Teekay Corporation
Annual Report 2002

Plain-text annual report

Leading from strength Teekay Shipping Corporation / 2002 Annual Report Table of Contents Financial Highlights Inside flap Chairman’s Message 10 CEO’s Report 12 Market Review 14 Offshore Loading Business 17 Fleet Profile 18 Financial Review 19 Board of Directors 42 Corporate Information Inside back cover Financial Highlights Revenue $ millions Net Income $ millions Earnings Per Share(3) $ US 1,050 900 750 600 450 300 150 0 350 300 250 200 150 100 50 0 -20 10 8 6 4 2 0 -0.5 99(1) 99(2) 00 01 02 99(1) 99(2) 00 01 02 99(1) 99(2) 00 01 02 Fiscal Year Ended December 31 (1) Fiscal year ended March 31 (2) Nine months ended December 31, 1999 Fiscal Year Ended December 31 (1) Fiscal year ended March 31 (2) Nine months ended December 31, 1999 Fiscal Year Ended December 31 (1) Fiscal year ended March 31 (2) Nine months ended December 31, 1999 (3) Fully Diluted Leverage (1) % Capital Expenditures $ millions Cash Flow(1) $ millions 60 50 40 30 20 10 0 650 450 250 200 150 100 50 0 600 500 400 300 200 100 0 99(2) 99 00 01 02 99(1) 99(2) 00 01 02 99(2) 99(3) 00 01 02 As at December 31 (1) Net debt/capitalization (2) As at March 31 Fiscal Year Ended December 31 Vessels and equipment, gross Drydocking (1) Fiscal year ended March 31 (2) Nine months ended December 31, 1999 Fiscal Year Ended December 31 (1) Earnings before interest, taxes, depreciation and amortization (EBITDA) (2) Fiscal year ended March 31 (3) Nine months ended December 31, 1999 Financial Highlights (in thousands of U.S. dollars, except per share and per day data, or as otherwise indicated) Year Ended December 31, 2002 Year Ended December 31, 2001 $ 543,872 $ 53,391 789,494 336,518 $ 2,723,506 1,421,898 $ 2,467,781 1,398,200 Income Statement Data Net voyage revenues Net income Balance Sheet Data Total assets Total stockholders’ equity Per Share Data Fully diluted earnings per share $ 1.33 $ 8.31 Weighted average shares outstanding – diluted (thousands) 40,252 40,488 Other Financial Data EBITDA $ 278,061 $ 539,324 Net debt to capitalization (%) 36.4 34.3 Capital expenditures: Vessel purchases, gross* Drydocking Total fleet operating cash flow 135,650 34,913 544,737 20,064 per ship per day 8,168 17,682 *Includes vessels from acquisitions. Teekay Shipping is recognized as a world leader in the safe and efficient transportation of crude oil and petroleum products. We lead from the strength of : • our fleet and operations, which are guided by the most rigorous and exacting standards in the industry; • our relationships with customers, who continue to trust and rely on us as a valued business partner; • our global network of people, both on ships and on shore; and • our financial strategy, which allows us to create enduring shareholder value through sound, strategic investments. Teekay Shipping. Leading from strength. Teekay Shipping Corporation / 2002 Annual Report 1 We lead from the strength of ouroperations 2 Teekay Shipping Corporation / 2002 Annual Report “I have spent the better part of 21 years on procedures required to safely shepherd a and exceeding our customers’ expectations. ships. While life on board doesn’t offer the tanker loaded with 100,000 tonnes of They have entrusted us with their business comforts of home, what keeps you going is highly sensitive cargo are brought to bear – and the network of people and systems your professionalism, your commitment to on the administrative and corporate we have in place at Teekay means we are the career you have chosen and the pride resources required on shore to support a always in a position to reward that trust.” you take in a job well done. At Teekay, that fleet of more than 100 ships operating commitment and sense of duty stretches around the globe. Nothing is left to chance. beyond our vessels to every aspect of our We are constantly monitoring and tracking operations. The same rigor, discipline and performance to make sure we are meeting Duncan Elsdon Chief Officer Teekay Shipping Corporation / 2002 Annual Report 3 “For two-and-a-half years I had the perfect powerful value proposition. Their offering expand their view of their business, so do perspective on Teekay’s approach to building included superior customer service, seemingly we. Our fleet is growing and our ships are relationships with customers. I used to endless vessel availability, incredible among the highest quality in the industry. compete head-to-head with Teekay when I flexibility, and competitive pricing – it was We have the expertise to handle cargo in worked in chartering with a small shipping pretty hard to compete with that. Needless the most sensitive waters, and we have the company in Germany. Competing with to say, when Teekay approached me to be capacity to deliver on our commitments. Teekay was frustrating. I was dealing with a part of its global chartering team, I was It’s a great formula.” four-vessel fleet, which meant I had to win thrilled! There is a real focus at Teekay to business on rates. But on every deal, Teekay build a brand that is always our customers’ was always there with an incredibly first choice. As our customers continue to Masa Mirkovic Chartering Specialist 4 Teekay Shipping Corporation / 2002 Annual Report We lead from the strength of our customer service Teekay Shipping Corporation / 2002 Annual Report 5 We lead from the strength of our people 6 Teekay Shipping Corporation / 2002 Annual Report “As a boy growing up in Calcutta, seafaring where you could settle down, build a career, whether it be on our vessels or on shore was always part of my life. My father used to challenge yourself to grow and learn. So, – are at their highest. And we clearly take me out of school to join him on voyages. when I moved to Canada, Teekay was first understand that the right people armed I was the envy of all my schoolmates when I on my list of prospective employers. It was with the right tools, and a sense of pride told them of the places I had been and the clear from the beginning that the rumours in serving our customers, will continue to sights I had seen. My career began as a 17- were true. A commitment to people is separate Teekay from the rest of the pack.” year-old cadet with the Shipping Corporation central to our vision for success. Every day of India and I have been going to sea ever I am impressed by the commitment and since. While captaining various vessels around dedication displayed by my colleagues. the world, I heard rumours that Teekay was a We invest heavily in training to ensure that different kind of shipping company – one standards throughout the organization – Bikramjit Kanjilal Marine Superintendent Teekay Shipping Corporation / 2002 Annual Report 7 “During the late 90’s, after taking Teekay and the tanker industry has gained a long-term contracts and provides a platform public, we were trying to do two things: greater awareness among investors. The for further growth in this area. Not only raise capital to grow the company, and cyclical nature of our business requires because it adds stability but because it is communicate to the investor community financial strength and stability. We continue profitable. It’s a great position to be in.” that a tanker company could deliver to focus on improving our balance sheet so shareholder value over the long term. that we can take advantage of all tanker Thanks to the operating performance of market conditions and invest wisely. For our team, we have delivered on our example, our recent acquisition of Navion commitment to create shareholder value has significantly increased our portfolio of Peter Antturi Chief Financial Officer 8 Teekay Shipping Corporation / 2002 Annual Report We lead from the strength of our financial strategy Teekay Shipping Corporation / 2002 Annual Report 9 Chairman’s Message to Shareholders Teekay’s results in 2002 reflect the much weaker believe this is an excellent investment of our tanker market that prevailed for most of the year. shareholders’ funds. The Prestige oil spill off the coast The drop in our earnings from the previous two years of Spain at the end of last year and its catastrophic demonstrates the earnings volatility inherent in our consequences once again demonstrate why safety and deeply cyclical industry. However, we continue to protection of the environment are core values that we work hard to bring greater stability and visibility to will not compromise. our future earnings. The acquisition outlined below As we begin a new year, we are benefiting from will move us much closer to this goal. tanker rates that have spiked sharply upwards, In December we entered into an agreement to propelled by a very cold winter in the Northern acquire Navion from Statoil, the Norwegian oil hemisphere, unrest in Venezuela and hostilities in company. Navion’s fleet of specialized shuttle vessels the Middle East. Once this stimulus subsides, tanker is committed to long-term contracts servicing major demand will depend on the vigour of the global oil companies. We will also have the right of first economy. Although a large number of new tankers C. SEAN DAY Chairman of the Board of Directors refusal on all of Statoil’s conventional oil shipments are scheduled to be delivered this year, fleet growth worldwide for the next five years, and will achieve is likely to be tempered by stepped-up regulatory global economies of scale by integrating Navion’s pressure to recycle older vessels following the large conventional fleet with Teekay’s worldwide Prestige oil spill. operations. This acquisition is the next step in our We rely on the professionalism and dedication of strategy to balance our spot market exposure with our seafarers every day. All of them work long hours “Statoil’s decision to sell its long-term contract cover. in a challenging environment. I am grateful to them marine transportation business to Teekay was made after rigorous scrutiny of the quality The acquisition of Navion vividly illustrates the all, as well as our shore staff, our loyal customers and theme of our report this year – Leading from our shareholders. Strength. Navion’s specialized vessels operate year- round in the hostile and environmentally sensitive waters of the North Sea. Statoil’s decision to sell its marine transportation business to Teekay was made of our personnel, our operations after rigorous scrutiny of the quality of our personnel, and our balance sheet.” our operations and our balance sheet. We are proud C. Sean Day that we were selected for this landmark transaction Chairman of the Board of Directors in our industry. As industry leaders, we continue to invest in training and systems, and are committed to maintaining the highest operating standards in our industry. We 10 Teekay Shipping Corporation / 2002 Annual Report Teekay Shipping Corporation / 2002 Annual Report 11 CEO’s Report to Shareholders In 2002 the tanker industry experienced a decline in During the year, UNS, our Norwegian shuttle demand driven by a weak global economy and oil tanker subsidiary, used its strong brand and technical production cuts by OPEC. The low freight rates that know-how to secure a major new shuttle tanker resulted for much of the year caused Teekay’s contract in Brazil. The two modern Suezmax tankers earnings in 2002 to decline to $53.4 million or $1.33 we acquired for this project are in the process of per share, compared with $336.5 million or $8.31 being converted for shuttle service. This contract is per share in 2001. expected to produce stable EBITDA of $11 million Given Teekay’s significant operating leverage, annually over the next 15 years. cyclical swings in tanker rates have a big impact on The highlight in 2002 for Teekay was the our financial results. While we cannot influence the announcement of an agreement to acquire Navion, timing and the magnitude of the shipping cycles, we the shipping subsidiary of Statoil of Norway, for $800 can focus on growing Teekay’s earning power through million cash. The transaction is expected to close in the cycles. We do this by consistently pursuing two the second quarter of 2003. The largest transaction of complementary strategies: using a strong balance its kind, Navion represents a substantial breakthrough sheet and a disciplined approach to the timing of new for Teekay. It places us in an important, long-term role investments in our large spot-trading tanker fleet that in the logistics chain of Statoil and a number of other is exposed to the market cycles; and growing a major oil companies. The transaction represents a portfolio of long-term, profitable contract business natural extension of Teekay’s core businesses. Navion’s that provides stable cash flow throughout the cycles. large portfolio of complex logistics contracts to load In 2002 we delivered on both of these strategies. oil from offshore production platforms represents a Having concentrated on building our financial vertical integration from UNS, which operates in a flexibility in previous years, we brought the strength distinctly different part of the market. Navion’s fixed- of our balance sheet to bear, entering into more than rate contracts are expected to generate over $100 $1 billion of profitable new investments. million annually in EBITDA. In addition, Navion holds We announced a program to build a series of high- a long-term right-of-first-refusal contract on all of specification Aframax tankers at prices about 20 per Statoil’s conventional tanker requirements in the cent below those seen just one year earlier. We hold crude oil and petroleum products markets. In support a number of attractively priced options to extend this of this relationship, Navion operates a large modern program at a time when shipbuilding prices have fleet of in-chartered tankers ranging from smaller returned to an upward trend due to renewed product tankers to very large crude carriers. This fleet demand for new tonnage across a broad range of will further increase Teekay’s operating leverage and shipping sectors. will complement our spot-trading tanker franchise, providing us with a platform in several new customer service segments. BJORN MOLLER President and CEO “Our ability to commit to a cash transaction the size of Navion at the end of a year of weak tanker rates demonstrates the competitive advantage provided by our strong balance sheet.” 