that it is one of the largest United States marine transporters of petroleum and petroleum products in the United States coastwise Jones Act trade (i.e. from point-to-point within the United States), excluding affiliates of integrated oil companies, and that it owns one of the largest domestic fleets of U.S. flag oceangoing tank barges in terms of cargo-carrying capacity.
Maritrans operates a fleet of tank barges and tugboats and three terminal facilities. Its largest barge has a capacity of approximately 400,000 barrels, and its current operating barge fleet capacity aggregates approximately 4.1 million barrels. Aggregate capacity at Maritrans' terminal facilities totals approximately 1.6 million barrels at December 31, 1996.
Demand for Maritrans' services is dependent primarily upon general demand for petroleum and petroleum products in the geographic areas served by its vessels. Management believes that United States petroleum consumption, and particularly consumption in New England and Florida, are significant indicators of demand for Maritrans' services. Increases in product consumption generally increase demand for Maritrans' services; conversely, decreases in consumption generally lessen demand for Maritrans' services.
Management further believes that the level of domestic consumption of imported product is also significant to Maritrans' business. Imported petroleum products generally can be shipped on foreign-flag vessels directly into United States ports for storage, distribution and eventual consumption. These shipments reduce the need for domestic marine transportation service providers such as Maritrans to carry products from United States refineries to such ports. While Maritrans does benefit somewhat from the increase in demand for domestic redistribution services that results from the delivery of excess product to terminals by foreign-flag vessels, the overall effect of refined product imports on the demand for Maritrans' services is generally negative.
In May 1996, Maritrans restructured its operations into two divisions -- Eastern and Gulf, supported by executive and service units. The two divisions provide marketing, logistical, and operational support for Maritrans' vessels, which are assigned to divisions based on market conditions and to the terminals, which are supported at the Eastern division. This divisional restructuring was designed to improve productivity and efficiency in operations, better coordinate marketing of complementary services and permit more rapid decisions and responses to changing conditions.
The Gulf Division, headquartered in Tampa, Florida, provides marine transportation services for petroleum products from refineries located in Texas, Louisiana and Mississippi to distribution points along the Gulf and Atlantic Coasts generally south of Cape Hatteras, North Carolina and particularly into Florida. The Eastern Division, supported by a major fleet center in Philadelphia, Pennsylvania, transports petroleum products from East Coast refineries (primarily located in and near Philadelphia) and pipeline terminals located in the New York Harbor area to distribution terminals primarily located along the Eastern Seaboard between the Canadian Maritime Provinces and Norfolk, Virginia and transports petroleum products between refineries and distribution points along the Delaware River and in the Chesapeake Bay. Maritrans also provides, as part of its Eastern Division, lightering services for large tank ships (a process of off-loading crude oil or petroleum products from an inbound tanker into barges, thereby enabling the tanker to navigate draft-restricted rivers and ports to discharge cargo at a refinery or storage and distribution terminal).
SALES AND MARKETING
Maritrans provides marine transportation, storage, and distribution coordination services primarily to integrated oil companies, independent oil companies, and petroleum distributors in the southern and eastern United States. Maritrans relies primarily on direct sales efforts, minimizing its use of chartering brokers. Maritrans monitors the supply and distribution patterns of its actual and prospective customers and focuses its efforts on providing services that are responsive to the current and future needs of these customers.
Maritrans does business on a spot market basis, a term contract basis and, more recently, on a product exchange basis. Maritrans strives to maintain an appropriate mix of contracted business, based on current market conditions.
In light of the potential liabilities of oil companies and other shippers of petroleum products under the Oil Pollution Act of 1990 ("OPA") and analogous state laws, management believes that some shippers have begun to select transporters in larger measure than in the past on the basis of a demonstrated record of safe operations. Maritrans believes that the measures it has implemented in the last six years to promote higher quality operations and its longstanding commitment to safe transportation of petroleum products benefits its marketing efforts with these shippers.
In 1996, approximately 79 percent of Maritrans' revenues were generated from ten customers. In 1996, contracts with Sun Oil Company, Marathon Oil and Star Enterprise, accounted in the aggregate for approximately 20 percent, 12 percent and 10 percent, respectively, of Maritrans' revenues. There could be a material adverse effect on Maritrans if any of these customers were to cancel or terminate their various agreements with Maritrans. Management believes that cancellation or termination of all its business with any of its larger customers is unlikely.
In early 1996, BP Oil Company completed the sale of its northeastern U.S. retail outlets, terminal facilities and its Marcus Hook, Pennsylvania, refinery to Tosco Corporation ("Tosco"). This refinery's output did not represent the only source of Maritrans' revenue from BP Oil Shipping Company in 1995 or 1996. The refinery was
turned over to Tosco in a non-operating state. This development negatively impacted financial results although Maritrans took action to replace the revenues that had been associated with this refinery's output, including relocating certain vessels and other steps to mitigate the financial impact. Maritrans understands that Tosco currently plans to reopen this refinery sometime in 1997.
COMPETITION AND COMPETITIVE FACTORS
Overview. The maritime petroleum transportation industry is highly competitive. The Jones Act, a federal law, restricts United States point-to-point maritime shipping to vessels built in the United States, owned by U.S. citizens and manned by U.S. crews. In Maritrans' market areas, its primary direct competitors are the operators of U.S. flag oceangoing barges and U.S. flag tankers. In the Gulf market, the primary competitors are the fleets of both other independent petroleum transporters and integrated oil companies. In the Eastern market, management believes, based on its extensive knowledge and experience in the industry, that Maritrans primarily competes with other independent oceangoing barge operators and with the captive fleets of integrated oil companies and, in lightering operations, competes with foreign-flag operators which lighter offshore. Some of the integrated oil company fleets with which Maritrans competes are larger than Maritrans' fleet. Additionally, in certain geographic areas and in certain business activities, Maritrans competes with the operators of petroleum product pipelines. Competitive factors which also affect Maritrans include the output of United States refineries and the importation of refined petroleum products.
The primary competition for Maritrans' marine terminals is proprietary storage capacity of integrated oil companies, merchant refiners, and independent marine terminal operators.
U.S. Flag Barges and Tankers. Maritrans' most direct competitors are the other operators of U.S. flag oceangoing barges and tankers. Because of the restrictions imposed by the Jones Act, there is a finite number of vessels that are currently eligible to engage in U.S. maritime petroleum transport. Therefore, the size and capacity of Maritrans' fleet relative to those of others in the industry is an important factor in competing for business on the basis of service. The number of vessels eligible to engage in Jones Act trade has declined significantly over the past several years. The gradual implementation of regulations requiring significant capital modifications and in some cases loss of vessel capacity, as well as a decrease in the number of new vessels constructed since 1982, have been the major causes of this decline. Competition in the industry is based upon price and service (including vessel availability) and is intense.
Maritrans is engaged in several different market activities. A significant portion of its revenues in 1996 was generated in the coastal transportation of petroleum products from refineries or pipeline terminals in the Gulf of Mexico to ports which are not served by pipelines. Management believes that the optimal vessel size suited to serve these ports is between 20,000 deadweight tons ("DWT") (approximately 160,000 barrels) and 40,000 DWT (approximately 320,000 barrels). Maritrans currently operates eight barges in this size range in this market, which comprises a significant number of the vessels able to compete in this market. The relatively large size of Maritrans' fleet generally provides greater flexibility in meeting customers' needs.
Maritrans competes with operators of generally smaller vessels in its Eastern transportation activities. In this activity Maritrans is competing primarily with other barge operators. This is a diverse market allowing a broader size range of vessels to participate than in the Gulf of Mexico.
Management believes that, to some extent, Maritrans' independent competitors do not provide the same level of service, quality performance, or attention to safe operations as Maritrans due to its fleet size, maintenance and training programs, and spill record.
General Agreement on Trade in Services ("GATS") and North American Free Trade Agreement ("NAFTA").
