2 0 0 4 A N N U A L R E P O R T
T E E K A Y – T H E M A R I N E M I D S T R E A M C O M P A N Y TM
Teekay Shipping Corporation
TA B L E O F C O N T E N T S
Letter to Shareholders
Board of Directors
Tanker Market Report
Reconciliations & Forward-Looking Statements
2 - 4
5
6 - 7
8
Corporate Information
inside back cover
F I N A N C I A L H I G H L I G H T S
Cash flow from vessel operations(2)
$ millions
Earnings per share(1) $ US
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
$1,200
$1,000
$800
$600
$400
$200
$0
Total stockholders' equity $ millions
$2,500
$2,000
$1,500
$1,000
$500
$0
2000
2001
2002
2003
2004
2000
2001
2002
2003
2004
Fiscal Year ended December 31
Fiscal Year ended December 31
2000
2001
As at December 31
2002
2003
2004
(1) Fully diluted, adjusted for 2:1 stock split.
(2) Cash flow from vessel operations represents income from vessel operations before depreciation and amortization
expense, and vessel write-downs/(gain) loss on sale of vessels. See reconciliation on page 8.
(in thousands of U.S. dollars, except per share data, or as otherwise indicated)
Y E A R E N D E D
D E C E M B E R 3 1 , 2 0 0 4
Y E A R E N D E D
D E C E M B E R 3 1 , 2 0 0 3
Income Statement Data
Voyage revenues
Income from vessel operations
Net income
Balance Sheet Data
Total assets
Total stockholders’ equity
Per Share Data
Fully diluted earnings per share*
Weighted average shares outstanding
– diluted (thousands)
Other Financial Data
Cash flow from vessel operations**
Net debt to capitalization (%) (at end of period)
Vessel purchases, gross***
$ 2,219,238
821,186
757,440
$ 5,503,740
2,237,358
$
$
8.63
87,729
979,430
41.9
548,587
$
$
$
$
1,576,095
292,964
177,364
3,588,044
1,651,827
2.18
81,466
574,590
39.8
372,433
Stock split adjusted.
*
** Cash flow from vessel operations represents income from vessel operations before depreciation and amortization expense
and vessel write-downs/(gain) loss on sale of vessels. See reconciliation on page 8.
*** Excludes vessels from the acquisitions of Naviera F. Tapias SA (2004) and Navion AS (2003).
L E T T E R T O S H A R E H O L D E R S
2 0 0 4 — A R E C O R D Y E A R
W E A R E P L E A S E D T O R E P O RT T O Y O U O N
A YEAR THAT CAN BE BEST DESCRIBED AS
SPECTACULAR! WE ACHIEVED OUTSTANDING
FINANCIAL AND O P E R AT I N G R E S U LT S ,
D R I V E N B Y E X T R A O R D I N A R I LY T I G H T
TA N K E R M A R K E T F U N D A M E N TA L S A N D
T H E W E L L - T I M E D G R O W T H O F O U R
B U S I N E S S .
There were many highlights in 2004: we generated record earnings;
we entered the strategically important liquefied natural gas (LNG)
shipping sector; we achieved superior operational performance; and we
reconfigured our fleet to be more modern while maintaining our
exposure to the strong tanker market and avoiding the purchase of
spot tanker assets at cyclically high prices.
All of our business segments produced their best results ever. This
allowed us to generate $757 million in net income, earning a return
on our shareholders' equity of 37 percent! We produced almost $1
billion* in cash flow from vessel operations.
T E E K A Y — T H E M A R I N E M I D S T R E A M
C O M P A N Y T M
Our mission is to become the premier provider of marine services to
our customers in the oil and gas industry. In support of this mission
we have built a unique business platform centered on our 5,500
employees, operating from 14 countries and on board some 145 ships
around the world. Today, we transport more than 10 percent of the
world’s seaborne oil. With a track record of profitable growth, we have
become much more than a conventional tanker company. We are
integrated into our customers' logistics chain, helping them seamlessly
link their upstream oil and gas production with their downstream
refining and distribution networks. We are The Marine Midstream
Company.
* See page 8 for a reconciliation of this non-GAAP measure to the most directly comparable
GAAP financial measure.
Bjorn Moller – President and CEO (L); C. Sean Day – Chairman of the
CAPITALIZING ON STRONG TANKER RATES
The value of our offshore loading business comes from the
In 2004, Teekay's spot tanker business enjoyed very strong market
conditions. Oil demand grew at its fastest pace in almost a
quarter century, creating an estimated seven percent increase in
the demand for seaborne oil transportation at a time when
global tanker capacity was already stretched. The resulting high
utilization of the world fleet led to record high, and very volatile,
tanker rates. Teekay, as one of the largest operators of spot
tankers, was ideally positioned to benefit from these market
dynamics. Not only did our spot tanker fleet enjoy high absolute
returns, but we also outperformed our peers due to our uniform
fleet, our global network of customer-direct marketing offices
and our scale efficiencies.
During the year we took advantage of strong asset prices by
disposing of more than 20 single-hull tankers, responding to
our customers' growing preference for double-hull ships. We
replenished our fleet with a similar number of double-hull tankers,
partly through taking delivery of new ships ordered at lower prices
in 2002, and partly through concluding a series of in-charters
during a dip in tanker rates in the second and third quarters. Our
use of in-charters has proven to be an effective way to build
market exposure rather than acquiring cyclical assets at today's
high prices. Through our carefully executed fleet renewal
program we maintained the size of our spot tanker fleet while
reducing its average age from almost seven years at the beginning
of 2004 to only five years at the end of the year, and increasing our
proportion of double-hull tankers from 70 percent to almost 90
percent of the fleet. Buying and selling cyclical assets at the right
time in the cycle is a critical part of our business; our $172 million
gain on asset sales during 2004 is testament to our discipline in the
timing of our asset strategy. At the beginning of 2005, we still had
eight new tankers on order for our spot segment, including ships
intended for the crude oil, refined petroleum and ice-class trades.
B U I L D I N G O U R O F F S H O R E M A R I N E
F R A N C H I S E
Teekay Navion Shuttle Tankers, our world-leading offshore loading
franchise, enjoyed an excellent year in 2004. Often dubbed "the
floating pipeline," our large fleet of sophisticated, dynamically
positioned shuttle tankers ensures that our customers' oil is lifted
on a just-in-time basis from offshore fields in the North Sea, Brazil
and other regions, then shuttled to nearby shore terminals.
Because our shuttle tankers are generally the same size as our
spot vessels, we can seamlessly switch these ships in and out of
our spot trading system whenever we have surplus shuttle tanker
profitability of the contracts as well as from the opportunity to
create alliances with customers. When our shuttle customers
design oil export solutions for new oil fields it is not uncommon
for them to involve us in the logistics planning phase. On existing
fields, with the opportunity cost of any field shutdown greater
than ever at today's high oil price, our customers regard us as
close partners in maintaining uninterrupted production at their
fields. With an average daily transportation volume of 2.6
million barrels and more than 1,500 voyages annually, we believe
our offshore loading business constitutes the most complex
logistics challenge anywhere in the tanker industry.
The outlook for our offshore loading segment is positive. High oil
prices are stimulating investment in offshore oil production, which
is projected to increase globally to 36 million barrels per day by
2008, compared to 26 million barrels per day in 2003. Technology
advances continue to facilitate the development of smaller, more
remote offshore oil fields for which shuttle tankers are more
competitive than fixed sub sea pipelines. Therefore, even with
overall North Sea oil production volumes gradually declining, we
believe we will see a growing worldwide demand for shuttle
tankers going forward.
We provide a range of other offshore marine services to our
customers. For example, our fleet of Floating Storage and Offtake
(FSO) tankers has been steadily growing over the past several years
and today serves customers in Australia, Asia and Europe. During
2004, our FSO business continued its growth with our latest FSO
entering service under a 10-year contract in Thailand.
E N T R Y I N T O L N G S H I P P I N G
A major highlight for Teekay in 2004 was our entry into the LNG
shipping sector. This move was linked to our philosophy of
following our customers, many of whom view LNG as a high
priority. In April 2004, through our purchase of Naviera F. Tapias
S.A. of Spain, we acquired our first four LNG carriers, all with
an average remaining term of 18-year fixed-rate charters to
major Spanish energy companies. A few months later, we
secured a strategic contract in Qatar, a major supplier of LNG
to the world's markets. The contract involves 20-year charters
for three additional LNG ships, commencing in 2006/2007.
In late 2004 we announced the filing of a registration statement
for an initial public offering of our subsidiary, Teekay LNG Partners
L.P. With the registration process ongoing at the time of writing,
we are limited in our ability to discuss our LNG business until after
capacity, thereby increasing vessel utilization and earnings.
the completion of the offering.
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L E T T E R T O S H A R E H O L D E R S c o n ’ t .
R A I S I N G T H E B A R I N S A F E T Y,
Q U A L I T Y A N D S E R V I C E
R E A D Y F O R T H E F U T U R E
Our customers are increasingly focusing on building strategic
Today, the tanker industry is under greater scrutiny than ever.
partnerships with a few carefully selected, highly capable
We operate in an environment with growing regulatory
providers of marine solutions that meet their uncompromisingly
pressure and zero tolerance for pollution. One of the
high standards. We believe this trend, over time, will profoundly
cornerstones of Teekay's track record of profitable growth has
change the structure of our industry and improve the way in
been our ability to excel in this environment with a reputation
which it operates. We have spent the last several years positioning
as the industry leader in safety, quality and service. We believe
ourselves for these developments, building our capabilities and
our customers' trust in our operations is the single most
leading the initial rounds of consolidation in the industry. We have
important key success factor for our company. We are focused
already been a major beneficiary of the changes that have
on earning that trust every day and in every customer interaction,
occurred, earning a much more central position in the logistics
seeking to deliver flawless service. In 2004, we achieved the
chain of some of our largest customers. We believe that Teekay
remarkable feat of performing 8,000 cargo operations, for 110
today provides a broader range of transportation solutions, a
customers in 75 countries, delivering two billion barrels of oil and
higher quality of customer service, through more sophisticated
gas, with zero spills attributable to Teekay!
systems and at a lower cost of capital than any other company in
Our reputation as the industry leader is not built on merely
complying with regulations or industry norms but on setting new
standards for operational excellence. By managing all aspects of
our industry. We follow our customers’ growing energy
transportation needs and provide them with marine services that
add value to their business.
the construction and operation of our ships in-house, we provide
Based on our marine midstream franchise, we consider Teekay
our customers with a superior combination of world-class assets,
to be in an excellent position to continue its long-term,
leadership in risk management and first class customer service,
profitable growth, whatever the future direction of the tanker
while having direct control of costs. We also continue to raise the
cycle. A continuation of the current high cycle — a distinct
bar in our industry with our operational innovations, such as our
possibility in the current high-growth oil demand environment
award-winning "SCOPE" initiative — the first seafarer
— would result in continued strong earnings for Teekay,
competency system ever to be certified in the shipping industry,
because of our low fleet net income breakeven and our
our ship-specific structural integrity program and our
substantial operating leverage. An eventual cyclical downturn
groundbreaking research into operational risk probability, which
should, however, allow us to accelerate our growth, through
is used to formulate risk mitigation strategies in our operations.
our strong balance sheet and our unmatched portfolio of long-
C A P I T A L D I S C I P L I N E
term, fixed-rate contracts, with more than $6 billion in forward
sales. We believe our business strategy will steadily increase the
We maintained our focus on the good stewardship of our
shareholders' capital, continuing our disciplined approach to
C E O ' S A N D C H A I R M A N ’ S M E S S A G E T O S H A R E H O L D E R S c o n ’ t .
counter-cyclical investments in the midst of a record high tanker
In closing, we commend our dedicated employees around the
world, at sea and ashore, for the outstanding results they
quality of our earnings through the tanker cycle.
market. The bulk of the $1.8 billion we invested in 2004, and
delivered in 2004 and the important groundwork they provided
the $700 million we committed going forward, was directed
for Teekay's future success.
towards profitable, long-term, fixed-rate businesses, as opposed
to high-priced spot tanker assets, which have almost doubled in
price over the past two years. We returned excess capital to
shareholders through a share repurchase program and a second
consecutive annual dividend increase.
We thank our customers for trusting us with their business and
our shareholders for their continuing support of Teekay.