12 Teekay Shipping Corporation / 2002 Annual Report Our ability to commit to a cash transaction the size of Looking ahead to the rest of 2003 we see an Entering 2003, we believe that we lead our industry Navion at the end of a year of weak tanker rates unusually broad range of factors that could affect the from a position of strength in a number of strategically demonstrates the competitive advantage provided by our tanker market this year. A relatively large delivery of new important areas: the flexibility of our balance sheet; the strong balance sheet. tanker capacity is likely to increase physical supply. Yet, safety and efficiency of our operations; the experience of Teekay’s consistently well-timed investments have had given the large number of old tankers in the world fleet our global team; and our ability to deliver the benefits of a positive effect on our earning power over the past five that are likely to be marginalized in the post-Prestige these attributes to our customers day in and day out. We years. We expect our annual earnings per share in a era – through customer discrimination, new regulations, will continue to create shareholder value by building on typical mid-cycle tanker market to increase from $1.50 in or both – the net supply growth picture appears more this leadership position. 1999 to $4.60 by 2004 when our newbuildings will have balanced. Tanker demand looks set to grow in 2003 due I would like to thank our more than 4,100 dedicated delivered, and peak earnings per share to increase from to growth in global oil demand, coupled with employees, from ship to shore, for continuing to build $6.00 to $11.00. Mid-cycle annualized cash flow (EBITDA) geopolitical factors, such as reduced production in Teekay’s position during this past year. I thank our is expected to increase from $190 million to Venezuela, increased production by Middle-East OPEC customers for trusting us with their business. And, I approximately $500 million, $260 million of which will countries and potential disruption in Iraq. During the thank our loyal shareholders for their continued come from long-term, fixed-rate contracts, compared to first few months of 2003 the combination of these supply support of Teekay. only $23 million in 1999. and demand factors has resulted in very strong tanker 2002 was also a year in which we focused on rates. While these rate levels may not be sustainable strengthening our customer service franchise. We refined throughout the year, the tanker market is certainly off to our service offering through further investments in an excellent start in 2003. Beyond 2003, anticipated strict people and systems. We believe that we outperform the new regulations could set the stage for a potentially average tanker operator in every area: in our responsive, tight balance in the tanker market in the coming years, flexible service provided through scale and global particularly if demand growth returns to historic levels. presence; in our reputation for operational excellence The beneficiaries of such a market environment will be Bjorn Moller through our modern, high quality, well-managed fleet; in tanker companies like Teekay that have made large President and CEO our safe operations through industry-leading health, investments in modern tanker fleets. safety and environment programs; and in the well- In 2003, Teekay is celebrating its 30th anniversary. trained and experienced crews that operate our ships. From the outset, our late founder, Torben Karlshoej, had The Prestige accident, described on page 16 of this an unalterable vision of Teekay becoming a world leader. report, has highlighted what our oil company customers 2002 was yet another year during which we built on are looking for during this time of increased regulatory Torben’s vision. In 2003, after the closing of the Navion and public scrutiny: they want to deal with large, transaction, Teekay will be responsible for carrying more transparent, well-capitalized tanker companies that are than 10 per cent of the world’s sea-borne oil on board professionally run and can be trusted with the safe our 150 owned and in-chartered tankers. transportation of their oil. Teekay is such a company. Teekay Shipping Corporation / 2002 Annual Report 13 Market Review Overview The tanker freight market weakened during 2002 following incidents such as the sinking of the Prestige has helped to further tighten the supply-demand balance. compared to the previous year mainly due to a decline During the fourth quarter of 2002, a seasonal increase in tanker demand during the first nine months. The in oil consumption and several short-term operational aftermath of the global economic recession in 2001, and geopolitical factors led to a significant increase in lingering effects of September 11, warmer than normal tanker demand while tanker supply was effectively winter weather in the first quarter and OPEC production reduced by heightened customer discrimination against cutbacks all contributed to weak tanker demand. older vessels. This tightening in the supply-demand Worldwide TCE rates for Aframax tankers averaged equation during the fourth quarter caused TCE rates to $19,400 per day in 2002, compared to $30,400 per day recover to the high levels of 2000 and 2001. the previous year. The tanker market fared considerably better in 2002 than in 1999, which was the last year of weak tanker Tanker Demand Tanker demand in the first half of 2002 was influenced demand; TCE rates in that year averaged $13,300 per day. by the effect of the global economic recession that This improvement in TCE rates reflects the fact that the began in 2001, the lingering effects of September 11 on tanker fleet has remained relatively stable in the last two the airline industry and a warmer than normal winter in years, and that increased customer discrimination the first quarter. Global oil consumption declined by 0.5 Worldwide Aframax Spot TCE's y a D r e P $ S U 50,000 40,000 30,000 20,000 10,000 0 9 9 q 1 9 9 q 2 9 9 q 3 9 9 q 4 0 0 q 1 0 0 q 2 0 0 q 3 0 0 q 4 1 0 q 1 1 0 q 2 1 0 q 3 1 0 q 4 2 0 q 1 2 0 q 2 2 0 q 3 2 0 q 4 Source: CRS Weak tanker demand caused a decline in tanker rates during 2002. A strong turnaround was seen in the fourth quarter. per cent during this period compared to the first half of 2001. However, a significant turnaround occurred in the second half, particularly in the fourth quarter, as a gradual global economic recovery, colder than normal winter in the Northern hemisphere, the shutdown of nuclear power plants in Japan and high natural gas prices caused oil demand to grow by 1.5 per cent from the previous year. Overall for 2002, global oil demand grew by 0.5 per cent compared to 2001. Global oil production, a more immediate driver of tanker demand, decreased to 76.6 million barrels per day (mb/d) in 2002, down by 0.2 mb/d from 2001 levels. A 1.4 mb/d increase in non-OPEC production, mainly from the Former Soviet Union and West Africa, was more than 14 Teekay Shipping Corporation / 2002 Annual Report World Oil Demand & Production Year-on-Year Change World Demand World Production 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% 9 9 q 1 9 9 q 2 9 9 q 3 9 9 q 4 0 0 q 1 0 0 q 2 0 0 q 3 0 0 q 4 1 0 q 1 1 0 q 2 1 0 q 3 1 0 q 4 2 0 q 1 2 0 q 2 2 0 q 3 2 0 q 4 3 0 q 1 3 0 q 2 3 0 q 3 3 0 q 4 Source: IEA, Industry Forecast A gradual recovery in the global economy saw global oil consumption rise by 0.5 per cent in 2002. Underlying this data was a 0.5 per cent decline in the first half and a strong recovery to 1.5 per cent year-on-year growth in the second half. World Oil Production vs. Aframax TCE Rates Production TCE ) / D B n o i l l i M ( n o i t c u d o r P 79.0 78.0 77.0 76.0 75.0 74.0 73.0 72.0 ) y a D r e P $ S U ( E C T 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 9 9 q 1 9 9 q 2 9 9 q 3 9 9 q 4 0 0 q 1 0 0 q 2 0 0 q 3 0 0 q 4 1 0 q 1 1 0 q 2 1 0 q 3 1 0 q 4 2 0 q 1 2 0 q 2 2 0 q 3 2 0 q 4 offset by a decline of 1.6 mb/d from OPEC, three-quarters of which occurred in the Middle East. This shift from Tanker Supply The world tanker fleet increased in 2002 to 307.5 million long-haul OPEC to short-haul non-OPEC production led deadweight (mdwt), up by 0.9 per cent from December to lower tanker demand. This was most visible in the first 2001. Despite this recent growth, the tanker fleet size half of the year, as OPEC restrained production to remains smaller than it was two years ago. New tanker support crude oil prices. However, increased oil deliveries increased from 14.3 mdwt in 2001 to 23.4 consumption in the second half of the year, coupled with mdwt in 2002. Demolition of old tankers rose to 18.3 a decline in OECD oil inventories, led to rising crude oil mdwt compared to 16.5 mdwt in 2001, while prices and paved the way for increases in OPEC production and, in turn, rising tanker demand. miscellaneous removals, losses and conversions accounted for another 3.1 mdwt compared to 3.3 mdwt in 2001. According to IEA’s forecast, world oil demand is In the Aframax sector, 36 tankers were delivered in expected to rise by 1.5 per cent in 2003 based on a 2002 while 22 vessels were scrapped and one vessel (the recovery in the global economy, a colder than normal Prestige) was lost at sea. As a result, the fleet increased winter in the first quarter, strong demand growth in by 2.5 per cent to total 642 vessels, which is just one ship Asia, and the continued closure of Japanese nuclear more than at the end of 1999. power plants until mid-year. Tanker ordering declined in 2002 as owners took a There are several additional short-term factors more cautious approach towards placing new orders due augmenting tanker demand in 2003. The replacement of to the weaker freight markets during the first nine reduced short-haul Venezuelan oil exports with long-haul months. A total of 20.8 mdwt was contracted during the Middle East oil, which has already led to a significant year, down 23 per cent from the preceding year. The increase in tanker tonne-mile demand, is expected to last order book declined to 60.5 mdwt at the end of 2002, for some time. While Venezuelan production is slowly compared to 63.1 mdwt at the end of 2001. The pace of recovering, industry experts expect it may take months to Aframax ordering also slowed in 2002, with 46 new restore production towards historical levels and that as contracts placed compared to 70 in 2001. The Aframax much as 0.5 mb/d may be permanently lost. In addition, order book rose to 131 from 121 ships. a war in Iraq could lead to a disruption in crude exports from that country. If such a disruption were confined to Iraq and if Iraqi crude oil exports are replaced by other Middle East oil this would increase tanker demand, as tankers would transport oil directly from the Middle East to replace oil currently carried by pipeline from Iraq into Continued on next page Source: IEA & CRS the Mediterranean. Global oil production declined in 2002, as OPEC production cutbacks more than offset the increase from non-OPEC producers. Teekay Shipping Corporation / 2002 Annual Report 15 Teekay Shipping Corporation / 2002 Annual Report 15 Deliveries Tanker Fleet Net Changes Deletions Newbuildings Net Change The Sinking of the Prestige The Sinking of the Prestige On November 19, 2002, the Prestige, a 26-year-old On November 19, 2002, the Prestige, a 26-year-old oil tanker owned by a small privately-held shipping oil tanker owned by a small privately-held shipping company, was carrying 77,000 tonnes of heavy fuel company, was carrying 77,000 tonnes of heavy fuel oil when it broke in two in bad weather and sank off oil when it broke in two in bad weather and sank off the Northwest coast of Spain. The oil from the spillage the Northwest coast of Spain. The oil from the spillage contaminated beaches on the Spanish Galician coast contaminated beaches on the Spanish Galician coast and also caused pollution in France and Portugal. The and also caused pollution in France and Portugal. The adverse impact on the region’s fisheries-based economy adverse impact on the region’s fisheries-based economy has become a major political issue in Spain. has become a major political issue in Spain. t h g i e w d a e D n o i l l i M 40 30 20 10 0 -10 -20 -30 0 9 9 1 1 9 9 1 2 9 9 1 3 9 9 1 4 9 9 1 5 9 9 1 6 9 9 1 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 + 5 0 0 2 Source: CRS The world tanker fleet increased by 0.9 per cent in 2002. However, the size of the fleet remains smaller than two years ago. The market outlook for 2003 hinges on several key factors. On the supply side, whilst forecast deliveries for 2003 (34.2 mdwt or 11 per cent of the existing fleet) appear large, they could be offset by two factors: typical In response to the Prestige incident, authorities in In response to the Prestige incident, authorities in the European Union (EU) have undertaken close scrutiny the European Union (EU) have undertaken close scrutiny of the use of older tankers for the carriage of oil, of the use of older tankers for the carriage of oil, particularly persistent oil. Proposals have already been particularly persistent oil. Proposals have already been issued following this incident to accelerate the phase- issued following this incident to accelerate the phase- out of single-hull oil tankers. Other countries, out of single-hull oil tankers. Other countries, including the United States, Japan and Australia, are including the United States, Japan and Australia, are also considering revisions to their existing pollution also considering revisions to their existing pollution regulations applicable to tankers. The EU may also regulations applicable to tankers. The EU may also propose a global adoption of these rules via the propose a global adoption of these rules via the slippage of around 15 per cent from published schedules International Maritime Organization. International Maritime Organization. that could reduce deliveries in 2003 from 11 per cent to nine per cent of the fleet; and heightened charterer discrimination against older vessels and proposed European regulations that could lead to a high rate of If the proposals are adopted in their current form, If the proposals are adopted in their current form, there could be a tightening in the world tanker supply there could be a tightening in the world tanker supply and a reallocation of tonnage. This could result in firm and a reallocation of tonnage. This could result in firm market conditions and increased tanker freight rates for market conditions and increased tanker freight rates for scrapping. On the demand side, the increase in tanker modern vessels. modern vessels. demand from a fundamental increase in oil consumption and several short-term factors, have the potential to largely match fleet growth. The strength in the tanker market during early 2003 indicates that some of the factors mentioned above are playing out and supply- demand fundamentals remain finely balanced. 