The possible inclusion of maritime services within the scope of the GATS and the NAFTA was the subject of discussion in the concluded Uruguay Round of GATS negotiations and NAFTA negotiations. Maritime services were not included in GATS until at least the year 2000. If maritime services were deemed to include cabotage (vessel trade or marine transportation between two points within the same country) and were included in any multi-national trade agreements, the result would be to open the Jones Act trade, (i.e., transportation of
maritime cargo between U.S. ports in which Maritrans and other U.S. vessel owners operate) to foreign-flag vessels which would operate at lower costs. While cabotage will not be included in the GATS and the NAFTA in the immediate future, the possibility exists that cabotage could be included in the GATS, NAFTA or other international trade agreement in the future. In the meantime, Maritrans and the maritime industry will continue to resist vigorously the inclusion of cabotage in the GATS, NAFTA and any other international trade agreements.
The U.S. Administration signed legislation to export Alaskan crude oil on U.S. built and manned vessels. While to date this law has not materially affected the vessel capacity competing against Maritrans in the Jones Act trades, it could have an adverse impact on the status of the Jones Act in the context of future international trade developments.
Refined Product Pipelines. Existing refined product pipelines generally are the lowest incremental cost method for the long-haul movement of petroleum and refined petroleum products. Other than the Colonial Pipeline system, which originates in Texas and terminates at New York Harbor, the Plantation Pipeline, which originates in Louisiana and terminates in Washington D.C., and smaller regional pipelines between Philadelphia and New York, there are no pipelines carrying refined petroleum products to the major storage and distribution facilities currently served by Maritrans. While the Colonial Pipeline system reduces the amount of refined product transported into the New York area by ship, it provides an origination point for Maritrans' business of transporting such products from New York Harbor to New England ports. Management believes that high capital costs, tariff regulation and environmental considerations make it unlikely that a new refined product pipeline system which would have a material adverse effect on Maritrans' business will be built in its market areas in the foreseeable future. It is possible, however, that, as noted above, new pipeline segments (including pipeline segments that connect with existing pipeline systems) could be built or that existing pipelines could be converted to carry refined petroleum products, either of which could effectively compete with Maritrans in particular locations.
Natural Gas Pipelines. In December 1991, a 370 mile natural gas pipeline from the Canadian border to the northeastern United States markets was completed. The operation of this pipeline increased the amount of natural gas supplied to the northeastern United States, thus reducing the demand for residual fuel for power generation. This ultimately reduced the demand for marine transportation of residual fuel and other petroleum products to and within the area negatively affecting Maritrans and other carriers active in this trade. The continuation of this reduction will depend on the relative prices between residual fuel and natural gas, including transportation costs, in the future.
Imported Refined Petroleum Products. A significant factor affecting the level of Maritrans' business operations is the level of refined petroleum product imports, particularly in Florida and New England. Imported refined petroleum products may be transported on foreign-flag vessels, which are generally less costly to operate than U.S. flag vessels. To the extent that there is an increase in the importation of refined petroleum products to any of the markets served by Maritrans, there could be a decrease in the demand for the transportation of refined products from United States refineries, which would likely have an adverse impact upon Maritrans. One possible outcome of the Clean Air Act could be the importing of more refined product from outside the United States in order to avoid the expense of upgrading United States refineries to comply with such Act. In this case, while there would still be a need for marine petroleum transportation, the demand would decrease, thereby possibly materially adversely affecting the coastwise business of Maritrans and its competitors.
Delaware River Channel Deepening. Legislation has been approved by the United States Congress which authorizes the U.S. Army Corps of Engineers to deepen the channel of the Delaware River between the river's mouth and Philadelphia from forty to forty-five feet late in the 1990's. If further legislation appropriating the funds for this project should become law and this project is implemented and used by vessels calling on the Delaware Valley refineries, it would have a material adverse effect on Maritrans' lightering business which currently transports crude oil which is off-loaded from deeply laden tankers from the mouth of the Delaware Bay up the Delaware River to the Delaware Valley refineries.
EMPLOYEES AND EMPLOYEE RELATIONS
At December 31, 1996, Maritrans and its subsidiaries employed a total of 476 persons. Of these employees, 78 are employed at the Philadelphia, Pennsylvania headquarters of the Registrant or at the Philadelphia and
Tampa fleet centers, 383 are seagoing employees who work aboard the tugs and barges, and 15 are employed by Maritrans' non-marine affiliates. Maritrans and its predecessors have had collective bargaining agreements with the Seafarers' International Union of North America, Atlantic, Gulf and Inland District, AFL-CIO ("SIU"), and with American Maritime Officers ("AMO"), formerly District 2 Marine Engineers Beneficial Association, Associated Maritime Officers, AFL-CIO, for approximately 34 years. Approximately one-half of the total number of seagoing employees employed are supervisors and, hence, as part of management, are not represented by maritime unions. The collective bargaining agreement with the SIU covers approximately 155 employees. The collective bargaining agreement with the AMO covers approximately 43 employees. Each expires on May 31, 2001. The employees of the subsidiaries of Maritrans Holdings Inc. are not covered by any collective bargaining agreement.
Management believes that the seagoing supervisory and non-supervisory personnel contribute significantly to responsive customer service. Maritrans maintains a policy of seeking to promote from within, where possible, and generally seeks to draw from its union and non-union personnel to fill supervisory and other management positions as vacancies occur.
Management believes that its operational audit program (performed by Tidewater School of Navigation, Inc.) and training program are essential to insure that its employees are knowledgeable and highly skilled in the performance of their duties as well as in their preparedness for any unforeseen emergency situations that may arise. Consequently, various training sessions and additional skill improvement seminars are held throughout the year. In 1991, Maritrans introduced its Quality Improvement Program. All employees participate in quality training seminars in addition to the skills improvement training.
REGULATION
Marine Transportation -- General. The Interstate Commerce Act exempts from economic regulation the water transportation of petroleum cargos in bulk. Accordingly, Maritrans' transportation rates, which are negotiated with its customers, are not subject to special rate regulation under the provisions of such act or otherwise. The operation of tugboats and barges is subject to regulation under various federal laws and international conventions, as interpreted and implemented by the United States Coast Guard, as well as certain state and local laws. Tugboats and barges are required to meet construction and repair standards established by the American Bureau of Shipping, a private organization, and/or the United States Coast Guard and to meet operational and safety standards presently established by the United States Coast Guard. Maritrans' seagoing supervisory personnel are licensed by the United States Coast Guard. Seamen and tankermen are certificated by the United States Coast Guard.
Jones Act. The Jones Act, a federal law, restricts maritime transportation between United States points to vessels built and registered in the United States and owned by United States citizens. The entities in the Maritrans organizational structure engaged in maritime transportation between United States points are subject to the provisions of the law. Therefore, it is the responsibility of Maritrans to monitor ownership of these entities and take any remedial action necessary to insure that no violation of the Jones Act ownership restrictions occurs. In addition, the Jones Act requires that all United States flag vessels be manned by United States citizens, which significantly increases the labor and certain other operating costs of United States flag vessel operations compared to foreign-flag vessel operations. Foreign-flag seamen generally receive lower wages and benefits than those received by United States citizen seamen. In addition, a significant number of foreign governments subsidize, at least to some extent, the wages and/or benefits received by the seamen of those nations. Furthermore, certain of these foreign governments subsidize those nations' shipyards, resulting in lower shipyard costs both for new vessels and repairs, than those paid by United States-flag vessel owners such as Maritrans, to United States shipyards. Finally, the United States Coast Guard and American Bureau of Shipping maintain the most stringent regime of vessel inspection in the world, which tends to result in higher regulatory compliance costs for United States-flag operators than those paid by owners of vessels registered under foreign flags of convenience. Because Maritrans transports petroleum and petroleum products between United States ports, most of its business depends upon the Jones Act remaining in effect. There have been various unsuccessful attempts in the past by foreign governments and companies to gain access to the Jones Act trade, as well as by interests within the United States to limit or do away with the Jones Act. Legislation to this effect was introduced in the last session of Congress. Management expects that efforts of this type will continue.