C. Sean Day
Bjorn Moller
Chairman of the Board
President and CEO
B O A R D O F D I R E C T O R S
C. Sean Day
Chairman of the Board
Axel Karlshoej
Chairman Emeritus
Bruce C. Bell
Dr. Ian D. Blackburne
Leif O. Höegh
Thomas Kuo-Yuen Hsu
Eileen A. Mercier
Bjorn Moller
Tore I. Sandvold
B O A R D C O M M I T T E E S
AAuuddiitt CCoommmmiitttteeee
Eileen A. Mercier (Chair)
Leif O. Höegh
Tore I. Sandvold
CCoommppeennssaattiioonn aanndd HHuummaann
NNoommiinnaattiinngg aanndd GGoovveerrnnaannccee
RReessoouurrcceess CCoommmmiitttteeee
Axel Karlshoej (Chair)
Dr. Ian D. Blackburne
CCoommmmiitttteeee
Ian D. Blackburne (Chair)
Bruce C. Bell
Thomas Kuo-Yuen Hsu
Thomas Kuo-Yuen Hsu
Eileen A. Mercier
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T A N K E R M A R K E T R E P O R T
G E N E R A L C O M M E N T S / O V E R V I E W
In 2004, tanker freight rates strengthened to levels that have not
disruptions to U.S. domestic production, added to the already
been observed since the early 1970s. This was a result of the
significant volatility in spot tanker rates.
global economy growing at the fastest pace in three decades,
which drove oil demand growth to the highest level in 26 years.
The majority of the growth in global oil demand was met by long-
haul Middle East oil production. This led to tanker demand growth
of an estimated seven percent and thus a significant increase in
freight rates in spite of modest fleet growth.
The graph below (left) compares historical tanker demand and
supply with the resulting fleet utilization (illustrated by the shaded
area). Ninety percent is considered full utilization of the tanker fleet,
which was stretched above this level during periods of high
demand. In the fourth quarter of 2004, extraordinarily high levels
of fleet utilization resulted in freight rates rising to unprecedented
With the fundamental tanker supply / demand equation already
highs (see graph below right), which were last experienced in the
finely balanced, short-term factors during the year, such as
early 1970s.
nuclear reactor outages in Japan and hurricane related
Utilization
Supply
Demand
QUARTERLY AVERAGE SPOT TCEs*
Aframax
Suezmax
VLCC
)
.
t
w
D
n
o
i
l
l
i
M
(
y
l
p
p
u
S
&
d
n
a
m
e
D
r
e
k
n
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T
310
290
270
250
230
210
190
170
150
130
LH Axis
RH Axis
90% is
considered full
utilization of fleet
0
0
q
2
0
0
q
4
1
0
q
2
1
0
q
4
2
0
q
2
2
0
q
4
3
0
q
2
3
0
q
4
4
0
q
2
4
0
q
4
100%
%
n
o
i
t
a
z
i
l
i
t
U
98%
96%
94%
92%
90%
88%
86%
84%
82%
y
a
D
r
e
p
$
S
U
180,000
150,000
120,000
90,000
60,000
30,000
0
0
0
q
2
0
0
q
4
1
0
q
2
1
0
q
4
2
0
q
2
2
0
q
4
3
0
q
2
3
0
q
4
4
0
q
2
4
0
q
4
Source : Platou
*TCEs = Time Charter Equivalents
Source : Clarkson
M A R K E T O U T L O O K / F O R E C A S T
The outlook for tanker fundamentals in 2005 remains positive,
The tanker orderbook at the beginning of 2005 (89.3 mdwt)
pointing towards a balance between tanker supply and demand.
represented 26.7% of the then existing tanker fleet with the
The global economy is forecast to continue to grow at a good
following delivery schedule: 32.6 mdwt in 2005, 24.5 mdwt in
pace, with oil demand growth expected to be driven by non-
2006, 27.7 mdwt in 2007, and 4.5 mdwt in 2008 and beyond.
OECD Asian countries led by China.
Going forward, net fleet changes are expected to be a function
As of April 2005, the International Energy Agency (IEA) was
estimated 1.8 mb/d (or 2.1 percent) oil demand growth during
2005, which is relatively firm compared to historical averages.
primarily of scrapping levels, which will be driven by tanker
freight rates, charterer discrimination against single-hull
tonnage, and regulatory pressures.
With oil prices remaining high (above $50/bbl), as of April 2005,
Starting from a very high level of fleet utilization at the beginning
OPEC producers are expected to maintain a high production
of 2005, even moderate changes in the balance between tanker
level for some time.
demand and supply will likely result in fleet utilization remaining
relatively high.
Overview
2004 * (mb/d)
2003 * (mb/d)
%
Change
Main Factors
Global Oil Demand
82.5
79.8
+3.4% • Global oil demand grew by 2.7 mb/d, which was the fastest rate of growth since 1978.
(cid:127) Strong global economic growth led by North America, China and other non-OECD Asian countries
contributed to the growth in world oil demand.
Global Oil Production
83.0
79.7
+4.1% (cid:127) Global oil production rose by 3.3 mb/d, the fastest annual rate of growth since 1976. OPEC
production rose by 2.3 mb/d and non-OPEC increased by 1.0 mb/d.
OPEC Production
33.0
30.7
+7.5% (cid:127) Increases in OPEC production were led predominantly by Middle East producers. Of the 2.3 mb/d
increase in OPEC output, Iraq accounted for 0.7 mb/d and these exports were routed mainly out of
the Arabian Gulf, contributing to an increase in tanker demand.
Tanker Spot Rates
2004 Avg **
($ per day)
2003 Avg **
($ per day)
%
Change
Main Factors
Very Large Crude Carrier
(VLCC)
97,000
53,000
+83% (cid:127) Rates strengthened to levels not experienced since the early 1970s.
(cid:127) High volumes of Middle East oil production and Asian demand for long-haul West African sweet crude
imports drove demand for VLCCs.
Suezmax
75,000
43,000
+74% (cid:127) An increase in U.S. crude imports from West Africa provided a boost to Suezmax rates in the Atlantic.
(cid:127) Rising production out of the Former Soviet Union (FSU) exported through Black / Baltic Sea ports led
to increased demand for Suezmaxes.
Aframax
50,000
35,000
+43% (cid:127) An increase in FSU exports from the Baltic and rising output from non-Middle East OPEC members
were the main drivers behind the strengthening of Aframax rates.
(cid:127) Strong oil demand in the Asia Pacific region lifted Aframax rates in the Far East.
Large Range II Product
Carriers
Medium Range Product
Carriers
42,000
33,000
+27% (cid:127) Firm demand for petrochemical feedstock in Asia was a key factor behind the strength in LR tanker
rates.
26,000
18,000
+44% (cid:127) A sharp increase in product imports to China coupled with rising U.S. gasoline imports were key
factors behind the strength in product tanker rates.
Fleet
World Tanker Fleet
2004 *
(mdwt)
334
2003 *
(mdwt)
317
%
Change
Comments
+5.4% (cid:127) World tanker fleet rose by 5.4% compared to the end of 2003.
Deliveries
28.0
30.5
-8.2% (cid:127) Although deliveries were smaller than the previous year the trend of high levels of deliveries
continued.
Deletions / Scrapping
10.9
22.0
-50.5% (cid:127) Scrapping activity slowed considerably from 2003 as the spot market strengthened to near record
levels.
Newbuilding Orders
39.6
50.2
-20.5% (cid:127) Despite rising newbuilding prices, new orders remained at high levels, although at a decline from
2003 levels.
Orderbook
89.3
77.4
+15.4% (cid:127) The orderbook at the end of 2004 rose to the highest level since 1974.
Mdwt = million deadweight tonnes
Mb/d = million barrels per day
Avg = Average
Sources : *
International Energy Agency
** Clarkson Research Studies
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R E C O N C I L I A T I O N S & F O R W A R D - L O O K I N G S T A T E M E N T S
R E C O N C I L I AT I O N S O F N O N - G A A P M E A S U R E S
Cash flow from vessel operations represents income from vessel
generally accepted in the United States and should not be
operations before depreciation and amortization expense and
considered as an alternative to net income or any other
vessel write-downs/(gain) loss on sale of vessels. Cash flow from
indicator of our performance required by accounting principles
vessel operations is included because certain investors use this
generally accepted in the United States. The following table is
data to measure a company's financial performance. Cash flow
provided to reconcile our income from vessel operations with
from vessel operations is not required by accounting principles
cash flow from vessel operations:
Reconciliation of cash flow from
vessel operations ($000s)
Year Ended
December 31, 2000
Year Ended
December 31, 2001
Year Ended
December 31, 2002
Year Ended
December 31, 2003
Year Ended
December 31, 2004
Actual
Income from vessel operations
Depreciation and amortization
Vessel write downs/(gain) loss on
sale of vessels
Cash flow from vessel operations
326,671
100,153
1,004
427,828
383,463
136,283
—
119,346
149,296
—
519,746
268,642
292,964
191,237
90,389
574,590
821,186
237,498
(79,254)
979,430
F O R WA R D - L O O K I N G S TAT E M E N T S
This document contains forward-looking statements (as defined
rates of tanker scrapping; changes in trading patterns
in Section 21E of the Securities Exchange Act of 1934, as
significantly impacting overall tanker tonnage requirements;
amended) which reflect management’s current views with
changes in applicable industry laws and regulations and the
respect to certain future events and performance, including
timing of implementation of new laws and regulations; changes
statements regarding: our future growth prospects; tanker
in the typical seasonal variations in tanker charter rates; changes
market fundamentals, including the balance of supply and
in the present or expected increase in the offshore production of
demand in the tanker market, tanker utilization and spot tanker
oil; the potential for early termination of long-term contracts
charter rates; our disciplined approach to fleet development and
and inability to renew or replace long-term contracts; our
our ability to achieve accelerated growth in an industry
future capital expenditure requirements or changes in our
downturn; industry consolidation; the initial public offering of
financial condition or position; the potential inability to
common units of Teekay LNG Partners L.P.; and the growing
complete the initial public offering of Teekay LNG Partners L.P.;
investment in offshore oil production and resulting increase in
and other factors discussed in Teekay’s filings from time to time
worldwide demand for shuttle tankers. The following factors
with the SEC, including its Report on Form 20-F for the fiscal
are among those that could cause actual results to differ
year ended December 31, 2004. We expressly disclaim any
materially from the forward-looking statements, which involve
obligation or undertaking to release publicly any updates or
risks and uncertainties, and that should be considered in
revisions to any forward-looking statements contained herein to
evaluating any such statement: changes in production of or
reflect any change in our expectation with respect thereto or
demand for oil, petroleum products and LNG, either generally
any change in events, conditions or circumstances on which any
or in particular regions; greater or less than anticipated levels of
such statement is based.
tanker newbuilding orders or greater or less than anticipated
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ]
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X]
[ ]
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1- 12874
TEEKAY SHIPPING CORPORATION
(Exact name of Registrant as specified in its charter)
Republic of The Marshall Islands
(Jurisdiction of incorporation or organization)
TK House, Bayside Executive Park, West Bay Street & Blake Road, P.O. Box AP-59212, Nassau,
Commonwealth of the Bahamas
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Common Stock, par value of $0.001 per share
8.32% First Preferred Ship Mortgage Notes due 2006
7.25% PEPS Units
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the
annual report.
82,951,275 shares of Common Stock, par value of $0.001 per share.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Indicate by check mark which financial statement item the registrant has elected to follow:
Yes [X] No [ ]
Item 17 [ ] Item 18 [X]
1
3
9
19
29
33
34
34
35
37
TEEKAY SHIPPING CORPORATION
INDEX TO REPORT ON FORM 20-F
Page
Identity of Directors, Senior Management and Advisors........................................................................... Not applicable
Offer Statistics and Expected Timetable ................................................................................................... Not applicable
Key Information .........................................................................................................................................
Information on the Company .....................................................................................................................
Operating and Financial Review and Prospects .......................................................................................
Directors, Senior Management and Employees........................................................................................
Major Shareholders and Related Party Transactions ...............................................................................
Financial Information .................................................................................................................................
The Offer and Listing .................................................................................................................................
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Additional Information................................................................................................................................
Item 11.
Quantitative and Qualitative Disclosures About Market Risk....................................................................
Item 12.
Description of Securities Other than Equity Securities ............................................................................. Not applicable
PART II.
Item 13.
Defaults, Dividend Arrearages and Delinquencies....................................................................................
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds........................................
Item 15.
Controls and Procedures...........................................................................................................................
Item 16A.
Audit Committee Financial Expert .............................................................................................................
39
39
39
39
Item 16B.
Code of Ethics ...........................................................................................................................................
39
Item 16C.
Principal Accountant Fees and Services...................................................................................................
39
Item 16D.
Exemptions from the Listing Standards for Audit Committees..................................................................
40
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers ..................................................
40
PART III.
Item 17.
Financial Statements ................................................................................................................................. Not applicable
Item 18.
Financial Statements .................................................................................................................................
Item 19.
Exhibits ......................................................................................................................................................
Signature
...................................................................................................................................................................
40
40
44
2
PART I
This Annual Report should be read in conjunction with the consolidated financial statements and accompanying notes included in this report.
