Teekay Corporation Annual Report 1997

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FY1997 Annual Report · Teekay Corporation

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Teekay
Shipping
Corporation

Va l u e - a d d e d t r a n s p o r t a t i o n s o l u t i o n s

A n n u a l R e p o r t 19 9 7

CONTENTS

CORPORATE PROFILE

Financial Highlights

President’s Report

to Shareholders

6 Market Analysis

12 The Teekay Fleet

14 Operations Overview

21 Management’s

Teekay Shipping Corporation owns and manages the

world’s largest and most modern fleet of medium-sized

tankers. Founded in 1973 by the late Torben Karlshoej,

the Company has established a reputation for excel-

lence as a provider of quality transportation services

to the oil industry.

Teekay operates primarily in the Indo-Pacific

Discussion & Analysis

Basin, and maintains continuous presence in the world

25 Auditors’ Report

26 Financial Statements

29 Notes to the

Consolidated Financial

Statements

38 Five Year Summary of

Financial Information

39 Board of Directors

40 Corporate Information

tanker market from its chartering offices in London,

Singapore, Tokyo, and Vancouver. Most day-to-day

activities are coordinated from the Vancouver office,

and the Company’s headquarters are in Nassau, Bahamas.

Teekay employs 1600 people in its sea-going

operations and offices. The Company trades on the

New York Stock Exchange under the symbol TK.

Teekay Shipping

Corporation’s Annual

General Meeting

will take place on

September 3, 1997

at 10:00 a.m. at the

Royal Automobile Club,

89 Pall Mall,

London, England.

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D

F i n a n c i a l H i g h l i g h t s

(in thousands of U.S. dollars, except per share and per day data and ratios)

Year ended
March 31, 1997

Year ended
March 31, 1996

Income Statement Data

Net voyage revenues

280,212

245,745

Net income

Balance Sheet Data

42,630

29,070

Total assets

1,372,838

1,355,301

Total stockholders’ equity

629,815

599,395

Per Share Data

Net income per share

1.52

1.17

Weighted average shares

outstanding (thousands)

28,138

24,837

Other Financial Data

EBITDA

191,632

166,233

Net debt to capitalization (%)

48.0

51.0

CASH FLOW (1)

$ millions
240

Capital Expenditures:

Vessel purchases, gross

Drydocking

Operating cash flow

65,104

23,124

123,843

11,641

6
1
9
1

2
6
6
1

4
1
5
1

8
6
4
1

1
6
3
1

per ship per day

11,819

10,613

93 94* 95

96
March 31

April 30

200

160

120

REVENUE

$ millions
450

* 11 month period ending March 31, 1994

(1)

Earnings before interest, taxes,

depreciation and amortization
(EBITDA)

2
2
8
3 3
6
3
3

0
7
3
3

7
7
1
3

0
0
2
3

93
April 30

94* 95

96 97

March 31

375

300

225

150

* 11 month period ending March 31, 1994

6
5
8
2

5
7
5
2

4
7
9
2

6
2
4

93 94* 95

96
March 31

April 30

EARNINGS(1)

$ millions
60

6
8
2
4

* 11 month period ending March 31, 1994

(1)

Net income before discontinued
operations and foreign exchange
translation

Pr e s i d e n t’s Re p o r t t o S h a r e h o l d e r s

This was
a successful year
for Teekay.

The results of Teekay’s

first full year as a public

company show steady

growth and improvement

in operating performance.

Both cash flow and earnings

for fiscal 1997 increased

over the previous year. Net

voyage revenues rose by

14 percent to $280.2 mil-

lion and net income by over

46 percent to $42.6 million

or $1.52 per share com-

pared to $1.17 per share

for the previous fiscal year.

Average time charter equiv-

alent rates increased from

$18,438 to $20,356 per

day and operating cash

flow per ship-day from

$10,613 to $11,819.

Overall, the Company’s

built in 1981. In addition,

orderbook stands at around

financial performance was

the 1996-built double-hull

eleven percent of the exist-

Captain James N. Hood,

encouraging, and we expect

105,000 tonne Seabridge

ing tanker fleet, scrapping

that it will continue to

was added to our fleet in

remains at a disappointing

improve as the tanker mar-

April under time charter

level, and we believe that

ket builds to full strength.

for 12 months from BHP

tonne-mile demand growth

President and

Chief Executive Officer

THE FLEET

Transport of Australia. In

will probably not exceed

will continue to reflect this

Our strong performance

June of this year, we took

one percent per annum over

delicate balance. In addi-

reflects not only the improv-

delivery of Hamane Spirit,

the next two years.

tion, we expect that the

ing tanker market but also

the most recent in our series

On the positive side,

increasing volume of short-

our strategy of maintaining

of Onomichi-built double

however, some 87 VLCCs

haul crude trading and the

a large, modern fleet focused

hull Aframaxes. Excluding

(Very Large Crude Carriers)

regionalisation of the oil

on serving major customers

periods off-hire our fleet

will reach 25 years of age

markets will benefit the

in the Indo-Pacific Basin.

was laden approximately

within the next three years,

Aframax sector.

Average fleet size for

77 percent of the time dur-

oil demand and seaborne

We believe that many

the year was 41 ships, com-

ing fiscal 1997.

oil trade are forecast to

charterers are concerned

pared to 39 in fiscal 1996.

MARKET

grow at around 2.5 to

about this tight balance and

As of March 31, 1997 our

CONDITIONS AND

3 percent per annum and

that competition to secure

owned fleet stood at 41

OUTLOOK

regulatory pressures and

access to high quality,

ships of 4.1 million dead-

The outlook for the world

discrimination against

modern tonnage in the spot

weight tonnes, with an aver-

tanker market is dominated

older tonnage continue

market will intensify over

age age of just over 8 years,

by two factors – the ton-

to increase. Under these

the next two or three years.

including 38 Aframax

nage supply/demand bal-

conditions, we believe that

While shipping policies vary

tankers, 10 of which are

ance and the impact of

the balance between

from company to company,

double-hulled. During the

short-haul crude trades

demand and supply of

most charterers seem

year we acquired two mod-

on tonne-mile demand.

acceptable tonnage is, and

unwilling to commit to

ern Aframaxes built in 1987

During calendar 1997,

will remain, tight and that

long-term charters and seek

and 1988, and sold our 50

some 46 medium size

earnings, while volatile,

instead flexible, short-term

percent owned Amersham

and large tankers, includ-

ing 22 Aframaxes will be

delivered. Currently, the

solutions to their oil trans-

portation needs. Teekay,

with its large, modern fleet,

Pr e s i d e n t ’ s R e p o r t t o S h a r e h o l d e r s c o n t i n u e d

INCOME FROM
VESSEL OPERATIONS

$ millions

100

3
4
9

3
6
7

8
0
6

8
2
5

3
7
3

93 94* 95

96
March 31

April 30

* 11 month period ending March 31, 1994

its operational and logis-

of our fleet on the spot mar-

tical expertise and its focus

ket within the Indo-Pacific

on customer service is well

Basin and to focus as before

positioned to provide such

on the Australian, Japanese,

solutions and can add com-

South Korean and U.S. West

petitively superior value

Coast trades. The consis-

for its customers with flex-

tent quality of our fleet and

ible freight contracts and

operations provides a strong

strong operational support.

competitive advantage in

BUSINESS STRATEGY

these areas where there is

At this time we intend to

an ongoing demand for

continue to trade the bulk

modern, high quality ships,

where port state authori-

ties proactively enforce

national and international

regulations to weed out

substandard ships and

substandard operators,

and where our customers

demand the most rigorous

performance standards.

Two of these trades –

Australia and the U.S. West

Coast – continue to offer

frequent opportunities to

obtain cargoes inbound and

outbound, and we have

aggressively increased our

market share of inbound

cargoes to Australia in order

to take advantage of the

growing number of export

cargoes from that country

to the Far East.

The consistent quality of
our fleet and operations provides a
strong competitive advantage.

In addition to our gen-

in fiscal 1998 and 1999

Our main challenges

eral spot market trading,

which will have a positive

going forward are to grow

we have in place several

impact on our ROIC. We

the Company profitably,

time charters and contracts

recognize, however, that

to add economic and share-

of affreightment with major

in this cyclical industry

holder value through

customers in our region on

we must pursue a strategy

increased revenues and

both fixed and spot mar-

that creates long-term value

greater operating effi-

ket-related terms which

for our shareholders in

ciencies, to respond to our

accounted for some 22

both good markets and bad.

customers’ needs in a

percent of our total net

To this end, we are build-

changing market envi-

voyage revenue in fiscal

ing a value-creating culture

ronment, and to create

1997. Our fleet deployment

throughout the Company

and exploit new oppor-

strategy enables us to ser-

and we continually review

tunities for growth within

vice these contracts effi-

our priorities and our strat-

our industry.

ciently and provide safe,

egy accordingly. Perform-

Again I wish to thank

flexible, competitive marine

ance measurement and

all our shareholders for

transportation as part of

management incentive

their confidence in Teekay

our customers’ oil supply

programs are being geared

and assure you of Man-

logistics chain.

to that objective.

agement’s commitment

GOING FORWARD

This was a successful year

for Teekay compared to

our own recent historical

performance and to that of

our peer group within the

industry, yet our return on

invested capital (ROIC) was

a disappointing 7.7 per-

cent. We expect that mar-

ket conditions will improve

to long-term, profitable

growth and value creation.

