TEN

Business Context and Reporting Period

Company: Tsakos Energy Navigation Ltd. (TNP)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2011
Business Overview: A Bermuda-based provider of international seaborne crude oil and petroleum product transportation services. As of December 31, 2011, the company operated a fleet of 48 vessels (including one LNG carrier) with an average age of 7.0 years. The company is managed by Tsakos Energy Management Limited, an affiliate of the CEO.

Key Financial Metrics (2011)

Material Changes vs. Prior Period

• Revenue Decline: Voyage revenues decreased 3.1% to $395.2 million, driven by a 19% drop in the average Time Charter Equivalent (TCE) rate per vessel per day ($16,047 in 2011 vs. $19,825 in 2010) due to market oversupply and weak demand.
• Operating Loss: The company reported an operating loss of $37.7 million, a reversal from an $80.7 million operating income in 2010. This was primarily due to a $39.4 million impairment charge on two older VLCCs (La Prudencia and La Madrina) classified as held for sale.
• Expense Increases: Voyage expenses surged 48.2% to $127.2 million, largely due to a 38% increase in bunker (fuel) costs and higher spot market exposure. Vessel operating expenses rose 3.1% to $129.9 million.
• Asset Impairment: A significant $39.4 million impairment charge was recorded in 2011, compared to $3.1 million in 2010, reflecting the decline in vessel values and the decision to sell older assets.

Guidance, Outlook, and Risks

Outlook and Management Commentary: Management anticipates 2012 to be another difficult year, though they expect the market trough not to deepen significantly for crude oil transportation. There is reserved optimism for the product tanker sector due to muted new supply. The company expects to maintain high fleet utilization (65% of 2012 days fixed as of March 31, 2012) and aims to build cash reserves through operations and vessel sales.

Key Risks and Contingencies:

• Covenant Non-Compliance: As of December 31, 2011, the company was not in compliance with loan-to-value ratios on loans totaling $621.0 million and a leverage ratio on a subsidiary loan of $48.1 million. While waivers were obtained for the leverage ratio, no waivers were obtained for the loan-to-value ratios. Lenders could demand prepayment of approximately $65.4 million or additional collateral.
• Cross-Default Provisions: Most credit facilities contain cross-default provisions. A default on one loan could trigger acceleration of approximately $1.37 billion in indebtedness.
• Market Conditions: Continued oversupply of vessels and low charter rates pose a risk to future revenues and vessel values. The company faces exposure to spot market volatility as time charters expire.
• Related Party Dependence: The company relies heavily on Tsakos Energy Management, Tsakos Shipping, and Tsakos Columbia Shipmanagement (TCM) for executive, commercial, and technical management. Termination of the management agreement could result in a payout of approximately $135 million.

Investor Verification Checklist

• Debt Covenant Status: Verify the current status of the loan-to-value covenant waivers and whether lenders have requested the $65.4 million prepayment or additional collateral.
• Vessel Sales: Confirm the sale and proceeds of the two VLCCs (La Prudencia and La Madrina) classified as held for sale, which are critical to resolving debt covenant issues.
• Charter Expirations: Review the schedule of expiring time charters in 2012 and the rates at which vessels are being re-fixed, particularly given the exposure to the spot market.
• Liquidity Position: Assess the sufficiency of the $175.7 million cash balance against upcoming debt maturities and newbuilding commitments ($148.7 million remaining on two Suezmax shuttle tankers).
• Related Party Fees: Review the management fee structure and the potential financial impact of the management agreement termination clause.