In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. Such forward-
looking statements relate to future events and our operations, objectives, expectations, performance, financial condition and intentions. When used
in this Annual Report, the words "expect," "intend," "plan," "believe," "anticipate," "estimate" and variations of such words and similar expressions
are intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, in particular, statements regarding:
our future growth prospects; tanker market fundamentals, including the balance of supply and demand in the tanker market, and spot tanker charter
rates; future capital expenditures; delivery dates of and financing for newbuildings, and the commencement of service of newbuildings under long-
term time charter contacts; the impact of the Teekay Spain acquisition to our earnings, future cash flow from vessel operations and strategic
position; the growth prospects of the LNG shipping sector, including increased competition, and the joint venture company with the former
controlling shareholder of Teekay Spain; the initial public offering of Teekay LNG Partners L.P.; the expected impact of IMO regulations and
regulations of the European Union Parliament; the expected lifespan of a new LNG carrier; the expected impact of the heightened environmental
and quality concerns of insurance underwriters, regulators and charterers; the growth of the global economy and global oil demand; and the
proceeds and gains in the first and second quarters of 2006 relating to the sale of certain of our vessels. Forward-looking statements include,
without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the
words believe, anticipate, expect, estimate, project, will be, will continue, will likely result, or words or phrases of similar meanings. These
statements involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant
uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such
forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to: changes in production
of or demand for oil, petroleum products and LNG, either generally or in particular regions; the cyclical nature of the tanker industry and our
dependence on oil markets; greater or less than anticipated levels of tanker newbuilding orders or greater or less than anticipated rates of tanker
scrapping; changes in trading patterns significantly impacting overall tanker tonnage requirements; changes in applicable industry laws and
regulations and the timing of implementation of new laws and regulations; changes in typical seasonal variations in tanker charter rates; changes in
the offshore production of oil, competitive factors in the markets in which we operate; our potential inability to integrate effectively the operations of
Teekay Spain or any other future acquisitions; the potential for early termination of long-term contracts and inability of the Company to renew or
replace long-term contracts; shipyard production delays; conditions in the public equity markets; the ultimate number of common units and price per
unit, if any, issued by Teekay LNG Partners L.P. in its proposed public offering; and other factors detailed from time to time in our periodic reports.
Forward-looking statements in this Annual Report are necessarily estimates reflecting the judgment of senior management and involve known and
unknown risks and uncertainties. These forward-looking statements are based upon a number of assumptions and estimates that are inherently
subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those
expressed or implied by such forward-looking statements. Accordingly, these forward-looking statements should, be considered in light of various
important factors, including those set forth in this Annual Report under the heading "Factors That May Affect Future Results."
We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may
subsequently arise. You should carefully review and consider the various disclosures included in this Annual Report and in our other filings made
with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
Selected Financial Data
Set forth below are selected consolidated financial and other data of Teekay Shipping Corporation together with its subsidiaries (sometimes referred
to as "Teekay," the "Company," “we” or “us”), for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, which have been derived from
our consolidated financial statements. The data below should be read in conjunction with the consolidated financial statements and the notes
thereto and the Report of Independent Registered Public Accounting Firm therein, with respect to the consolidated financial statements for the years
ended December 31, 2004, 2003, and 2002, and "Item 5. Operating and Financial Review and Prospects," included herein.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.
3
Year Ended
December 31,
2004
Year Ended
December 31,
2003
Year Ended
December 31,
2002
(in thousands, except share, per share data and ratios)
Year Ended
December 31,
2001
Year Ended
December 31,
2000
Income Statement Data:
Voyage revenues................................... $2,219,238
Total operating expenses (1) ................. (1,398,052)
Income from vessel operations ............. 821,186
Interest expense .................................... (121,518)
Interest income ...................................... 18,528
Equity income from joint ventures .........
13,730
Gain (loss) on sale of marketable
93,175
securities................................................
Other - net.............................................. (67,661)
Net income............................................. 757,440
Per Share Data:
Net income — basic (2).......................... $9.14
Net income — diluted (2) ....................... 8.63
Cash dividends declared (2) .................. 0.51
$1,576,095
(1,283,131)
292,964
(80,999)
3,921
6,970
517
$ 783,327
(663,981)
119,346
(57,974)
3,494
4,523
(1,130)
$1,039,056
(655,593)
383,463
(66,249)
9,196
17,324
758
$ 893,226
(565,551)
327,675
(74,540)
13,021
9,546
-
(46,009)
177,364
(14,868)
53,391
(7,974)
336,518
(5,682)
270,020
$2.22
2.18
0.45
$0.67
0.66
0.43
$4.24
4.16
0.43
$3.51
3.43
0.43
Balance Sheet Data (at end of
year):
Cash and marketable securities ............
Restricted cash......................................
Vessels and equipment .........................
Total assets ...........................................
Total debt (including capital lease
obligations) ............................................
Capital stock ..........................................
Total stockholders’ equity......................
Number of outstanding shares of
common stock (2)...................................
Other Financial Data:
Net voyage revenues (3)........................
Net operating cash flow .........................
Total debt to total capitalization (4) (5)....
Net debt to total net capitalization (5)
(6) ...........................................................
Capital expenditures:
Vessel and equipment
purchases, gross (7)..........................
___________________________
$ 427,037
448,812
3,531,287
5,503,740
2,744,545
534,938
2,237,358
$ 387,795
2,672
2,574,860
3,588,044
1,636,758
492,653
1,651,827
$ 298,255
8,785
2,066,657
2,723,506
$ 196,004
7,833
2,043,098
2,467,781
$ 223,123
-
1,607,716
1,974,099
1,130,822
470,988
1,421,898
935,702
467,341
1,398,200
797,484
452,808
1,098,512
82,951,275
81,222,350
79,384,120
79,100,652
78,290,438
$1,786,843
814,704
54.9%
45.3%
$1,181,439
455,575
49.5%
44.5%
$543,872
179,531
43.9%
36.4%
$789,494
500,086
39.8%
34.3%
$644,269
321,314
42.1%
34.3%
548,587
372,433
135,650
184,983
43,512
(1)
Total operating expenses includes vessel write-downs and (gain) loss on sale of vessels, and restructuring charges as follows:
Vessel write-downs and
(gain) loss on sale of
vessels..................................
Restructuring charges ..........
Year Ended
December 31,
2004
Year Ended
December 31,
2003
Year Ended
December 31,
2002
(in thousands)
Year Ended
December 31,
2001
Year Ended
December 31,
2000
$(79,254)
1,002
(78,252)
$90,389
6,383
96,772
$-
-
-
$-
-
-
$1,004
-
1,004
(2)
(3)
On May 17, 2004, we effected a two-for-one stock split relating to our common stock. All per share data and number of outstanding shares of
common stock give effect to this stock split retroactively.
Consistent with general practice in the shipping industry, we use net voyage revenues (defined as voyage revenues less voyage expenses)
as a measure of equating revenues generated from voyage charters to revenues generated from time charters, which assists us in making
operating decisions about the deployment of our vessels and their performance. Under time charters the charterer pays the voyage
expenses, whereas under voyage charter contracts the ship owner pays the voyage expenses. Some voyage expenses are fixed, and the
remainder can be estimated. If we, as the ship owner, pay the voyage expenses, we typically pass the approximate amount of these
expenses on to our customers by charging higher rates under the contract or billing the expenses to them. As a result, although voyage
revenues from different types of contracts may vary, the net revenues after subtracting voyage expenses, which we call net voyage
revenues, are comparable across the different types of contracts. We principally use net voyage revenues, a non-GAAP financial measure,
because it provides more meaningful information to us than voyage revenues, the most directly comparable GAAP financial measure. Net
voyage revenues are also widely used by investors and analysts in the shipping industry for comparing financial performance between
companies and to industry averages. The following table reconciles net voyage revenues with voyage revenues.
4
Year Ended
December 31,
2004
Year Ended
December 31,
2003
Year Ended
December 31,
2002
(in thousands)
Year Ended
December 31,
2001
Year Ended
December 31,
2000
Voyage revenues .................
Voyage expenses.................
Net voyage revenues ...........
$2,219,238
(432,395)
1,786,843
$1,576,095
(394,656)
1,181,439
$783,327
(239,455)
543,872
$1,039,056
(249,562)
789,494
$893,226
(248,957)
644,269
(4)
Total capitalization represents total debt, minority interest and total stockholders' equity.
(5)
(6)
(7)
As at December 31, 2004, we had $143.7 million of Premium Equity Participating Security Units due May 18, 2006 (or Equity Units)
outstanding. If these Equity Units, which were issued on February 16, 2003, were presented as equity, our total debt to total capitalization
would have been 52.1% as of December 31, 2004 (December 31, 2003 - 45.2%) and our net debt to total capitalization would have been
41.9% as of December 31, 2004 (December 31, 2003 – 39.8%). We believe that this presentation as equity for the purposes of these
calculations is consistent with the requirement of each Equity Unit holder to purchase for $25 a specified fraction of a share of our common
stock on February 16, 2006.
Net debt represents total debt less cash, cash equivalents, restricted cash and short-term marketable securities. Total net capitalization
represents net debt, minority interest and total stockholders' equity.
Excludes vessels purchased in connection with our acquisitions of Ugland Nordic Shipping AS in 2001, Navion AS in 2003 and Teekay
Shipping Spain S.L. (or Teekay Spain) in 2004. Please see Item 5 – Operating and Financial Review and Prospects.
Factors That May Affect Future Results
The cyclical nature of the tanker industry causes volatility in our profitability.
Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in the supply of, and demand for, tanker
capacity. Increases or decreases in the supply of tankers could have a material adverse effect on our business, financial condition and results of
operations. The supply of tanker capacity is influenced by the number and size of new vessels built, older vessels scrapped, converted and lost, the
number of vessels that are out of service and regulations that may effectively cause early obsolescence of tonnage. The demand for tanker capacity
is influenced by, among other factors: global and regional economic conditions; increases and decreases in production of and demand for crude oil
and petroleum products; increases and decreases in OPEC oil production quotas; the distance crude oil and petroleum products need to be
transported by sea; and developments in international trade and changes in seaborne and other transportation patterns.
Because many of the factors influencing the supply of and demand for tanker capacity are unpredictable, the nature, timing and degree of changes
in tanker industry conditions are also unpredictable.
We depend upon oil markets, changes in which could result in decreased demand for our vessels and services.
Demand for our vessels and services in transporting crude oil and petroleum products depends upon world and regional oil markets. Any decrease
in shipments of crude oil in those markets could have a material adverse effect on our business, financial condition and results of operations.
Historically, those markets have been volatile as a result of the many conditions and events that affect the price, production and transport of oil, as
well as competition from alternative energy sources. A slowdown of the United States and world economies may result in reduced consumption of
crude oil and petroleum products and a decreased demand for our vessels and services.
Terrorist attacks, increased hostilities or war could lead to further economic instability, increased costs and disruption of our business.
Terrorist attacks, such as the attacks that occurred in the United States on September 11, 2001, the bombings in Spain on March 11, 2004, the
current conflict in Iraq and current and future conflicts, may adversely affect our business, operating results, financial condition, ability to raise capital
or future growth. Continuing hostilities in the Middle East may lead to additional armed conflicts or to further acts of terrorism and civil disturbance in
the United States, Spain or elsewhere, which may contribute further to economic instability and disruption of oil and liquefied natural gas (or LNG)
production and distribution, which could result in reduced demand for our services. In addition, oil and LNG facilities, shipyards, vessels, pipelines
and oil and gas fields could be targets of future terrorist attacks. Any such attacks could lead to, among other things, bodily injury or loss of life,
vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport oil and LNG to or from
certain locations. Terrorist attacks, war or other events beyond our control that adversely affect the distribution, production or transportation of oil or
LNG to be shipped by us could entitle our customers to terminate our charter contracts, which could harm our cash flow and our business.
Our substantial operations outside the United States expose us to political, governmental and economic instability, which could harm our
operations.
Because our operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental
conditions in the countries where we are engaged in business or where our vessels are registered. Any disruption caused by these factors could
harm our business. In particular, we derive a substantial portion of our revenues from shipping oil and LNG from politically unstable regions. Past
political conflicts in these regions, particularly in the Arabian Gulf, have included attacks on ships, mining of waterways and other efforts to disrupt
shipping in the area. In addition to acts of terrorism, vessels trading in this and other regions have also been subject, in limited circumstances, to
piracy. Future hostilities or other political instability in the Arabian Gulf or other regions where we operate or may operate could have a material
adverse effect on the growth of our business, results of operations and financial condition. In addition, tariffs, trade embargoes and other economic
sanctions by Spain, the United States or other countries against countries in the Middle East, Southeast Asia or elsewhere as a result of terrorist
attacks, hostilities or otherwise may limit trading activities with those countries, which could also harm our business.
Our dependence on spot voyages may result in significant fluctuations in the utilization of our vessels and our profitability.
5
During 2004 and 2003, we derived approximately 62% and 63%, respectively, of our net voyage revenues from the vessels in our spot tanker
segment. Our spot tanker segment consists of conventional crude oil tankers, oil/bulk/ore carriers and product carriers operating on the spot market
or subject to time charters or contracts of affreightment priced on a spot-market basis or short-term fixed-rate contracts. We consider contracts that
have an original term of less than three years in duration to be short-term. All of our very large crude carrier fleet, and substantially all of our
conventional Aframax tanker fleet, and large product and small product tanker fleets, and approximately half of our Suezmax tanker fleet are among
the vessels included in our spot tanker segment. Due to our dependence on the spot charter market, declining charter rates in a given period
generally will result in corresponding declines in operating results for that period. The spot charter market is highly competitive and spot charter
rates are subject to significant fluctuations based on tanker and oil supply and demand. Charter rates have varied significantly in the last few years.