16 Teekay Shipping Corporation / 2002 Annual Report Characteristics of the offshore loading business: • no spot market • no speculative newbuilding ordering • operational expertise is essential • sophisticated technology required due to the harsh environment • economies of scale are needed to support customer requirements • pipelines are costly and less viable for deepwater production The Offshore Loading Business Over the past two years, Teekay has made major investments in the offshore loading business. Shuttle tankers are technically-enhanced vessels used to transport oil from offshore production installations to on-shore storage and refinery facilities. They are an integral part of this logistics chain, essentially serving as floating pipelines to the offshore sector, and are the most cost-effective solution for transporting oil from deepwater fields and smaller marginal wells. Uninterrupted operations are critical to offshore oil production installations, as a disruption in production can result in significant financial consequences for the field operator. Shuttle tankers are equipped with specialized equipment and built-in redundancy that enables them to operate in high seas and harsh weather. Operational expertise is essential for safe and reliable operation of these vessels. Operators provide service either through long-term contracts of affreightment that provide a high degree of flexibility to the field operator, or through time- charter contracts where ships are dedicated to serving particular customers. Teekay first entered the offshore loading business in 2001 with the acquisition of Ugland Nordic Shipping (UNS), the world’s largest owner of shuttle tankers serving the time-charter market. With our pending acquisition of Navion, Teekay will become the leader in the logistically-complex contract of affreightment sector of the offshore loading business. UNS and Navion are in distinctly different, complementary areas of the shuttle market. Teekay’s combined investment in these profitable niche businesses will grow to more than $1.5 billion. The world shuttle tanker fleet comprises 63 vessels, with only five vessels on order – all of which are fixed on long-term contracts. There is no speculative newbuilding ordering in this sector. Currently the offshore loading business is concentrated in the North Sea. However, there are growing markets for shuttle tankers in many areas of active offshore oil exploration, such as the Gulf of Mexico, the East Coast of Canada and Brazil. Teekay Shipping Corporation / 2002 Annual Report 17 S H I P P I N G R O U T E S A N D O F F I C E S S U M M A R Y O F T E E K A Y F L E E T As of March 1, 2003 Number of Vessels Total DWT Aframax Tankers Onomichi Class Hyundai Class Imabari Class Samsung Class Mitsubishi Class Other Aframax In-Chartered Aframaxes 15 11 10 5 5 7 5 1,497,900 1,108,900 987,600 566,100 446,000 693,700 515,800 Shuttle Tankers 15 1,460,400 Oil/Bulk/Ore (OBO) Vessels Other Size Tankers VLCC Suezmax Product Carriers Floating Storage and Off-take (FSO) Vessels Newbuidings To Be Delivered Shuttle Tankers Suezmax Aframax Total 8 1 2 2 3 2 3 7 625,900 280,700 302,000 69,900 340,400 239,500 456,000 789,000 101 10,379,800 Trading Routes Teekay Offices Vancouver • Houston • Nassau • Glasgow • London • Sandefjord • Oslo • Riga • Mumbai • Singapore • Perth • Manila • Tokyo • Sydney Visit the Investor Centre at www.teekay.com for updates to and more details about Teekay’s fleet. 18 Teekay Shipping Corporation / 2002 Annual Report Financial Review Management’s Discussion and Analysis 20 Auditor’s Report 27 Consolidated Statements of Income 28 Consolidated Balance Sheets 29 Consolidated Statements of Cash Flows 30 Consolidated Statements of Changes in Stockholders’ Equity 31 Notes to the Consolidated Financial Statements 32 Five-Year Summary of Financial Information 41 Teekay Shipping Corporation / 2002 Annual Report 19 Management’s Discussion and Analysis of Financial Condition and Results of Operations 20 20 Teekay Shipping Corporation / 2002 Annual Report Teekay Shipping Corporation / 2002 Annual Report The following discussion and analysis should Company's revenues were generated by two the remaining 91% of which was purchased in be read in conjunction with the consolidated other modes of employment: time-charters, fiscal 2001), for $222.8 million in cash. financial statements and accompanying whereby vessels were chartered to customers for UNS is the world’s largest owner of shuttle notes included elsewhere in this report. a fixed period, and contracts of affreightment tankers, controlling a modern fleet of 18 vessels Except for historical information, the following (“COAs”), whereby the Company carried an (including two newbuildings on order) (the “UNS discussion contains forward-looking statements agreed quantity of cargo for a customer over Fleet”) that engage in the transportation of oil that involve risks and uncertainties, such a specified trade route within a given period from offshore production platforms to onshore as the Company’s objectives, expectations of time. In the year ended December 31, 2002, storage and refinery facilities. The UNS fleet has and intentions. When used in this report, approximately 20% (2001 – 21%; 2000 – 14%) an average age of approximately 9.4 years, the words “expects,” “intends,” “plans,” of net voyage revenues were generated by excluding the two newbuildings on order, and “believes,” “anticipates,” “estimates” time-charters and COAs priced on a spot market operates primarily in the North Sea under fixed- and variations of such words and similar basis. In the aggregate, approximately 65% rate long-term contracts. In addition, as of expressions are intended to identify forward- (2001 – 78%; 2000 – 82%) of the Company's December 31, 2002, UNS owned approximately looking statements. Actual results could differ net voyage revenues during the year ended 10.3% of Nordic American Tankers Shipping Ltd. materially from results that may be anticipated December 31, 2002 were derived from spot (AMEX: NAT) (“NAT”), the owner of three by such forward-looking statements included voyages or time-charters and COAs priced on Suezmax tankers on a long-term contract to in this report. The Company undertakes no a spot market basis, with the remaining 35% BP Shipping. obligation to revise any forward-looking (2001 – 22%; 2000 – 18%) being derived from For the year ended December 31, 2000, UNS statements to reflect events or circumstances fixed-rate time-charters and COAs. The change earned net voyage revenues of $69.1 million, that may subsequently arise. Readers should in the Company’s composition of net voyage resulting in income from vessel operations of carefully review and consider the various revenues reflects the acquisition of Ugland $23.8 million and net income of $15.4 million, disclosures made in this report including those Nordic Shipping AS in 2001 and the change applying accounting principles generally made in the “Risk Factors” section of the in spot tanker rates over this period. This accepted in the United States. The operating Company’s annual report on Form 20-F for the dependence on the spot market, which is within results of UNS have been consolidated in the year ended December 31, 2002 and in other industry norms, contributes to the volatility Company’s financial statements commencing Company SEC filings that discuss risks and of the Company's revenues, cash flow from March 6, 2001, the date that the Company factors that may affect our business, prospects, operations, and net income. acquired a majority interest in UNS. Minority financial condition and results of operations. Historically, the tanker industry has been interest expense, which is included in other General and asset values resulting from changes in the the minority shareholders’ share of UNS’ net Teekay is a leading provider of international supply of, and demand for, vessel capacity. income for the period from March 6, 2001 crude oil and petroleum product transportation In addition, tanker markets have historically to May 28, 2001, when the Company acquired services to major oil companies, major oil exhibited seasonal variations in charter rates. the remaining shares in UNS. cyclical, experiencing volatility in profitability income (loss), has been recorded to reflect traders and government agencies worldwide. Tanker markets are typically stronger in the At March 1, 2003, the Company’s fleet consisted winter months as a result of increased oil Pending Acquisition of Navion ASA of 101 vessels (including 12 newbuildings on consumption in the Northern hemisphere On December 16, 2002, Teekay and Statoil ASA order, five vessels time-chartered-in and four and unpredictable weather patterns that tend announced that they had entered into an vessels owned by joint ventures), for a total to disrupt vessel scheduling. agreement under which the Company will cargo-carrying capacity of approximately acquire Statoil’s wholly-owned shipping 10.4 million tonnes. Acquisition of Ugland Nordic Shipping AS company, Navion ASA (excluding its oil drilling During the year ended December 31, 2002, As of May 28, 2001, the Company had purchased ship and related operations and one floating approximately 45% (2001 – 57%; 2000 – 68%) 100% of the issued and outstanding shares of production, storage and offload vessel), on a of the Company's net voyage revenues were Ugland Nordic Shipping AS (“UNS”) (nine per debt-free basis, for approximately $800 million derived from spot voyages. The balance of the cent of which was purchased in fiscal 2000 and in cash. The Company anticipates funding its Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) acquisition of Navion by borrowing under a Critical Accounting Policies 25-year life has become the prevailing standard. new credit facility, together with available cash The Company's consolidated financial However, the actual life of a vessel may be or cash generated from operations and statements are prepared in accordance with different from the 25-year life, with a shorter borrowings under other existing credit facilities. accounting principles generally accepted in life potentially resulting in an impairment loss. The closing of the transaction is expected to the United States, which require the Company Regulations of the International Maritime take place in the second quarter of 2003. to make estimates in the application of its Organization that became effective in April Navion, based in Norway, operates primarily accounting policies based on the best 2001 require the accelerated phase-out of in the shuttle tanker and the conventional crude assumptions, judgments, and opinions of single-hull vessels. oil and product tanker markets. Its modern management. Following is a discussion of the In response to the sinking of the tanker shuttle tanker fleet, which as of December 31, accounting policies that involve a higher degree Prestige, the European Transport Commission 2002 consisted of nine owned and 17 chartered- of judgment and the methods of their issued a proposal on December 20, 2002, that in vessels (including four vessels chartered-in application. For a description of additional would, among other things, accelerate the from the Company’s subsidiary UNS), provides material accounting policies of the Company, phasing out of single-hull oil tankers and logistical services to Statoil and other oil see Note 1 to the Company's consolidated prohibit the transport to or from European companies in the North Sea under fixed-rate, financial statements. long-term contracts of affreightment. Navion’s modern, chartered-in, conventional tanker fleet, which as of December 31, 2002 consisted of 12 crude oil tankers and nine product tankers, operates primarily in the Atlantic region, providing services to Statoil and other oil companies. In addition, Navion owns two floating storage and off-take vessels currently trading as conventional crude tankers in the Atlantic region, and one gas carrier on long- term charter to Statoil. Through a joint venture with Statoil, Navion is responsible for meeting Statoil’s transportation needs for crude oil, condensate and refined petroleum products. As part of this arrangement, Navion has a right of first refusal on Statoil’s oil transportation requirements at the prevailing market rate until December 31, 2007. The Company believes this arrangement may increase the utilization of its conventional fleet. The Company also believes that the acquisition of Navion will provide added stability to the Company's cash flow and Revenue Recognition The Company generates a majority of its revenues from voyage charters. Within the shipping industry, the two methods used to account for voyage revenues and expenses are the percentage of completion and the completed voyage methods. For each method, voyages may be calculated on either a load-to- load or discharge-to-discharge basis. Most shipping companies, including the Company, use the percentage of completion method. In applying the percentage of completion method, management believes that the discharge-to-discharge basis of calculating voyages more accurately reflects voyage results than the load-to-load basis. At the time of cargo discharge, the Company generally has information about the next load port and expected discharge port, whereas at the time of loading the Company normally is less certain what the next load port will be. Vessel Lives and Impairment Union ports of heavy grades of oil on single- hull tankers. Member countries are currently examining the proposal and consulting with affected parties. The European Transport Council is scheduled to meet on March 27, 2003, to vote on the proposal. Although individual European Union members are currently not required to implement such a proposal, several countries, including some outside the European Union, are considering revisions to their existing pollution regulations applicable to tankers. If the proposals are adopted in their current form, they could result in higher depreciation expense related to a reduction of the estimated useful life of single-hull vessels for accounting purposes. However, the Company believes that the proposals could also result in a tightening in the world tanker supply and a reallocation of affected tonnage. This could result in firm tanker market conditions and increased tanker freight rates for modern vessels. The Company has not determined the impact, if any, that the adoption of this earnings throughout the tanker market cycle, The carrying value of each of the Company's proposal will have on the Company’s results due to the fixed-rate, long-term nature of vessels represents its original cost at the time of of operation or financial position. Navion’s shuttle tanker contracts. delivery or purchase less depreciation calculated using an estimated useful life of 25 years from the date the vessel was originally delivered from the shipyard. In the shipping industry, use of a Teekay Shipping Corporation / 2002 Annual Report 21 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 22 Teekay Shipping Corporation / 2002 Annual Report The carrying values of the Company's vessels revenues less voyage expenses (excluding The Company’s average fleet size increased may not represent their fair market value at commissions), divided by voyage ship-days 3.1% in the year ended December 31, 2002, any point in time since the market prices of for the round-trip voyage. Voyage revenues compared to the year ended December 31, second-hand vessels tend to fluctuate with and voyage expenses are a function of the 2001, primarily due to the