| MARITRANS INC /DE/ Item 1A RISK FACTORS Before you invest in our securities, you should be aware that there are various risks in such an investment, including those described below |
| You should consider carefully these risk factors together with all of the other information contained or incorporated by reference in this report |
| A decline in demand for, or level of consumption of, crude oil and refined petroleum products, particularly in the Atlantic Coast and Gulf Coast regions, could cause demand for our services to decline, which would decrease our revenues and profitability |
| The demand for our services is influenced by a number of factors, including: • the demand for refined petroleum products; • competition from foreign imports of refined petroleum products and alternative sources of energy, such as natural gas; • alternate transportation methods, including use of pipelines; 14 _________________________________________________________________ [59]Table of Contents • demands for refined petroleum product movements from the US Gulf Coast refining centers to the US West Coast; • global and regional economic and political conditions; • changes in seaborne and other transportation patterns, including changes in the distances that cargoes may be economically transported; and • environmental concerns |
| Any of these factors could adversely affect the demand for our services or the rates we are able to charge our customers |
| Any decrease in demand for our services or decrease in the rates we are able to charge our customers could adversely affect our business, financial condition and results of operations |
| In addition, we operate our tank vessels in the Atlantic Coast and Gulf Coast regions, markets that have historically exhibited seasonal variations in demand and, as a result, in charter rates |
| Movements of certain clean oil products, such as motor fuels, generally increase during the summer driving season |
| Movements of black oil products and certain clean oil products, such as heating oil, generally increase during the winter months |
| Unseasonably mild winters may result in significantly lower demand for heating oil in the northeastern US In addition, unpredictable weather patterns and variations in product inventories disrupt vessel scheduling |
| Seasonality could materially affect our business, financial condition and results of operations in the future |
| If spot market rates were to decline substantially, our revenue and results of operations could be adversely affected |
| Beginning in the second half of 2004, we shifted our deployment strategy and allocated more of our vessels to spot market charters |
| Vessels in the spot market are chartered in one-time open market transactions where services are provided at current market rates |
| As opposed to vessels under term contract charter, where rates are fixed for the life of the contract and delays in utilization are typically borne by the customer, vessels in the spot market are at risk to fluctuating rates and declining utilization levels based on the demand for US Jones Act vessels |
| If demand for US Jones Act vessels were to decrease, spot market rates would most likely decrease, which would result in a decrease in our spot market revenue |
| A significant decrease in our spot market revenue could adversely affect our revenues and results of operations |
| We depend on attracting and retaining experienced, qualified and skilled crewmembers to operate our vessels |
| Our ability to operate our vessels depends on our ability to attract and retain experienced, qualified and skilled crewmembers |
| One consequence of the length of tenure of our crewmembers is that those serving in senior positions are approaching retirement age |
| Given the amount of experience that our senior crewmembers must have both in the industry and on our vessels, we cannot assure you that we will be able to identify and develop qualified replacements when needed |
| If we are unable to identify and develop qualified replacements when needed, we may not be able to operate our vessels, which would cause a disruption to our business |
| Increased competition in the markets we serve could result in reduced profitability and loss of market share for us |
| Contracts for our vessels are generally awarded on a competitive basis, and competition in the markets we serve is intense |
| The most important factors determining whether a contract will be awarded include: • availability and capability of the vessels; • ability to meet the customer’s schedule; • price; • safety record; • ability to satisfy the customer’s vetting requirements; • reputation, including perceived quality of the vessel; and • experience |
| Long-haul transportation of refined petroleum products is generally less costly by pipeline than by tank vessel |
| During the past several years, proposals have been made to construct product pipelines into Florida 15 _________________________________________________________________ [60]Table of Contents and, in particular, into the Tampa market, including a current proposal by Colonial Pipeline to construct a pipeline under the Gulf of Mexico to Tampa |
| The construction of new pipeline segments to carry petroleum products into our markets, including pipeline segments that connect with existing pipeline systems, the expansion of existing pipelines and the conversion of existing non-refined petroleum product pipelines, could adversely affect our ability to compete in particular locations |
| Marine transportation has inherent operating risks, and our insurance may not be adequate to cover our losses |