James N. Hood

President and Chief Executive Officer

We intend to
pursue a
strategy that
creates
long-term
value for
shareholders.

M a r k e t A n a l y s i s

1996 – TOWARDS

on these quality sensitive

However, at this point, rates

it was in the early 1990s.

MARKET BALANCE

trades and strengthened

do not support new tanker

MODERATE GROWTH

Freight rates in the world

our focus on providing

orders for the average

IN DEMAND

tanker market improved

value-added service to key

operator: rates have not

1996 saw the strongest

during 1996. This increase

customers. We estimate that

yet returned to the levels

growth in oil demand since

was the result of continued

our market share in the Indo-

of 1991, the year of the

the late 1980s. Much of this

strong growth in oil demand

Pacific region Aframax trade

last market peak, and in

increased demand was met

and a consequent increase

is approximately 25 per-

addition, the industry cost

by oil from the North Sea

in tanker demand which

cent, and greater than 50

base is higher today than

and Latin America which

outpaced modest fleet

percent on some premium

growth. Consequently, uti-

routes.

lization of the world tanker

IMPROVED

fleet continued its recent

FREIGHT RATES

growth trend.

All segments of the

In 1996, Teekay contin-

tanker market recorded

ued to focus on its core

improved freight rates in

strengths: operating a large

1996 for the second con-

fleet of modern, Aframax

secutive year. This rise

tankers in the Indo-Pacific

in rates resulted from a

CONTINUED RISE IN
AFRAMAX TCE RATES

US $/day

20,000

17,500

15,000

12,500

Basin spot market. During

further tightening in the

10,000

the past year, we made gains

balance between tanker

in market share on several

supply and demand.

Source: Clarkson

premium routes because

we concentrated even more

Bjorn Moller,

Chief Operating

Officer

The tanker market recorded
improved freight rates in 1996 for
the second consecutive year.

In the future,we can expect to see
increased demand for quality transportation.

created only limited new

cent growth in oil demand,

demand for tankers due

and by the year 2000,

to the short-haul nature

demand is expected to

of these trades. Never-

reach 78.6 million barrels

theless, overall tanker

per day, representing an

demand rose by two per-

annual growth rate of 2.3

cent for the year according

percent.

to industry consultants,

Changes in oil produc-

Maritime Strategies Inc.

tion patterns worldwide

(MSI) and PIRA Energy

will continue to affect the

GROWTH IN DEMAND

million b/d

million tonne-miles

8,000

7,000

6,000

5,000

Group. More than half of

way in which these increases

4,000

Oil Demand (million b/d)

Tanker Demand (million tonne-miles)

Source: IEA, Fearnley's, PIRA Energy Group

the increased oil demand

in oil demand translate into

came from Teekay’s main

tanker demand. The increase

area of operations in Asia.

in short-haul crude oil move-

For 1997, the Inter-

national Energy Agency

(IEA) forecasts a 2.4 per-

M a r k e t A n a l y s i s c o n t i n u e d

ment from the North Sea

The growth of the world

and Latin America will

fleet was directly related

impact tanker demand

to the decline in scrapping

negatively to the extent

from 12.5 million dwt. in

that it replaces rather than

1995 to 8.5 million dwt. in

supplements long-haul

1996 which was caused

crude oil.

by stronger freight rates.

DYNAMIC SUPPLY

Under these conditions, a

FUNDAMENTALS

drop in scrapping was to

The world tanker fleet grew

be expected, but it is notable

by approximately one per-

that scrapping in 1996 was

cent in 1996, reversing the

four times as high as the

decline of the past two

average annual rate during

CONTROLLED PACE
OF DELIVERIES FOR
1997 AND 1998

Newbuilding Deliveries
millions of dwt.
60

97*

98*

*Anticipated newbuilding deliveries based on current orderbook.
Source: Clarkson

years. Newbuilding deliv-

the last firm market in

part of the world fleet is

When reviewing supply

eries at 12.4 million dwt.

1989-1991. This is a clear

reaching a critical age.

dynamics beyond the next

were up only slightly com-

sign that technical obso-

At the end of 1996, the

two years, world ship build-

pared to 11.1 million dwt.

lescence is playing an

world tanker orderbook

ing capacity must rank as

in 1995.

increasing role as a large

stood at 23.7 million dwt.,

a concern. During the first

or eight percent of the world

part of 1997 orderbook

tanker fleet, up from a low

increases have been recorded

of 19.0 million dwt. earlier

for delivery in 1999 onward.

in the year, but substan-

At the end of April, 1997,

tially unchanged from the

the orderbook had risen to

six-year low at the end of

30.3 million dwt., accord-

1995 of 22.8 million dwt.

ing to Clarkson Research.

Deliveries for 1997 are

However, the orderbook

expected to be lower than

is by no means high by

1996 with 9.7 million dwt.,

and for 1998 are estimated

at 12.7 million dwt.

SLIGHT INCREASE
IN TANKER SUPPLY

Fleet Size
millions of dwt.
320

Deliveries & Scrapping
millions of dwt.
20

305

290

275

-10

260

-20

Deliveries

Scrapping

World Tanker Fleet

Source: Clarkson

historical standards. Deliv-

tion of aging tankers in the

We do not believe that

eries for the next two years

world fleet.

large scale operation of

are well below the last peak

There is currently dis-

25-year-old tankers is

in deliveries in 1992-93,

cussion in the tanker

economically viable and

and nowhere near the pro-

industry of operating

therefore expect that a

longed period of high annual

tankers to 25 years and

large number of mid-1970s-

deliveries during 1971-77

beyond through vessel

built tankers will be phased

which depressed tanker

repairs and modifications.

out over the next three

freight rates for extended

Yet, tankers above 60,000

years. The old tankers that

periods during the next

dwt. scrapped in 1996 had

do continue to trade will

two decades.

an average age of only 23

principally be employed

In addition, there is a

years, and of the 28.8

in lower paying trades

major factor that reduces

million dwt. tankers built

rather than competing on

the threat of supply growth

in 1972, nearly 95 percent

premium routes.

driven by yard capacity,

have been scrapped at or

namely the large propor-

before reaching 25 years

of age.

ORDERBOOK vs.
AGING FLEET

millions of dwt.
150

125

100

88 89

95 9596
95

Fleet 18 years and older

Orderbook

Source: Clarkson

PHASE OUT
OF MID-70s
TANKERS

millions of dwt.
60

Currently Trading

Scrapped To Date

Source: Clarkson

M a r k e t A n a l y s i s c o n t i n u e d

MARKET OUTLOOK

the next couple of years.

The move towards balance

In addition, while the order-

between supply and

book is growing for deliv-

demand looks set to con-

ery from 1999 onwards,

Through the end of 1998

ber of rapidly growing

tinue over the next couple

the age distribution of the

we predict a finely balanced

economies in this region

of years.

existing world fleet and the

tanker market with firm

which in the past have pro-

We expect to see a small

hurdles involved in trading

freight rates, particularly

vided employment for many

increase in tanker demand

25-year-old ships on a large

for modern tonnage.

of the world’s oldest tankers,

in 1997 and 1998 as the

scale even in a good freight

TEEKAY’S

are increasing their scrutiny

net result of rising oil con-

market, have the potential

COMPETITIVE

of tankers. Furthermore,

sumption and shorter aver-

to more than offset the

ADVANTAGES

the world’s major oil com-

age hauls. Further on, there

inflow of new tonnage.

Teekay’s market position is

panies are increasing their

is potential for some ero-

While the tanker market will

continually strengthening

cooperation in preventing

sion in demand if the Middle

continue to be cyclical, the

as sensitivity to quality con-

substandard tonnage from

East reduces oil production

number of tankers facing

tinues to increase.

calling at their terminals.

to balance global oil sup-

critical surveys and tech-

Within the global tanker

ply and demand.

nical obsolescence over the

market, the Indo-Pacific

The supply side is poten-

rest of the decade is

region that Teekay serves

tially more positive. The

unprecedented, and has

shows the greatest poten-

pace of newbuilding deliv-

the potential to have a pos-

tial for growth in oil demand.

eries is very controlled over

itive impact on the market.

At the same time, a num-

TANKER SUPPLY/DEMAND BALANCE

millions of dwt.
320

240

160

Tanker Supply

Tanker Demand

Source: Maritime Strategies Inc.

These factors indicate that

making innovative freight

in the future, we can expect

service arrangements.

to see increased demand

The oil companies and

for quality transportation.

traders who work with

In fact, a number of our oil

Teekay can entrust their

company customers now

transportation to our

describe their marine activ-

Company rather than to a

ities as a “risk management

specific ship. This approach

function” rather than a

is part of our evolving strat-

“tanker business”. More

egy of taking our customer

than ever, quality is becom-

orientation to a new level,

ing a strategic parameter.

moving towards becoming

Teekay is ideally posi-

an extended transportation

tioned to prosper in the

department for our cus-

high quality segment of the

tomers. The Operations

world tanker market. The

Overview section which fol-

Company delivers value-

lows provides a more

added service which is tai-

detailed look at the specific

lored to maximize the

advantages that Teekay

benefit to the customer.

offers to its customers.