acquisition of UNS, changes in charter rates and the cost of type of charter, either spot charter or time- whose operating results were consolidated in newbuildings. Both charter rates and charter, the level of shipping freight rates the Company’s financial statements beginning newbuilding costs tend to be cyclical in nature. and port, canal and fuel costs, depending March 6, 2001. The Company reviews vessels and equipment on the trade route upon which a vessel is Net voyage revenues decreased 31.1% to for impairment whenever events or changes sailing. For this reason, shipowners base $543.9 million for the year ended December in circumstances indicate the carrying amount economic decisions regarding the deployment 31, 2002, from $789.5 million for the prior year. of an asset may not be recoverable. of their vessels upon anticipated TCE rates, The decrease was primarily due to a decline Recoverability of these assets is measured by and industry analysts typically measure bulk in the Company’s average TCE rate, partially comparison of their carrying amount to future shipping freight rates in terms of TCE rates. offset by the increase in the Company’s undiscounted cash flows the assets are Therefore, the discussion of revenue below average fleet size. expected to generate. If vessels and focuses on net voyage revenues and TCE rates. Vessel operating expenses, which include equipment are considered to be impaired, TCE rates are primarily dependent on oil crewing, repairs and maintenance, insurance, the impairment to be recognized equals production and consumption levels, the number stores, lubes, and communication expenses, the amount by which the carrying value of of vessels scrapped, the number of newbuildings increased 8.5% to $168.0 million for the year the assets exceeds their fair market value. delivered and charterers’ preference for modern ended December 31, 2002, from $154.8 million Goodwill The Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” and as a result has discontinued amortization of goodwill since January 1, 2002. Pursuant to SFAS 142, goodwill and indefinite lived intangible assets are tested for impairment annually or whenever an impairment indicator arises. An impairment test requires the Company to make estimates of future cash flows. If events or circumstances change, including reductions in anticipated cash flows generated by operations, goodwill could become impaired and require a charge to earnings. Based on the Company’s goodwill balance at December 31, 2001, the Company estimates that application of SFAS 142 will result in an annual increase in net income of approximately $4.5 million. Results of Operations Bulk shipping industry freight rates are commonly measured at the net voyage revenue level in terms of “time-charter equivalent” (“TCE”) rates, defined as voyage tankers. As a result of the Company’s for the year ended December 31, 2001, dependence on the tanker spot market, any primarily as a result of the acquisition of UNS, fluctuations in Aframax TCE rates will impact higher repair and maintenance costs, and the the Company’s revenues and earnings. effect on Norwegian Kroner denominated Year Ended December 31, 2002 versus Year Ended December 31, 2001 expenses from the appreciation of the Norwegian Kroner against the US dollar. Time-charter hire expense decreased 24.3% In response to a slowing global economy, to $49.9 million for the year ended December OPEC made a series of oil production cuts 31, 2002, from $66.0 million for the prior year, during 2001. These cuts resulted in reduced due primarily to a decrease in the average TCE tanker demand, contributing to a significant rates earned in the oil/bulk/ore (“O/B/O”) pool decline in average TCE rates during the last managed by the Company, the lower number three quarters of 2001. Average TCE rates of vessels owned by minority participants in continued to decline in the first three the O/B/O pool, and a decrease in the average quarters of 2002. Primarily due to increased number of vessels time-chartered-in by the global oil demand and oil production in Company. The minority participants’ share of the fourth quarter of 2002, the general strike the O/B/O pool’s net voyage revenues, which is in Venezuela, and the sinking of the tanker reflected as a time-charter hire expense, was Prestige, TCE rates increased in the fourth $18.3 million for the year ended December 31, quarter of 2002, and have remained strong 2002, compared to $27.6 million for the year into the first two months of 2003. Overall, ended December 31, 2001. The average the Company’s average TCE rate (excluding number of vessels time-chartered-in by the Company’s vessels on bareboat charter) the Company, excluding the O/B/O vessels, decreased 34.0% to $18,995 for the year was five in the year ended December 31, 2002, ended December 31, 2002, from $28,768 compared to six in the prior year. for the year ended December 31, 2001. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Depreciation and amortization expense interest expense, partially offset by equity increased 8.5% to $168.0 million for the year increased 9.5% to $149.3 million for the year income from 50%-owned joint ventures, ended December 31, 2002, from $154.8 million ended December 31, 2002, from $136.3 million dividend income from NAT, and foreign for the year ended December 31, 2001, for the prior year, mainly due to the acquisition exchange gains. Other income of $10.1 million primarily as a result of the acquisition of UNS, of UNS, which resulted in an increase in for the year ended December 31, 2001 was higher repair and maintenance costs, and the the average size and average cost base of primarily comprised of equity income from effect on Norwegian Kroner denominated the Company’s owned fleet, the purchase 50%-owned joint ventures, dividend income expenses from the appreciation of the of a 2001-built Suezmax tanker in June 2002, from NAT, gain on the disposition of available- Norwegian Kroner against the US dollar. and increased drydock amortization expense. for-sale securities, and foreign exchange gains, Time-charter hire expense increased 23.3% This was partially offset by the elimination partially offset by income tax expense and to $66.0 million for the year ended December of goodwill amortization. Depreciation and minority interest expense. Equity income from 31, 2001, from $53.5 million for the prior year, amortization expense included amortization 50%-owned joint ventures for the year ended due primarily to an increase in the average of drydocking costs of $21.8 million for the year December 31, 2001 included a $10.2 million number of vessels time-chartered-in by the ended December 31, 2002, compared to $14.2 gain on the sale of three 50%-owned vessels. Company and an increase in the average TCE million for the prior year. The increase in As a result of the foregoing factors, net rates earned in the O/B/O pool managed by drydock amortization is primarily the Company’s income declined to $53.4 million for the year the Company. The minority participants’ share acceleration of drydock maintenance on certain ended December 31, 2002, from $336.5 million of the O/B/O pool’s net voyage revenues, which vessels during 2002 and the increase in for the prior year. frequency of required drydockings for vessels older than 15 years of age. General and administrative expenses Year Ended December 31, 2001 versus Year Ended December 31, 2000 is reflected as a time-charter expense, was $27.6 million for the year ended December 31, 2001, compared to $26.3 million for the year ended December 31, 2000. The average increased 17.1% to $57.2 million for the year The Company’s average fleet size increased number of vessels time-chartered-in by ended December 31, 2002, from $48.9 million 15.3% for the year ended December 31, 2001 the Company, excluding the O/B/Os, was six for the prior year, primarily as a result of compared to the year ended December 31, in the year ended December 31, 2001, the acquisition of UNS and an increase in 2000, primarily due to the acquisition of UNS compared to five in the prior year. the number of shore staff. in March 2001. Depreciation and amortization expense Interest expense decreased 12.5% to Average TCE rates were higher in 2001, increased 36.1% to $136.3 million for the year $58.0 million for the year ended December 31, compared to 2000, due to increased demand ended December 31, 2001, from $100.2 million 2002, from $66.2 million for the prior year. for tankers, primarily arising from increased for the prior year, mainly due to the acquisition This decrease reflects lower interest rates, oil production in the first half of 2001. of UNS, which resulted in an increase in partially offset by the additional debt assumed The Company’s average TCE rate increased the average size and average cost base of as part of the UNS acquisition. 12.1% to $28,768 for the year ended the Company’s owned fleet, and an increase Interest income decreased 62.0% to December 31, 2001 (excluding the Company’s in drydock amortization expense. Depreciation $3.5 million for the year ended December 31, vessels on bareboat charter), from $25,661 and amortization expense included amortization 2002, compared to $9.2 million for the prior for the year ended December 31, 2000. of drydocking costs of $14.2 million for the year year, mainly as a result of lower interest rates. Net voyage revenues increased 22.5% to ended December 31, 2001, compared to Other loss of $11.5 million for the year $789.5 million for the year ended December $9.2 million for the prior year. ended December 31, 2002 was primarily 31, 2001, from $644.3 million for the year General and administrative expenses comprised of income taxes, the settlement ended December 31, 2000. This was the result increased 30.5% to $48.9 million for the year of a contingent payment relating to the of the increase in fleet size and an increase ended December 31, 2001, from $37.5 million Company’s purchase in 1993 of all the issued in the Company’s average TCE rate. for the prior year, primarily as a result of and outstanding shares of Palm Shipping Inc. Vessel operating expenses, which include the acquisition of UNS and higher senior (now Teekay Chartering Limited), loss on sale crewing, repairs and maintenance, insurance, management bonuses, which are driven largely of available-for-sale securities, and minority stores, lubes, and communication expenses, by the Company’s financial performance. Teekay Shipping Corporation / 2002 Annual Report 23 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 24 Teekay Shipping Corporation / 2002 Annual Report Interest expense decreased 11.1% to expenditures, a deposit for the purchase of of the principal amount of the 8.32% Notes on $66.2 million for the year ended December 31, Navion ASA, debt repayments and prepayments, February 1 of each year, commencing 2004. 2001, from $74.5 million for the prior year. payment of dividends, investment in a joint The Company’s unsecured 8.875% Senior This decrease reflects lower interest rates, venture, and a $57.6 million scheduled Notes are due July 15, 2011. The Company’s partially offset by the additional debt assumed reduction in the available borrowing limit outstanding term loans reduce in quarterly or as part of the UNS acquisition. under the Company’s two long-term revolving semi-annual payments with varying maturities Interest income decreased 29.4% to credit facilities (the “Revolvers”). This was through 2009. $9.2 million for the year ended December 31, partially offset by net cash flow from operating Among other matters, the long-term debt 2001, compared to $13.0 million for the prior activities during the year ended December 31, agreements generally provide for such items year, mainly as a result of lower interest rates. 2002. In the Company’s opinion, working as maintenance of certain vessel market value- Other income of $10.1 million for the year capital is sufficient for the Company’s to-loan ratios and minimum consolidated ended December 31, 2001 consisted primarily present requirements. financial covenants, prepayment privileges of equity income from 50%-owned joint Net cash flow from operating activities (in some cases with penalties), and restrictions ventures, dividend income from NAT, gain decreased to $214.4 million in the year ended against the incurrence of new investments by on the disposition of available-for-sale securities, December 31, 2002, compared to $520.2 million the individual subsidiaries without prior lender and foreign exchange gains, partially offset in the year ended December 31, 2001, and consent. The amount of Restricted Payments, by income tax expense and minority interest $333.3 million in the year ended December 31, as defined, that the Company can make, expense. Equity income from joint ventures 2000. This primarily reflects the significant including dividends and purchases of its own included a $10.2 million gain on the sale of decrease in the Company’s average TCE rate capital stock, was limited to $440.6 million three 50%-owned vessels. Other income for the for 2002, partially offset by the increase as of December 31, 2002. Certain of the loan year ended December 31, 2000 was $3.9 million, in the Company’s fleet size as a result of agreements require that a minimum level of which was comprised mainly of equity income the UNS acquisition. free cash be maintained. As at December 31, from a 50%-owned joint venture, partially Scheduled debt repayments were 2002, this amount was $84.8 million. offset by a loss on the disposition of two vessels $51.8 million during the year ended December The Company manages the impact of and income tax expense. 