ENVIRONMENTAL MATTERS
Maritrans' operations present potential environmental risks, primarily through the marine transportation or storage of petroleum. Maritrans is committed to protecting the environment and complying with applicable environmental laws and regulations. Maritrans, as well as its competitors, is subject to regulation under federal, state and local environmental laws which have the effect of increasing the costs and potential liabilities arising out of its operations.
Marine Storage Terminal Regulation. Maritrans marine terminal subsidiaries are subject to various federal, state and local environmental laws and regulations, particularly with respect to air quality, the handling of materials removed from the tanks of vessels which are cleaned, and any spillage of petroleum products on or adjoining marine terminal premises. Management believes that this regulatory scheme will become progressively stricter in the future, resulting in greater capital expenditures by Maritrans for environmentally related equipment. Also, there are significant fines and penalties for any violations of this scheme. Management intends to reflect any such additional expenditures, to the extent they are able, in the rates which are charged to customers from time to time for services.
Oil Pollution Legislation. Many of the states in which Maritrans does business have enacted laws providing for strict, unlimited liability for vessel owners in the event of an oil spill. In addition, certain states have enacted or are considering legislation or regulations involving at least some of the following provisions: tank- vessel-free zones, contingency planning, state inspection of vessels, additional operating, maintenance and safety requirements, and state financial responsibility requirements. As a result of this legislation and regulation, Maritrans has limited its carriage of persistent oils, primarily crude and #6 oil, to or through portions of several of these states. Persistent oils are those which continue to exist longer in the water when spilled, thus making them more difficult to clean up.
In August 1990, OPA became law. OPA substantially changes the liability exposure of owners and operators of vessels, oil terminals and pipelines from that imposed under prior law. Under OPA, each responsible party for a vessel or facility from which oil is discharged will be jointly, strictly and severally liable for all oil spill containment and clean-up costs and certain other damages arising from the discharge. These other damages are defined broadly to include (i) natural resource damage (recoverable only by government entities), (ii) real and personal property damage, (iii) net loss of taxes, royalties, rents, fees and other lost revenues (recoverable only by government entities), (iv) lost profits or impairment of earning capacity due to property or natural resource damage, and (v) net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards.
The owner or operator of a vessel from which oil is discharged will be liable under OPA unless it can be demonstrated that the spill was caused solely by an act of God, an act of war, or the act or omission of a third party unrelated by contract to the responsible party. Even if the spill is caused solely by a third party, the owner or operator must pay all removal cost and damage claims and then seek reimbursement from the third party or the trust fund established under OPA.
OPA establishes a federal limit of liability of the greater of $1,200 per gross ton or $10 million per tank vessel. A vessel owner's liability is not limited, however, if the spill results from a violation of federal safety, construction or operating regulations. In addition, OPA does not preclude states from adopting their own liability laws. Numerous states in which Maritrans operates have adopted legislation imposing unlimited strict liability for vessel owners and operators. Management believes that the liability provisions of OPA and similar state laws have greatly expanded Maritrans' potential liability in the event of an oil spill, even where Maritrans is not at fault.
OPA requires all vessels to maintain a certificate of financial responsibility for oil pollution in an amount equal to the greater of $1,200 per gross ton per vessel, or $10 million per vessel in conformance with U.S. Coast Guard regulations. Additional financial responsibility in the amount of $300 per gross ton is required under U.S. Coast Guard regulations under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), the federal Superfund law. The previous requirement was $150 per gross ton per vessel, or $250,000, whichever is larger. Owners of more than one tank vessel, such as Maritrans, however, are only
required to demonstrate financial responsibility in an amount equal to cover the vessel having the greatest maximum liability (approximately $40 million in Maritrans' case). Maritrans has acquired such certificates through filing required financial information with the U.S. Coast Guard.
OPA requires all newly constructed petroleum tank vessels engaged in marine transportation of oil and petroleum products in the U.S. to be double-hulled and all such existing single-hulled vessels to be retrofitted with double hulls or phased out of the industry beginning January 1, 1995, in order to comply with new standards for such vessels. Because of the age and size of Maritrans' individual barges, the first of its operating vessels will be required to be retired or retrofitted by January 1, 2003, and most of its large ocean-going, single-hulled vessels will be similarly affected on January 1, 2005. Management believes that it would, for example, cost approximately $20-25 milion to build a 20,000 DWT double-hulled barge. The cost of retrofitting an existing 20,000 DWT barge with a double hull may be somewhat less than the cost of a new barge, but the retrofitting cost would depend upon a variety of construction and engineering factors. Therefore, retrofitting may not be a viable economic alternative to the purchase of a new double-hulled barge. The prices of retrofitting and constructing new vessels may increase materially as a result of increased demand for shipyard capacity arising from OPA. Also as a result of this legislation, the expected lives of some of Maritrans' barges have been shortened, thus forcing Maritrans to accelerate the depreciation of these vessels. This change in depreciation calculation began in September 1990 and caused an increase of Maritrans' annual depreciation expense by approximately $1.4 million.
The double-hulled or double-bottomed tank barges currently owned by Maritrans account for approximately 25 percent of its fleet capacity. The OCEAN 400 and the MARITRANS 300, approximately 16 percent of fleet capacity, have been grandfathered under equivalency provisions of the interim final rule promulgated by the U.S. Coast Guard.
OPA further required all tank vessel operators to submit, by February 18, 1993, for federal approval, detailed vessel oil spill contingency plans setting forth their capacity to respond to a worst case spill situation. Maritrans filed its plans prior to that deadline. Several states have similar contingency or response plan requirements. Because of the large number of ports served by Maritrans, the cost of compliance may be substantial, and, while Maritrans is presently in compliance, there is no assurance that Maritrans will be able to remain in compliance with all the federal requirements or those of one or more states.
OPA is expected to have a continuing adverse effect on the entire U.S. oil and petroleum marine transportation industry, including Maritrans. The effects on the industry could include, among others, (i) increased requirements for capital expenditures, which the independent marine transporters of petroleum may not be able to finance, to fund the cost of double-hulled vessels, (ii) increased maintenance, training, insurance and other operating costs, (iii) civil penalties and liability, (iv) decreased operating revenues as a result of a further reduction of volumes transported by vessels and (v) increased difficulty in obtaining sufficient insurance, particularly oil pollution coverage. These effects could adversely affect Maritrans' profitability and liquidity.
The following table sets forth Maritrans' quantifiable cargo oil spill record for the period January 1, 1992 through December 31, 1996:
- ------ * Results for 1993 exclude the product lost, mostly burned, in the collision of Maritrans' barge, the OCEAN 255, with vessels owned by others off the coast of Florida in August 1993. Management believes that Maritrans was not at fault in this incident.
Maritrans believes that its spill ratio compares favorably with the other independent, coastwise operators in the Jones Act trade.
Water Pollution Regulations. The Federal Water Pollution Control Act of 1972 ("FWPCA"), as amended by the Clean Water Act of 1977, imposes strict prohibitions against the discharge of oil (and its derivatives) and hazardous substances into navigable waters of the United States. FWPCA provides civil and criminal penalties for any discharge of petroleum products in harmful quantities and imposes substantial liability for the clean-up costs of removing an oil spill. State laws for the control of water pollution also provide varying civil and criminal penalties and clean-up cost liabilities in the case of a release of petroleum or its derivatives into surface waters. In the course of its vessel operations, Maritrans engages contractors, in addition to Maritank Philadelphia Inc., to remove and dispose of waste material, including tank residue. In the event that any of such waste is deemed "hazardous," as defined in FWPCA or the Resource Conservation and Recovery Act, and is disposed of in violation of applicable law, Maritrans could be jointly and severally liable with the disposal contractor for the clean-up costs and any resulting damages. The United States Environmental Protection Agency ("EPA") previously determined not to classify most common types of "used oil" as a "hazardous waste," provided that certain recycling standards are met. While it is unlikely that used oil will be classified as hazardous, the management of used oil under EPA's proposed regulations will increase the cost of disposing of or recycling used oil from Maritrans' vessels. Some states in which Maritrans operates, however, have classified "used oil" as hazardous. Maritrans has found it increasingly expensive to manage the wastes generated in its operations.