Our large, homogenous

fleet and the consistent high

quality of operations enable

us to offer greater flexibil-

ity in terms of program-

ming customer cargo and

More than ever,
quality is becoming a
strategic parameter.

T h e Te e k a y F l e e t

A s a t J u n e 3 0 , 1 9 9 7

ONOMICHI CLASS — 15 SHIPS

OTHER AFRAMAX — 9 SHIPS

dwt.

Year Built

dwt.

Year Built

Seabridge (1)

105,200

1996

Kyushu Spirit DS

95,600

Koyagi Spirit

96,000

Magellan Spirit DS

95,000

Palm Monarch

89,900

Oppama Spirit

90,300

Mendana Spirit

81,700

Honshu Spirit

88,300

Tasman Spirit

87,600

1991

1989

1985

1981

1980

1979

OIL/BULK/ORE (OBO) CARRIERS — 2 SHIPS

Victoria Spirit DH 103,200

Vancouver Spirit DH 103,200

OTHER SIZE TANKERS — 3 SHIPS

Musashi Spirit

280,700

Scotland DS

40,800

Chiba Spirit DB***

60,900

1993

1992

1993

1982

1980

TOTAL TONNAGE: 4,325,600

(1) Time-chartered-in for one year.

* DH - Double-hull tanker

** DS - Double-sided tanker

*** DB - Double bottomed tanker

1997

1995

1994

1992

1991

1990

1989

1994

1993

1992

1989

1988

1987

1990

1988

Hamane Spirit DH*

98,600

Poul Spirit DH

98,600

Torben Spirit DH

98,600

Leyte Spirit DH

98,600

Luzon Spirit DH

98,600

Mayon Spirit DH

98,600

Samar Spirit DH

98,600

Palmstar Lotus

100,200

Palmstar Thistle

100,200

Teekay Spirit

100,200

Onozo Spirit

100,200

Palmstar Cherry

100,200

Palmstar Poppy

100,200

Palmstar Rose

100,200

Palmstar Orchid

100,200

IMABARI CLASS — 8 SHIPS

Senang Spirit DH

95,700

Sebarok Spirit DH

95,700

Seraya Spirit DS**

97,300

Sentosa Spirit DS

97,300

Alliance Spirit DS

97,300

Semakau Spirit DS

97,300

Singapore Spirit DS 97,300

Sudong Spirit DS

97,300

HYUNDAI CLASS - 6 SHIPS

Shilla Spirit

106,700

Ulsan Spirit

106,700

Frontier Spirit

106,700

Namsan Spirit

106,700

Pacific Spirit

106,700

Pioneer Spirit

106,700

Value-added
Transportation
Solutions

Every day of the year, Teekay

vessels transport valuable cargo

for the world’s major oil companies,

refiners and traders. In today’s

increasingly competitive environ-

ment, these customers demand

more than safe, reliable service,

they want transportation solutions

that can help them reduce operating

costs and maximize their results.

Teekay has long recognized

the importance of building long-

term customer relationships by

adding value to its service offering.

The entire organization, on shore and

at sea, is focused on providing the

highest level of service to customers

at each stage of the voyage.

Over the past year, Teekay

tankers performed 525 voyages,

traveling a total of 3.2 million miles,

and carrying 325 million barrels

TEEKAY OPERATIONS

NASSAU:

HEADQUARTERS
ADMINISTRATION

LONDON:

CHARTERING

GLASGOW:

CREWING

MUMBAI:

CREWING

SINGAPORE:

CHARTERING
OPERATIONS
TECHNICAL
QUALITY CONTROL

MANILA:

CREWING

of oil. Each one of these voyages

TOKYO:

CHARTERING
TECHNICAL
PURCHASING
QUALITY CONTROL

represents a closely coordinated,

well-timed exercise, planned and

executed to optimize the return for

SYDNEY:

QUALITY CONTROL

both the customer and the Company.

VANCOUVER:

CHARTERING
OPERATIONS
CREWING
PURCHASING
RISK MANAGEMENT
QUALITY CONTROL
FINANCIAL
INFORMATION SYSTEMS

O p e r a t i o n s O v e r v i e w

Negotiating the Charter

Singapore, and Tokyo to

mented an aggressive

ensure that customers

inspection program aimed

always receive prompt,

at ensuring that every ves-

Chartering tankers is a

responsive service.

sel in the fleet satisfies the

highly competitive and

HIGH QUALITY

requirements of the oil com-

time-sensitive business.

OPERATIONS

panies’ vetting inspections.

Negotiations are carried on

When negotiating the char-

Each ship is inspected at

around the clock and deals

ter, Teekay staff draw on a

least twice a year by qual-

must be concluded quickly.

modern fleet of 43 tankers

ified Teekay personnel, cov-

Teekay maintains 24-hour

which are maintained and

ering more than 500

presence in the tanker mar-

operated to the highest

checkpoints. Prompt and

ket with chartering offices

quality standards. As part

thorough shore support

in London, Vancouver,

of the Company’s business

from the Technical and

strategy to keep close con-

Safety departments ensures

trol of the quality and cost

that Teekay tankers are

of operations, all ship man-

immediately acceptable for

agement functions are per-

carrying cargo by the major

formed by in-house experts.

oil companies.

Meeting the standards

TRADING

of safety and preparedness

FLEXIBILITY

required by the oil tanker

The ability to offer world-

industry is imperative for

wide options accommo-

companies that trade on

dates customers who

the spot market. Teekay

continue to trade cargo

Meeting the
most demanding
standards

As part of the Company’s strategy

has developed and imple-

while negotiating in the

to provide transportation solutions

tailored to customers’ needs, Teekay

vessels are constructed or retrofitted

with equipment that meets customers’

requirements.

Customer Benefit: Teekay ships can call at

the most demanding terminals.

tanker market. Teekay ves-

sels can trade in every mar-

ket, including some of the

most strictly regulated,

environmentally sensitive

At this stage, loading

areas in the world, such as

arrangements with multi-

the U.S. West Coast, Japan

ple suppliers, stowage opti-

and Australia. Teekay’s

mization, regional vetting

Universally
acceptable

proactive approach to cus-

requirements and other

Acceptance by the major oil companies

tomer service extends

issues are resolved. Effective

is essential for ship owners operating on

beyond compliance with

communication systems

the spot market. Teekay’s resources on

mandated requirements for

move information quickly

shore play an important role in making

trading in these areas – the

between ship and shore so

sure that oil company approvals are kept

Company has constructed

that charter negotiations

up-to-date: dedicated staff monitor the

and retrofitted its vessels

are concluded swiftly.

vetting schedule, arrange inspections

to meet its customers’

specific requirements.

During charter negoti-

ations, Teekay chartering

staff assess the many vari-

ables and determine which

vessel is best suited to han-

dle the customer’s needs.

and ensure that any questions are effec-

tively resolved through the Company’s

Technical and Safety departments.

Customer Benefit: Assurance that every Teekay

tanker meets the highest operating

standards and will be accepted at any

terminal.

O p e r a t i o n s O v e r v i e w c o n t i n u e d

Voyage Planning

As soon as agreement is

STOWAGE EXPERTISE

reached on the terms of

The Company’s expertise

the charter, Teekay’s

and experience in handling

Commercial Operations

complex stowage arrange-

department takes charge

ments comes into play when

of voyage logistics.

multiple grades of cargo

Working

from

the

are involved. This demand-

Vancouver office, the Vessel

ing process is a critical part

Operations Coordinator

of Teekay’s high level of

handles the arrangements

customer service. The Vessel

3 , 0 6 4
B B L S

# 3

# 2

# 1

9 5 , 2 9 7
B B L S

8 8 , 1 2 6
B B L S

on shore and at sea to

Operations Coordinator

ensure that the voyage is

consults with the customer

planned and performed

and the ship master to

efficiently. Operations staff

handle all the details, work-

in Singapore make sure

that uninterrupted service

is provided for Teekay’s

9 5 , 6 1 8
B B L S

customers in the Far East

9 5 , 6 1 8
B B L S

ing and reworking the plan
8 7 , 5 3 5
B B L S
9 5 , 6 1 8
until optimal stowage
B B L S
9 5 , 6 1 8
B B L S
arrangements are in place.

6 0 , 4 0 1
B B L S

and Australia.

N o .

S L O P S

Stowage optimization

N o .

Stowage arrangements become increasingly complex, when loading different grades of

cargo from a number of suppliers.

Customer Benefit: Optimal stowage arrangements help to maximize the results of the voyage.

ACCOMMODATING

Teekay’s unique set of

SCHEDULING

capabilities enable the

CHANGES

Company to accommodate

When operating in an envi-

changes on short notice.

ronment that is subject to

The large fleet size, age

change from many sources,

profile and consistent

Scheduling
flexibility

scheduling

flexibility

quality of the Company’s

When customer requirements change or

becomes a key competitive

vessels trading in a con-

unexpected delays occur, Teekay can

advantage for Teekay and

centrated area ensure

draw on its large, uniform fleet to offer

its customers. Even before

that a suitable ship is

an alternative vessel when necessary.

the voyage begins, cus-

often available when un-

Customer Benefit: Accommodating changes

tomer requirements can

expected changes occur.

on short notice minimizes the inconve-

change and unexpected

delays may be caused by

port congestion in the pre-

vious voyage, weather con-

ditions, or unplanned

terminal delays.

nience to the customer.