| Our vessels and their cargoes are at risk of being damaged or lost because of events such as: • marine disasters; • bad weather; • mechanical failures; • grounding, fire, explosions and collisions; • human error; and • war and terrorism |
| All of these hazards can result in death or injury to persons, loss of property, environmental damages, delays or rerouting |
| We carry insurance to protect against most of the accident-related risks involved in the conduct of our business |
| Nonetheless, risks may arise against which we are not adequately insured |
| For example, a catastrophic spill could exceed our insurance coverage and have a material adverse effect on our operations |
| Similarly, a terrorist attack on one or more of our vessels could have a material adverse effect on our financial condition, results of operations or cash flows |
| Although we currently maintain the maximum War Risk and Terrorism liability insurance coverage that is available through The West of England Ship Owners Mutual Insurance Association (Luxembourg), if an incident was deemed to be a terrorist attack, the maximum coverage would be dlra500cmam000cmam000 per incident plus any hull value, which could prove to be insufficient |
| In addition, we may not be able to procure adequate insurance coverage at commercially reasonable rates in the future, and we cannot guarantee that any particular claim will be paid |
| In the past, new and stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable |
| Changes in the insurance markets attributable to terrorist attacks may make certain types of insurance more difficult for us to obtain |
| Moreover, the insurance that may be available to us may be significantly more expensive than our existing insurance coverage |
| Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital |
| Furthermore, even if insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement vessel in the event of a loss |
| We do not carry loss-of-hire insurance, which covers the loss of revenue during extended vessel off-hire periods, such as for unscheduled shipyard maintenance due to damage to the vessel from accidents |
| Accordingly, any loss of a vessel or extended vessel off-hire, due to accident or otherwise, could have a material adverse effect on our business, results of operations and financial condition |
| Delays or cost overruns in building new vessels, the double-hulling of our remaining single-hulled barges or in the scheduled shipyard maintenance of our other barges could adversely affect our results of operations |
| In order to comply with the provisions of OPA, we are required to rebuild or retire our existing single-hulled barges by 2015 or earlier, depending on vessel size and age |
| To date, we have successfully rebuilt six of our single-hulled barges to a double-hull design configuration, which complies with OPA, using our patented double-hulling process |
| During July 2005, we awarded contracts to rebuild two of our remaining three single-hull barges to double-hull configurations |
| In addition, two of our barges were originally constructed with double hulls |
| As of December 31, 2005, approximately 69prca percent of our oil-carrying fleet capacity is double-hulled |
| In addition, each of our vessels undergoes scheduled, and, on occasion, unscheduled shipyard maintenance |
| Each of our barges represents approximately 5 to 7 percent of our total fleet capacity, which is removed from revenue generating service during the double-hulling or shipyard maintenance of that vessel |
| In each of July 2006 and July 2008, a single-hulled tanker will reach the OPA-mandated retirement date and will no longer be able to transport petroleum products |
| The timing of when we take a barge or tanker out of service for double-hulling or shipyard maintenance is determined by a number of factors, including regulatory deadlines, market conditions, shipyard pricing, shipyard availability and customer requirements |
| 16 _________________________________________________________________ [61]Table of Contents Building new vessels, rebuilding our existing single-hulled barges and scheduled shipyard maintenance of our other barges may be subject to the risks of delay or cost overruns caused by one or more of the following: • unforeseen quality or engineering problems; • work stoppages; • weather interference; • unanticipated cost increases; • delays in receipt of necessary materials or equipment; and • inability to obtain the requisite permits, approvals or certifications from the US Coast Guard and the American Bureau of Shipping upon completion of work |
| Significant delays and cost overruns could materially increase our expected contract commitments, which would have an adverse effect on our revenues, borrowing capacity and results of operations |
| Furthermore, delays would result in vessels being out-of-service for extended periods of time, and therefore not earning any revenue, which could have a material adverse effect on our revenues, financial condition and results of operations |
| A decrease in the demand for our lightering services resulting from the deepening of the Delaware River or conditions affecting the Delaware Bay refineries could adversely affect our business and results of operations |
| We perform lightering services for inbound tankers carrying crude oil or petroleum products up the Delaware River to refineries in the Delaware Bay |
| Legislation approved by the US Congress in 1992 authorized the US Army Corps of Engineers to deepen the Delaware River between the river’s mouth and Philadelphia |