Future spot charters may not be available at rates that will be sufficient to enable our vessels to be operated profitably or to provide sufficient cash
flow to service our debt obligations.
Reduction in oil produced from offshore oil fields could harm our shuttle tanker business.
Demand for our shuttle tankers in transporting crude oil and petroleum products depends upon the amount of oil produced from offshore oil fields,
especially in the North Sea, where our shuttle tankers primarily operate. As oil prices increase, the prospect of offshore oil exploration and
development of offshore oil fields, which cost more to develop than land oil fields, becomes more attractive to oil companies. However, when oil
prices decline, it becomes less attractive for oil companies to explore for oil offshore and develop offshore oil fields. If the amount of oil produced
from offshore oil fields declines, especially in the North Sea, our shuttle tanker business could be harmed. In addition, if for environmental or other
reasons, there is a change in policy towards using pipelines rather than oceangoing vessels in transporting crude oil and petroleum products from
offshore oil fields, our shuttle tanker business could be adversely affected, which could have a material adverse effect on our business, financial
condition and results of operations. As at December 31, 2004, we had 41 vessels (including 12 chartered-in vessels and one tanker held for sale) in
our shuttle tanker fleet. Most of our shuttle tanker revenues are derived from long-term contracts of affreightment. Revenue under most of these
contracts depends upon the amount of oil we transport, the production of which is beyond our control and which can vary depending upon the
nature of a given oil field and the field operator's production decisions.
Our growth partially depends on continued growth in demand for LNG and LNG shipping.
A portion of our growth strategy focuses on expansion in the LNG shipping sector and, thus, depends on continued growth in world and regional
demand for LNG and LNG shipping and supply of LNG.
Demand for LNG and LNG shipping could be negatively affected by a number of factors, such as increases in the costs of natural gas derived from
LNG relative to the cost of natural gas generally, increases in the production of natural gas in areas linked by pipelines to consuming areas,
increases in the price of LNG relative to other energy sources, the availability of new energy sources, and negative global or regional economic or
political conditions. Reduced demand for LNG and LNG shipping would have a material adverse effect on future growth of our LNG segment, and
could harm that segment’s results.
Growth of the LNG market may be limited by infrastructure constraints and community and environmental group resistance to new LNG
infrastructure over concerns about the environment, safety and terrorism. If the LNG supply chain is disrupted or does not continue to grow, or if a
significant LNG explosion, spill or similar incident occurs, it could have a material adverse effect on our business, results of operations and financial
condition.
The intense competition in our markets may lead to reduced profitability or expansion opportunities.
Our crude oil and product tankers operate in highly competitive markets. Competition arises primarily from other conventional Aframax and shuttle
tanker owners, including major oil companies and independent companies. We also compete with owners of other size tankers. Our market share is
insufficient to enforce any degree of pricing discipline in the markets in which we operate and our competitive position may erode in the future. Any
new markets that we enter could include participants that have greater financial strength and capital resources than we have. We may not be
successful in entering new markets.
One of our objectives is to enter into additional long-term, fixed-rate LNG time charters. The process of obtaining new long-term time charters is
highly competitive and generally involves an intensive screening process and competitive bids, and often extends for several months. We expect
substantial competition for providing marine transportation services for potential LNG projects from a number of experienced companies, including
state-sponsored entities and major energy companies affiliated with the LNG project requiring LNG shipping services. Many of these competitors
have greater experience in the LNG market and significantly greater financial resources than do we. We anticipate that an increasing number of
marine transportation companies, including many with strong reputations and extensive resources and experience will enter the LNG transportation
sector. This increased competition may cause greater price competition for time charters. As a result of these factors, we may be unable to expand
our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which would have a material adverse effect on
our business, results of operations and financial condition.
The loss of any key customer could result in a significant loss of revenue in a given period.
We have derived, and believe that we will continue to derive, a significant portion of our voyage revenues from a limited number of customers. One
customer accounted for 17% ($373.7 million) of our consolidated voyage revenues during 2004. The same customer accounted for 15% ($239.5
million) of our consolidated voyage revenues during 2003. No customer accounted for more than 10% of our consolidated voyage revenue during
2002. The loss of any significant customer or a substantial decline in the amount of services requested by a significant customer could have a
material adverse effect on our business, financial condition and results of operations.
The tanker industry is subject to substantial environmental and other regulations, which may significantly increase our expenses.
Our operations are affected by extensive and changing environmental protection laws and other regulations and international conventions. We have
incurred, and expect to continue to incur, substantial expenses in complying with these laws and regulations, including expenses for ship
modifications and changes in operating procedures. Additional laws and regulations may be adopted that could limit our ability to do business or
further increase our costs, which could harm our business. This could have a material adverse effect on our business, financial condition and results
of operations.
6
The United States Oil Pollution Act of 1990 (or OPA 90) in particular has increased our expenses. OPA 90 provides for the phase-in of the exclusive
use of double-hull tankers at United States ports, as well as potentially unlimited liability for owners, operators and demise or bareboat charterers for
oil pollution in U.S. waters. To comply with the OPA 90, tanker owners generally incur increased costs in meeting additional maintenance and
inspection requirements, in developing contingency arrangements for potential spills and in obtaining required insurance coverage. OPA 90 contains
financial responsibility requirements for vessels operating in U.S. waters and requires owners and operators of vessels to establish and maintain
with the United States Coast Guard evidence of insurance or of qualification as a self-insurer or other evidence of financial responsibility sufficient to
meet their potential liabilities under the OPA 90.
Following the example of the OPA 90, the International Maritime Organization (or IMO), the United Nations’ agency for maritime safety, has adopted
regulations for tanker design and inspection that are designed to reduce oil pollution in international waters. Most recently, on December 9, 2003 the
IMO announced regulations accelerating the phase out of single hull tankers. The regulations also impose a more rigorous inspection regime for
older tankers and ban the carriage of heavy oils on single-hull tankers. As a result of changes to these regulations, we recorded a non-cash write-
down of the book value of certain vessels totalling $56.9 million during the fourth quarter of 2003. The IMO’s accelerated phase out schedule will
affect two of our existing vessels, effectively reducing the economic life of each of these vessels. Please see Item 4. Information on the Company:
Regulations.
Our shuttle tankers primarily operate in the North Sea. In addition to the regulations imposed by the IMO, countries having jurisdiction over North
Sea areas impose regulatory requirements in connection with operations in those areas. These regulatory requirements, together with additional
requirements imposed by operators of North Sea oil fields, require that we make further expenditures for sophisticated equipment, reporting and
redundancy systems on our shuttle tankers and for the training of seagoing staff. Additional regulations and requirements may be adopted or
imposed that could limit our ability to do business or further increase the cost of doing business in the North Sea.
We may not be able to successfully integrate future acquisitions.
A principal component of our strategy is to continue to grow by expanding our business both in the geographic areas and markets where we have
historically focused as well as into new geographic areas, market segments and services. We may not be successful in expanding our operations
and any expansion may not be profitable. Our strategy of growth through acquisitions, including our acquisition in April 2004 of Teekay Spain,
involves business risks commonly encountered in acquisitions of companies, including: disruption of our ongoing business; difficulties in integrating
the operations, personnel and business culture of acquired companies; difficulties of coordinating and managing geographically separate
organizations; adverse effects on relationships with our existing suppliers and customers, and those of the companies acquired; difficulties entering
geographic markets or new market segments in which we have no or limited experience; and loss of key officers and employees of acquired
companies.
Our failure to effectively integrate businesses we may acquire in the future may harm our business and results of operations.
The process of integrating operations could also cause an interruption of, or loss of momentum in, the activities of one or more of an acquired
company’s businesses and our businesses. Members of our senior management may be required to devote considerable amounts of time to this
integration process, which will decrease the time they will have to manage our business, service existing customers and attract new customers. If
our senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of
the integration process, our business could suffer.
We may not realize expected benefits from acquisitions, and implementing our strategy of growth through acquisitions may harm our
financial condition and performance.
Present and future acquisitions may not be profitable to us at the time of their completion and may not generate revenues sufficient to justify our
investment. In addition, our acquisition growth strategy exposes us to risks that may harm our results of operations and financial condition, including
risks that we may: fail to realize anticipated benefits, such as cost-savings, revenue and cash flow enhancements and earnings accretion; decrease
our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions; incur additional indebtedness, which
may result in significantly increased interest expense or financial leverage, or issue additional equity securities to finance acquisitions, which may
result in significant shareholder dilution; incur or assume unanticipated liabilities, losses or costs associated with the business acquired; or incur
other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.
The strain that growth places upon our systems and management resources may harm our business.
Our growth has placed and will continue to place significant demands on our management, operational and financial resources. As we expand our
operations, we must effectively manage and monitor operations, control costs and maintain effective quality and control in geographically dispersed
markets. Our future growth and financial performance will also depend on our ability to: recruit, train, manage and motivate our employees to
support our expanded operations; and continue to improve our customer support, financial controls and information systems.
These efforts may not be successful and may not occur in a timely or efficient manner. Failure to effectively manage our growth and the system and
procedural transitions required by expansion in a cost-effective manner could have a material adverse affect on our business.
Our insurance may not be sufficient to cover losses that may occur to our property or as a result of our operations.
The operation of oil tankers and LNG carriers is inherently risky. Although we carry protection and indemnity insurance, all risks may not be
adequately insured against, and any particular claim may not be paid. In addition, we do not carry insurance on our oil tankers covering the loss of
revenues resulting from vessel off-hire time due to its cost compared to our off-hire experience. In the future, we may not continue to maintain off-
hire insurance for our LNG carriers. Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of
claims may be brought, the aggregate amount of these deductibles could be material. Certain of our insurance coverage is maintained through
mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and
above budgeted premiums if member claims exceed association reserves.
7
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent
environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks
of environmental damage of pollution. A catastrophic oil spill or marine disaster could exceed our insurance coverage, which could harm our
business, financial condition and operating results. Any uninsured or underinsured loss could harm our business and financial condition. In addition,
our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable
maritime self-regulatory organizations.
Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain. In
addition, the insurance that may be available to us may be significantly more expensive than our existing coverage.
An incident involving environmental damage or pollution and any of our vessels could harm our reputation and business.
Oil spills related to the sinkings of the tanker Erika off the coast of France in 1999 and the tanker Prestige off the coast of Spain in 2002, and other
tanker-related environmental incidents have created increased demand for modern vessels operated by ship management companies with a
reputation for safety and environmental compliance. Any event involving our tankers that results in material environmental damage or pollution could
harm our reputation for safety and environmental compliance and decrease the demand for our services, which could harm our business.
Our operating results are subject to seasonal fluctuations.
We operate our tankers in markets that have historically exhibited seasonal variations in demand and, therefore, in charter rates. This seasonality
may result in quarter-to-quarter volatility in our results of operations. Tanker markets are typically stronger in the winter months as a result of
increased oil consumption in the northern hemisphere. In addition, unpredictable weather patterns in these months tend to disrupt vessel
scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities in the winter months. As a result,
our revenues have historically been weaker during fiscal quarters ended June 30 and September 30, and, conversely, revenues have been stronger
in fiscal quarters ended December 31 and March 31.
We expend substantial sums during construction of newbuildings without earning revenue and without assurance that they will be
completed.
We are typically required to expend substantial sums as progress payments during construction of a newbuilding, but we do not derive any revenue
from the vessel until after its delivery. In addition, under some of our time charters if our delivery of a vessel to a customer is delayed, we may be
required to pay liquidated damages in amounts equal to or, under some charters, almost double the hire rate during the delay. For prolonged delays,
the customer may terminate the time charter and, in addition to the resulting loss of revenues, we may be responsible for additional substantial
liquidated charges.
If we were unable to obtain financing required to complete payments on any of our newbuilding orders, we could effectively forfeit all or a portion of
the progress payments previously made. As of December 31, 2004, we had 15 newbuildings on order with deliveries scheduled between 2005 and
2008. We may order additional newbuildings in the future.
Exposure to currency exchange rate and interest rate fluctuations could result in fluctuations in our cash flows and operating results.
Substantially all of our revenues are earned in U.S. Dollars, although we are paid in Euros and Australian Dollars under some of our charters. A
portion of our operating costs are incurred in currencies other than U.S. Dollars. This partial mismatch in operating revenues and expenses could
lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to other currencies, in particular the Norwegian Kroner, the
Australian Dollar, the Canadian Dollar, the Singapore Dollar, the Japanese Yen, the British Pound and the Euro. We also make payments under two
Euro-denominated term loans. If the amount of our Euro-denominated obligations exceeds our Euro denominated revenues, we must convert other
currencies, primarily the U.S. Dollar, into Euros. An increase in the strength of the Euro relative to the U.S. Dollar would require us to convert more
U.S. Dollars to Euros to satisfy those obligations.