O p e r a t i o n s O v e r v i e w c o n t i n u e d

Voyage Execution

The successful execution

Teekay to ensure continuity

Proactive safety and

of the voyage draws on all

of service, safety and

staffing policies provide fur-

of Teekay’s strengths at sea

reliability. The Company

ther assurance of high qual-

and ashore. The consistent

accesses, recruits, screens

ity operations. Regular safety

high quality of operations

and selects highly qualified

meetings, drills and training

is supported by the high-

and experienced tanker

are part of the routine on

est standards of ship main-

personnel through its offices

board. In addition, every

tenance and management.

in Glasgow, Mumbai, Manila

Teekay vessel carries an extra

CONTINUITY

and Vancouver. An excellent

officer on board so that senior

OF SERVICE

working environment,

officers are always available

The Company’s staffing

attractive compensation

and alert to attend to the crit-

policies have created a

and benefits, and access

ical stages of operations.

knowledgeable and dedi-

to opportunities

for

This becomes especially

cated group of employees.

advancement sustain the

important when transiting

All sea-going staff are

commitment of all Teekay

congested waters and dur-

employed exclusively by

employees.

ing loading and discharge

operations.

A commitment to training

Teekay provides opportunities for training, enrichment and

advancement for officers, ratings and crew, as well as staff

on shore. The Company has developed in-house, customized

programs for officers and crew, and has dedicated

two ships for training.

Customer Benefit: Knowledgeable, competent staff are vital to

the safe transport and handling of valuable cargo.

OPTIMIZING

to a minimum. In Japan and

ROUTING

Korea, Teekay has appointed

Information systems on

dedicated liason officers to

board the vessel are used

facilitate communication

Route
optimization

to optimize

routing

at the discharge terminals.

Teekay ships are equipped with advanced

throughout the voyage.

The Company recog-

weather tracking systems.

An advanced weather track-

nizes the value of reliable,

Customer Benefit: Helps to optimize routing,

ing system provides up-to-

high quality agents and

avoid heavy weather, prevent damage to

date information on weather

works with those who are

ship or cargo, and supports timely delivery.

patterns which enables

ISO accredited, have had

the ship master to make

media training, and have

better informed routing

in place crisis management

decisions. Following the

planning.

most expeditious track

Timely delivery of the

supports safe and timely

cargo marks the success-

arrival of the cargo at the

ful conclusion of the voy-

destination and helps to

age. Experienced crew carry

maximize the results of

out the discharge and load-

the voyage for the customer

ing procedures, meeting

and the Company.

port and customer require-

FACILITATING PORT

ments for safe and efficient

TURNAROUND

handling of the cargo, while

The Vessel Operations

staff on shore are already

Coordinator monitors the

planning the vessel’s next

ship position, providing

voyage.

regular updates on vessel

movements to the customer

and port agents.

When the tanker reaches

its destination, efficient

port turnaround is essen-

tial. Teekay’s representative

port agents optimize port

operations so that unpro-

ductive waiting time is kept

Results for fiscal 1997 show
continued improvement in operating
performance and financial condition.

OPERATING
CASH FLOW
PER SHIP DAY

$ thousands
12

LIQUIDITY

(1)

$ millions
300

6
8
5
2

3
5
9
1

2
7
0
1

7
5
8

8
8
4

93
April 30

94 95

96 97

March 31

250

200

150

100

(1) Cash, marketable securities, and
undrawn long-term credit lines

CAPITAL
EXPENDITURES

$ millions
420

350

280

210

140

96 97

93
April 30

94* 95

March 31

* 11 month period ending March 31, 1994

Vessel purchases, gross

Drydocking

94
Teekay Shipping

95 96

Other bulk shipping companies*

* weighted average of BEA, BSH,
LOFS, OMI, OSG, SMT

LEVERAGE

(1)

%
90

5
7
6

9
5
6

3
3
6

0
1
5

0
8
4

93
April 30

96
95
March 31

(1) Net debt/capitalization

M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f

F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s

The Company is a leading provider of international crude oil and petroleum product transportation services to major oil

companies, major oil traders, and government agencies, principally in the region spanning from the Red Sea to the U.S. West

Coast. The Company’s fleet consists of 42 tankers, including 39 Aframax oil tankers and oil/bulk/ore carriers, two smaller

tankers, and one VLCC, for a total cargo-carrying capacity of approximately 4.2 million tonnes. An additional double-hull

newbuilding Aframax tanker is scheduled for delivery on June 17, 1997.

Approximately 78% of the Company’s net voyage revenue is currently derived from spot voyages. The balance of

the Company’s revenue is generated by two other modes of employment: time charters, whereby vessels are chartered to

customers for a fixed period; and by contracts of affreightment, whereby the Company carries an agreed quantity of cargo

for a customer over a specified trade route over a specified period of time. In aggregate, approximately 86% of the Company’s

net voyage revenue is currently derived from spot voyages and spot-market related contracts. This dependence on spot

voyages, which is within industry norms, contributes to the volatility of the Company’s revenue, cash flow from operations,

and net income. Management believes that the Company has a competitive advantage over other tanker owners in the

Aframax spot market.

Historically, the tanker industry has been cyclical, experiencing volatility in profitability resulting from changes in

the supply of and demand for tankers. Additionally, tanker markets have exhibited seasonal variations in charter rates.

Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemi-

sphere and unpredictable winter weather patterns which tend to disrupt vessel scheduling.

RESULTS OF OPERATIONS

Bulk shipping industry freight rates are commonly measured at the net voyage revenue level in terms of “time charter equiv-

alent” (or “TCE”) rates, defined as voyage revenues less voyage expenses (excluding commissions), divided by revenue-gen-

erating ship-days for the round-trip voyage. Voyage revenues and voyage expenses are a function of the type of charter,

either spot charter or time charter, and port, canal and fuel costs depending on the trade route upon which a vessel is sail-

ing, in addition to being a function of the level of shipping freight rates. For this reason, shipowners base economic deci-

sions regarding the deployment of their vessels upon anticipated TCE rates, and industry analysts typically measure bulk

shipping freight rates in terms of TCE rates. Therefore, the discussion of revenue below focuses on net voyage revenue and

TCE rates.

FISCAL 1997, FISCAL 1996, AND FISCAL 1995

The Company’s net income was $42.6 million ($1.52 per share) in fiscal 1997, up from $29.1 million ($1.17 per share) in

fiscal 1996, and $6.4 million ($0.35 per share) in fiscal 1995, reflecting improvement in the tanker charter market accom-

panied by a relatively stable cost environment.

The Company sold its remaining eight mid-1970s-built tankers in fiscal years 1995 and 1996, and acquired a total

of six newer Aframax tankers in fiscal years 1996 and 1997. As a result, the Company’s average fleet size increased by 4.6%

in fiscal 1997 following a decrease of 7.1% from fiscal 1995 to 1996.

M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f

F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s c o n t i n u e d

Net voyage revenue grew 14.0% to $280.2 million in fiscal 1997 from $245.7 million in fiscal 1996, and 4.6% in

fiscal 1996 from $235.0 million in fiscal 1995, reflecting improving tanker charter market conditions and the effect of

changes in the size of the fleet. The Company’s average TCE rate in fiscal 1997 was up 10.4% to $20,356 from $18,438 in

fiscal 1996, after an increase of 11.4% in fiscal 1996 from $16,552 in fiscal 1995.

Vessel operating expenses increased 7.0% to $72.6 million in fiscal 1997 from $67.8 million in fiscal 1996, and

decreased 6.7% in fiscal 1996 from $72.7 million in fiscal 1995, mainly reflecting changes in fleet size.

Depreciation and amortization expense increased 10.1% to $90.7 million in fiscal 1997 from $82.4 million in fis-

cal 1996, as a result of an increase in average fleet size, and a higher than usual number of scheduled drydockings. Depreciation

and amortization expense decreased 12.8% in fiscal 1996 from $94.5 million in fiscal 1995, as a result of a decrease in

average fleet size and a revision to estimates of residual values of the Company’s vessels as at April 1, 1995. The revision

effectively reduced depreciation expense by approximately $9.4 million in fiscal 1996 as compared to fiscal 1995. Depreciation

and amortization expense included amortization of drydocking costs of $10.9 million in fiscal 1997, $8.6 million in fiscal

1996, and $10.3 million in fiscal 1995.

General and administrative expenses rose 14.7% to $19.2 million in fiscal 1997 from $16.8 million in fiscal 1996,

and 11.5% in fiscal 1996 from $15.0 million in fiscal 1995, as the result of increases in senior management compensation,

the cost of compliance with increasingly stringent tanker industry regulations, and greater administrative costs subsequent

to the acquisition of Teekay Shipping Limited in March 1995.