| If this project is funded and completed, and if refineries dredged their private channels, it would significantly reduce our lightering business by allowing arriving ships to proceed up the river with larger loads |
| In addition, our lightering business would be adversely affected if any of the Delaware Bay refineries were shut down or scaled back their operations in any material respect |
| The reduction of lightering revenues resulting from a completed channel deepening project or conditions affecting the Delaware Bay refineries may have an adverse affect on our business and results of operations |
| We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business |
| Increasingly stringent federal, state and local laws and regulations governing worker health and safety and the manning, construction and operation of vessels significantly affect our operations |
| Many aspects of the marine industry are subject to extensive governmental regulation by the US Coast Guard, the National Transportation Safety Board, the US Customs Service and the US Maritime Administration and to regulation by private industry organizations such as the American Bureau of Shipping |
| The US Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards |
| The US Coast Guard is authorized to inspect vessels at will |
| Our operations are also subject to federal, state, local and international laws and regulations that control the discharge of pollutants into the environment or otherwise relate to environmental protection |
| Compliance with such laws, regulations and standards may require installation of costly equipment or operational changes |
| Failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations |
| Some environmental laws impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault |
| Under OPA, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the 200-mile exclusive economic zone around the US Additionally, an oil spill could result in significant liability, including fines, penalties, criminal liability and costs for natural resource damages |
| The potential for these releases could increase as we increase our fleet capacity |
| Most states bordering on a navigable waterway have enacted legislation providing for potentially unlimited liability for the discharge of pollutants within their waters |
| We rely on a limited number of customers for a significant portion of our revenues |
| The loss of any of these customers could adversely affect our business and operating results |
| 17 _________________________________________________________________ [62]Table of Contents The portion of our revenues attributable to any single customer changes over time, depending on the level of relevant activity by the customer, our ability to meet the customer’s needs and other factors, many of which are beyond our control |
| Contracts with Chevron, Sunoco, Inc, Valero, Conoco Phillips and Marathon accounted for approximately 24prca, 19prca, 14prca, 12prca and 10prca, respectively, of our 2005 revenue |
| If we were to lose any of these customers or if any of these customers significantly reduced its use of our services, our business and operating results could be adversely affected |
| Our business would be adversely affected if we failed to comply with the US Jones Act provisions on coastwise trade, or if these provisions were repealed and if changes in international trade agreements were to occur |
| We are subject to the US Jones Act and other federal laws that restrict maritime transportation between points in the US (known as marine cabotage services or coastwise trade) to vessels built and registered in the US and owned and manned by US citizens |
| We are responsible for monitoring the ownership of our common stock and other partnership interests to insure compliance with the US Jones Act |
| If we do not comply with these restrictions, we would be prohibited from operating our vessels in US coastwise trade, and under certain circumstances we would be deemed to have undertaken an unapproved foreign transfer, resulting in severe penalties, including permanent loss of US coastwise trading rights for our vessels, fines or forfeiture of the vessels |
| Additionally, the US Jones Act restrictions on the provision of maritime cabotage services are subject to exceptions under certain international trade agreements, including the General Agreement on Trade in Services and the North American Free Trade Agreement |
| If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, or if the restrictions contained in the US Jones Act were otherwise repealed or altered, the transportation of maritime cargo between US ports could be opened to foreign-flag or foreign-manufactured vessels |
| On two occasions during 2005, the US Secretary of Homeland Security, at the direction of the President of the US, issued limited waivers of the US Jones Act for the transportation of petroleum and petroleum products in light of the extraordinary circumstances created by Hurricane Katrina and Hurricane Rita on Gulf Coast refineries and petroleum product pipelines |
| During the past several years, interest groups have lobbied Congress to repeal the US Jones Act to facilitate foreign flag competition for trades and cargoes currently reserved for US-flag vessels under the US Jones Act and cargo preference laws |
| We believe that continued efforts will be made to modify or repeal the US Jones Act and cargo preference laws currently benefiting US-flag vessels |