Air Pollution Regulations. The 1990 amendments to the Clean Air Act give the EPA and the states the authority to regulate emissions of volatile organic compounds ("VOCs") and any other air pollutant from tank vessels in all ports served by Maritrans and storage terminals. Several states with ports served by Maritrans already have established regulations to require the installation of vapor recovery equipment on petroleum- carrying vessels to reduce the emissions of VOCs. Compliance with these federal and state regulations has required material capital expenditures for the retrofitting of Maritrans' barges and has increased operating costs. The state of Delaware has announced that it intends to regulate vapor emissions from lightering in the Delaware Bay. This regulation, the timing of which is presently uncertain, would in all likelihood require the installation of additional equipment on lightering barges at a material cost. Similarly, various states require vapor recovery equipment at storage terminals for the loading of petroleum into vessels and tank trucks. Maritrans' terminal facilities are equipped with vapor recovery capabilities for the loading of tank trucks. They do not currently load petroleum into vessels and therefore have not acquired vapor recovery capabilities for that activity. The EPA also has the authority to regulate emissions from marine vessel engines; however, with the possible exception of the use of low sulfur fuels, direct regulation of marine engine emissions is not likely in the near future in ports served by Maritrans. However, it is possible that the EPA and/or various state environmental agencies ultimately may require that additional air pollution abatement equipment be installed in tugboats, including those owned by Maritrans. Such a requirement could result in a material expenditure by Maritrans, which could have an adverse effect on Maritrans' profitability if it is not able to recoup these costs through increased charter rates. Also, the application of various air quality rules in connection with the operation of Maritrans facilities may require significant additional expenditures which may not be recovered through increased rates.
Port and Tanker Safety Act. The Port and Tanker Safety Act of 1978 ("PTSA") requires certain oil-carrying tankships to be fitted with segregated ballast tanks. PTSA requires self-propelled vessels to be retrofitted to meet these standards. Barges are not generally affected by such requirements. However, if the environmental standards of PTSA were to be made applicable to the large barges operated by Maritrans, Maritrans would be required to make significant capital expenditures to retrofit such barges, and the cargo-carrying capacity of such barges would also be decreased. There have been no recent regulatory efforts to apply the PTSA standards to large barges such as those operated by Maritrans.
User Fees and Taxes. The Water Resources Development Act of 1986 permits local non-federal entities to recover a portion of the costs of new port and harbor improvements from vessel operators with vessels benefitting from such improvements. Management does not believe that Maritrans' vessels currently benefit from such improvements. However, there can be no assurance that such entities will not seek to recover a portion of such costs from Maritrans. Federal legislation has been enacted imposing user fees on vessel operators such as Maritrans to help fund the United States Coast Guard's regulatory activities. Other federal, state and local agen-
cies or authorities could also seek to impose additional user fees or taxes on vessel operators or their vessels. The Coast Guard collects fees for vessel inspection and documentation, licensing and tank vessel examinations. These fees have not been material to Maritrans. There can be no assurance that additional user fees, which could have a material adverse effect upon the financial condition and results of operations of Maritrans, will not be imposed in the future.
ITEM 2.
ITEM 2. PROPERTIES
Vessels. The Registrant's subsidiaries owned, at December 31, 1996, a fleet of 50 vessels, of which 27 are barges and 23 are tugboats. Three additional tugs are chartered under long-term leases.
In December of 1994, Maritrans increased its double-hull and double-bottom vessel capacity to over one million barrels by purchasing the MARITRANS 300, an oceangoing, double-hulled petroleum tank barge with a capacity of approximately 300,000 barrels. After undergoing modifications, this vessel was placed in service in the fourth quarter of 1995.
The barge fleet consists of a variety of vessels falling within six different barge classifications. The largest vessels in the fleet are the twelve superbarges ranging in capacity from 188,065 to 400,000 barrels. The oldest vessel in that class is the OCEAN 250 which was constructed in 1970, while the largest vessel is the OCEAN 400, for which modifications were completed as recently as 1990. For the most part, however, the bulk of the superbarge fleet was constructed during the 1970's and early 1980's.
The fleet's next eight largest barges range in capacity from 61,638 barrels to 165,881 barrels and were constructed or substantially renovated between 1967 and 1981. The remainder of the barge fleet is comprised of three vessels falling in the 50,000 barrel class, and four vessels in the 30,000 barrel class. The majority of these vessels were constructed between 1961 and 1977.
The tugboat fleet is comprised of one 11,000 horsepower class vessel, eleven 5,600 horsepower class vessels, three 4,000 horsepower class vessels, five 3,200 horsepower class vessels, four 2,200 horsepower class vessels, one pusher class vessel and one chartered 15,000 horsepower class vessel. The year of construction or substantial renovation of these vessels ranges from 1962 to 1990 with the bulk of the tugboats having been constructed sometime between 1967 and 1981.
Substantially all of the vessels in the fleet are subject to first preferred ship mortgages to secure payment of the notes of the Operating Partnership. These mortgages require the Operating Partnership to maintain the vessels at a high standard and continue a life-extension program for certain of its larger barges. At December 31, 1996, Maritrans is in compliance with the Operating Partnership's mortgage covenants.
Marine Terminals. At December 31, 1996, MPI owns 35 acres on the west bank of the Schuylkill River in Philadelphia where twelve storage tanks with a total capacity of 1,040,000 barrels, truck loading racks, office space and related equipment used in MPI's marine terminal and tank cleaning operations are located. In early 1993, MMI acquired 25 acres on the Wicomico River in Salisbury, Maryland where fourteen storage tanks with a total capacity of 170,000 barrels, truck loading racks, office space and related equipment used in MMI's marine terminal operations are located. In March 1997, MMI sold 20 acres in Baltimore, Maryland with ten storage tanks with a total capacity of 530,000 barrels, truck loading racks and related equipment.
Other Real Property. The Registrant's operations are headquartered in Philadelphia, Pennsylvania, where it leases office space, expiring in 1998. Eastern fleet operations are located on the west bank of the Schuylkill River in Philadelphia, Pennsylvania where the Operating Partnership owns approximately six acres of improved land. In addition, it also leases a bulkhead of approximately 430 feet from the federal government for purposes of mooring vessels adjacent to the owned land. This lease was renewed in 1993 and expires in 1998. In the Philadelphia area, the Operating Partnership has one short term (one year or less) lease for nearby pier space for the purpose of mooring vessels. The Operating Partnership also leases four acres of Port Authority land in Tampa, Florida for use as its Gulf Division fleet center, which expires in 2004, with three renewal options of ten years each and a limited amount of office space in Wilmington, Delaware for itself and its affiliated entities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Maritrans is a party to routine, marine-related claims, lawsuits and labor arbitrations arising in the ordinary course of its business. The claims made in connection with Maritrans' marine operations are covered by marine
insurance, subject to applicable policy deductibles which are not material as to any type of insurance coverage. Management believes, based on its current knowledge, that such lawsuits and claims, even if the outcomes were to be adverse, would not have a material adverse effect on Maritrans' financial condition.
In connection with the sale of Main Iron Works, Inc. ("MIW"), Maritrans' predecessor agreed to reimburse MIW for certain ongoing workmen's compensation claims arising prior to the sale of MIW, and retained an assignment of the shipyard's rights against its former workmen's compensation insurance carrier, which has been in liquidation proceedings. Maritrans assumed its predecessor's reimbursement obligations to MIW and obtained an assignment of the predecessor's rights against the workmen's compensation insurance carrier. Due to the size and complexity of the liquidation proceeding, it is unlikely that this matter will be resolved for several years. Maritrans recently reached an agreement in principle with MIW pursuant to which Maritrans would no longer have any reimbursement obligations to MIW for any of these ongoing workmens' compensation claims in return for which Maritrans would modify the amount due by MIW to Maritrans under the original agreement. Maritrans retains all rights against MIW's original insurance carrier with respect to the monies Maritrans has reimbursed MIW.