31, 2002, compared to $72.0 million during interest rate changes on earnings and cash As a result of the foregoing factors, net the year ended December 31, 2001, and flows through its interest rate structure. For the income rose to $336.5 million for the year $63.8 million during the year ended December Revolvers, the interest rate structure is based on ended December 31, 2001, from $270.0 million 31, 2000. Debt prepayments were $8.0 million LIBOR plus a margin depending on the financial for the prior year. during the year ended December 31, 2002, leverage of the Company. Interest payments compared to $751.7 million during the year on the term loans are also based on LIBOR plus Liquidity and Capital Resources ended December 31, 2001, and $429.9 million a margin. As at December 31, 2002, the interest As at December 31, 2002, the Company during the year ended December 31, 2000. rate swap agreements effectively change had total cash and cash equivalents of As at December 31, 2002, the Company’s the Company’s interest rate exposure on $284.6 million, compared to $174.9 million total debt was $1,130.8 million, up from $20.0 million of debt from a floating LIBOR as at December 31, 2001, and $181.3 million $935.7 million as at December 31, 2001. rate to an average fixed rate of 5.75%. as at December 31, 2000. The Company's total The Company’s Revolvers provided for The interest rate swap agreements expire liquidity, including cash, short-term marketable borrowings of up to $450.7 million, of which between March 2003 and May 2004. securities and undrawn long-term borrowings, $240.7 million was undrawn at December 31, Funding and treasury activities are was $525.3 million as at December 31, 2002, 2002. The amount available under the Revolvers conducted within corporate policies to down from $688.2 million as at December 31, reduces semi-annually, with final balloon minimize borrowing costs and maximize 2001, and up from $373.1 million as at reductions in 2006 and 2008. The Company’s investment returns while maintaining the December 31, 2000. The decrease in liquidity 8.32% First Preferred Ship Mortgage Notes safety of the funds and appropriate levels of during the year ended December 31, 2002 are due February 1, 2008 and are subject to liquidity for Company purposes. Cash and cash was mainly the result of cash used for capital a sinking fund which will retire $45.0 million equivalents are held primarily in U.S. dollars, with some balances held in Japanese Yen, Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Singapore Dollars, Canadian Dollars, Australian due to the Company’s decision to accelerate debt or the utilization of surplus cash balances, Dollars, British Pounds and Norwegian Kroner. drydock maintenance on certain vessels during or a combination of the two. As of December The Company is exposed to market risk 2002 and an increase in the Company’s fleet 31, 2002, the remaining payments required from foreign currency fluctuations and changes size as a result of the UNS acquisition. to be made under these newbuilding contracts in interest rates and bunker fuel prices. As at December 31, 2002, the Company were $245.9 million in 2003 and $123.4 million The Company uses forward foreign currency was committed to the construction of two in 2004. With the exception of four Aframax contracts, interest rate swaps, and bunker fuel shuttle, three Suezmax and six Aframax tankers tankers scheduled for delivery in 2004, all of swap contracts to manage currency, interest scheduled for delivery between March 2003 and the vessels upon delivery will be subject to long- rate, and bunker fuel price risks, but does not October 2004, at a total cost of approximately term charter contracts, which expire between use these financial instruments for trading or $496.6 million, excluding capitalized interest. 2009 and 2015. speculative purposes. As at December 31, 2002, As of December 31, 2002, there have been The Company is also committed to a capital the Company had $65.8 million in forward payments made towards these commitments lease on an Aframax tanker that is currently foreign currency contracts, which expire of $127.3 million and long-term financing under construction and is expected to deliver between January 2003 and December 2004. arrangements existed for $16.3 million of the in the fourth quarter of 2003. The lease will The Company is also committed to bunker fuel unpaid cost of these vessels. It is the Company’s require minimum payments of $66.9 million swap contracts totaling 20,400 metric tonnes intention to finance the remaining unpaid (including a purchase obligation payment) with a weighted-average price of $116.00 per amount of $353.0 million through incremental over the 15-year term of the lease. tonne, which expire between January 2003 and May 2004. The following table summarizes the Company’s long-term contractual obligations (excluding Dividends declared during the year ended commitments of Navion ASA) as at December 31, 2002 (in millions of U.S. dollars). December 31, 2002 were $34.1 million, or $0.86 per share. On September 19, 2001, Teekay announced that its Board of Directors had authorized the repurchase of up to 2,000,000 shares of its Common Stock in the open market. As at December 31, 2002, Teekay had repurchased 561,700 shares of Common Stock at an average price of $27.97 per share. During the year ended December 31, 2002, the Company incurred capital expenditures for vessels and equipment of $135.7 million. These capital expenditures were primarily for the purchase of a 2001-built Suezmax tanker in June 2002 and for newbuilding Long-term debt Chartered-in vessels (operating lease) Commitment for future chartered-in vessel (capital lease) Newbuilding installments Total 2003 83.6 2004 2005 2006 104.9 131.1 180.8 2007 84.8 There- after Total 545.6 1,130.8 25.7 10.8 2.0 38.5 1.3 4.1 4.1 4.1 4.1 49.2 66.9 245.9 356.5 123.4 243.2 137.2 184.9 88.9 594.8 1,605.5 369.3 The Company and certain subsidiaries of debt has maturity dates ranging from May 2008 the Company have guaranteed their share to August 2009. These joint venture companies installment payments. During September 2002, of the outstanding mortgage debt in three own three shuttle tankers. the Company, through a 50%-owned joint 50%-owned joint venture companies. As of In February 2003, the Company completed venture, purchased another 2001-built Suezmax December 31, 2002, the Company and these an offering for gross proceeds of $143.75 tanker for $26.0 million. Cash expenditures subsidiaries had guaranteed $82.7 million of million in mandatory convertible equity units for drydocking were $34.9 million in the year such debt, or 50% of the total $165.3 million pursuant to its currently effective universal ended December 31, 2002, compared to in outstanding mortgage debt of the joint shelf registration statement filed with the SEC. $20.1 million in the year ended December 31, venture companies. The outstanding mortgage Each equity unit includes a forward contract 2001, and $11.9 million in the year ended December 31, 2000. This increase was primarily Teekay Shipping Corporation / 2002 Annual Report 25 Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 26 Teekay Shipping Corporation / 2002 Annual Report to purchase shares of the Company’s common tanker supply and demand; supply and anticipated rates of tanker scrapping; changes stock on February 16, 2006, and a $25 principal demand for oil; future capital expenditures; in trading patterns significantly impacting amount, subordinated note due May 18, 2006. the Company's growth strategy and measures overall tanker tonnage requirements; changes The forward contracts provide for contract to implement such strategy; the Company's in typical seasonal variations in tanker charter adjustment payments of 1.25% annually competitive strengths; the expected financing, rates; the Company's dependence on spot and the notes bear interest at 6.0% annually. benefits and results of our pending acquisition oil voyages; our potential inability to close Upon settlement of the 5.75 million forward of Navion ASA; and the future success of the our pending acquisition of Navion ASA and contracts included in the equity units on Company. Other statements contained in this our potential inability to integrate effectively February 16, 2006, the Company will issue report are forward-looking statements and are the operations of Navion or any other future between 3,267,150 and 3,991,075 shares of not based on historical fact, such as statements acquisition with our own; competitive factors its Common Stock (depending on the average containing the words “believes,” “may,” in the markets in which the Company closing price of the Common Stock for the 20- “will,” “estimates,” “continue,” “anticipates,” operates; environmental and other regulation, trading day period ending on the third trading “intends,” “expects” and words of similar including without limitation, the imposition day prior to February 16, 2006). Proceeds from import. These forward-looking statements, of freight taxes and income taxes; the the offering may be used to finance potential wherever they may occur in this report, Company's potential inability to achieve acquisitions and for general corporate are necessarily estimates reflecting the best and manage growth; risks associated with purposes, including capital expenditures, judgment of senior management and involve operations outside the United States; the working capital, and the repayment of debt. a number of risks and uncertainties that could potential inability of the Company to generate As part of its growth strategy, the cause actual results to differ materially from internal cash flow, to drawdown on existing Company will continue to consider strategic those suggested by the forward-looking credit facilities and obtain additional debt or opportunities, including the acquisition of statements. These forward-looking statements equity financing to fund capital expenditures; additional vessels and expansion into new should, therefore, be considered in light of the potential inability of the Company to markets. The Company may choose to pursue various important factors, including those set renew long-term contracts; the exercise by such opportunities through internal growth, forth in this report. These statements involve charterers of early termination rights in long- joint ventures, or business acquisitions. known and unknown risks and are based term contracts; and other factors detailed The Company intends to finance any future upon a number of assumptions and estimates from time to time in the Company's periodic acquisitions through various sources of capital, that are inherently subject to significant reports filed with the U.S. Securities and including internally generated cash flow, existing uncertainties and contingencies, many of Exchange Commission. The Company expressly credit lines, additional debt borrowings, and which are beyond the control of the Company. disclaims any obligation or undertaking to the issuance of additional shares of capital stock Actual results may differ materially from those release publicly any updates or revisions to or other equity securities. expressed or implied by such forward-looking any forward-looking statements contained Forward-Looking Statements actual results to differ materially include, expectations with respect thereto or any The Company’s Annual Report on Form 20-F but are not limited to: changes in production change in events, conditions or circumstances for the year ended December 31, 2002 and of or demand for oil and petroleum products, on which any such statement is based. statements. Important factors that could cause herein to reflect any change in the Company's this Annual Report to Shareholders for 2002 either generally or in particular regions; contain certain forward-looking statements changes in the offshore production of oil; (as such term is defined in Section 27A the cyclical nature of the tanker industry of the Securities Act of 1933, as amended, and its dependence on oil markets; the supply and Section 21E of the Securities Exchange Act of tankers available to meet the demand of 1934, as amended) concerning future events for transportation of petroleum products; and the Company's operations, performance charterers’ preference for modern tankers; and financial condition, including, in particular, greater or less than anticipated levels of tanker statements regarding: Aframax TCE rates; newbuilding orders or greater or less than To the Shareholders of Teekay Shipping Corporation Auditor’s Report We have audited the accompanying consolidated balance An audit also includes assessing the accounting principles sheets of Teekay Shipping Corporation and subsidiaries used and significant estimates made by management, as of December 31, 2002 and 2001, and the related as well as evaluating the overall financial statement consolidated statements of income, changes in presentation. We believe that our audits provide a stockholders’ equity and cash flows for the years ended reasonable basis for our opinion. December 31, 2002, 2001, and 2000. These financial In our opinion, based on our audit and the report statements are the responsibility of the Company's of the other auditors, the financial statements referred management. Our responsibility is to express an opinion to above present fairly, in all material respects, the on these financial statements based on our audits. consolidated financial position of Teekay Shipping We did not audit the financial statements of Ugland Nordic Corporation and subsidiaries as at December 31, 2002 Shipping AS, a wholly-owned subsidiary, for the period and 2001, and the consolidated results of their operations from acquisition on March 6, 2001 to December 31, 2001, and their cash flows for the years ended December 31, 2002, whose total assets and net voyage revenues for the period 2001, and 2000 in conformity with accounting principles from acquisition on March 6, 2001 to December 31, 2001, generally accepted in the United States. constituted 21 percent and 10 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report had been furnished to us for that period, and our opinion, insofar as it relates to the amounts included for Ugland Nordic Shipping AS for that period, is based solely on the report of the other auditors. ERNST & YOUNG LLP We conducted our audits in accordance with auditing Chartered Accountants standards generally accepted in the United States. Those standards require that we plan and perform the audit to Vancouver, Canada, obtain reasonable assurance about whether the financial February 13, 2003 (except for Note 15(b) which is as of statements are free of material misstatement. An audit February 19, 2003.) includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Teekay Shipping Corporation / 2002 Annual Report 27 Consolidated Statements of Income For the years ended December 31, 2002, 2001 and 2000 (in thousands of U.S. dollars, except share and per share amounts) The accompanying notes are an integral part of the consolidated financial statements. 