Interest expense decreased by 3.3% to $60.8 million in fiscal 1997 from $62.9 million in fiscal 1996, and by 5.1%

in fiscal 1996 from $66.3 million in fiscal 1995. The decreases resulted primarily from a continued decline in the Company’s

total debt, partially offset by higher interest rates resulting from the issue of $225 million 8.32% First Preferred Ship Mortgage

Notes in January 1996. Interest income of $6.4 million in fiscal 1997, $6.5 million in fiscal 1996, and $5.9 million in fiscal

1995, largely reflected increasing cash balances offset in fiscal 1997 by lower interest rates.

Other income of $2.8 million in fiscal 1997 and $9.2 million in fiscal 1996 consisted primarily of gains on the sale

of a 50%-owned tanker in fiscal 1997 and two vessels in fiscal 1996. Other income of $12.8 million in fiscal 1995 included

an $18.2 million gain on the sale of six vessels, partially offset by $4.3 million in losses on available-for-sale securities and

a $2.1 million equity loss from the Company’s 50% investment in VCSC.

The following table illustrates the relationship between fleet size (measured in ship-days), time charter equivalent

(“TCE”) per revenue-generating ship-day performance, and operating results per calendar ship-day:

Year Ended
March 31, 1997

Year Ended
March 31, 1996

Year Ended
March 31, 1995

Total calendar ship-days

Non-revenue days

14,937

866

14,310

698

15,315

822

Revenue-generating ship-days (A)

14,071

13,612

14,493

Net voyage revenue before

commissions (B) (000s)

286,429

Time charter equivalent (TCE) (B/A)

20,356

250,981

18,438

239,888

16,552

Operating results per calendar ship-day:

Net voyage revenue

18,760

17,173

15,345

Vessel operating expense

General and administrative expense

Drydocking expense

4,922

1,286

733

4,787

1,171

602

4,748

981

672

Operating cash flow per calendar ship-day

11,819

10,613

8,944

LIQUIDITY AND CAPITAL RESOURCES

The Company’s total liquidity, including cash, cash equivalents and undrawn long-term lines of credit, was $258.6 million

as at March 31, 1997, up from $197.3 million as at March 31, 1996, and $85.7 million as at March 31, 1995, as a result of

internally generated cash flow and debt refinancings. Net cash flow from operating activities rose to $139.2 million in fis-

cal 1997, compared to $98.4 million and $90.0 million in fiscal years 1996 and 1995, respectively, reflecting an improve-

ment in tanker charter market conditions.

The Company’s scheduled debt repayments were $16.0 million during fiscal 1997, down significantly from $57.9

million in fiscal 1996 and $87.6 million in fiscal 1995, as a result of debt refinancings which have lengthened repayment

terms. In October 1996, the Company completed two new term loan facilities (the “Term Loan Facilities”), with seven com-

mercial banks providing borrowings of up to $210 million in order to refinance existing debt at improved rates and credit

terms. The Term Loan Facilities also provided an additional $49 million of liquidity to the Company.

M a n a g e m e n t ’ s D i s c u s s i o n a n d A n a l y s i s o f

F i n a n c i a l C o n d i t i o n a n d R e s u l t s o f O p e r a t i o n s c o n t i n u e d

Dividend payments during fiscal 1997 were $24.1 million, or 86 cents per share, of which $13.5 million was paid

in cash and $10.6 million was paid in the form of common shares issued under the Company’s dividend reinvestment plan.

During fiscal 1997, the Company incurred capital expenditures for vessels and equipment of $65.1 million, mainly

as a result of the acquisition of two modern, second-hand Aframax tankers, the SEMAKAU SPIRIT and the SINGAPORE SPIRIT

(formerly the GALAXY RIVER). These acquisitions were financed through the Term Loan Facilities completed in October 1996.

As a result of a larger number of scheduled drydockings in fiscal 1997, capital expenditures for drydocking were $16.6 mil-

lion in fiscal 1997, compared to $7.4 million in fiscal 1996 and $14.4 million in fiscal 1995.

A double-hull newbuilding Aframax tanker is scheduled for delivery on June 17, 1997 for a total cost of $44.5 mil-

lion. At March 31, 1997, payments of $8.9 million had been made towards this commitment and a $35.6 million long-term

financing arrangement exists for the remaining unpaid cost of this vessel.

FORWARD-LOOKING STATEMENTS

The Company’s Annual Report on Form 20-F for the fiscal year ended March 31, 1997 and this Annual Report to Shareholders

for 1997 contain forward-looking statements (as defined in Section 21E of the Securities Exchange Act of 1934, as amended)

which reflect management’s current views with respect to future events and financial performance, in particular the state-

ments regarding an improvement in the tanker market conditions and the Company’s return on invested capital in fiscal

years 1998 and 1999; the Company’s competitive advantage over other tanker owners in the Aframax spot market; the num-

ber of mid-1970s-built tankers in the market that will be phased out over the next three years; the increase in tanker demand

in 1997 and 1998; and the balance of supply and demand in the tanker market. The following factors are among those that

could cause actual results to differ materially from the forward-looking statements and that should be considered in evalu-

ating any such statement: changes in production of or demand for oil and petroleum products, either generally or in par-

ticular regions; greater than anticipated levels of tanker newbuilding orders or less than anticipated rates of tanker scrapping;

changes in trading patterns significantly impacting overall tanker tonnage requirements; changes in the typical seasonal

variations in tanker charter rates; unanticipated changes in laws and regulations and the Company’s ability to comply with

all existing and future laws and regulations; changes in demand for modern, high quality vessels; risks incident to vessel

operation, including pollution; and other risks detailed from time to time in the Company’s periodic reports filed with the

U.S. Securities and Exchange Commission. The Company may issue additional written or oral forward-looking statements

from time to time which are qualified in their entirety by the cautionary statement contained in this paragraph and in other

reports hereafter filed by the Company with the U.S. Securities and Exchange Commission.

A u d i t o r s’ R e p o r t

TO THE SHAREHOLDERS OF TEEKAY SHIPPING CORPORATION

We have audited the accompanying consolidated balance sheets of Teekay Shipping Corporation and subsidiaries as of March

31, 1997 and 1996, and the related consolidated statements of income and retained earnings and cash flows for each of

the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company’s man-

agement. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 dis-

closures in the financial statements. An audit also includes assessing the accounting principles used and significant esti-

mates 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 Teekay Shipping Corporation and subsidiaries as at March 31, 1997 and 1996, and the consolidated

results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in confor-

mity with accounting principles generally accepted in the United States.

Nassau, Bahamas

May 7, 1997

Chartered Accountants

C o n s o l i d a t e d S t a t e m e n t s o f I n c o m e

a n d R e t a i n e d E a r n i n g s

(in thousands of U.S. dollars, except per share amounts)

NET VOYAGE REVENUES

Voyage revenues

Voyage expenses

Net voyage revenues

OPERATING EXPENSES

Vessel operating expenses

Time charter hire expense

Depreciation and amortization

General and administrative (note 3)

Income from vessel operations

OTHER ITEMS

Interest expense

Interest income

Other income (note 10)

Net income before cumulative effect

of accounting change

Cumulative effect of change in accounting

for marketable securities (note 1)

Net income

Retained earnings, beginning of the year

Year Ended
March 31, 1997

Year Ended
March 31, 1996

Year Ended
March 31, 1995

382,249

102,037

280,212

336,320

90,575

245,745

319,966

84,957

235,009

72,586

67,841

72,723

3,461

90,698

19,209

185,954

94,258

2,503

82,372

16,750

169,466

76,279

94,452

15,018

182,193

52,816

(60,810)

(62,910)

(66,304)

6,358

2,824

6,471

9,230

(51,628)

(47,209)

42,630

29,070

42,630

363,690

406,320

29,070

406,547

435,617

(60,000)

(11,927)

5,904

12,839

(47,561)

5,255

1,113

6,368

400,179

406,547

Exchange of redeemable preferred stock (note 8)

Dividends declared and paid

(24,142)

Retained earnings, end of the year

$ 382,178

363,690

406,547

EARNINGS PER SHARE AMOUNTS (note 1)

Net income before cumulative effect

of accounting change

1.52

1.17

0.29

Cumulative effect of change in accounting

for marketable securities

Net income

Weighted average number of common shares

1.52

1.17

0.06

0.35

outstanding

28,138,187

24,837,109

18,000,000

The accompanying notes are an integral part of the consolidated financial statements.

C o n s o l i d a t e d B a l a n c e S h e e t s

(in thousands of U.S. dollars)

ASSETS

Current

Cash and cash equivalents

Accounts receivable

– trade

– other

Prepaid expenses and other assets

Total current assets

Vessels and equipment (notes 1,5 and 9)

At cost, less accumulated depreciation of $457,779

(1996 – $377,105)

Advances on vessels

Total vessels and equipment

Investment

Other assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current

Accounts payable

Accrued liabilities (note 4)

Current portion of long-term debt (note 5)

Total current liabilities

Long-term debt (note 5)

Total liabilities

Stockholders’ equity

Capital stock (note 8)

Retained earnings

Total stockholders’ equity

As at
March 31, 1997

As at
March 31, 1996

117,523

101,780

25,745

1,066

14,666

22,213

2,725

15,331

159,000

142,049

$ 1,187,399

1,193,557

8,938

5,250

$ 1,196,337

1,198,807

6,335

11,166

1,624

12,821

$ 1,372,838

1,355,301

16,315

11,761

26,982

36,283

79,580

663,443

743,023

247,637

382,178

629,815

$ 1,372,838

18,303

19,102

49,166

706,740

755,906

235,705

363,690

599,395

1,355,301

Commitments and contingencies (notes 5, 6 and 9)

The accompanying notes are an integral part of the consolidated financial statements.

