Teekay Corporation Annual Report 2002

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FY2002 Annual Report · Teekay Corporation

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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

350

300

250

200

150

100

-20

-0.5

99(1) 99(2) 00

99(1) 99(2)

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

650

450

250

200

150

100

600

500

400

300

200

100

99(2)

99(1) 99(2) 00

99(2) 99(3) 00

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

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

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

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

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

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.”

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

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

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
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o

i
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i

(
n
o
i
t
c
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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

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

Deliveries

Tanker Fleet Net Changes
Deletions

Newbuildings

Net Change

The Sinking of the Prestige

On November 19, 2002, the Prestige, a 26-year-old

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

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.

t
h
g

i
e
w
d
a
e
D
n
o

i
l
l
i

-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-

out of single-hull oil tankers. Other countries,

including the United States, Japan and Australia, are

also considering revisions to their existing pollution

regulations applicable to tankers. The EU may also

propose a global adoption of these rules via the

slippage of around 15 per cent from published schedules

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

market conditions and increased tanker freight rates for

scrapping. On the demand side, the increase in tanker

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.

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

1,497,900

1,108,900

987,600

566,100

446,000

693,700

515,800

Shuttle Tankers

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

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.

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)

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)

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

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)

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

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

Teekay Shipping Corporation / 2002 Annual Report

Thousands
of Common
Shares
#

Accumulated
Other
Retained
Earnings
$

Common
Stock
$

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

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

(6,636)

(3,627)
4,155

(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

(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)

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)

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

8.15

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

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

December 31, 2001

Available-for-sale equity securities

24,500

Available-for-sale debt securities

5,028

29,528

(7,786)

(8,474)

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

Approximate
Market and
Carrying Values
$

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,

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

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)

(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
$

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.

Teekay Shipping Corporation / 2002 Annual Report

11. Other (Loss) Income

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)

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
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

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

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

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

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

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

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