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 Income from vessel operations OTHER ITEMS Interest expense Interest income Other (loss) income (note 11) Net income Earnings per common share • Basic • Diluted Weighted average number of common shares • Basic • Diluted 2002 2001 2000 $ 783,327 239,455 543,872 $ 1,039,056 249,562 789,494 $ 893,226 248,957 644,269 168,035 49,949 149,296 57,246 424,526 119,346 (57,974) 3,494 (11,475) (65,955) 154,831 66,019 136,283 48,898 406,031 383,463 (66,249) 9,196 10,108 (46,945) 125,415 53,547 100,153 37,479 316,594 327,675 (74,540) 13,021 3,864 (57,655) $ 53,391 $ 336,518 $ 270,020 $ $ 1.35 1.33 $ $ 8.48 8.31 $ $ 7.02 6.86 39,630,997 40,252,396 39,706,799 40,488,222 38,468,158 39,368,253 28 Teekay Shipping Corporation / 2002 Annual Report ASSETS Current Cash and cash equivalents (note 6) Marketable securities (note 4) Restricted cash Accounts receivable Prepaid expenses and other assets Total current assets Marketable securities (note 4) Vessels and equipment (note 6) At cost, less accumulated depreciation of $940,082 (December 31, 2001 - $801,985) Advances on newbuilding contracts (note 13) Total vessels and equipment Restricted cash (note 6) Deposit for purchase of Navion ASA (note 13) Investment in joint ventures Other assets Goodwill (note 1) LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable Accrued liabilities (note 5) Current portion of long-term debt (note 6) Total current liabilities Long-term debt (note 6) Other long-term liabilities (note 1) Total liabilities Minority interest Stockholders' equity Capital stock (note 9) Retained earnings Accumulated other comprehensive loss Total stockholders' equity Commitments and contingencies (notes 7, 12, 13 and 15) 2002 2001 $ 284,625 - 4,180 70,906 27,847 387,558 $ 174,950 5,028 7,833 57,519 22,139 267,469 13,630 16,026 1,928,488 138,169 1,925,844 117,254 2,066,657 2,043,098 4,605 76,000 56,354 29,513 89,189 - - 27,352 26,757 87,079 $2,723,506 $2,467,781 $ 22,307 83,643 83,605 189,555 1,047,217 44,512 $ 24,484 51,011 51,830 127,325 883,872 39,407 1,281,284 1,050,604 20,324 18,977 470,988 954,005 (3,095) 467,341 935,660 (4,801) 1,421,898 1,398,200 $2,723,506 $2,467,781 Consolidated Balance Sheets As at December 31, 2002 and 2001 (in thousands of U.S. dollars) The accompanying notes are an integral part of the consolidated financial statements. Teekay Shipping Corporation / 2002 Annual Report 29 Consolidated Statements of Cash Flows For the years ended December 31, 2002, 2001 and 2000 (in thousands of U.S. dollars) The accompanying notes are an integral part of the consolidated financial statements. Cash and cash equivalents provided by (used for) OPERATING ACTIVITIES Net income Non-cash items: Depreciation and amortization Loss on disposition of vessels and equipment Loss (gain) on disposition of available-for-sale securities Equity income (net of dividends received: December 31, 2002 - $1,748; December 31, 2001 - $33,514; December 31, 2000 - $8,474) Deferred income taxes (note 11) Other – net Change in non-cash working capital items related to operating activities (note 14) 2002 2001 2000 $ 53,391 $ 336,518 $ 270,020 149,296 - 1,130 (2,775) 11,413 (5,049) 136,283 - (758) 16,190 6,963 (3,243) 100,153 1,004 - (1,072) 999 (1,173) 7,038 28,197 (36,676) Net cash flow from operating activities 214,444 520,150 333,255 FINANCING ACTIVITIES Net proceeds from long-term debt Scheduled repayments of long-term debt Prepayments of long-term debt Increase in restricted cash Proceeds from issuance of Common Stock Repurchase of Common Stock Cash dividends paid Other 255,185 (51,830) (8,000) (952) 4,221 (1,547) (34,073) - 688,381 (72,026) (751,738) (7,833) 20,584 (14,162) (34,094) - 206,000 (63,757) (429,926) - 24,843 - (32,973) 2,970 Net cash flow from financing activities 163,004 (170,888) (292,843) INVESTING ACTIVITIES Expenditures for vessels and equipment Expenditures for drydocking Proceeds from disposition of assets Deposit for purchase of Navion ASA Purchase of Ugland Nordic Shipping AS (net of cash acquired of $26,605) (note 3) Acquisition costs related to purchase of Ugland Nordic Shipping AS (note 3) Acquisition costs related to purchase of Bona Shipholding Ltd. Investment in joint venture Proceeds from disposition of available-for-sale securities Purchases of available-for-sale securities Other (135,650) (34,913) - (76,000) (184,983) (20,064) - - (43,512) (11,941) 9,713 - - (176,453) (13,114) - - (26,000) 6,675 - (1,885) (5,067) (20) - 35,975 (5,000) - - (2,685) - - (17,900) - Net cash flow from investing activities (267,773) (355,612) (79,439) Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of the period 109,675 174,950 (6,350) 181,300 (39,027) 220,327 Cash and cash equivalents, end of the period $ 284,625 $ 174,950 $ 181,300 30 Teekay Shipping Corporation / 2002 Annual Report Thousands of Common Shares # Accumulated Other Retained Earnings $ Common Stock $ Compre- hensive Income (Loss) $ Compre- hensive Income (Loss) $ Balance as at December 31, 1999 38,064 427,937 404,130 - Total Stockholders’ Equity $ 832,067 Net income Other comprehensive income: Unrealized gain on available-for-sale securities Comprehensive income Dividends declared Reinvested dividends Exercise of stock options 270,020 270,020 270,020 1 1,080 28 24,843 (33,001) 4,555 4,555 274,575 4,555 (33,001) 28 24,843 Balance as at December 31, 2000 39,145 452,808 641,149 4,555 1,098,512 Net income Other comprehensive income: Unrealized loss on available-for-sale securities Reclassification adjustment for gain on available for-sale securities included in net income Cumulative effect of accounting change (note 12) Unrealized loss on derivative instruments (note 12) Reclassification adjustment for gain on derivative instruments (note 12) Comprehensive income Adjustment for equity income on step acquisition (note 3) Dividends declared Reinvested dividends Exercise of stock options Repurchase of Common Stock 336,518 336,518 336,518 (6,636) (6,636) (6,636) (3,627) 4,155 (3,627) 4,155 (3,627) 4,155 (2,274) (2,274) (2,274) (974) (974) 327,162 (974) 198 (34,102) 8 20,584 (14,162) 1 917 (513) 8 20,584 (6,059) 198 (34,102) (8,103) Balance as at December 31, 2001 39,550 467,341 935,660 (4,801) 1,398,200 Net income Other comprehensive income: Unrealized loss on available-for-sale securities Reclassification adjustment for loss on available- for-sale securities included in net income Unrealized gain on derivative instruments (note 12) Reclassification adjustment for gain on derivative instruments (note 12) Comprehensive income Dividends declared Reinvested dividends Exercise of stock options Repurchase of Common Stock 53,391 53,391 53,391 (239) (239) (239) 1 190 (49) 6 4,221 (580) (34,079) (967) 737 3,023 (1,815) 737 3,023 (1,815) 55,097 737 3,023 (1,815) (34,079) 6 4,221 (1,547) Balance as at December 31, 2002 39,692 470,988 954,005 (3,095) 1,421,898 Consolidated Statements of Changes in Stockholders’ Equity (in thousands of U.S. dollars, except share amounts) The accompanying notes are an integral part of the consolidated financial statements. Teekay Shipping Corporation / 2002 Annual Report 31 Notes to the Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of presentation operating expenses comprise all expenses expenditures occur prior to the expiry of this relating to the operation of vessels including period, the remaining unamortized balance crewing, repairs and maintenance, insurance, of the original drydocking cost is expensed The consolidated financial statements stores, lubes, and communications. in the month of the subsequent drydocking. (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 32 Teekay Shipping Corporation / 2002 Annual Report have been prepared in accordance with accounting principles generally accepted in the United States. They include the accounts of Teekay Shipping Corporation (“Teekay”), which is incorporated under the laws of the Republic of the Marshall Islands, and its wholly owned or controlled subsidiaries (the “Company”). Significant intercompany balances and transactions have been eliminated upon consolidation. Cash and cash equivalents The Company classifies all highly liquid investments with a maturity date of three months or less when purchased as cash and cash equivalents. Cash interest paid during the years ended December 31, 2002, 2001 and 2000, totalled $65.3 million, $54.8 million, and $77.1 million, respectively. The preparation of financial statements Marketable securities Amortization of drydocking expenditures for the years ended December 31, 2002, 2001 and 2000 aggregated $21.8 million, $14.2 million, and $9.2 million, respectively. The Company reviews vessels and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted in conformity with accounting principles The Company's investments in marketable cash flows the assets are expected to generally accepted in the United States securities are classified as available-for-sale generate. If vessels and equipment are requires management to make estimates securities and are carried at fair value. Net considered to be impaired, the impairment and assumptions that affect the amounts unrealized gains or losses on available-for- to be recognized equals the amount by reported in the financial statements and sale securities, if material, are reported as a which the carrying value of the assets accompanying notes. Actual results could component of other comprehensive income. exceeds their fair market value. differ from those estimates. Vessels and equipment Investment in joint ventures Reporting currency All pre-delivery costs incurred during the The Company has a 50% participating The consolidated financial statements are construction of newbuildings, including interest in four joint venture companies stated in U.S. dollars because the Company interest costs and supervision and technical (2001- three), each of which owns a shuttle operates in international shipping markets costs, are capitalized. The acquisition cost tanker. The joint ventures are accounted which utilize the U.S. dollar as the and all costs incurred to restore used vessel for using the equity method, whereby functional currency. purchases to the standard required to the investment is carried at the Company’s Operating revenues and expenses Voyage revenues and expenses are recognized on the percentage of completion method of accounting determined using the discharge-to- discharge basis. 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 which will be earned in subsequent periods. Voyage expenses comprise all expenses relating to particular voyages, including bunker fuel expenses, port fees, canal tolls, and brokerage commissions. Vessel properly service the Company's customers original cost plus its proportionate share are capitalized. Depreciation is calculated of undistributed earnings. on a straight-line basis over a vessel's useful During 2001, a joint venture in which life from the date a vessel is initially placed the Company owns a 50% interest sold in service. its three vessels, and ceased operations Interest costs capitalized to vessels (see Note 11). and equipment for the years ended December 31, 2002, 2001 and 2000 aggregated $6.0 million, $2.5 million, and $nil respectively. Expenditures incurred during drydocking are capitalized and amortized on a straight- line basis over the period until the completion of the next anticipated drydocking. When significant drydocking Investment in the Panamax O/B/O Pool All oil/bulk/ore carriers (“O/B/O”) owned by the Company are operated through a Panamax O/B/O Pool. The participants in the Pool are the companies contributing vessel capacity to the Pool. The voyage revenues and expenses of these vessels have been included on a 100% basis in the consolidated financial statements. The minority pool participants’ share goodwill, which was acquired as a result of The Company accounts for such taxes using of the result has been deducted as time- the acquisition of Ugland Nordic Shipping AS the liability method pursuant to Statement charter hire expense. (“UNS”) (see Note 3), was amortized over of Financial Accounting Standards No. 109, Notes to the Consolidated Financial Statements 20 years using the straight-line method. “Accounting for Income Taxes”. (continued) Loan costs Loan costs, including fees, commissions and legal expenses, which are presented as other assets are capitalized and amortized on a straight line basis over the term of the relevant loan. Amortization of loan costs is included in interest expense. Derivative instruments As at December 31, 2002, goodwill is recorded net of accumulated amortization of $3.5 million. During the six-month period ended June 30, 2002, the Company completed its transitional impairment testing required by SFAS 142 and determined that goodwill was not impaired. Based upon the Company’s Derivative instruments are recorded goodwill balance at December 31, 2001, as assets or liabilities, measured at fair the Company estimates that application value. Derivatives that are not hedges of SFAS 142 will result in an annual are adjusted to fair value through income. increase in net income of approximately If the derivative is a hedge, depending $4.5 million, by no longer amortizing upon the nature of the hedge, changes goodwill. Had goodwill not been amortized in the fair value of the derivatives are prior to 2002, net income would have either offset against the fair value of been $340.0 million or $8.56 per share assets, liabilities or firm commitments ($8.40 per share - diluted), for the year through income, or recognized in ended December 31, 2001 and unchanged other comprehensive income until for 2000. (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) Accounting for Stock-Based Compensation Under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”, disclosures of stock- based compensation arrangements with employees are required and companies are encouraged (but not required) 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”. As the exercise price of the Company's employee stock options equals the market price of underlying stock on the date of grant, no compensation the hedged item is recognized in income. The ineffective portion of a derivative’s change in fair value is immediately recognized into income (see Note 12). Income taxes The legal jurisdictions of the countries in expense is recognized under APB 25. which Teekay and the majority of its subsidiaries are incorporated do not impose Goodwill and other intangible assets income taxes upon shipping-related In July 2001, the Financial Accounting activities. The Company’s Australian Standards Board (“FASB”) issued Statement shipowning subsidiaries, its Canadian of Financial Accounting Standards No. 142 subsidiary Teekay Canadian Tankers Ltd., (“SFAS 142”), “Goodwill and Other and its Norwegian subsidiary UNS are Intangible Assets”, which establishes new subject to income taxes. UNS income taxes standards for accounting for goodwill and are deferred until payment of dividends other intangible assets. SFAS 142 requires (see Note 11). Included in other long-term that goodwill and indefinite lived intangible liabilities are deferred income taxes of assets no longer be amortized, but reviewed $43.7 million at December 31, 2002, for impairment during the first six months of $36.3 million at December 31, 2001 2002 and annually thereafter, or more and $4.2 million at December 31, 2000. frequently if impairment indicators arise. This statement is effective for existing goodwill beginning with fiscal years starting after December 15, 2001. Prior to 2002, Teekay Shipping Corporation / 2002 Annual Report 33 Notes to the Consolidated Financial Statements (continued) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 34 Teekay Shipping Corporation / 2002 Annual Report The following table illustrates the effect on net income and earnings per share if the guarantees issued or modified after Company had applied the fair value recognition provisions of SFAS 123 to stock-based December 31, 2002. The Company has not determined the effect, if any, that the adoption of FIN 45 will have on the Company’s consolidated financial position or results of operations. 