C o n s o l i d a t e d S t a t e m e n t s o f C a s h F l o w s

(in thousands of U.S. dollars)

Cash and cash equivalents provided by (used for)

OPERATING ACTIVITIES

Net income from operating activities

42,630

29,070

5,255

Year Ended
March 31, 1997

Year Ended
March 31, 1996

Year Ended
March 31, 1995

Add (deduct) charges to operations not requiring

a payment of cash and cash equivalents:

Depreciation and amortization

Gain on disposition of assets

Loss (gain) on available-for-sale securities

Equity loss (income) (net of dividend received:

March 31, 1997 – $282)

Other – net

Change in non-cash working capital items related to

90,698

(2,414)

2,785

82,372

(8,784)

(55)

(1,139)

2,507

94,452

(18,245)

4,303

2,089

914

operating activities (note 11)

5,459

(5,556)

1,251

Net cash flow from operating activities

139,158

98,415

90,019

FINANCING ACTIVITIES

Proceeds from long-term debt

240,000

448,000

Scheduled repayments of long-term debt

(16,038)

(57,850)

Prepayments of long-term debt

(250,078)

(505,962)

Scheduled payments on capital lease obligations

Prepayments of capital lease obligations

Net proceeds from issuance of Common Stock

Cash dividends paid

Capitalized loan costs

(1,527)

(43,023)

137,872

(7,094)

(5,965)

1,283

(13,493)

(1,130)

(87,570)

(15,033)

(1,565)

Net cash flow from financing activities

(39,456)

(35,549)

(104,168)

INVESTING ACTIVITIES

Expenditures for vessels and equipment

(net of capital lease financing of:

(March 31, 1997 – $NIL; March 31, 1996 –

$44,550; March 31, 1995 – $NIL)

(65,104)

(79,293)

(7,465)

Expenditures for drydocking

Proceeds from disposition of assets

Net cash flow from investment

Proceeds on sale of available-for-sale securities

Purchases of available-for-sale securities

Other

(16,559)

(2,296)

Net cash flow from investing activities

Increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of the year

Cash and cash equivalents, end of the year

(83,959)

15,743

101,780

117,523

(7,405)

28,428

3,273

111,770

(41,993)

14,780

77,646

24,134

101,780

(14,431)

16,817

2,650

110,806

(115,085)

(6,669)

(20,818)

44,952

24,134

The accompanying notes are an integral part of the consolidated financial statements.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

(all tabular amounts stated in thousands of U.S. dollars)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements are prepared in accordance with accounting principles generally accept-

ed in the United States. They include the accounts of Teekay Shipping Corporation (“Teekay” – which is incor-

porated under the laws of Liberia) and its wholly owned or controlled subsidiaries (the “Company”). Significant

intercompany items and transactions have been eliminated upon consolidation.

On March 31, 1995, Teekay acquired 100% of the outstanding stock of Teekay Shipping Limited (“TSL”),

an affiliated company, for cash consideration of $776,000 representing the net book value of TSL at March 31,

1995. The impact of this transaction on the financial position and results of operations of Teekay is not con-

sidered significant. The assets and liabilities of TSL have been combined with those of Teekay effective March

31, 1995. Teekay’s results of operations include those of TSL subsequent to that date. As a result, certain voy-

age expenses which were paid to TSL have been reclassified to general and administrative expenses, in order

to conform with the presentation adopted subsequent to March 31, 1995.

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.

Reporting currency

The consolidated financial statements are stated in U.S. dollars because the Company operates in international

shipping markets which utilize the U.S. dollar as the functional currency.

Investment

The Company’s 50% interest in Viking Consolidated Shipping Corp. (“VCSC”) is carried at the Company’s origi-

nal cost plus its proportionate share of the undistributed net income. On March 12, 1997, VCSC entered into

an agreement to sell its one remaining vessel and it is not anticipated that the operating companies of VCSC

will have active operations in the near future. The disposal of this vessel and the related gain on sale has been

reflected in these consolidated financial statements (see Note 10 – Other Income).

Operating revenues and expenses

Voyage revenues and expenses are recognized on the percentage of completion method of accounting. Estimated

losses on voyages are provided for in full at the time such losses become evident. The consolidated balance sheets

reflect the deferred portion of revenues and expenses applicable to subsequent periods.

Voyage expenses comprise all expenses relating to particular voyages, including bunker fuel expens-

es, port fees, canal tolls, and brokerage commissions. Vessel operating expenses comprise all expenses relat-

ing to the operation of vessels, including crewing, repairs and maintenance, insurance, stores and lubes, and

miscellaneous expenses including communications.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s c o n t i n u e d

(all tabular amounts stated in thousands of U.S. dollars)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Marketable securities

The Company adopted the Statement of Financial Accounting Standards Board Statement No. 115, “Accounting

for Certain Investments in Debt and Equity Securities” (“FAS 115”) for the year ended March 31, 1995. In apply-

ing FAS 115, investments in marketable securities (disposed of during fiscal 1996) have been classified by man-

agement as available-for-sale securities and are carried at fair value. Net unrealized gains or losses on available-

for-sale securities are reported as a separate component of stockholders’ equity. The cumulative effect on open-

ing retained earnings from application of this Statement has been reflected separately as an adjustment to net

income for the year ended March 31, 1995.

Vessels and equipment

All pre-delivery costs incurred during the construction of new buildings, including interest costs, and supervi-

sion and technical costs are capitalized. The acquisition cost and all costs incurred to restore used vessel pur-

chases to the standard required to properly service the Company’s customers are capitalized. Depreciation is

calculated on a straight-line basis over a vessel’s useful life, estimated by the Company to be twenty years from

the date a vessel is initially placed in service.

Effective April 1, 1995, the Company revised its estimates of the residual values of its vessels. The

effect of this change in estimated residual values was to reduce depreciation expense for the years ended March

31, 1997 and March 31, 1996 by $9.2 million (or $0.33 per common share) and $9.4 million (or $0.38 per com-

mon share), respectively.

Interest costs capitalized to vessels and equipment for the years ended March 31, 1997, 1996 and 1995

aggregated $232,000, $106,000, and $151,000, respectively.

Expenditures incurred during drydocking are capitalized and amortized on a straight-line basis over the period

until the next anticipated drydocking. When significant drydocking expenditures recur prior to the expiry of

this period, the remaining balance of the original drydocking is expensed in the month of the subsequent dry-

docking. Drydocking expenses amortized for the years ended March 31, 1997, 1996 and 1995 aggregated

$10,941,000, $8,617,000, and $10,281,000, respectively.

Vessels acquired pursuant to bareboat hire purchase agreements are capitalized as capital leases and

are amortized over the estimated useful life of the acquired vessel.

Other assets

Loan costs, including fees, commissions and legal expenses, are capitalized and amortized over the term of the

relevant loan. Amortization of loan costs is included in interest expense.

Interest rate swap and cap agreements

The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment

to interest expense. Premiums paid for interest rate cap agreements are recorded at cost. Premiums and receipts,

if any, are recognized as adjustments to interest expense over the lives of the individual contracts.

Forward contracts

The Company enters into forward contracts as a hedge against changes in foreign exchange rates. Market value

gains and losses are deferred and recognized in the period when the hedged transaction is recorded in the

accounts.

Cash flows

Cash interest paid during the years ended March 31, 1997, 1996 and 1995 totalled $57,400,000, $59,021,000,

and $65,368,000, respectively.

The Company classifies all highly liquid investments with a maturity date of three months or less when

purchased as cash and cash equivalents.

Income taxes

The legal jurisdictions of the countries in which Teekay and its subsidiaries are incorporated do not impose

income taxes upon shipping-related activities.

Earnings per share

Earnings per share amounts are based upon the weighted average number of common shares outstanding dur-

ing each period, after giving effect to the 1 for 2 reverse stock split (see Note 8 – Capital Stock). Stock options

have not been included in the computation of the earnings per share amounts since their effect thereon would

not be material.

Accounting for Stock-Based Compensation

Effective April 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123”),

“Accounting for Stock-Based Compensation.” SFAS 123 requires expanded disclosures of stock-based compen-

sation arrangements with employees and encourages (but does not require) companies to record compensation

costs associated with employee stock option awards, based on estimated fair values at the grant dates. The

Company has chosen to continue to account for stock-based compensation using the intrinsic value method

prescribed in APB Opinion No. 25 (APB 25) “Accounting for Stock Issued to Employees” and has disclosed the

required pro forma effect on net income and net income per share as if the fair value method of accounting as

prescribed in SFAS 123 had been applied (see Note 8 – Capital Stock).