Maritrans has been sued by 54 individuals, alleging unspecified damages for exposure to asbestos and in at least 43 such cases for exposure to tobacco smoke. Although Maritrans believes these claims are without merit, it is impossible at this time to express a definitive opinion on the final outcome of any such suit. Management believes that any liability would not have a material adverse effect as it would be adequately covered by applicable insurance.
During 1993, one of the Company's tug/barge units was involved in a collision off the coast of Florida. Claims resulting from this incident have been and are expected to be covered by insurance. In 1993, Maritrans received insurance proceeds in excess of the barge's net book value for the constructive total loss of the barge.
In 1996, Maritrans filed suit against the United States government under the Fifth Amendment to the U.S. Constitution for "taking" 37 of Maritrans' tank barges without just compensation. Maritrans asserts that the vessels were taken with the passage of Section 4115 of the Oil Pollution Act of 1990 and that this taking was done in contravention of the Fifth Amendment, which specifically prohibits the United States government from taking private property for public use without just compensation. Maritrans is seeking compensation based on the fact that Maritrans has been deprived of its reasonable investment-backed expectation in the continued use of its barges by Section 4115 of OPA, which prohibits all existing single-hull tank vessels from operating in U.S. waters under a retirement schedule which began January 1, 1995, and ends on January 1, 2015. Under this OPA provision, Maritrans' single-hull tank barges will be forced from service commencing on January 1, 2003, with a significant portion of the economic lives remaining, or be required to be retrofitted.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Registrant's security holders, through the solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information and Holders
Maritrans Inc. Common Shares trade on the New York Stock Exchange under the symbol "TUG." The following table sets forth, for the periods indicated, the high and low sales prices per share as reported by the New York Stock Exchange.
QUARTERS ENDING IN 1996: HIGH LOW ------------------------ --------- --------- March 31, 1996 $6.250 $5.000 June 30, 1996 6.250 5.125 September 30, 1996 7.000 5.875 December 31, 1996 6.500 6.000
QUARTERS ENDING IN 1995: HIGH LOW ------------------------ --------- --------- March 31, 1995 $6.000 $5.250 June 30, 1995 6.500 5.500 September 30, 1995 6.000 5.500 December 31, 1995 5.875 5.125
As of January 31, 1997, the Registrant had 11,960,909 Common Shares outstanding and approximately 1,027 shareholders of record.
Dividends
For the year ended December 31, 1996 and 1995, Maritrans Inc. paid the following cash dividends to stockholders:
PAYMENTS IN 1996: PER SHARE ---------------------- ------------- March 13, 1996 $.050 June 12, 1996 $.075 September 11, 1996 $.075 December 11, 1996 $.075 ------------- Total $.275 =============
PAYMENTS IN 1995: PER SHARE ---------------------- ------------- March 13, 1995 $.020 June 14, 1995 $.020 September 13, 1995 $.020 December 13, 1995 $.050 ------------- Total $.110 =============
While dividend policy is determined at the discretion of the Board of Directors of Maritrans Inc., management believes that it is likely Maritrans will pay quarterly cash dividends during 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA ($000)
- ------ (1) On April 1, 1993, Maritrans Partners L.P. converted from partnership to corporate form, and Maritrans Inc. succeeded to all assets and liabilities of Maritrans Partners L.P. In the first quarter of 1993 Maritrans Partners L.P. recognized a net deferred income tax liability for temporary differences in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes," which resulted in a one-time charge to earnings of $16.6 million.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the consolidated financial condition and results of operations of Maritrans Inc. (the "Corporation"), and, together with its subsidiaries and its predecessor, Maritrans Partners L.P. (the "Partnership"), herein called "Maritrans."
OVERVIEW
Historically, Maritrans has served the petroleum and petroleum product distribution industry by using tugs, barges and marine terminal facilities to provide marine transportation and terminalling services along the East and Gulf Coasts of the United States. Between 1992 and 1996, Maritrans has transported at least 218 million barrels annually. The high was 248 million barrels in 1993, and the low was 218 million barrels in 1996. Many factors affect the number of barrels transported and will affect future results for Maritrans, including its vessel and fleet size and average trip lengths, the continuation of federal law restricting United States point-to-point maritime shipping to U.S. vessels (the Jones Act), domestic oil consumption -- particularly in Florida and the northeastern U.S., environmental laws and regulations, oil companies' operating and sourcing decisions, competition, labor and training costs and liability insurance costs. Overall U.S. oil consumption during 1992-1996 fluctuated between 17.0 million and 18.2 million barrels a day.
Since 1990, Maritrans has taken steps to modify the mix of operating characteristics of its fleet. Maritrans has increased its vessel capacity with the placing in service of its two largest oceangoing, double-hulled petroleum tank barges, the OCEAN 400 and MARITRANS 300, with capacities of approximately 400,000 and 300,000 barrels, respectively. Over this period, Maritrans has also made reductions in owned capacity, disposing of vessels which, due to their sizes and operating characteristics, Maritrans considered excess to its long-term business needs. The operating fleet owned by Maritrans is now approximately 15 percent smaller in barrel capacity than it had been at year-end 1990.
LEGISLATION
The enactment of the Oil Pollution Act of 1990 ("OPA") significantly increased the liability exposure of marine transporters of petroleum in the event of an oil spill. In addition, the states in which Maritrans operates have enacted legislation increasing the liability for oil spills in their waters. Maritrans maintains oil pollution liability insurance of $700 million on each of its vessels. There can be no assurance that such insurance will be adequate to cover potential liabilities in the event of a catastrophic spill, that additional premium costs will be recoverable through increased vessel charter rates, or that such insurance will continue to be available in satisfactory amounts.
Moreover, this legislation has increased other operating costs as Maritrans has taken steps to minimize the risk of spills. Among such costs are those for additional training, safety and contingency programs; these expenses have not yet been and may never be fully recovered through increased vessel charter rates. Additionally, management believes that the legislation has effectively reduced the total volume of waterborne petroleum transportation as shippers of petroleum have tried to limit their exposure to OPA liability. This legislation has had a material adverse effect on Maritrans' operations, financial performance and expectations.
OPA is expected to continue having negative effects on the entire U.S. oil and marine petroleum transportation industry, including Maritrans. These effects could include: (i) increased capital expenditures to cover the cost of mandated double-hulled vessels -- expenditures that the independent marine transporters of petroleum may not be able to finance, (ii) continued increased maintenance, training, insurance and other operating costs, (iii) increased liability and exposure to civil penalties, (iv) decreased operating revenues as a result of further reductions in volumes transported on vessels and (v) increased difficulty in obtaining sufficient insurance, particularly oil pollution coverage. These effects could adversely affect Maritrans' profitability and liquidity.
OPA will require the retirement of, or retrofitting with double hulls, all single-hulled petroleum tankers and barges operating in U.S. waters, including most of Maritrans' existing barges. The first of Maritrans' affected barges will have to be retired or retrofitted by 2003. However, most of Maritrans' large oceangoing, single-hulled barges will be affected January 1, 2005. Maritrans' barges under 5,000 gross registered tons are not scheduled for retirement until 2015. Approximately 16 percent of Maritrans' operating capacity has been qualified by the United States Coast Guard as meeting the double-hull requirements and, therefore, is allowed to continue operating without modification and without a legislatively determined retirement date. If Maritrans were to replace its entire barge capacity with newly built double hulls, the estimated cost would be approximately $500 million. This estimate could be higher as shipyard costs increase.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues for 1996 were $127.0 million and were $124.5 million in 1995, an increase of $2.5 million, or two percent. Barrels of cargo transported decreased by 6.9 million barrels, from 225.0 million to 218.1 million, or three percent. Curtailment of a portion of refinery throughput in the Delaware Valley refineries in 1996 caused Maritrans to employ its vessel capacity in alternative markets. This had the result of increasing average trip length, which further resulted in higher average revenues per barrel transported, as equipment formerly utilized in and around Delaware Valley refining and terminalling locations was redeployed into the Gulf of Mexico, the Chesapeake Bay, and into delivery locations in the Caribbean. The markets within which Maritrans operates continue to experience severe price competition for oil transportation services which is expected to continue. Revenue from sources other than marine transportation decreased from 4.0 percent of total revenues in 1995 to 3.6 percent in 1996.