2. 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. No customer accounted for more than 10% of the Company’s consolidated voyage revenues during the year ended December 31, 2002. One customer, an international oil company, accounted for 13% ($130.8 million) of the Company’s consolidated voyage revenues during the year ended December 31, 2001. Two customers, both international oil companies, individually accounted for 13% ($118.3 million) and 12% ($110.2 million) of the Company’s consolidated voyage revenues during the year ended December 31, 2000. No other customer accounted for more than 10% of the Company’s consolidated voyage revenues during the fiscal periods presented herein. employee compensation (see Note 9). Year Ended Year Ended December 31, December 31, December 31, Year Ended Net income - as reported Less: Total stock-based compensation expense Net income - pro forma Basic earnings per common share: As reported Pro forma Diluted earnings per common share: As reported Pro forma 2002 $ 53,391 7,538 45,853 1.35 1.16 1.33 1.14 2001 $ 336,518 6,466 330,052 8.48 8.31 8.31 8.15 2000 $ 270,020 5,571 264,449 7.02 6.87 6.86 6.72 The fair values of the option grants recognition, measurement and reporting were estimated on the dates of grant using of costs associated with exit and disposal the Black-Scholes option-pricing model with activities. The Company does not anticipate the following assumptions: risk-free average that the adoption of SFAS 146 will have interest rates of 4.7% for the year ended a significant impact on the Company’s December 31, 2002; 4.5% for the year consolidated financial position or results ended December 31, 2001 and 6.6% for the of operations. year ended December 31, 2000, respectively; In November 2002, the FASB issued dividend yield of 3.0%; expected volatility Interpretation No. 45, “Guarantor’s of 30%; and expected lives of five years. Accounting and Disclosure Requirements Comprehensive income The Company follows Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a guarantor to make significant new disclosures about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair Recent accounting pronouncements value of the obligation undertaken In July 2002, the FASB issued Statement in issuing the guarantee. The disclosure No. 146 (“SFAS 146”), “Accounting for Costs requirements of FIN 45 are effective for Associated with Exit or Disposal Activities”. financial statements with periods ending This Standard, which is effective for disposal after December 15, 2002. The initial activities initiated after December 31, 2002, recognition and measurement provisions addresses significant issues regarding the are applicable on a prospective basis to 3. Acquisition of The following table shows comparative summarized consolidated pro forma financial information Ugland Nordic Shipping AS for the years ended December 31, 2001 and 2000 and gives effect to the acquisition of 100% of As of May 28, 2001, Teekay had purchased the outstanding shares in UNS as if it had taken place January 1, on each of the years presented: 100% of the issued and outstanding shares of UNS (nine per cent of which was purchased in fiscal 2000 and the remaining 91% was purchased in fiscal 2001), for $222.8 million cash, including estimated transaction expenses of approximately $7 million. UNS controls a modern fleet of 18 shuttle tankers (including two newbuildings on order) that engage in the transportation of oil from offshore production platforms to onshore storage and refinery facilities. The acquisition of UNS has been accounted for using the purchase method of accounting, based upon estimates of fair value. UNS’ operating results are reflected in these financial statements commencing March 6, 2001, the date Teekay acquired a majority interest in UNS. Equity income related to the Company’s nine per cent interest in UNS up to December 31, 2000 has been credited as an adjustment to retained earnings. Teekay’s interest in UNS for the period from January 1, 2001 to March 5, 2001 has been included in equity income for the corresponding period. Pro Forma Year Ended December 31, 2001 (unaudited) $ Year Ended December 31, 2000 (unaudited) $ Net voyage revenues Net income Net income per common share - basic - diluted 805,754 336,514 8.47 8.31 713,350 265,554 6.90 6.75 4. Investments in Marketable Securities Gross Unrealized Gains $ Gross Unrealized Losses $ Cost $ Approximate Market and Carrying Values $ December 31, 2002 Available-for-sale equity securities 21,416 21,416 December 31, 2001 Available-for-sale equity securities 24,500 Available-for-sale debt securities 5,028 29,528 - - - - - (7,786) (7,786) (8,474) - (8,474) 13,630 13,630 16,026 5,028 21,054 Available-for-sale equity securities represent 1,001,221 shares (2001 – 1,150,221) in Nordic American Tanker Shipping Ltd. These shares were acquired as part of the 2001 acquisition of UNS (see Note 3). The cost and approximate market value of available-for-sale debt securities by contractual maturity, as at December 31, 2002 and December 31, 2001, are shown as follows: December 31, 2002 Less than one year Due after one year through five years December 31, 2001 Less than one year Due after one year through five years Cost $ - - - 5,028 - 5,028 Approximate Market and Carrying Values $ - - - 5,028 - 5,028 Notes to the Consolidated Financial Statements (continued) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) Teekay Shipping Corporation / 2002 Annual Report 35 Notes to the Consolidated Financial Statements (continued) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 5. Accrued Liabilities Voyage and vessel Interest Payroll and benefits 6. Long-Term Debt December 31, 2002 $ December 31, 2001 $ 37,314 22,484 23,845 83,643 16,450 24,180 10,381 51,011 December 31, 2002 $ December 31, 2001 $ Revolving Credit Facilities First Preferred Ship Mortgage Notes (8.32%) due through 2008 Term Loans due through 2009 Senior Notes (8.875%) due July 15, 2011 Less current portion 210,000 167,229 401,593 352,000 1,130,822 83,605 1,047,217 - 167,229 416,239 352,234 935,702 51,830 883,872 of the Company and the 8.32% Notes Guarantor Subsidiaries under the Indenture and the Security Documents (as defined in the Indenture) 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 Company has several term loans outstanding, which, as at December 31, 2002, totalled $401.6 million. Interest payments are based on LIBOR plus a margin. At December 31, 2002 and 2001, the margins ranged between 0.50% and 1.45%. The term loans reduce in quarterly or semi-annual payments with varying maturities through 2009. All term loans of the Company are collateralized by first preferred mortgages on the vessels to which the loans relate, together with certain other collateral, and guarantees from Teekay. As at December 31, 2002, The Company has two long-term Revolving mortgages on seven of the Company's UNS had term loans totalling $313.5 million. Credit Facilities (the “Revolvers”) available, Aframax tankers, together with certain Teekay does not guarantee any of the which, as at December 31, 2002, provided other related collateral, and are guaranteed obligations of UNS under these facilities. for borrowings of up to $450.7 million, of by seven subsidiaries of Teekay that own One term loan required a retention deposit which $240.7 million was undrawn. Interest the mortgaged vessels (the “8.32% Notes of $4.6 million as at December 31, 2002 payments are based on LIBOR (December 31, Guarantor Subsidiaries”) to a maximum (December 31, 2001 - $7.8 million). 2002: 1.4%; December 31, 2001: 1.9%) plus a of 95% of the fair value of their net assets. The 8.875% Senior Notes due July 15, margin depending on the financial leverage As at December 31, 2002, the fair value 2011 (the “8.875% Notes”) rank equally in of the Company; at December 31, 2002 and of these net assets approximated right of payment with all of the Company’s 2001, the margins ranged between 0.50% $171.6 million. The 8.32% Notes are also existing and future senior unsecured debt and 0.75%. The amount available under subject to a sinking fund, which will retire and senior to the Company’s existing and the Revolvers reduces semi-annually by $45.0 million principal amount of the 8.32% future subordinated debt. The 8.875% $28.8 million, with final balloon reductions Notes on each February 1, commencing Notes are not guaranteed by any of in 2006 and 2008. The Revolvers are 2004. During June 2001, the Company Teekay’s subsidiaries and effectively rank collateralized by first priority mortgages repurchased a principal amount of $22.0 behind all existing and future secured granted on 33 of the Company’s vessels, million of the 8.32% Notes outstanding. debt of Teekay and other liabilities, together with certain other related collateral, Upon the 8.32% Notes achieving secured and unsecured, of its subsidiaries. and a guarantee from Teekay for all amounts Investment Grade Status (as defined in the Among other matters, the long-term outstanding under the Revolvers. Indenture) and subject to certain other debt agreements generally provide for The 8.32% First Preferred Ship Mortgage conditions, the guarantees of the 8.32% such items as maintenance of certain Notes due February 1, 2008 (the “8.32% Notes Guarantor Subsidiaries will terminate, vessel market value to loan ratios and Notes”) are collateralized by first preferred all of the collateral securing the obligations minimum consolidated financial covenants, 36 Teekay Shipping Corporation / 2002 Annual Report prepayment privileges (in some cases 8. Fair Value of Financial Instruments Interest rate swap agreements and with penalties), and restrictions against Carrying amounts of all financial foreign exchange contracts - The fair value the incurrence of new investments by instruments approximate fair market of interest rate swaps and foreign exchange the individual subsidiaries without prior value except for the following: contracts, used for hedging purposes, is the lender consent. The amount of Restricted Long-term debt - The fair values of estimated amount that the Company would Payments, as defined, that the Company the Company's fixed rate long-term debt receive or pay to terminate the agreements can make, including dividends and are based on either quoted market prices at the reporting date, taking into account purchases of its own capital stock, is limited or estimated using discounted cash current interest rates, the current credit as of December 31, 2002, to $440.6 million. flow analyses, based on rates currently worthiness of the swap counter parties Certain of the loan agreements require a available for debt with similar terms and foreign exchange rates. minimum level of free cash be maintained. and remaining maturities. Notes to the Consolidated Financial Statements (continued) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) The estimated fair value of the Company's financial instruments is as follows: December 31, 2002 Fair Value $ Carrying Amount $ December 31, 2001 Fair Value $ Carrying Amount $ Cash and cash equivalents, marketable securities, and restricted cash 307,040 307,040 Long-term debt (1,130,822) (1,143,753) 203,837 (935,702) 203,837 (952,055) Derivative instruments (note 12) Interest rate swap agreements (802) Foreign currency contracts Bunker fuel swap contracts Written freight call option 545 254 - (802) 545 254 - (2,429) (2,429) (343) (328) (857) (343) (328) (857) The Company transacts all of its derivative instruments with investment grade rated financial institutions and requires no collateral from these institutions. As at December 31, 2002, this amount was $84.8 million. The aggregate annual long-term debt principal repayments required to be made for the five fiscal years subsequent to December 31, 2002 are $83.6 million (2003), $105.1 million (2004), $131.3 million (2005), $181.1 million (2006), and $85.0 million (2007). 7. Leases Charters-out Time-charters and bareboat charters to third parties of the Company's vessels are accounted for as operating leases. As at December 31, 2002, minimum future revenues to be received on time-charters and bareboat charters were $176.7 million (2003), $189.6 million (2004), $146.7 million (2005), $101.9 million (2006), $94.4 million (2007), and $546.5 million thereafter. The minimum future revenues should not be construed to reflect total charter hire revenues for any of the years. Charters-in As at December 31, 2002, minimum commitments under vessel operating leases were $25.7 million (2003), $10.8 million (2004) and $2.0 million (2005). Teekay Shipping Corporation / 2002 Annual Report 37 Notes to the Consolidated Financial Statements (continued) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 9. Capital Stock Stock Option Plan (the “Plan”). During 10. Related Party Transactions The authorized capital stock of Teekay the years ended December 31, 2002, 2001, As at December 31, 2002, Resolute at December 31, 2002 was 25,000,000 and 2000, the Company granted options Investments, Inc. owned 41.6% of the shares of Preferred Stock, with a par under the Plan to acquire up to 1,026,025, Company’s outstanding Common Stock. value of $1 per share, and 725,000,000 863,200, and 889,500 shares of Common Two of the Company’s directors are officers shares of Common Stock, with a par value Stock, respectively, to certain eligible and directors of Resolute Investments, Inc. of $0.001 per share. As at December 31, officers, employees (including senior Two additional directors of the Company 2002, Teekay had 39,692,060 shares sea staff), and directors of the Company. are directors of the entity that controls of Common Stock and no shares of The options have a 10-year term and had Resolute Investments, Inc. Preferred Stock issued and outstanding. initially vested equally over four years from Payments made by the Company to On September 19, 2001, Teekay the date of grant. Effective September 8, Resolute Investments, Inc. or companies announced that its Board of Directors had 2000, the Company amended the Plan related through common ownership authorized the repurchase of up to 2,000,000 which reduced the vesting period for in respect of port agent services, legal shares of its Common Stock in the open all subsequent stock option grants from and administration fees, shared office costs, market. As at December 31, 2002, Teekay four years to three years. In addition, and consulting fees for the years ended had repurchased 561,700 shares of Common the Company also accelerated the vesting December 31, 2002, 2001 and 2000 totalled Stock at an average price of $27.97 per share. period for the existing grants by one year. $0.9 million, $1.5 million, and $1.6 million, As of December 31, 2002, the Company The impact of the accelerated vesting respectively. In 1993 the Company had reserved 5,803,471 shares of Common for the existing grants on compensation purchased all of the issued and outstanding Stock for issuance upon exercise of options expense was not material for the years shares of Palm Shipping Inc. (now Teekay granted pursuant to the Company’s 1995 ended December 31, 2002, 2001 and 2000. Chartering Limited) from an affiliate of A summary of the Company's stock option activity, and related information for the years ended December 31, 2002, 2001 and 2000 is as follows: December 31, 2002 Weighted- Average Exercise Options (000’s) # December 31, 2001 Weighted Average Exercise Options (000’s) # December 31, 2000 Weighted Average Exercise Price $ Options (000’s) # Price $ Price $ Resolute Investments, Inc. During the year ended December 31, 2002, the Company accrued and expensed in Other (loss) income $6.0 million as a settlement of a contingent payment, which was required under the terms of the Palm Shipping acquisition agreement. Outstanding-beginning of year 2,740 Granted Exercised Forfeited Outstanding-end of year 1,026 (190) (69) 3,507 28.04 39.12 22.16 33.86 31.46 2,860 863 (917) (66) 2,740 22.25 41.19 22.44 26.86 28.04 3,099 889 (1,080) (48) 2,860 22.14 23.56 23.00 22.77 22.25 Exercisable- end of year 1,739 24.97 1,164 22.99 1,453 23.54 Weighted-average fair value of options granted during the year (per option) 9.79 10.19 6.62 Exercise prices for the options outstanding as of December 31, 2002 ranged from $16.88 per share to $41.19 per share. These options have a weighted-average remaining contractual life of 7.53 years. 