| Because foreign vessels may have lower construction costs, wage rates and operating costs, this could significantly increase competition in the coastwise trade, which could have a material adverse effect on our business, results of operations and financial condition |
| We are a defendant in numerous asbestos-related lawsuits |
| We are a defendant in numerous lawsuits filed alleging unspecified damages for exposure to asbestos and, in most of these cases, tobacco smoke |
| Additional litigation relating to these matters may be commenced in the future |
| The status of many of these claims is uncertain and it is not possible to predict or determine the ultimate outcome of all pending and any subsequently filed claims |
| Although we believe that any material liability would be adequately covered by our existing insurance, it is possible that an adverse outcome, whether individually or in the aggregate, could have an adverse effect on our business, financial condition and results of operations |
| An increase in the price of fuel may adversely affect our business and results of operations |
| The cost of fuel used to power our vessels is a significant component of our operating expenses |
| We have recently experienced significant increases in the cost of fuel we purchase to be used in our operations |
| We have been able to pass a portion of these increases on to our customers pursuant to the terms of our charters |
| However, because of the competitive nature of our industry, there can be no assurances that we will be able to pass on current or any future increases in fuel prices |
| If fuel prices continue to increase and we are not able to pass such increases on to our customers, then our business and results of operations may be adversely affected |
| 18 _________________________________________________________________ [63]Table of Contents We have high levels of fixed costs that will be incurred regardless of our level of business activity |
| Our business has high fixed costs, including crew costs, routine maintenance costs, insurance and other costs that continue even if our vessels have out-of-service time, and downtime or low productivity due to reduced demand, weather interruptions or other causes can have a significant negative effect on our operating results and financial condition |
| Capital expenditures and other costs necessary to operate and maintain a vessel may increase due to changes in governmental regulations and safety or other equipment standards |
| Changes in governmental regulations and safety or other equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations and customer requirements or competition, may require us to make additional expenditures |
| For example, we may be required to make significant expenditures for alterations or the addition of new equipment to satisfy requirements of the US Coast Guard and ABS In addition, we may be required to take our vessels out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment |
| In order to fund these capital expenditures, we will utilize internally generated funds, incur borrowings or raise capital through the sale of debt or equity securities |
| Our ability to access the capital markets for future offerings may be limited by our financial condition at the time as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control |
| Our failure to obtain the funds for necessary future capital expenditures could limit our ability to continue to operate some of our vessels and could have a material adverse effect on our business and on our ability to pay dividends to stockholders |
| We depend on unionized labor for the provisions of our services and we may not be able to negotiate collective bargaining agreements on terms favorable to us |
| Any work stoppages could disrupt our business |
| Our operations are heavily dependent on unionized labor and we have collective bargaining agreements with two different unions |
| Maintenance of satisfactory labor relations is important to our operations |
| At December 31, 2005, 100prca of our seagoing employees were affiliated with maritime unions, approximately 68prca of whom were subject to collective bargaining agreements and approximately 34prca of whom were in the union for benefits only |
| In 2005 we entered into a tug/barge supplement to the collective bargaining agreement, which expires March 31, 2008 |
| The tankers supplement to the collective bargaining agreement with unlicensed personnel expires on May 31, 2006, and the collective bargaining agreement with licensed non-supervisory seagoing employees expires on October 8, 2007 |
| There is no assurance that we will be able to negotiate new collective bargaining agreements on terms favorable to us upon expiration of the current agreements |
| If we are not able to negotiate favorable terms, we may be at a competitive disadvantage |
| A protracted strike or similar action by a union could have a material adverse effect on our results of operations or financial condition |
| Our seagoing employees are covered by federal laws that may subject us to job-related claims in addition to those provided by state laws |
| All of our seagoing employees are covered by a congressional statute that typically operates to make liability limits established by state workers’ compensation laws inapplicable to these employees and to permit these employees and their representatives to pursue actions against employers for job-related injuries in federal courts |
| Because we are not generally protected by the limits imposed by state workers’ compensation statutes, we have greater exposure for claims made by these employees as compared to employers whose employees are not covered by these provisions |