Operating expenses of $113.3 million for 1996 increased by $3.3 million, or 3.0 percent from $110.0 million in 1995. The MARITRANS 300 unit, Maritrans' second largest tug/barge unit, entered service in the fourth quarter of 1995 and was operational for the full year in 1996. The aforementioned increase in trip length and rising fuel prices contributed to the increase in operating expenses. General and administrative costs rose as a result of the increased use of outside professional services, particularly for matters related to business development and analysis.
Interest expense in 1996 was consistent with the prior year. Other income in 1996 increased $1.1 million from $3.1 million in 1995 to $4.2 million in 1996 due primarily to the gain from disposals of vessels which, due to their sizes and operating characteristics, were considered excess to Maritrans' long-term business needs.
Net income for 1996 increased by $0.2 million to $5.2 million as the result of the aforementioned increased revenues and other income more than offsetting the increase in operating expenses.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenues for 1995 were $124.5 million and were $124.8 million in 1994, a decrease of $0.3 million, or less than half a percent. Barrels of cargo transported decreased by 12.1 million barrels, from 237.1 million to 225.0 million. While severe price competition for oil transportation services has existed in the markets served by Maritrans in recent years and is expected to continue, the fleet's average revenue per barrel rose in 1995, primarily due to an increase in average trip length. Revenue from sources other than marine transportation decreased from 5.5 percent of total revenues in 1994 to 4.0 percent in 1995.
Operating expenses of $110.0 million for 1995 increased by $3.6 million, or 3.4 percent from $106.4 million in 1994. Fleet capacity increased in 1995, with the MARITRANS 300 unit entering service in the fourth quarter. The aforementioned increase in trip length contributed to the increase in operating expenses, particularly fuel. Other contributing factors include additional training for crew members and an increase in vessel insurance costs. General and administrative costs rose as a result of the increased use of outside professional services, particularly for matters related to new business development and for training.
Interest expense of $9.4 million for 1995 decreased $0.5 million or 5.1 percent from $9.9 million in 1994. The decrease resulted from capitalized interest partially offset by the interest expense on the long-term debt acquired to purchase the MARITRANS 300.
Other income in 1995 increased $1.2 million from $1.8 million in 1994 to $3.0 million in 1995 due to a rise in interest rates and an increase in the average amount of cash available for investment.
Net income for 1995 decreased by $1.5 million to $5.0 million as the result of the aforementioned increase in operating expenses partially offset by the increase in other income.
LIQUIDITY AND CAPITAL RESOURCES
In 1996, funds provided by operating and investing activities were sufficient to fully meet debt service obligations (including $8.7 million in required long-term debt repayments and the repurchase, at par, of $15 million principal amount of long-term debt of a subsidiary), to meet loan agreement restrictions, to make capital improvements, and to allow Maritrans to pay a dividend of $0.05 per common share in the first quarter and $0.075 per common share in each of the last three quarters. Maritrans believes that in 1997, funds provided by operating activities, augmented by financing transactions and investing activities, will be sufficient to finance operations, anticipated capital expenditures, lease payments and required debt repayments. Dividend payments are expected to continue quarterly in 1997.
In 1996, approximately $3 million was spent for improvements to the existing fleet and terminal facilities. Maritrans believes capital expenditures in 1997 for improvements to its current fleet of vessels and existing marine terminals will be approximately $4 million. No material commitments existed at December 31, 1996, for capital expenditures. Maritrans will continue to evaluate potential investments, and the related funding of those investments, consistent with its long-term strategic interests.
On May 10, 1995, the Corporation announced a stock buy-back plan to reacquire up to 1.8 million shares of its common stock over the course of the next two years, depending on market conditions. This amount represented approximately 15 percent of the 12.5 million shares then outstanding. Maritrans intends to hold the majority of the shares as treasury stock, although some shares may be used for employee compensation plans and/or other corporate purposes. As of December 31, 1996, the Company has purchased 877,955 shares at a cost of approximately $5.1 million. Maritrans has financed and expects that additional share purchases, if made, would be financed with internally generated funds.
WORKING CAPITAL AND OTHER BALANCE SHEET CHANGES
At December 31, 1996, current assets exceeded current liabilities by $32 million. The ratio of current assets to current liabilities at December 31, 1996, was 1.95:1. At December 31, 1995, this ratio was 2.21:1. In 1996, Maritrans utilized available working capital to repurchase, at par, $15 million principal amount of long-term debt of a subsidiary. Working capital decreased $4.2 million from December 31, 1995, to December 31, 1996. The working capital decline was due primarily to the increases in current debt maturities and other current liabilities and decreases in investments held-to-maturity. Partially offsetting the working capital decline was an increase in trade accounts receivable based upon the timing of revenues and payments in the latter part of the fourth quarter of 1996. At December 31, 1996 and 1995, the combined balances of cash and cash equivalents and investments held-to-maturity were $33.2 million and $38.6 million, respectively.
DEBT OBLIGATIONS AND BORROWING FACILITY
At December 31, 1996, Maritrans had $89.3 million in total outstanding debt, secured by mortgages on substantially all of the fixed assets of the subsidiaries of the Corporation. The current portion of this debt at December 31, 1996, was $10.2 million. Maritrans has a $10 million working capital facility, secured by its marine receivables and inventories, which expires June 30, 1997 and which it expects to renew. This facility was not used in 1996.
At December 31, 1996 and 1995, total debt to total capitalization was 52 percent and 59 percent, respectively. For purposes of this calculation, total capitalization consists of long-term debt, including those portions that are current, and stockholders' equity.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors Maritrans Inc.
We have audited the accompanying consolidated balance sheets of Maritrans Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(A). These financial statements and schedule are the responsibility of the management of Maritrans Inc. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maritrans Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP Philadelphia, Pennsylvania January 24, 1997
MARITRANS INC. CONSOLIDATED BALANCE SHEETS
($000)
See accompanying notes.
MARITRANS INC. CONSOLIDATED STATEMENTS OF INCOME
($000 EXCEPT PER SHARE AMOUNTS)
See accompanying notes.
MARITRANS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
($000)
See accompanying notes.
MARITRANS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($000)
See accompanying notes.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Maritrans Inc. owns Maritrans Operating Partners L.P. (the "Operating Partnership"), Maritrans Barge Co. and Maritrans Holdings Inc. (collectively, the "Company"). These subsidiaries, directly and indirectly, own and operate tugs and barges principally used in the transportation of oil and related products, along the Gulf and Atlantic Coasts, and own and operate petroleum storage facilities on the Atlantic Coast.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Maritrans Inc. and subsidiaries, all of which are wholly owned. All significant intercompany transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
MARINE VESSELS AND EQUIPMENT
Equipment, which is carried at cost, is depreciated using the straight-line method. Vessels are depreciated over a period of up to 30 years. Certain electronic equipment is depreciated over periods of 7 to 10 years. Petroleum storage tanks are depreciated over periods of up to 25 years. Other equipment is depreciated over periods ranging from 3 to 20 years. Gains or losses on dispositions of fixed assets are included in other income in the accompanying consolidated statements of income.
The Oil Pollution Act requires all newly constructed petroleum tank vessels engaged in marine transportation of oil and petroleum products in the U.S. to be double-hulled and all such existing single-hulled vessels to be retrofitted with double hulls or phased out of the industry beginning January 1, 1995. Because of the age and size of Maritrans' individual barges, the first of its operating vessels will be required to be retired or retrofitted by January 2003, and most of its large oceangoing, single-hulled vessels will be similarly affected on January 1, 2005.
MAINTENANCE AND REPAIRS
Provision is made for the cost of upcoming major periodic overhauls of vessels and equipment in advance of performing the related maintenance and repairs. The current portion of this estimated cost is included in accrued shipyard costs while the portion of this estimated cost not expected to be incurred within one year is classified as long-term. Both the provisions for major periodic overhauls as well as non-overhaul maintenance and repairs are expensed as incurred.