38 Teekay Shipping Corporation / 2002 Annual Report 11. Other (Loss) Income Year Ended Year Ended Year Ended December 31, December 31, December 31, 2000 $ 2001 $ 2002 $ Loss on disposition of vessels and equipment - - (1,004) (Loss) gain on disposition of available-for-sale securities Equity income from joint ventures Deferred income taxes Miscellaneous (1,130) 4,523 (11,413) (3,455) (11,475) 758 17,324 (6,963) (1,011) 10,108 - 9,546 (999) (3,679) 3,864 Notes to the Consolidated Financial Statements (continued) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) The Company is exposed to credit loss in the event of non-performance by the counter parties to the interest rate swap agreements, foreign exchange forward contracts, and bunker fuel swap contracts; however, the Company does not anticipate non- performance by any of the counter parties. During the year ended December 31, 2002, the Company recognized a net gain of $0.1 million relating to the ineffective portion of its interest rate swap agreements and foreign currency forward contracts. The ineffective portion of these derivative 12. Derivative Instruments and Hedging Activities foreign currencies with forward contracts instruments is presented as interest expense and a portion of its bunker fuel and other (loss) income, respectively. The Company adopted SFAS 133, expenditures with bunker fuel swap As at December 31, 2002, the Company “Accounting for Derivative Instruments contracts. As at December 31, 2002, and Hedging Activities”, on January 1, 2001. the Company was committed to foreign estimates, based on current foreign exchange rates, bunker fuel prices The Company recognized the fair value of exchange contracts for the forward and interest rates, that it will reclassify its derivatives as assets of $2.2 million and purchase of approximately Singapore approximately $1.5 million of net gain on liabilities of $1.3 million on its consolidated Dollars 2.0 million, Norwegian Kroner derivative instruments from accumulated balance sheet as of January 1, 2001. These 74.3 million, Canadian Dollars 84.0 million other comprehensive income to earnings amounts were recorded as a cumulative and Euros 1.9 million for U.S. Dollars, during the next 12 months due to actual effect of an accounting change as an at an average rate of Singapore Dollar voyage, vessel operating, drydocking and adjustment to stockholders’ equity through 1.78 per U.S. Dollar, Norwegian Kroner 7 general and administrative expenditures other comprehensive income. There was .39 per U.S. Dollar, Canadian Dollar 1.59 per and the payment of interest expense no impact on net income. In addition, a U.S. Dollar and Euros 0.93 per U.S. Dollar, associated with the floating-rate debt. deferred gain of $3.2 million on unwound respectively. As at December 31, 2002, interest rate swap agreements presented the Company was committed to bunker 13. Commitments and Contingencies as other long-term liabilities at December fuel swap contracts totalling 20,400 metric As at December 31, 2002, the Company 31, 2000, was reclassified to accumulated tonnes with a weighted-average price was committed to the construction of two other comprehensive income and will be of $116.00 per tonne, which expire recognized into earnings over the hedged between January 2003 and May 2004. shuttle, three Suezmax and six Aframax tankers scheduled for delivery between term of the debt. As at December 31, 2002, the Company March 2003 and October 2004, at a total cost The Company only uses derivatives was committed to interest rate swap of approximately $496.6 million, excluding for hedging purposes. The following agreements whereby $20.0 million summarizes the Company’s risk strategies of the Company’s floating rate debt capitalized interest. As of December 31, 2002, payments made towards these with respect to market risk from foreign was swapped with fixed rate obligations commitments totaled $127.3 million currency fluctuations, changes in interest having a weighted-average remaining term and long-term financing arrangements rates and bunker fuel prices and the effect of 10 months, expiring between March 2003 existed for $16.3 million of the unpaid cost of these strategies on the Company’s and May 2004. These agreements effectively of these vessels. It is the Company’s intention financial statements. change the Company’s interest rate exposure to finance the remaining unpaid amount The Company hedges portions of its on $20.0 million of debt from a floating of $353.0 million through incremental debt forecasted expenditures denominated in LIBOR rate to a weighted-average fixed or the utilization of surplus cash balances, rate of 5.75%. Teekay Shipping Corporation / 2002 Annual Report 39 Notes to the Consolidated Financial Statements (continued) (all tabular amounts stated in thousands of U.S. dollars, other than share or per share data) 40 Teekay Shipping Corporation / 2002 Annual Report or a combination thereof. As of December 31, in the second quarter of 2003. It is anticipated together with available cash or cash 2002, the remaining payments required to that the acquisition of Navion will be funded generated from operations and borrowings be made under these newbuilding contracts by borrowings under a new credit facility, under other existing credit facilities. were $245.9 million in 2003, and $123.4 million in 2004. With the exception of four Aframax tankers scheduled for delivery in 2004, all of the vessels upon delivery will be subject to long-term charter contracts, which expire between 2009 and 2015. 14. Change in Non-Cash Working Capital Items Related to Operating Activities Year Ended Year Ended Year Ended December 31, December 31, December 31, 2000 $ 2001 $ 2002 $ The Company is also committed to a Accounts receivable capital lease on an Aframax tanker that is Prepaid expenses and other assets currently under construction and is expected to deliver in the fourth quarter of 2003. The lease will require minimum payments of $66.9 million (including a purchase obligation Accounts payable Accrued liabilities payment) over the 15-year term of the lease. 15. Subsequent Events (13,508) (5,002) 27,375 (1,827) 7,038 23,993 5,152 666 (1,614) 28,197 (49,405) 3,443 2,613 6,673 (36,676) Teekay and certain subsidiaries of Teekay (a) On February 1, 2003, one of the (b) As of February 18, 2003, the Company have guaranteed their share of the outstanding mortgage debt in three 50%-owned joint venture companies. Company’s vessels, the Alliance Spirit, completed an offering for gross proceeds was empty of cargo and waiting off of $143.75 million in mandatory Skikda, Algeria to load crude oil when a convertible equity units pursuant to As of December 31, 2002, Teekay and these severe storm arose and pushed the vessel its currently effective universal shelf subsidiaries had guaranteed $82.7 million of aground. Subsequent to the grounding, registration statement filed with the such debt, or 50% of the total $165.3 million the vessel has been classified as a U.S. Securities and Exchange Commission. in outstanding mortgage debt of the joint constructive total loss. Although all Each equity unit includes a contract venture companies. The outstanding bunker fuel, diesel fuel, lube oils, paints to purchase shares of the Company’s mortgage debt has maturity dates ranging and chemicals on board have been common stock on February 16, 2006 and from May 2008 to August 2009. These joint successfully removed from the vessel, a $25 principal amount, subordinated venture companies own three shuttle tankers. between 40 and 80 metric tonnes of note due May 18, 2006. The forward On December 16, 2002, Teekay and Statoil residual oil remain in the cargo tanks. contracts provide for contract adjustment ASA announced that they had entered into The vessel is insured for its full value payments of 1.25% annually and the an agreement under which Teekay will acquire and thus, the Company has requested notes bear interest at 6.0% annually. Statoil’s wholly-owned shipping company, Navion ASA (excluding its oil drilling ship and related operations and one floating production, storage and offload vessel), on a debt free-basis, for approximately $800.0 million in cash. Navion, based in Norway, operates primarily in the shuttle tanker and the conventional crude oil and payment of the insurance proceeds, Upon settlement of the 5.75 million which is anticipated to cover the vessel’s forward contracts included in the equity full value. The Company also maintains units on February 16, 2006, the Company insurance coverage on the vessel for will issue between 3,267,150 and environmental damage or pollution 3,991,075 shares of its Common Stock liability in an amount of $1 billion. (depending on the average closing price The Company believes any liability of the Common Stock for the 20-trading resulting from the escape of any oil into day period ending on the third trading product tanker markets. As of December 31, the environment would be substantially day prior to February 16, 2006). Proceeds 2002, the Company had made a deposit of below this amount. Under the applicable from the offering may be used to finance $76.0 million towards the purchase price, with global convention, any liability above potential acquisitions and for general the remaining unpaid amount being due $1 billion for any oil spill in this region corporate purposes, including capital upon closing, which is expected to take place relating to this incident would be limited expenditures, working capital, and the to approximately $32 million. repayment of debt. Year Ended Nine Months Ended December 31, December 31, December 31, December 31, 1999 Year Ended Year Ended 2000 2002 2001 Year Ended March 31, 1999 Income Statement Data: Net voyage revenues Income from vessel operations Net income (loss) Per Share Data: $ 543,872 $ 789,494 $ 644,269 $ 248,350 $ 318,411 119,346 53,391 383,463 336,518 327,675 270,020 23,572 (19,595) 85,634 45,406 Five-Year Summary of Financial Information (all tabular amounts stated in thousands of U.S. dollars, except per share and per day data, or as otherwise indicated) Fully diluted earnings (loss) per share $ 1.33 $ 8.31 $ 6.86 $ (0.54) $ 1.46 Weighted average shares outstanding-diluted (thousands) 40,252 40,488 39,368 36,405 31,063 Balance Sheet Data (at end of period): Total assets Total stockholders' equity Other Financial Data: EBITDA $2,723,506 $2,467,181 $1,974,099 $1,982,684 $1,452,220 1,421,898 1,398,200 1,098,512 832,067 777,390 $ 278,061 $ 539,324 $ 451,066 $ 95,875 $ 186,069 Net debt to capitalization (%) 36.4 34.3 34.3 50.7 39.6 Capital expenditures: Vessel purchases, gross* Drydocking Fleet Data: $ 135,650 $ 544,737 $ 43,512 $ 452,584 $ 85,445 34,913 20,064 11,941 6,598 11,749 Average number of ships 89 85 74 68 47 Aframax time-charter equivalent (TCE) $ 18,205 $ 30,542 $ 27,138 $ 13,462 $ 19,576 Total fleet operating cash flow per ship per day 8,168 17,682 16,687 5,177 11,171 * Includes vessels from acquisitions. Teekay Shipping Corporation / 2002 Annual Report 41 Board of Directors Bruce C. Bell Director and Corporate Secretary, Managing Director of Oceanic Bank and Trust Ltd. Morris L. Feder Director, President of Worldwide Cargo Inc. Axel Karlshoej Director and Chairman Emeritus, President of Nordic Industries Inc. Dr. Ian D. Blackburne Director, Former CEO of Caltex Australia Petroleum Pty. Ltd. Leif O. Höegh Director, Managing Director of Leif Höegh (UK) Ltd. Eileen A. Mercier Director, President of Finvoy Management Inc. C. Sean Day Chairman of the Board of Directors, President of Seagin International, LLC Thomas Kuo-Yuen Hsu Director, Executive Director of Expedo & Company (London) Ltd. Bjorn Moller Director, President and CEO Teekay Board Committees Audit Committee Eileen A. Mercier – Chair Morris L. Feder Leif O. Höegh Nominating and Governance Committee Compensation Committee C. Sean Day – Chair Bruce C. Bell Eileen A. Mercier Axel Karlshoej – Chair Dr. Ian D. Blackburne Thomas Kuo-Yuen Hsu 42 Teekay Shipping Corporation / 2002 Annual Report Corporate Information TK House Share Price Information Investor Relations Bayside Executive Park The following table sets forth on a per share basis the high and low A copy of the Company's Annual Report on West Bay Street & Blake Road sales prices for consolidated trading in the Company’s common shares Form 20-F is available by writing or calling to: P.O. Box AP-59212 Nassau, The Bahamas on the New York Stock Exchange for each quarter during the 12 months ended December 31, 2002: Teekay Shipping (Canada) Ltd., Stock Transfer Agent and Registrar Quarter Ended High Low The Bank of New York 101 Barclay Street, 11 West P.O. Box 11258 Church Street Station New York, New York 10286 Tel: 1-800-524-4458 Mar. 31, 2002 Jun. 30, 2002 Sept. 30, 2002 Dec. 31, 2002 $39.12 $40.58 $36.50 $44.70 $32.05 $35.05 $27.90 $26.35 Stock Exchange Listing New York Stock Exchange Symbol: TK There were 39,691,710 million shares outstanding at December 31, 2002. Dividends Declared (Per Share) $0.215 $0.215 $0.215 $0.215 Investor Relations Suite 2000 Bentall 5 550 Burrard Street Vancouver, BC Canada V6C 2K2 Tel: +1 (604) 844 6654 Fax: +1 (604) 681 3011 Email: investor.relations@teekay.com Web site: www.teekay.com Vancouver • Houston • Nassau • Glasgow • London • Sandefjord • Oslo • Riga • Mumbai • Singapore • Perth • Manila • Tokyo • Sydney www.teekay.com 

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