Because we report our operating results in U.S. Dollars, changes in the value of the U.S. Dollar relative to other currencies also result in fluctuations
of our reported revenues and earnings. In addition, under U.S. accounting guidelines, all foreign currency-denominated monetary assets and
liabilities, such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations,
are revalued and reported based on the prevailing exchange rate at the end of the period. This revaluation causes us to report significant non-
monetary foreign currency exchange gains and losses each period. The primary source of these gains and losses is our Euro-denominated term
loans.
At December 31, 2004, approximately $1,561.8 million, or 74%, of our debt bore interest at floating interest rates. To partially mitigate this interest
rate exposure, we have entered into interest rate swaps that effectively change our interest rate exposure from floating LIBOR and EURIBOR rates
to average fixed-rates. Please see Item 11 – Quantitative and Qualitative Disclosures About Market Risk.
We may not be exempt from United States tax on our United States source income, which would reduce our net income and cash flow by
the amount of the applicable tax.
If we are not exempt from tax under Section 883 of the United States Internal Revenue Code, the shipping income derived from the United States
sources attributable to our subsidiaries' transportation of cargoes to or from the United States will be subject to U.S. federal income tax. If our
subsidiaries were subject to such tax, our net income and cash flow would be reduced by the amount of such tax. Currently, we have claimed an
exemption under Section 883. We cannot give any assurance that future changes and shifts in ownership of our stock will not preclude us from
being able to satisfy the existing exemption.
In the years ended December 31, 2004 and 2003, approximately 15.2% and 12.3%, respectively, of our gross shipping revenues were derived from
U.S. sources attributable to the transportation of cargoes to or from the United States. The average U.S. federal income tax on such U.S. source
income, in the absence of exemption under Section 883, would have been 4% thereof, or approximately $13.7 million and $7.8 million, respectively,
for the years ended December 31, 2004 and 2003.
8
Item 4. Information on the Company
A. Overview, History and Development
Overview
We are a leading provider of international crude oil and petroleum product transportation services through our spot tanker fleet, which includes the
world's largest fleet of Aframax-size oil tankers, our fixed-rate fleet, which includes the world's largest fleet of shuttle tankers, and our LNG fleet. Our
tankers and LNG carriers provide transportation services to major oil companies, oil traders and government agencies worldwide.
Our spot tanker segment includes our conventional crude oil tankers, and product carriers operating on the spot market or subject to time charters
or contracts of affreightment priced on a spot-market basis or short-term fixed-rate contracts (contracts less than three years). As of December 31,
2004, our Aframax vessels, which had a total cargo capacity of approximately 7.1 million tonnes, represented approximately 9% of the total tonnage
of the world Aframax fleet. Please see Item 4 – Information on the Company: Our Fleet.
Our fixed-rate tanker segment includes our shuttle tanker operations, floating storage and off-take vessels, a liquid petroleum gas carrier and certain
conventional crude oil, methanol and product tankers on long-term fixed-rate time-charter contracts or contracts of affreightment, under which we
carry an agreed quantity of cargo for a customer over a specified trade route within a given period of time. As of December 31, 2004, our shuttle
tanker fleet, which had a total cargo capacity of approximately 4.9 million tonnes, represented approximately 68% of the total tonnage of the world
shuttle tanker fleet. Please see Item 4 – Information on the Company: Our Fleet.
Our fixed-rate LNG segment includes our seven LNG carriers, including three newbuildings, on long-term fixed-rate time charter contracts. As of
December 31, 2004, our LNG Fleet, including newbuildings, had a total cargo carrying capacity of 1.0 million cubic meters.
The Teekay organization was founded in 1973. We are incorporated under the laws of the Republic of The Marshall Islands as Teekay Shipping
Corporation and maintain our principal executive headquarters at TK House, Bayside Executive Park, West Bay Street & Blake Road, P.O. Box AP-
59212, Nassau, The Bahamas. Our telephone number at such address is (242) 502-8820. Our principal operating office is located at Suite 2000,
Bentall 5, 550 Burrard Street, Vancouver, British Columbia, Canada, V6C 2K2. Our telephone number at such address is (604) 683-3529.
Business Acquisitions and Combinations
Acquisition of Teekay Shipping Spain S.L., formerly Naviera F. Tapias S.A.
On April 30, 2004, we acquired all of the outstanding shares of Naviera F. Tapias S.A. and renamed it Teekay Shipping Spain S.L. (or Teekay
Spain). Teekay Spain is the leading independent owner and operator of LNG carriers and crude oil tankers in Spain. We also entered into an
agreement with an entity controlled by the former controlling shareholder of Teekay Spain to establish a 50/50 joint venture that will pursue new
business in the oil and gas shipping sectors that relate only to the Spanish market or are led by Spanish entities or entities controlled by a Spanish
Company. The acquisition of Teekay Spain has provided us with a platform from which to expand our presence in the high growth LNG shipping
sector and positions us as a key supplier of LNG shipping to Spain, the world’s third largest importer of LNG. We funded this acquisition with a
combination of cash, cash generated from operations and borrowings under existing credit facilities.
As at December 31, 2004, Teekay Spain’s LNG fleet consisted of four vessels, which are all contracted under long-term fixed-rate charters to major
Spanish energy companies. As at December 31, 2004, Teekay Spain’s conventional crude oil tanker fleet consisted of five Suezmax tankers, and
two newbuildings scheduled for delivery in 2005. Four Suezmax tankers and one newbuilding are contracted under long-term fixed-rate charters
with a major Spanish oil company. We sold the Suezmax tanker newbuilding not contracted under a long-term fixed-rate charter upon its delivery in
March 2005.
Acquisition of 50% of PetroTrans Holdings Ltd.
On September 30, 2003, we acquired 50% of the issued and outstanding shares of PetroTrans Holdings Ltd., the parent company of Skaugen
PetroTrans Inc. (or SPT).
SPT is a lightering company operating out of Houston, Texas. Lightering is the process of ship-to-ship transfer of oil cargo, which is required when
vessels transporting oil are too large to enter ports that are not deep enough or have narrow entrances or small berths. The lightering process
consists of maneuvering a smaller tanker (service vessel) alongside the larger tanker, typically with both vessels underway. The service vessel
transports the oil cargo to the port. SPT lighters approximately 14% of all seaborne crude oil delivered to U.S. ports.
Acquisition of Navion AS
In April 2003, we completed our acquisition of 100% of the issued and outstanding shares of Navion AS. Navion, based in Stavanger, Norway,
operates primarily in the shuttle tanker and the conventional crude oil and product tanker markets. Its modern shuttle tanker fleet, which as of
December 31, 2004, consisted of eight owned and 12 chartered-in vessels (excluding six vessels chartered-in from our shuttle tanker subsidiary,
Ugland Nordic Shipping AS, and our other subsidiaries), provides logistical services to the Norwegian state-owned oil company, Statoil ASA, and
other oil companies in the North Sea under fixed-rate, long-term contracts of affreightment. Subsequent to the acquisition, the operations of UNS
and the shuttle tanker operations of Navion were combined into one business unit, Teekay Navion Shuttle Tankers. Navion’s modern, chartered-in,
conventional tanker fleet, which as of December 31, 2004, consisted of 12 crude oil tankers and 16 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 oil tankers in the Atlantic region, one chartered-in methanol carrier and one liquid petroleum gas carrier on long-term
charter to Statoil. Through Navion Chartering AS, an entity owned jointly with Statoil, Navion has a right of first refusal on Statoil’s oil transportation
requirements at the prevailing market rate until December 31, 2007. In addition to tanker operations, Navion also assembles, installs, operates and
leases equipment that reduces volatile organic compound emissions during loading, transportation and storage of oil and oil products.
Additional information about these acquisitions, including our financing of them, is included in Item 5 – Operating and Financial Review and
Prospects.
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B. Operations
Spot Tanker Segment
The vessels in our spot tanker segment compete primarily in the Aframax market. In the Aframax market, international seaborne oil and other
petroleum products transportation services are provided by two main types of operators: captive fleets of major oil companies (both private and
state-owned) and independent ship owner fleets. Many major oil companies and other oil trading companies, the primary charterers of the vessels
owned or controlled by us, also operate their own vessels and transport their own oil and oil for third party charterers in direct competition with
independent owners and operators. Competition for charters in the Aframax spot charter market is intense and is based upon price, location, the
size, age, condition and acceptability of the vessel, and the reputation of the vessel's manager.
We compete principally with other Aframax owners in the spot charter market through the global tanker charter market. This market is comprised of
tanker broker companies that represent both charterers and ship owners in chartering transactions. Within this market, some transactions, referred
to as "market cargoes," are offered by charterers through two or more brokers simultaneously and shown to the widest possible range of owners;
other transactions, referred to as "private cargoes," are given by the charterer to only one broker and shown selectively to a limited number of
owners whose tankers are most likely to be acceptable to the charterer and are in position to undertake the voyage.
As of December 31, 2004, other large operators of Aframax tonnage (including newbuildings on order) included Malaysian International Shipping
Corporation (approximately 36 Aframax vessels), Novorossiisk Sea Shipping Co. (approximately 27 Aframax vessels), General Maritime
Corporation (approximately 26 Aframax vessels), British Petroleum (approximately 20 Aframax vessels) and Minerva (approximately 17 Aframax
vessels).
Our competition in the Aframax (75,000 to 119,999 dwt) market is also affected by the availability of other size vessels that compete in our markets.
Suezmax (120,000 to 199,999 dwt) size vessels and Panamax (50,000 to 74,999 dwt) size vessels can compete for many of the same charters for
which we compete. Because of their large size, Very Large Crude Carriers (200,000 to 319,999 dwt) (or VLCCs) and Ultra Large Crude Carriers
(320,000+ dwt) (or ULCCs) rarely compete directly with Aframax tankers for specific charters. However, because VLCCs and ULCCs comprise a
substantial portion of the total capacity of the market, movements by such vessels into Suezmax trades and of Suezmax vessels into Aframax
trades would heighten the already intense competition.
We believe that we have competitive advantages in the Aframax tanker market as a result of the quality, type and dimensions of our vessels and our
market share in the Indo-Pacific and Atlantic Basins. As of December 31, 2004, our Aframax tanker fleet (excluding Aframax-size shuttle tankers
and newbuildings) had an average age of approximately 7.7 years, compared to an average age for the world oil tanker fleet, including Aframax
tankers, of approximately 9.6 years and for the world Aframax tanker fleet of approximately 9.7 years.
We have chartering staff located in Vancouver, Canada; Stavanger, Norway; Tokyo, Japan; London, England; Houston, USA; and Singapore. Each
office serves our clients headquartered in that office's region. Fleet operations, vessel positions and charter market rates are monitored around the
clock. We believe that monitoring such information is critical to making informed bids on competitive brokered business.
During 2004, approximately 62% of our net voyage revenues were earned by the vessels in the spot tanker segment, compared to approximately
63% in 2003 and 73% in 2002. Please see Item 5 - Operating and Financial Review and Prospects: Results of Operations.
Fixed-Rate Tanker Segment
The vessels in our fixed-rate tanker segment compete primarily in the offshore loading business. These offshore loading vessels called shuttle
tankers, transport oil from offshore production platforms to onshore storage and refinery facilities. Our shuttle tankers are primarily subject to long-
term, fixed-rate time-charter contracts for a specific offshore oil field or under contracts of affreightment for various fields. The number of voyages
performed under these contracts of affreightment normally depends upon the oil production of each field. Competition for charters is based primarily
upon price, availability, the size, technical sophistication, age and condition of the vessel and the reputation of the vessel's manager. Technical
sophistication of the vessel is especially important in harsh operating environments such as the North Sea. Although the size of the world shuttle
tanker fleet has been relatively unchanged in recent years, conventional tankers could be converted into less sophisticated shuttle tankers by adding
specialized equipment to meet the requirements of the oil companies. Shuttle tanker demand may also be affected by the possible substitution of
sub-sea pipelines to transport oil from offshore production platforms.
As of December 31, 2004, there were approximately 64 vessels in the world shuttle tanker fleet (including newbuildings), the majority of which
operate in the North Sea. We currently own 29 shuttle tankers, including one classified as held for sale and charter in an additional 12 shuttle
tankers. Other shuttle tanker owners in the North Sea include Knutsen OAS Shipping AS and JJ Ugland Group, which as of December 31, 2004
owned approximately 15 and five shuttle tankers, respectively. The remaining owners in the North Sea each owned three or fewer vessels as of that
date.
We believe that we have significant competitive advantages in the shuttle tanker market as a result of the quality, type and dimensions of our
vessels and our market share in the North Sea.