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s c o n t i n u e d

(all tabular amounts stated in thousands of U.S. dollars)

BUSINESS OPERATIONS

The Company is engaged in the ocean transportation of petroleum cargoes worldwide through the ownership

and operation of a fleet of tankers. All of the Company’s revenues are earned in international markets.

The Company had one charterer (an international oil company) during fiscal 1997 from which voyage rev-

enues exceeded 10% of total voyage revenues. Voyage revenues from such charterer amounted to $48,696,000.

CONTRACTUAL RELATIONSHIPS

Prior to the acquisition of TSL, (see Note 1 – Basis of presentation), TSL and its affiliated companies rendered admin-

istrative, operating and ship management services to the Company in return for a monthly fee and commissions

at rates considered usual and customary to the industry. Fees and commissions incurred, included in general

and administrative expenses, for the year ended March 31, 1995 aggregated $11,826,000. Commissions incurred,

related to vessel dispositions, for the year ended March 31, 1995 aggregated $295,000.

ACCRUED LIABILITIES

Voyage and vessel

Interest

Payroll and benefits

March 31, 1997

March 31, 1996

15,458

9,294

2,230

9,053

7,789

1,461

26,982

18,303

LONG-TERM DEBT

March 31, 1997

March 31, 1996

Revolving Credit Facility

118,000

First Preferred Ship Mortgage Notes (8.32%)

U.S. dollar debt due through 2008

225,000

First Preferred Ship Mortgage Notes (9 5/8%)

U.S. dollar debt due through 2004

151,200

Floating rate (LIBOR + 0.65% to 1 1/2%)

U.S. dollar debt due through 2006

Less current portion

323,526

699,726

36,283

231,642

725,842

19,102

663,443

706,740

As at March 31, 1997, the Revolving Credit Facility (the “Revolver”) provided for borrowings of up to $141.1 mil-

lion (the “commitment amount”) on a revolving credit basis. The commitment amount reduces by $6.9 million

semi-annually each June and December together with a final balloon reduction in June 2003. Interest payments

are based on LIBOR plus a margin ranging from 0.80% to 1.25%, depending on the financial leverage of the

Company. The Revolver is collateralized by first priority mortgages granted on ten of the Company’s Aframax

tankers, together with certain other related collateral, and a guarantee from the Company for all amounts out-

standing under the Revolver.

The 8.32% First Preferred Ship Mortgage Notes due February 1, 2008 (the “8.32% Notes”) are collateral-

ized by first preferred mortgages on seven of the Company’s Aframax tankers, together with certain other relat-

ed collateral, and are guaranteed by seven subsidiaries of Teekay that own the mortgaged vessels (the “8.32%

Notes Guarantor Subsidiaries”) to a maximum of 95% of the fair value of their net assets. As at March 31, 1997,

the fair value of these net assets approximated $278 million. The 8.32% Notes are also subject to a sinking fund,

which will retire $45 million principal amount of the 8.32% Notes on each February 1, commencing 2004.

Upon the 8.32% Notes achieving Investment Grade Status and subject to certain other conditions, the guar-

antees of the 8.32% Notes Guarantor Subsidiaries will terminate, all of the collateral securing the obligations of

the Company and the 8.32% Notes Guarantor Subsidiaries under the Indenture and the Security Documents will

be released (whereupon the Notes will become general unsecured obligations of the Company) and certain

covenants under the Indenture will no longer be applicable to the Company.

The 9 5⁄ 8% First Preferred Ship Mortgage Notes due July 15, 2003 (the “95⁄ 8% Notes”) are collateralized by

first preferred mortgages on six of the Company’s Aframax tankers, together with certain other related collat-

eral, and are guaranteed by six subsidiaries of Teekay that own the mortgaged vessels (the “95⁄ 8% Notes Guarantor

Subsidiaries”) to a maximum of 95% of the fair value of their net assets. As at March 31, 1997, the fair value of

these net assets approximated $191 million. The 95⁄ 8% Notes are also subject to a sinking fund, which will retire

$25 million principal amount of the 95⁄ 8% Notes, on each July 15, commencing July 15, 1997. During first quar-

ter of fiscal 1996, the Company retired $23.8 million of the 95⁄ 8% Notes, which will be applied to reduce the July

15, 1997 sinking fund requirement. The 95⁄ 8% Notes are redeemable at the option of the Company, in whole or

in part, on or after July 15, 1998 at the following redemption prices expressed as a percentage of principal:

July 15

Redemption Price

1998

1999

2000

104.813%

102.406%

100.000%

Upon a Change of Control each 9 5⁄ 8% Note holder and 8.32% Note holder has the right, unless the Company elects

to redeem these Notes, to require the Company to purchase these Notes at 101% of their principal amount plus

accrued interest.

All other floating rate loans are collateralized by first preferred mortgages on the vessels to which the

loans relate, together with certain other collateral, and guarantees from the parent Company. In certain instances

second preferred mortgages have been recorded against specific vessels.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s c o n t i n u e d

(all tabular amounts stated in thousands of U.S. dollars)

LONG-TERM DEBT continued

Among other matters, the long-term debt agreements generally provide for such items as maintenance of cer-

tain vessel market value to loan ratios and minimum consolidated financial covenants, prepayment privileges (in

some cases with penalties), and restrictions against the incurrence of additional debt and new investments by

the individual subsidiaries without prior lender consent. The amount of Restricted Payments, as defined, that the

Company can make, including dividends and purchases of its own capital stock, is limited as of March 31, 1997,

to $58.7 million.

As at March 31, 1997, the Company was committed to a series of interest rate swap agreements where-

by $150 million of the Company’s floating rate debt was swapped with fixed rate obligations having an average

remaining term of 19.5 months. The swap agreements expire between October 1998 and December 1998. These

arrangements effectively change the Company’s interest rate exposure on $150 million of debt from a floating

LIBOR rate to an average fixed rate of 5.86%. The Company is exposed to credit loss in the event of non-perfor-

mance by the counter parties to the interest rate swap agreements; however, the Company does not anticipate

non-performance by any of the counter parties.

The aggregate annual long-term debt principal repayments required to be made for the five fiscal years

subsequent to March 31, 1997 are $36,283,000 (fiscal 1998), $69,093,000 (fiscal 1999 - 2001), and $80,324,000

(fiscal 2002).

LEASES

Charters-out

Time charters to third parties of the Company’s vessels are accounted for as operating leases. The minimum

future revenues to be received on time charters currently in place are $34,893,000 (fiscal 1998) and $3,875,000

(fiscal 1999).

The minimum future revenues should not be construed to reflect total charter hire revenues for any of the years.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Carrying amounts of all financial instruments approximate fair market value except for the following:

Long-term debt – The fair values of the Company’s fixed rate long-term debt are based on either quot-

ed market prices or estimated using discounted cash flow analyses, based on rates currently available for debt

with similar terms and remaining maturities.

Interest rate swap and cap agreements – The fair value of interest rate swaps, used for hedging pur-

poses, is the estimated amount that the Company would receive or pay to terminate the agreements at the report-

ing date, taking into account current interest rates and the current credit worthiness of the swap counter par-

ties. The fair value of interest rate cap agreements is the estimated amount that the Company would receive

from selling the contracts as at the reporting date.

The estimated fair value of the Company’s financial instruments is as follows:

March 31, 1997

March 31, 1996

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

Cash and cash equivalents

$ 117,523

101,780

Long-term debt

699,726

695,265

725,842

723,056

Interest rate swap agreements – net receivable

(payable) position

Interest rate cap agreements

1,154

618

(60)

The Company transacts with investment grade rated financial institutions and requires no collateral from these

institutions.

CAPITAL STOCK

Authorized

25,000,000 Preferred Stock with a par value of $1 per share

125,000,000 Common Stock with no par value

Common
Stock

Thousands
of Shares

Preferred
Stock

Thousands
of Shares

Issued and outstanding

Balance March 31, 1994 and 1995

33,000

36,000

600

May 15, 1995 1-for-2 Reverse Common Stock Split

(18,000)

July 19, 1995 Initial Public Offering 6,900,000

shares at $21.50 per share of Common

Stock (net of share issue costs)

137,613

6,900

July 19, 1995 Exchange of Redeemable Preferred

Stock for 2,790,698 shares of Common Stock

60,000

2,791

(1)

(600)

Reinvested Dividends

Exercise of Stock Options

4,833

259

201

Balance March 31, 1996

235,705

27,904

Reinvested Dividends

Exercise of Stock Options

10,649

1,283

364

Balance March 31, 1997

247,637

28,328

The Company has reserved 2,076,862 shares of Common Stock for issuance upon exercise of options granted

pursuant to the Company’s 1995 Stock Option Plan (the “Plan”).

During fiscal 1997 and 1996, the Company granted options under the Plan to acquire up to 343,250 and 796,750

shares of Common Stock (the “Grants”), respectively, to certain eligible officers, key employees

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s c o n t i n u e d

(all tabular amounts stated in thousands of U.S. dollars)

CAPITAL STOCK continued

(including senior sea staff), and directors of the Company. The options have a 10-year term and follow a graded-vest-

ing schedule. The options granted during fiscal 1997 vest equally over four years from the date of grant. Three quar-

ters of the options granted during fiscal 1996 have vested and the remaining quarter will vest during fiscal 1998.