INVENTORIES
Inventories, consisting of materials, supplies and fuel, are carried at specific cost which does not exceed net realizable value.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
SIGNIFICANT CUSTOMERS
During 1996, the Company derived revenues aggregating 42 percent of total revenues from 3 customers, each one representing 10 percent or more of total revenues. In 1995, revenues from 4 customers aggregated 54 percent of total revenues and in 1994, revenues from 4 customers aggregated 49 percent of total revenues. The Company does not necessarily derive 10 percent or more of its total revenues from the same group of custom-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. Organization and Significant Accounting Policies - (Continued)
ers each year. In 1996, approximately 79 percent of the Company's revenues were generated by 10 customers. Credit is extended to various companies in the petroleum industry in the normal course of business. This concentration of credit risk within this industry may be affected by changes in economic or other conditions and may, accordingly, affect overall credit risk of the Company.
RELATED PARTIES
The Company obtained protection and indemnity insurance coverage from a mutual insurance association, whose chairman is also the chairman of Maritrans Inc. The related insurance expense was $2,654,000, $2,700,000 and $2,501,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company paid $440,000 and $510,000 in 1996 and 1995, respectively to a law firm, a partner of which was elected to the Company's Board of Directors during 1995. In 1996, the amount paid represents $277,000 relating to the lease of office space and $163,000 for legal services. In 1995, the amount represents $277,000 relating to the lease of office space and $233,000 for legal services.
EARNINGS PER COMMON SHARE
Earnings per common share are based on the average number of common shares outstanding. The potential effect of outstanding stock options is not dilutive.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1996, and 1995 consisted of cash and commercial paper, the carrying value of which approximates fair value. For purposes of the consolidated financial statements, short-term highly liquid debt instruments with original maturities of three months or less are considered to be cash equivalents.
3. INVESTMENTS HELD-TO-MATURITY
Investments held-to-maturity, which consist of debt securities, are carried at cost which approximates market value. The Company has both the ability and positive intent to hold these securities until maturity. The securities all mature within one year.
4. STOCK INCENTIVE PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FAS Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. The effect of applying Statement No. 123's fair value method to the Company's stock-based awards results in pro forma net income and earnings per share that are not materially different from amounts reported.
Maritrans Inc. has a stock incentive plan (the "Plan"), whereby non-employee directors may be granted stock, and officers and other key employees may be granted stock, stock options and, in certain cases, receive cash under the Plan. Any outstanding options granted under the Plan are exercisable at a price not less than market value of the shares on the date of grant. In 1996, there were 6,494 shares issued to directors. Compensation expense equal to the fair market value on the date of the grant to the directors is included in general and administrative expense in the consolidated statement of income.
During 1996, there were 158,842 shares of restricted stock issued under the Plan. The restrictions lapse over a four year period. The shares are subject to forfeiture under certain circumstances. Unearned compensation, representing the fair market value of the shares at the date of issuance, is amortized to expense as the restrictions lapse. At December 31, 1996 and 1995, 230,467 and 570,815 remaining shares within the Plan were reserved for grant.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Information on stock options for 1996 follows:
Exercise Number of Price Shares ------------- ----------- Outstanding at beginning of year $4.00-6.00 619,643 Granted ........................ $5.25-5.375 159,428 Exercised ...................... $4.00-5.375 96,911 Cancelled ...................... -- -- Expired ........................ -- -- Outstanding at end of year ..... $4.00-6.00 682,160 Exercisable at end of year ..... $4.00-5.00 208,957
Outstanding options are exercisable in installments over two to four years and expire beginning in 2002.
5. INCOME TAXES
The income tax provision consists of:
The differences between the federal income tax rate of 35 percent in 1996, 1995 and 1994, and the effective tax rates were as follows:
Principal items comprising deferred income tax liabilities and assets as of December 31, 1996 and 1995 are:
1996 1995 --------- ------- ($000) Deferred tax liabilities: Tax over book depreciation ............ $35,423 $33,153 Prepaids .............................. 1,828 1,897 --------- ------- 37,251 35,050 --------- ------- Deferred tax assets: Reserves and accruals ................. 8,598 7,342 Net operating loss and credit carryforwards ....................... 4,943 4,154 --------- ------- 13,541 11,496 --------- ------- Net deferred tax liabilities ............... $23,710 $23,554 ========= =======
At December 31, 1996, Maritrans Inc. has net operating loss carryforwards of approximately $28.4 million for income tax reporting purposes which expire in the year 2005 and thereafter. The Company has an Alternative Minimum Tax credit of $2.9 million at December 31, 1996 which does not expire.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. RETIREMENT PLANS
Most of the shoreside employees and substantially all of the seagoing supervisors participate in a qualified defined benefit retirement plan of Maritrans Inc. Net periodic pension costs were determined under the projected unit credit actuarial method. Pension benefits are primarily based on years of service and begin to vest after two years. Employees covered by collective bargaining agreements and employees of Maritrans Holdings Inc. or its subsidiaries are not eligible to participate in the qualified defined benefit retirement plan of Maritrans Inc.
The weighted average discount rate, used to determine the actuarial present value of the projected benefit obligation, and the expected long-term rate of return on plan assets was 6.75 percent for all periods. The weighted average assumed rate of compensation increase used to determine the actuarial present value of the projected benefit obligation was 5 percent for all periods.
Net periodic pension costs included the following components for the years ended December 31:
The following table sets forth the plan's funded status at December 31, 1996 and 1995:
Substantially all of the shoreside employees and seagoing supervisors also participate in a qualified defined contribution plan. Contributions under the plan are determined annually by the Board of Directors of Maritrans Inc. The cost of the plan was $0, $1,005,000 and $742,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Contributions to industry-wide, multi-employer seamen's pension plans, which cover substantially all seagoing personnel covered under collective bargaining agreements, were approximately $474,000, $480,000 and $399,000 for the years ended December 31, 1996, 1995 and 1994, respectively. These contributions include funding for current service costs and amortization of prior service costs of the various plans over periods of 30 to 40 years. The pension trusts and union agreements provide that contributions be made at a contractually determined rate per man-day worked. Maritrans Inc. and its subsidiaries are not administrators of the multi-employer seamen's pension plans.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. DEBT
At December 31, 1996, total outstanding debt of the subsidiaries of Maritrans Inc. is $89.3 million, $79.1 million of which is long-term. At December 31, 1995, total outstanding debt was $113.0 million, $104.3 million of which was long-term. The debt is secured by mortgages on substantially all of the fixed assets of those subsidiaries. At December 31, 1996, total outstanding debt consists of several series -- $8.5 million maturing through 1997, $6.6 million maturing through 1998, $9.2 million maturing through 2005, and $65.0 million maturing from 1998 through 2006. The weighted average interest rate on this indebtedness is 8.89 percent. Terms of the indebtedness require the subsidiaries to maintain their properties in a specific manner, maintain specified insurance on their properties and business, and abide by other covenants which are customary with respect to such borrowings. At December 31, 1995, the total outstanding debt consisted of several series -- $23.3 million maturing through 1997, $9.7 million maturing through 2005, and $80 million maturing from 1998 through 2007.
The Operating Partnership has a $10 million working capital facility secured by its receivables and inventories. There were no borrowings under this facility during fiscal 1996.
Based on the borrowing rates currently available for loans with similar terms and maturities, the fair value of long term debt was $87.7 million and $113.1 million at December 31, 1996 and 1995, respectively.