During 2004, approximately 36% of our net voyage revenues were earned by the vessels in the fixed-rate tanker segment, compared to
approximately 37% in 2003 and 27% in 2002. Please see Item 5 - Operating and Financial Review and Prospects: Results of Operations.
Fixed-Rate LNG Segment
The vessels in our fixed-rate LNG segment compete in the LNG market. LNG carriers are usually chartered to carry LNG pursuant to time charter
contracts, where a vessel is hired for a fixed period of time, usually between 20 and 25 years, and the charter rate is payable to the owner on a
monthly basis. LNG shipping historically has been transacted with these long-term, fixed-rate time charter contracts. LNG projects require significant
capital expenditures and typically involve an integrated chain of dedicated facilities and cooperative activities. Accordingly, the overall success of an
LNG project depends heavily on long-range planning and coordination of project activities, including marine transportation. Although most shipping
10
requirements for new LNG projects continue to be provided on a long-term basis, spot voyages (typically consisting of a single voyage) and short
term time charters of less than 12 months duration have grown from 1% of the market in 1992 to 8% in 2002.
We compete principally with other private and state-controlled energy and utilities companies that generally operate captive LNG fleets, and
independent ship owners and operators. Many major energy companies compete directly with independent owners by transporting LNG for third
parties in addition to their own LNG. Given the complex, long-term nature of LNG projects, major energy companies historically have transported
LNG through their captive fleets. However, independent fleet operators recently have been obtaining an increasing percentage of charters for new
or expanded LNG projects as major energy companies continue to divest non-core businesses. As of December 31, 2004, independent owners
owned approximately 45% of the world LNG fleet, including approximately 25% owned by independent Japanese and South Korean owners.
Approximately 60% of newbuilding orders are from independent owners.
LNG carriers transport LNG internationally between liquefaction facilities and import terminals. After natural gas is transported by pipeline from
production fields to a liquefaction facility, it is supercooled to a temperature of approximately negative 260 degrees Fahrenheit. This process
reduces its volume to approximately 1 / 600th of its volume in a gaseous state. The reduced volume facilitates economical storage and transportation
by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to meet
their demand for natural gas. LNG carriers include a sophisticated containment system that holds and insulates the LNG so it maintains its liquid
form. LNG that evaporates during the voyage and converts to natural gas (called boil-off) is used as fuel to help propel the vessel. The LNG is
transported overseas in specially built tanks on double-hulled ships to a receiving terminal, where it is offloaded and stored in heavily insulated
tanks. In regasification facilities at the receiving terminal, the LNG is returned to its gaseous state (or regasified) and then shipped by pipeline for
distribution to natural gas customers.
Most new vessels, including all of our vessels, are being built with a membrane containment system. These systems are built inside the carrier and
consist of insulation between thin primary and secondary barriers and designed to accommodate thermal expansion and contraction without
overstressing the membrane. New LNG carriers are generally expected to have a lifespan of approximately 40 years. Unlike the oil tanker industry,
there currently are no regulations that require the phase-out from trading of LNG carriers after they reach a certain age. As at December 31, 2004,
there were approximately 177 vessels in the world LNG fleet, with an average age of approximately 13.6 years. In addition, there are approximately
104 additional LNG carriers under construction or on order for delivery through 2009.
Our fixed-rate LNG segment consists of LNG carriers subject to long-term, fixed-rate time-charter contracts. The acquisition of Teekay Spain on
April 30, 2004 established our entry into the LNG shipping sector. Our fixed-rate LNG segment includes four LNG carriers. Two of the LNG carriers
have been included from the date of the Teekay Spain acquisition. We took delivery of one LNG carrier in July 2004, which commenced service
under a 25-year time-charter contract (with a charterer’s option to extend an additional five years). We took delivery of another LNG carrier in
December 2004, which commenced service under a 20-year time-charter contract (with a charterer’s option to extend an additional ten years). As at
December 31, 2004, we had three newbuilding LNG carriers on order, which will commence service under long-term contracts with Ras Lafan
Liquefied Natural Gas Co. Limited II (or RasGas II), a joint venture company between a subsidiary of ExxonMobil Corporation and Qatar Petroleum,
upon delivery, scheduled for the fourth quarter of 2006 and the first half of 2007. The vessels will be time-chartered to RasGas II for a period of 20
years (with a charterer’s option to extend for periods up to an additional 15 years). These LNG charter contracts are subject, in certain
circumstances, to termination and vessel purchase rights.
During 2004, approximately 2% of our net voyage revenues were earned by the vessels in the fixed-rate LNG segment. We did not operate LNG
carriers prior to 2004. Please see Item 5 – Operating and Financial Review and Prospects: Results of Operations.
Ship Management
Safety is our top operational priority. Our vessels are operated in a manner intended to protect the safety and health of our employees, the general
public and the environment. We actively manage the risks inherent in our business and are committed to eliminating incidents that threaten safety,
such as groundings, fires, collisions and petroleum spills. We are also committed to reducing emissions and waste generation.
Customers and tanker rating services have recognized us for safety, quality and service. Given the emphasis by customers on quality as a result of
stringent environmental regulations, and heightened concerns about liability for oil pollution, we believe that our emphasis on quality and safety
provide us with a favorable competitive profile. We are one of a few companies who have fully integrated our health, safety, environment and quality
management systems. This results in increased efficiencies in operations and management as any redundancies in each of the four standards is
reduced. As well, one management system for operations ensures that strategies and programs are aligned when in comes to business, customer,
safety, environment, or quality drivers.
We have achieved certification under the standards reflected in International Standards Organization’s (or ISO) 9001 for quality assurance, ISO
14001 for environment management systems, OHSAS 18001 for Occupational Health and Safety, and the IMO’s International Management Code
for the Safe Operation of Ships and Pollution Prevention on a fully integrated basis. As part of ISM Code compliance, all of our vessels’ safety
management certificates are being maintained through ongoing internal audits performed by our certified internal auditors and intermediate audits
performed by Det Norske Veritas.
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The critical ship management functions of vessel maintenance, crewing, purchasing, shipyard supervision, insurance and financial management
services are carried out “in-house” in our various facilities around the world for most of our fleet. These functions are supported by onboard and
onshore systems for maintenance, inventory, purchasing and budget management. Since 1995, IUM Shipmanagement AS, a company in which we
own a 51% interest through our wholly owned subsidiary UNS, has provided ship management services for certain of our shuttle tankers, including
crewing and maintenance. OSM Ship Management AS (or OSM), a company which is unrelated to us, provides ship management services for most
of the shuttle tankers acquired as part of our acquisition of Navion. OSM is under contract to provide these services to Navion until September 30,
2006.
In 2003, we established a purchasing alliance with two other shipping companies and named it Teekay Bergesen Worldwide. This alliance
leverages the purchasing power of the combined fleets, mainly in such commodity areas as lube oils, paints and other chemicals.
The generally uniform design of some of our existing and newbuilding vessels and the adoption of common equipment standards should also result
in operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair, and spare parts
ordering.
Business Structure
Our organization is divided into four key areas: Teekay Tanker Services; Teekay Navion Shuttle Tankers; Teekay Gas & Offshore; and Teekay
Marine Services. These centers of expertise work closely with customers and internally to ensure a thorough understanding of our customers’
requirements and to develop tailored solutions.
(cid:122) Teekay Tanker Services is responsible for the commercial management of our conventional crude oil and product tanker
transportation services. We offer a full range of flexible, customer-focused shipping solutions through our worldwide network of
commercial offices.
(cid:122) Teekay Navion Shuttle Tankers offers a wide range of shuttle tanker and project services. Our expertise and partnerships allow us to
create solutions for customers producing crude oil from offshore installations.
(cid:122) Teekay Gas & Offshore offers a diverse range of mooring, floating storage and offloading solutions. In addition, we now also offer gas
shipping services, pursuing the LNG and compressed natural gas markets.
(cid:122) Teekay Marine Services provides a vast range of marine services and products across all our operations as well as to third-parties.
Business Strategy
We pursue an intensively customer- and operations-oriented business strategy designed to achieve superior operating results. We believe that we
have four key competitive strengths:
(cid:122) a strong network of customer relationships developed by providing consistent performance, innovative solutions, and exceptional
customer service to quality-sensitive customers,
(cid:122) a disciplined acquisition strategy that has resulted in our achieving a market concentration in the Aframax market and the shuttle
tanker market, which is sufficient to facilitate comprehensive coverage of charterer requirements and provides a base for efficient
operation and a high degree of capacity utilization in those markets;
(cid:122) a highly-integrated global network of approximately 5,500 sea staff and shore employees, with comprehensive market intelligence and
operational and technical sophistication. This includes full-service marine operations capabilities and experienced management in all
functions critical to our operations, which affords a focused marketing effort, high quality and tight cost controls, improved capacity
utilization and effective operations and safety monitoring; and
(cid:122) a strong balance sheet that we believe allows us to take advantage of appropriate investment opportunities throughout the tanker
cycle.
As part of our growth strategy, we will continue to consider strategic opportunities, including business acquisitions, such as our acquisitions of
Teekay Spain in 2004 and Navion and our joint venture, Skaugen PetroTrans Inc. (or SPT), in 2003. To the extent we enter new geographic areas
or tanker market segments, there can be no assurance that we will be able to compete successfully. New markets may involve competitive factors
that differ from those of the Aframax market segment in the Indo-Pacific and Atlantic Basins and the North Sea shuttle tanker market and may
include participants that have greater financial strength and capital resources than we have.
Our growth strategy is to leverage our existing competitive strengths to continue to expand our business. We anticipate that the continued upgrade
and expansion of our tanker business will continue to be a key component of our strategy. In addition, we believe that our full-service marine
operations capabilities, reputation for safety and quality and strong customer orientation provide us with the opportunity to expand our business by
providing additional value-added and innovative services, in many cases to existing customers. Finally, we intend to identify expansion opportunities
in new tanker market segments, geographic areas and services to which our competitive strengths are well suited, such as our entry into the shuttle
tanker market through our acquisitions of UNS and Navion and our entry into the LNG market through our acquisition of Teekay Spain, as described
above. We may choose to pursue such opportunities through internal growth, joint ventures or business acquisitions.
Risk of Loss and Insurance
The operation of any ocean-going vessel carries an inherent risk of catastrophic marine disasters, death or injury of persons and property losses
caused by adverse weather conditions, mechanical failures, human error, war, terrorism, piracy and other circumstances or events. In addition, the
transportation of crude oil and LNG is subject to the risk of spills and to business interruptions due to political circumstances in foreign countries,
hostilities, labor strikes and boycotts. The occurrence of any of these events may result in loss of revenues or increased costs.
12
We carry “hull and machinery” and “protection and indemnity” insurance coverage to protect against most of the accident-related risks involved in
the conduct of our business. Hull and machinery insurance covers loss of or damage to a vessel due to marine perils such as collisions, grounding
and weather. Protection and indemnity insurance indemnifies us against other liabilities incurred while operating vessels, including injury to our
crew, third parties, cargo loss and pollution. The current available amount of our coverage for pollution is $1 billion per vessel per incident. We also
carry insurance policies covering war risks (including piracy and terrorism) and, for our LNG carriers, loss of revenues resulting from vessel off-hire
time due to a marine casualty or an officer or crew strike. However, we may not continue to carry this “loss of hire” insurance based on its cost
compared to our off-hire experience. We believe that our current insurance coverage is adequate to protect against most of the accident-related
risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage.
However, we cannot assure that all covered risks are adequately insured against, that any particular claim will be paid or that we will be able to
procure adequate insurance coverage at commercially reasonable rates in the future. More stringent environmental regulations have resulted in
increased costs for, and may result in the lack of availability of, insurance against the risks of environmental damage or pollution.
We use in our operations a thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance
and assessment programs, a seafarers competence training program, seafarers workshops and membership in emergency response organizations.
Operations Outside the United States
Because our operations are primarily conducted outside of the United States, they may be affected by currency fluctuations and by changing
economic, political and governmental conditions in the countries where we engage in business or where our vessels are registered.
During 2004, we derived approximately 23% of our total net voyage revenues from our operations in the Indo-Pacific Basin, compared to
approximately 27% during 2003. Past political conflicts in that region, particularly in the Arabian Gulf, have included attacks on tankers, mining of
waterways and other efforts to disrupt shipping in the area. Vessels trading in the region have also been subject to, in limited instances, acts of
piracy. In addition to tankers, oil pipelines, LNG facilities and offshore oil fields could also be targets of terrorist attacks. The escalation of existing or
the outbreak of future hostilities or other political instability in this region or other regions where we operate could affect our trade patterns, increase
insurance costs, increase tanker operational costs and otherwise adversely affect our operations and performance. In addition, tariffs, trade
embargoes, and other economic sanctions by the United States or other countries against countries in the Indo-Pacific Basin or elsewhere as a
result of terrorist attacks or other hostilities may limit trading activities with those countries, which could also adversely affect our operations and
performance.