A summary of the Company’s stock option activity, and related information for the years ended March 31 follows:

Fiscal 1997

Fiscal 1996

Options
(000’s)

Weighted
Average
Exercise Price

Options
(000’s)

Weighted
Average
Exercise Price

Outstanding, beginning of year

779

21.50

Granted

Exercised

Forfeited

Outstanding, end of year

Exercisable at end of year

Weighted-average fair value of options

343

(60)

(6)

1,056

519

27.38

21.50

24.00

23.40

21.50

797

(12)

(6)

779

383

21.50

granted during the year (per option)

6.72

5.16

Exercise prices for the options outstanding as of March 31, 1997 ranged from $21.50 to $27.38 and have a weighted-aver-

age remaining contractual life of 8.57 years.

The Company applies APB 25, “Accounting for Stock Issued to Employees” and related Interpretations in account-

ing for its employee stock options (see Note 1 – Accounting for Stock-Based Compensation). Under APB 25, because the

exercise price of the Company’s employee stock options equals the market price of underlying stock on the date of grant,

no compensation expense is recognized.

Had the Company recognized compensation costs for the Grants consistent with the methods recommended by

SFAS 123 (see Note 1 – Accounting for Stock-Based Compensation), the Company’s net income and net income per share for

those years ended would have been stated at the pro forma amounts as follows:

Year Ended March 31, 1997

Year Ended March 31, 1996

Net income:

As reported

Pro forma

Net income per common share:

As reported

Pro forma

42,630

40,679

1.52

1.45

29,070

26,842

1.17

1.08

The fair values of the Grants were estimated on the dates of grant using the Black-Scholes option-pricing model with the

following assumptions: risk-free average interest rates of 6.44% and 6.14% for fiscal 1997 and fiscal 1996, respectively, div-

idend yield of 3.0%; expected volatility of 25%; and expected lives of 5 years.

COMMITMENTS AND CONTINGENCIES

As at March 31, 1997, the Company was committed to foreign exchange contracts for the forward purchase of

approximately Japanese Yen 100 million and Singapore dollars 16,478,650 for U.S. dollars, at an average rate of

Japanese Yen 122.12 per U.S. dollar and Singapore dollar 1.41 per U.S. dollar, respectively, for the purpose of

hedging accounts payable and accrued liabilities.

As at March 31, 1997, the Company was committed to the construction of an Aframax vessel for a cost

of $44.5 million, scheduled for delivery in June 1997. At March 31, 1997, payments of $8.9 million had been made

towards this commitment and a $35.6 million long-term financing arrangement exists for the remaining unpaid

cost of this vessel.

10.

OTHER INCOME

Year Ended

Year Ended
March 31, 1997 March 31, 1996 March 31, 1995

Year Ended

Gain on disposition of assets

8,784

18,245

Gain (loss) on available-for-sale securities

Equity in results of 50% owned company

Foreign currency exchange gain (loss)

Miscellaneous – net

2,696

(226)

354

1,139

(665)

(83)

(4,303)

(2,089)

991

(5)

2,824

9,230

12,839

For the year ended March 31, 1997, equity in results of the 50% owned company includes a $2,732,000 gain on

a vessel sale.

Gross realized gains on sales of available-for-sale securities for the years ended March 31, 1996 and

1995 aggregated $1,787,000 and $691,000, respectively. Gross realized losses on sales of available-for-sale

securities for the years ended March 31, 1996 and 1995 aggregated $1,732,000 and $4,994,000, respectively.

11.

CHANGE IN NON-CASH WORKING CAPITAL ITEMS RELATED TO OPERATING ACTIVITIES

Year Ended

Year Ended
March 31, 1997 March 31, 1996 March 31, 1995

Year Ended

Accounts receivable

(1,873)

(4,792)

3,585

Prepaid expenses and other assets

Accounts payable

Accrued liabilities

12.

COMPARATIVE FIGURES

665

4,554

2,113

(2,058)

(1,597)

281

1,013

(310)

(427)

5,459

(5,556)

1,251

Certain of the comparative figures have been reclassified to conform with the presentation adopted in the cur-

rent period.

F i v e Ye a r S u m m a r y o f F i n a n c i a l I n f o r m a t i o n

(US dollars in thousands, except per share and per day data and ratios)

Fiscal year

ended March 31,

11 month period
ended March 31,

1997

1996

1995

1994

Fiscal year
ended April 30,
1993

INCOME STATEMENT DATA:

Net voyage revenues

280,212

245,745

235,009

236,690

$ 228,189

Income from vessel

operations

94,258

76,279

52,816

60,777

37,310

Income before foreign

exchange gain (loss) and

discontinued operations

Net income (loss)

PER SHARE DATA:

42,856

42,630

29,735

29,070

4,264

6,368

25,745

30,158

28,559

(47,468)

Earnings (loss) per share

1.52

1.17

0.35

1.68

(2.64)

Weighted average shares

outstanding (thousands)

28,138

24,837

18,000

BALANCE SHEET DATA (at end of period):

Total assets

$ 1,372,838

$ 1,355,301

$ 1,306,474

$ 1,405,147

$ 1,368,966

Total stockholders' equity

629,815

599,395

439,066

433,180

403,022

OTHER FINANCIAL DATA:

EBITDA

191,632

166,233

146,756

151,364

$ 136,123

Net debt to capitalization (%)

48.0

51.0

63.3

65.9

67.5

CAPITAL EXPENDITURES:

Vessel purchases, gross $

65,104

123,843

7,465

163,509

$ 334,733

Drydocking

23,124

11,641

11,917

13,296

16,440

FLEET DATA:

Average number of ships

Time-charter equivalent (TCE) $

20,356

18,438

16,552

17,431

13,722

Operating cash flow

per ship per day

11,819

10,613

8,944

9,133

6,511

B o a r d o f D i r e c t o r s

AXEL KARLSHOEJ

Director and

Chairman of the Board

President of Nordic Industries

CAPTAIN JAMES N. HOOD

Director, President and

Chief Executive Officer

ARTHUR F. COADY

Director, Executive

Vice President and

General Counsel

MICHAEL D. DINGMAN

Director

Chairman and Chief

Executive Officer of

The Shipston Group

Limited

MORRIS L. FEDER

Director

President of Worldwide

Cargo Inc.

STEVE G.K. HSU

Director

Chairman of

Oak Maritime (H.K.)

Inc., Limited

Not shown

THOMAS KUO-YUEN HSU

Director

Executive Director of

Expedo & Company

(London) Ltd.

C o r p o r a t e I n f o r m a t i o n

STOCK TRANSFER AGENT AND REGISTRAR

INVESTOR RELATIONS

The Bank of New York

101 Barclay Street

P.O. Box 11258

Church Street Station

New York, New York 10286

Tel: 1-800-524-4458

STOCK EXCHANGE LISTING

New York Stock Exchange

Symbol: TK

A copy of the Company’s Annual Report on

Form 20-F is available by writing or calling:

Teekay Shipping (Vancouver) Ltd.

Investor Relations

2100-200 Burrard Street

Vancouver, B.C.

Canada V6C 3L6

Tel: (604) 844-6654

Fax: (604) 844-6619

There were 28.3 million shares outstanding

CORPORATE HEADQUARTERS

at March 31, 1997.

Teekay Shipping Corporation

Tradewinds Building, 5th Floor

SHARE PRICE INFORMATION

Bay Street

The following table sets forth the New York Stock

P.O. Box SS-6293

Exchange high and low prices of the Company’s stock

Nassau

for each quarter during fiscal 1997:

The Bahamas

Quarter ended

June 30, 1996

September 30, 1996

December 31, 1996

March 31, 1997

High

$28

$305 ⁄ 8

$331 ⁄ 8

$341 ⁄ 4

Low

$25

$261 ⁄ 2

$287 ⁄ 8

$261 ⁄ 2

Teekay Shipping Limited

Teekay Shipping (Singapore) Pte. Ltd.

Tradewinds Building, 5th Floor

12 Prince Edward Road

Bay Street

P.O. Box SS-6293

Nassau

The Bahamas

#06-10, Podium B, Bestway Building

Singapore 079212

Mayon Marine Management, Inc.

PVB Building, Ground Floor

Teekay Shipping (Vancouver) Ltd.

Gen. Luna St. Cor., Sta. Potenciana St.

200 Burrard Street, 21st Floor

Vancouver, B.C.

Canada V6C 3L6

Intramuros

Manila

Philippines

Teekay Shipping (UK) Ltd.

Teekay Shipping (Japan) Ltd.

Ravensbourne House, 4th Floor

6F Eiyu Irifune Building

Cromwell Avenue

Bromley, Kent BR2 9HF

England

Teekay Norbulk Ltd.

Norbulk House

68 Glassford Street

Glasgow G1 1UP

Scotland

1-13 Irifune 3 - Chome, Chuo-ku

Tokyo 104

Japan

Teekay Shipping (Australia) Pty. Ltd.

24 Carpenter Crescent

Warriewood, NSW 2102

Australia

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Printed in Canada