The maturity schedule for outstanding indebtedness under existing debt agreements at December 31, 1996, is as follows:
($000) --------- 1997 ......... $10,213 1998 ......... 13,958 1999 ......... 8,608 2000 ......... 8,662 2001 ......... 8,720 2002 -- 2006 . 39,175 --------- $89,336 =========
8. COMMITMENTS AND CONTINGENCIES
Minimum future rental payments under noncancellable operating leases at December 31, 1996, are as follows:
($000) --------- 1997 ......... $ 2,113 1998 ......... 2,030 1999 ......... 1,863 2000 ......... 2,012 2001 ......... 2,012 2002 -- 2006 . 7,212 --------- $17,242 =========
The indenture governing the Operating Partnership's long-term debt permits cash distributions by Maritrans Operating Partners L.P. to Maritrans Inc., so long as no default exists under the indenture and provided that such distributions do not exceed contractually prescribed amounts.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Commitments and Contingencies - (Continued)
In the ordinary course of its business, claims are filed against the Company for alleged damages in connection with its operations. Management is of the opinion that the ultimate outcome of such claims at December 31, 1996 will not have a material adverse effect on the consolidated financial statements.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- ($000, except per share amounts) - ---- Revenues ......... $31,586 $30,959 $31,831 $32,618 Operating income . 3,025 2,001 4,326 4,332 Net income ....... 709 215 1,511 2,814 Earnings per share $ 0.06 $ 0.02 $ 0.13 $ 0.23
- ---- Revenues ......... $32,783 $30,125 $29,102 $32,517 Operating income . 5,428 2,733 2,253 4,110 Net income ....... 2,302 1,061 366 1,252 Earnings per share $ 0.18 $ 0.08 $ 0.03 $ 0.11
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Registrant, and information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, is incorporated herein by reference to the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Commission") not later than 120 days after the close of the year ended December 31, 1996, under the captions "Information Regarding Nominees For Election As Directors And Regarding Continuing Directors" and "Section 16 Requirements."
The individuals listed below are directors and executive officers of Maritrans Inc. or its subsidiaries.
- ------ (1) As of March 1, 1997 (2) Member of the Compensation Committee (3) Member of the Audit Committee (4) Member of the Finance Committee (5) Member of the Nominating Committee
Mr. Van Dyck has been Chairman of the Board and Chief Executive Officer of the Company and its predecessor since April 1987. For the previous year, he was a Senior Vice President -- Oil Services, of Sonat Inc. and Chairman of the Boards of the Sonat Marine Group, another predecessor, and Sonat Offshore Drilling Inc. For more than five years prior to April 1986, Mr. Van Dyck was the President and a director of the Sonat Marine Group and Vice President of Sonat Inc. Mr. Van Dyck is a member of the Board of Directors of Amerigas Propane, Inc. Mr. Van Dyck is also the Chairman of the Board and a director of the West of England Ship Owners Mutual Insurance Association (Luxembourg), a mutual insurance association. He is a member of the Company's Finance (Chairman) and Nominating Committees of the Board of Directors. See "Certain Transactions."
Dr. Boni retired as Chairman of Armco Inc., a steel, oil field equipment and insurance corporation on November 30, 1990. Dr. Boni became Chief Executive Officer of Armco Inc. in 1985 and Chairman in 1986. He served as Non-Executive Chairman of the Board of and consultant for Alexander & Alexander Services Inc., an insurance services company, during 1994 and as a consultant for that company during January 1995. He is a member of the Company's Compensation (Chairman), Audit and Finance Committees of the Board of Directors.
Dr. Dorman is serving as Chief Scientist/Technical Director, Office of Naval Research, Europe on an Intergovernmental Personnel Act assignment from Pennsylvania State University where he serves as Senior Scientist, Applied Research Lab. From 1993 until mid-1995 he served as Deputy Director Defense Research and Engineering for Laboratory Management, U.S. Department of Defense, on an Intergovernmental Personnel Act assignment from Woods Hole Oceanographic Institution. He was Director and Chief Executive Officer of Woods Hole Oceanographic Institution from 1989 until 1993. From 1962 to 1989, Dr. Dorman was an officer in the U.S. Navy, most recently Rear Admiral and Program Director for Anti-Submarine Warfare. He is a member of the Company's Audit and Compensation Committees of the Board of Directors.
Mr. Lichtenstein has been a partner in the law firm of Morgan, Lewis & Bockius LLP since 1988. He is a member of the Company's Finance and Nominating Committees of the Board of Directors. See "Certain Transactions".
Mr. Schless has been Managing Director, Investment Banking Department, Head of Transportation Group, of Schroder Wertheim & Co., New York, NY since 1994. From 1985 to 1994, Mr. Schless was a member of the Investment Banking Department, Wheat First Securities Inc., Richmond, VA, reaching the position of Managing Director. He is a member of the Company's Finance and Compensation Committees of the Board of Directors.
Mr. McCreary is a Vice President of Maritrans General Partner Inc. and joined the Company in May 1995. Previously Mr. McCreary was Vice President, Operations and Engineering, Canal Barge Lines (1990-May 1995).
Ms. Smallacombe is a Vice President of Maritrans General Partner Inc. and has been continuously employed by the Company or its predecessors in various capacities since 1982.
Mr. Burns is a Vice President of Maritrans General Partner Inc. and has been continuously employed by the Company or its predecessors in various capacities since 1975.
Mr. Welch is a Vice President of Maritrans General Partner Inc. and has been continuously employed by the Company or its predecessors in various capacities since 1977.
Mr. Newcomb is Vice President, General Counsel and Secretary of the Company, and has been continuously employed in various capacities by Maritrans or its predecessors since 1975.
Mr. Deas was named Vice President, Chief Financial Officer and Treasurer of the Company in March 1996. Previously, he was Assistant Treasurer (since 1988) of, or held various financial positions with, Scott Paper Company since 1978. Mr. Deas resigned his position with the Company in February 1997.
Mr. Bromfield is Controller of the Company, and has been continously employed in various capacities by Maritrans or its predecessors since 1981.
Mr. Bailey was named President of the Eastern Division of the Operating Partnership in June 1995. Previously, Mr. Bailey was Vice President, Sales and Marketing, ASB Meditest (August 1991 to June 1995); and President, Envirobusiness (March 1990 to May 1991). Mr. Bailey resigned his position with the Company in December 1996.
ITEMS 11, 12 AND 13.
The information required by Item 11, Executive Compensation, by Item 12, Security Ownership of Certain Beneficial Owners and Management, and by Item 13, Certain Relationships and Related Transactions, is incorporated herein by reference to the Company's definitive Proxy Statement to be filed with the Commission not later than 120 days after the close of the fiscal year ended December 31, 1996, under the headings "Compensation of Directors and Executive Officers", "Security Ownership of Certain Beneficial Owners and Management" and "Certain Transactions".
PART IV
* Incorporated by reference herein to the Exhibit number in parentheses filed on March 24, 1988 as Amendment No. 1 to Maritrans Partners L. P. Form 10-K Annual Report, dated March 3, 1988, for the fiscal year ended December 31, 1987.
+ Incorporated by reference herein to the Exhibit number in parentheses filed with Maritrans Partners L. P. Form S-1 Registration Statement No. 33-11652 dated January 30, 1987 or Amendment No. 1 thereto dated March 20, 1987.
# Incorporated by reference herein to the Exhibit of the same number filed with the Registrant's Post-Effective Amendment No. 1 to Form S-4 Registration Statement No. 33-57378 dated January 26, 1993.
& Incorporated by reference herein to Exhibit A of the Registrant's definitive Proxy Statement to be filed with the Commission not later than 120 days after the close of the fiscal year ended December 31, 1993.
@ Incorporated by reference herein to the Exhibit number in parentheses filed with Maritrans Partners L. P. Form 10-K Annual Report, dated March 29, 1993 for the fiscal year ended December 31, 1992.
^ Incorporated by reference herein to the Exhibit of the same number filed with Maritrans Inc. Form 10-K Annual Report, dated March 30, 1994 for the fiscal year ended December 31, 1993.
= Incorporated by reference herein to the Exhibit of the same number filed with Maritrans Inc. Form 10-K Annual Report, dated March 29, 1996 for the fiscal year ended December 31, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MARITRANS INC. (Registrant)
By: /s/ Stephen A. Van Dyck Dated: March 28, 1997 --------------------------------- Stephen A. Van Dyck Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
MARITRANS INC. SCHEDULE II -- VALUATION ACCOUNT
($000)
- ------ (a) Deductions are a result of write-offs of uncollectible accounts receivable for which allowances were previously provided.