Customers
We have derived, and believe that we will continue to derive, a significant portion of our voyage revenues from a limited number of customers. Our
customers include major oil companies, major oil traders, large oil consumers and petroleum product producers, government agencies, and various
other entities dependent upon the tanker transportation trade. One customer, an international oil company, accounted for 17% ($373.7 million) of
our consolidated voyage revenues during 2004. The same customer accounted for 15% ($239.5 million) of our consolidated voyage revenues
during 2003. No customer accounted for more than 10% of our consolidated voyage revenues during 2002. No other customer accounted for more
than 10% of our consolidated voyage revenues during 2004 or 2003. The loss of any significant customer or a substantial decline in the amount of
services requested by a significant customer could have a material adverse effect on our business, financial condition and results of operations.
Our Fleet
The following list provides additional information with respect to our vessels as at December 31, 2004.
Owned Vessels
Vessels Held for
Sale
Chartered-in
Vessels
Newbuildings on
Order
Total
Number of Vessels(1)
Spot Tanker Segment:
Very Large Crude Carriers
Suezmax Tankers (2)
Aframax Tankers
Large Product Tankers
Small Product Tankers
Total Spot Tanker Segment
Fixed-Rate Tanker Segment:
Shuttle Tankers (3)
Conventional Tankers
Floating Storage & Offtake (or FSO)
Units (4)
LPG / Methanol Carriers
Total Fixed-Rate Tanker Segment
Fixed-Rate LNG Segment
Total
-
2
28
-
-
30
28
12
4
1
45
4
79
-
-
8
-
-
8
1
-
-
-
1
-
9
1
4
18
5
10
38
12
-
-
1
13
-
51
-
1
5
3
-
9
-
3
-
-
3
3
15
1
7
59
8
10
85
41
15
4
2
62
7
154
(1) Excludes vessels managed for third parties.
(2) We have sold the Suezmax tanker newbuilding in the Spot Tanker Segment in March 2005.
13
(3) Includes seven shuttle tankers of which our ownership interests range from 50% to 70.25%.
(4) Includes one FSO unit of which our ownership interest is 89%.
Our vessels are of Australian, Bahamian, Canadian, Cayman Islands, Liberian, Norwegian, Norwegian International Ship and Spanish registry.
Many of our Aframax vessels and some of our shuttle tankers have been designed and constructed as substantially identical sister ships. These
vessels can, in many situations, be interchanged, providing scheduling flexibility and greater capacity utilization. In addition, spare parts and
technical knowledge can be applied to all the vessels in the particular series, thereby generating operating efficiencies.
As of December 31, 2004, we had 15 newbuildings on order, which will require remaining payments of $363.7 million in 2005, $255.9 million in
2006, $140.9 million in 2007, and $50.7 million due in 2008 under the terms of the contracts. Please see Item 5. Operating and Financial Review
and Prospects – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Please see Note 9 of the consolidated financial statements for information with respect to major encumbrances against our vessels.
Classification, Audits and Inspections
The seafaring staff operating our vessels regularly inspect them and perform much of the necessary routine maintenance. Shore-based operational
and technical specialists also inspect our vessels at least twice a year for conformity with established criteria. Upon completion of each inspection,
recommendations are made for improving the overall condition of the vessel and its maintenance, safety and crew welfare. All recommendations
are monitored until they are completed. Our objectives are to:
(cid:131) maintain the structural integrity of the vessel;
(cid:131)
(cid:131)
(cid:131)
ensure reliability;
optimize performance in terms of speed and fuel consumption; and
ensure the vessel’s appearance will support our brand and meet customer expectations.
To achieve our vessel structural integrity objective, we use a comprehensive “Structural Integrity Management System” developed by us. This
system is designed to monitor the condition of our vessels closely and to ensure that structural strength and integrity are maintained throughout a
vessel’s life.
All of our vessels have been certified as being “in-class” by their respective classification societies: Bureau Veritas, Det Norske Veritas, Lloyd’s
Register of Shipping or American Bureau of Shipping. Every vessel’s hull and machinery is “classed” by a classification society. The classification
society certifies that the vessel has been built and maintained in accordance with the rules of that classification society and complies with applicable
rules and regulations of the country of registry of the vessel and the international conventions of which that country is a signatory, although for some
of our vessels we obtain this latter certification directly from the relevant flag state authorities. Each vessel is inspected by a classification society
surveyor annually, with either the second or third annual inspection being a more detailed survey (an Intermediate Survey) and the fourth or fifth
annual inspection being the most comprehensive survey (a Special Survey). The inspection cycle resumes after each Special Survey. Vessels also
may be required to be drydocked at each Intermediate and Special Survey for inspection of the underwater parts of the vessel and resulting repairs.
Intermediate Surveys of steam-propelled LNG vessels may be done while the vessel is in service, but in all instances the inspection requires
shutting down the vessel’s main boiler, which slows travel if in service. In-water surveys generally take vessels out of service for one day, but out-of-
service surveys of steam-propelled LNG vessels can take up to seven days. All of our LNG carriers, including our newbuildings, are steam-
propelled. Many of our vessels have qualified with their respective classification societies for drydocking every four or five years in connection with
the Special Survey and are no longer subject to the Intermediate Survey drydocking process. To qualify, we were required to enhance the resiliency
of the underwater coatings of each vessel and mark the hull to accommodate underwater inspections by divers.
In addition to the classification inspections, many of our customers regularly inspect our vessels as a precondition to chartering, and regular
inspections are standard practice under long-term charters as well. Port and flag state control authorities, such as the U.S. Coast Guard, the
Australian Maritime Safety Authority and Spain’s flag administration (or classification societies acting on behalf of the flag state control authorities),
also inspect some of our vessels. We believe that our relatively new, well-maintained and high-quality vessels should provide us with a competitive
advantage in the current environment of increasing regulation and customer emphasis on quality of service.
We have obtained approval for our safety management system as being in compliance with the ISM Code. Our safety management system has also
been certified as being compliant with ISO 9001, 14001 and OSHAS 18001 standards. To maintain compliance, the system is audited regularly by
either the vessels’ flag state or, when nominated by them, of the classification societies. Certification is valid for five years subject to satisfactorily
completing internal and external audits.
Organizational Structure
Please see Exhibit 8.1 for a list of our significant subsidiaries as at December 31, 2004.
C. Regulations
Our business and the operation of our vessels are significantly affected by international conventions and national, state and local laws and
regulations in the jurisdictions in which our vessels operate, as well as in the country of their registration. Because these conventions, laws, and
regulations change frequently, we cannot predict the ultimate cost of compliance or their impact on the resale price or useful life of our vessels.
Additional conventions, laws and regulations may be adopted that could limit our ability to do business or increase the cost of our doing business
and that may materially adversely affect our operations. We are required by various governmental and quasi-governmental agencies to obtain
permits, licenses and certificates with respect to our operations. Subject to the discussion below and to the fact that the kinds of permits, licenses
and certificates required for the operations of the vessels we own will depend on a number of factors, we believe that we will be able to continue to
obtain all permits, licenses and certificates material to the conduct of our operations.
14
We believe that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will generally lead to
greater inspection and safety requirements on all vessels in the oil tanker and LNG carrier markets and will accelerate the scrapping of older vessels
throughout these industries.
Regulation—International Maritime Organization (or IMO). IMO regulations relating to pollution prevention for tankers apply to many
jurisdictions in which our tanker fleet operates. These regulations provide that:
• tankers between 25 and 30 years old must be of double-hull construction or of a mid-deck design with double-side construction,
unless they have wing tanks or double-bottom spaces, not used for the carriage of oil, which cover at least 30% of the length of the
cargo tank section of the hull, or are capable of hydrostatically balanced loading which ensures at least the same level of protection
against oil spills in the event of collision or stranding;
• tankers 30 years old or older must be of double-hull construction or mid-deck design with double-side construction; and
• all tankers are subject to enhanced inspections.
Also, under IMO regulations, a tanker must be of double-hull construction or a mid-deck design with double-side construction or be of another
approved design ensuring the same level of protection against oil pollution in the event that such tanker (a) is the subject of a contract for a major
conversion or original construction on or after July 6, 1993, (b) commences a major conversion or has its keel laid on or after January 6, 1994, or (c)
completes a major conversion or is a newbuilding delivered on or after July 6, 1996.
On December 9, 2003, the IMO revised its regulations relating to the prevention of pollution from tankers. These regulations, which came into effect
on April 5, 2005, will accelerate the mandatory phase-out of single-hull tankers and impose a more rigorous inspection regime for older tankers. As
of the date of this report, we estimate that upon their effectiveness, the regulations will ban from world-wide trading the oldest single-hull tankers,
representing approximately 3% to 5% of the current world tanker fleet. It is expected that a further 22% to 24% of the existing world tanker fleet will
be excluded from the majority of the oil tanker trades by 2010. These regulations identify three categories of single-hull tankers, which include
double-bottom and double-side tankers:
•
•
•
"Category 1 oil tanker" means any oil tanker of 20,000 dwt and above carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as
cargo, and of 30,000 dwt and above carrying other oils, which does not have segregated ballast tanks;
"Category 2 oil tanker" means any oil tanker of 20,000 dwt and above carrying crude oil, fuel oil, heavy diesel oil or lubricating oil as
cargo, and of 30,000 dwt and above carrying other oils, which has segregated ballast tanks; and
"Category 3 oil tanker" means an oil tanker of 5,000 dwt and above but less than the tonnage specified for Category 1 and 2 oil
tankers.
All of the single-hull tankers we operate are Category 2 oil tankers. As illustrated in the following table, the most recent IMO regulations provide for
the phase-out on a rolling basis of Category 1 oil tankers during 2005 and of Category 2 oil tankers by 2010.
Category of Oil Tanker
Year To Be Removed From Service
Category 1 ………………………………………..
April 5, 2005 for ships delivered on April 5, 1982 or earlier
2005 for ships delivered after April 5, 1982
Category 2 and Category 3………………………
April 5, 2005 for ships delivered on April 5, 1977 or earlier
2005 for ships delivered after April 5, 1977 but before 1978
2006 for ships delivered in 1978 and 1979
2007 for ships delivered in 1980 and 1981
2008 for ships delivered in 1982
2009 for ships delivered in 1983
2010 for ships delivered in 1984 or later
However, under certain conditions, Category 2 and Category 3 oil tankers may continue in operation beyond the date set forth in the table above.
For Category 2 and Category 3 oil tankers fitted with (a) double bottoms or double sides, not used for the carriage of oil, that extend to the entire
cargo tank length or (b) double hull spaces, not meeting minimum distance protection requirements, which are not used for the carriage of oil and
that extend to the entire cargo tank length, the vessel’s flag state may allow continued operation beyond 2010, provided that the ship was in service
on July 1, 2001, the flag state is satisfied by verification of the official records that the ship complied with the conditions specified, and that those
conditions remain unchanged. Such continued operation must not go beyond the date on which the ship reaches 25 years of age measured from
the date of delivery. In spite of this flag-state exemption, a port state may declare that it does not accept entry of such vessels after their phase-out
date. The European Union, Cyprus and Malta have already declared that they will not permit the entry of such vessels.
Vessels must pass a Condition Assessment Scheme (or CAS) Survey after 2005 for Category 1 oil tankers, and after 2010 for Category 2 oil
tankers. The CAS Survey includes surveys of the hull structure, including cargo tanks, pump rooms, cofferdams, pipe tunnels, void spaces within
the cargo area and all ballast tanks.
The IMO’s accelerated phase out schedule will affect two of our existing vessels, effectively reducing the economic life of each of these vessels. As
a result of these regulations, we recorded non-cash write-down of the book value of the affected vessels totaling $56.9 million during the fourth
quarter of 2003. The following table outlines the impact of these regulations on the remaining two vessels:
15
Number
of
Vessels
1
1
Vessel Type
Aframax
Aframax
Hull
Type
Single-Hull
Single-Hull
Year
Built
1989
1990
Year of IMO Phase-Out
(No Exemption) (1)
Year of IMO
Phase-Out Date (With
Exemption) (1)
2010
2010
2014
2015
(1) As described above, under certain conditions flag states may permit an exemption which allows continued operation of Category 2 or 3
tankers in the waters of the flag state beyond 2010 subject to satisfactory results from the CAS until the ship reaches 25 years of age or
the anniversary date of the delivery in 2015, whichever is earlier.
IMO regulations also include the International Convention for Safety of Life at Sea (or SOLAS), including amendments to SOLAS implementing the
International Security Code for Ports and Ships (or ISPS), the ISM Code and the International Code for Construction and Equipment of Ships
Carrying Liquefied Gases in Bulk (or the IGC Code). SOLAS provides rules for the construction of and equipment required for commercial vessels
and includes regulations for safe operation. Flag states which have ratified the convention and the treaty generally employ the classification
societies, which have incorporated SOLAS requirements into their class rules, to undertake surveys to confirm compliance.
SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances,
radio equipment and the global maritime distress and safety system, are applicable to our operations. Non-compliance with IMO regulations,
including SOLAS, the ISM Code, ISPS and the IGC Code, may subject us to increased liability or penalties, may lead to decreases in available
insurance coverage for affected vessels and may result in the denial of access to or detention in some ports.
The ISM Code requires vessel operators to obtain a safety management certification for each vessel they manage, evidencing the shipowner’s
compliance with requirements of the ISM Code relating to the development and maintenance of an extensive “Safety Management System.” Such a
system includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe
operation and describing procedures for dealing with emergencies. Each of the existing vessels in our fleet currently is ISM Code-certified, and we
expect to obtain safety management for each newbuilding vessel upon delivery. However, there can be no assurance that we will be able to
maintain such certification in the future.
ISPS was adopted in December 2002 in the wake of heightened concern over worldwide terrorism and became effective on July 1, 2004. The
objective of ISPS is to enhance maritime security by detecting security threats to ships and ports and by requiring the development of security plans
and other measures designed to prevent such threats. The United States implemented ISPS with the adoption of the Maritime Transportation
Security Act of 2002 (or MTSA), which requires vessels entering U.S. waters to obtain certification of plans to respond to emergency incidents there,
including identification of persons authorized to implement the plans. Each of the existing vessels in our fleet currently complies with the
requirements of ISPS and MTSA, and we expect all newbuildings to comply upon delivery.
LNG carriers are also subject to regulation under the IGC Code. Each LNG carrier must obtain a certificate of compliance evidencing that it meets
the requirements of the IGC code, including requirements relating to its design and construction. Each of our LNG carriers currently is in compliance
with the IGC code, and each of our newbuilding shipbuilding contracts requires compliance prior to delivery.
Environmental Regulations—The United States Oil Pollution Act of 1990 (or OPA 90). OPA 90 established an extensive regulatory and liability
regime for the protection and cleanup of the environment from oil spills, including discharges of oil cargoes, fuel (or bunkers) or lubricants. OPA 90
affects all owners and operators whose vessels trade to the United States or its territories or possessions or whose vessels operate in United States
waters, which include the 200-mile exclusive economic zone around the United States.
Under OPA 90, vessel owners, operators and demise or bareboat charterers are “responsible parties” and are jointly, severally and strictly liable
(unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and
other damages arising from discharges or threatened discharges of oil from their vessels. These other damages are defined broadly to include:
• natural resources damages and the costs of assessment thereof,
• real and personal property damages,
• net loss of taxes, royalties, rents, fees and other lost revenues,
• lost profits or impairment of earning capacity due to property or natural resources damage,
• net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and
• loss of subsistence use of natural resources.
OPA 90 limits the liability of responsible parties to the greater of $1,200 per gross ton or $10 million per tanker that is over 3,000 gross tons (subject
to possible adjustment for inflation). These limits of liability would not apply if the incident was proximately caused by violation of applicable U.S.
federal safety, construction or operating regulations, including IMO conventions to which the United States is a signatory, or by the responsible
party's gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in
connection with the oil removal activities. We currently plan to continue to maintain for each of our vessels pollution liability coverage in the amount
of $1 billion per incident. A catastrophic spill could exceed the coverage available, which could harm our business, financial condition and results of
operations.
16
Under OPA 90, with limited exceptions, all newly built or converted tankers delivered after January 1, 1994 and operating in United States waters
must be built with double-hulls, and existing vessels that do not comply with the double-hull requirement must be phased out over a 20-year period
(1995 to 2015) based on size, age and hull construction. Vessels with double-sides and double-bottoms are granted an additional five years of
service life before being phased out. Notwithstanding the phase-out period, OPA 90 currently permits existing single-hull tankers to operate until the
year 2015 if their operations within United States waters are limited to discharging at the Louisiana Off-shore Oil Platform, or off-loading by means of
lightering activities within authorized lightering zones more than 60 miles offshore.
OPA 90 requires owners and operators of vessels, including LNG carriers, to establish and maintain with the United States Coast Guard (or Coast
Guard) evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90. In December 1994, the Coast Guard
implemented regulations requiring evidence of financial responsibility in the amount of $1,500 per gross ton for tankers, coupling the OPA limitation
on liability of $1,200 per gross ton with the Comprehensive Environmental Response, Compensation, and Liability Act (or CERCLA) liability limit of
$300 per gross ton. Under the regulations, such evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance
or guaranty. Under OPA 90, an owner or operator of a fleet of tankers is required only to demonstrate evidence of financial responsibility in an
amount sufficient to cover the tanker in the fleet having the greatest maximum liability under OPA 90.
The Coast Guard's regulations concerning certificates of financial responsibility (or COFR) provide, in accordance with OPA 90, that claimants may
bring suit directly against an insurer or guarantor that furnishes COFR; and, in the event that such insurer or guarantor is sued directly, it is
prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses
available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. Certain
organizations, which had typically provided COFR under pre-OPA 90 laws, including the major protection and indemnity organizations, have
declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy
defenses.
The Coast Guard's financial responsibility regulations may also be satisfied by evidence of surety bond, guaranty or by self-insurance. Under the
self-insurance provisions, the shipowner or operator must have a net worth and working capital, measured in assets located in the United States
against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the Coast
Guard regulations by providing a financial guaranty from a related company evidencing sufficient self-insurance for all our vessels trading into the
United States or by providing third-party guarantees. If other vessels in our fleet trade into the United States in the future, we expect to provide
guaranties through self-insurance, or to obtain such guaranties from third-party insurers.
OPA 90 and CERCLA permit individual states to impose their own liability regimes with regard to oil or hazardous substance pollution incidents
occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for spills. We intend to comply with all
applicable state regulations in the ports where our vessels call.
Owners or operators of tankers operating in United States waters are required to file vessel response plans with the Coast Guard, and their tankers
are required to operate in compliance with their Coast Guard approved plans. Such response plans must, among other things:
• address a “worst case” scenario and identify and ensure, through contract or other approved means, the availability of necessary private
response resources to respond to a “worst case discharge;”
• describe crew training and drills; and
• identify a qualified individual with full authority to implement removal actions.
We have filed vessel response plans with the Coast Guard for the tankers we own and have received approval of such plans for all vessels in our
fleet to operate in United States waters.
OPA 90 allows U.S. State legislatures to pre-empt associated regulation if the state's regulations are equal or more stringent. Several coastal states
such as California, Washington and Alaska require state specific COFR and vessel response plans.
CERCLA contains a similar liability regime to OPA 90, but applies to the discharge of “hazardous substances” rather than “oil.” Petroleum products
and LNG should not be considered hazardous substances under CERCLA, but additives to oil or lubricants used on LNG carriers might fall within its
scope. CERCLA imposes strict liability upon the owner, operator or bareboat charterer of a vessel for cleanup costs and damages arising from a
discharge of hazardous substances.
OPA 90 and CERCLA do not preclude claimants from seeking damages for the discharge of oil and hazardous substances under other applicable
law, including maritime tort law. Such claims could include attempts to characterize the transportation of LNG aboard a vessel as an ultra-hazardous
activity under a doctrine that would impose strict liability for damages resulting from that activity. The application of this doctrine varies by
jurisdiction. There can be no assurance that a court in a particular jurisdiction will not determine that the carriage of oil or LNG aboard a vessel is an
ultra-hazardous activity, which would expose us to strict liability for damages we cause to injured parties even when we have not acted negligently.
Environmental Regulation—Other Environmental Initiatives.
On June 4, 2003, the European Union Parliament passed legislation that will accelerate the phase-out of single-hull tankers between now and 2010,
ban the carriage of heavy crude oil and heavy fuel oils on single-hull tankers in European waters and impose a Condition Assessment Scheme for
single-hull tankers older than 15 years. This new regulation effectively banned all Category 1 single hull tankers over the age of 23 years
immediately, with all remaining Category 1 single hull tankers being phased out by 2005. The phase-out date for Category 2 single hull tankers is
2010, with double sided or double bottomed tankers being phased-out by the earlier of 2015 or 25 years of age. The regulations became effective
on October 21, 2003, and immediately banned approximately 11% of the existing world tanker fleet from trading in European waters.
Although the United States is not a party, many countries have ratified and follow the liability scheme adopted by the IMO and set out in the
International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended (or CLC), and the Convention for the Establishment of an
International Fund for Oil Pollution of 1971, as amended. Under these conventions, which are applicable to vessels that carry persistent oil (not
17
LNG) as cargo, a vessel's registered owner is strictly liable for pollution damage caused on the territorial waters of a contracting state by discharge
of persistent oil, subject to certain complete defenses. Many of the countries that have ratified the CLC have increased the liability limits through a
1992 Protocol to the CLC. The liability limits in the countries that have ratified this Protocol are currently approximately $6.7 million plus
approximately $938 per gross registered tonne above 5,000 gross tonnes with an approximate maximum of $134 million per vessel, with the exact
amount tied to a unit of account which varies according to a basket of currencies. The right to limit liability is forfeited under the CLC where the spill
is caused by the owner's actual fault or privity and, under the 1992 Protocol, where the spill is caused by the owner's intentional or reckless conduct.
Vessels trading to contracting states must provide evidence of insurance covering the limited liability of the owner. In jurisdictions where the CLC
has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar
to the CLC.
In addition, the IMO, various countries and states, such as Australia, the United States and the State of California, and various regulators, such as
port authorities, the U.S. Coast Guard and the U.S. Environmental Protection Agency, have either adopted legislation or regulations, or are
separately considering the adoption of legislation or regulations, aimed at regulating the discharge of ballast water as a potential pollutant.
Shuttle Tanker Regulation
Our shuttle tankers primarily operate in the North Sea. In addition to the regulations imposed by the IMO, countries having jurisdiction over North
Sea areas impose regulatory requirements in connection with operations in those areas. These regulatory requirements, together with additional
requirements imposed by operators in North Sea oil fields, require that we make further expenditures for sophisticated equipment, reporting and
redundancy systems on our shuttle tankers and for the training of seagoing staff. Additional regulations and requirements may be adopted or
imposed that could limit our ability to do business or further increase the cost of doing business in the North Sea.
D. Taxation of the Company
The following discussion is a summary of the principal United States, Bahamian, Bermudian, Marshall Islands, Norwegian and Spanish tax laws
applicable to us. The following discussion of tax matters, as well as the conclusions regarding certain issues of tax law that are reflected in such
discussion, are based on current law. No assurance can be given that changes in or interpretation of existing laws will not occur or will not be
retroactive or that anticipated future factual matters and circumstances will in fact occur. Our views have no binding effect or official status of any
kind, and no assurance can be given that the conclusions discussed below would be sustained if challenged by taxing authorities.
United States Taxation
The following discussion is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended (or the Code), existing and proposed
U.S. Treasury Department regulations, administrative rulings, pronouncements and judicial decisions, all as of the date of this Annual Report.
We have made special U.S. tax elections in respect of some of our vessel-owning or vessel-operating subsidiaries that are potentially subject to
U.S. tax as a result of deriving income attributable to the transportation of cargoes to or from the United States. Our Norwegian, Canadian and
Spanish subsidiaries that occasionally transport cargoes to and from the United States are eligible to claim exemption from United States tax under
the United States-Norway, United States-Canada or United States-Spain Income Tax Treaties. Other subsidiaries that are considered to derive
income from sources within the United States rely on our ability to claim exemption under Section 883 of the Code.
For 2004 and 2003, approximately 15.2% and 12.3%, respectively, of our gross shipping revenues were derived from U.S. sources attributable to
the transportation of cargoes to or from the United States. The average U.S. federal income tax on such U.S. source income, in the absence of
exemption under Section 883, would have been 4% thereof, or approximately $13.7 million and $7.8 million, respectively, for 2004 and 2003.
Under Section 883 of the Code, we will be exempt from U.S. Taxation on our U.S. source shipping income if:
(a) Teekay is organized in a qualified foreign country which is one that grants an equivalent exemption from tax to corporations organized in the
United States in respect of the shipping income for which exemption is being claimed under Section 883 (referred to as the “country of
organization requirement”); and
(b) Teekay can satisfy any one of the following three stock ownership requirements:
• more than 50% of Teekay’s stock, in terms of value, is beneficially owned by individuals who are residents of a qualified foreign
country;
• Teekay is a “controlled foreign corporation” within the meaning of Section 957 of the Code and more than 50% of our shipping
income is includible in the gross income of U.S. persons that own 10% or more of our stock; or
• our stock is “primarily and regularly” traded on an established securities market in the United States or any qualified foreign country
(referred to as the “publicly-traded requirement”).
Final Treasury regulations interpreting Section 883 were promulgated in August 2003 and became effective for tax years beginning after September
24, 2004 (January 1, 2005 for calendar year taxpayers). For purposes of this discussion, we have assumed these regulations apply for 2004. As of
the date of this report, we believe that we qualify for the Section 883 exemption from U.S. tax on U.S. source shipping income under the final
Treasury Regulations on the basis that we satisfy the country of organization requirement because we are organized in the Marshall Islands and the
publicly-traded requirement because our stock is primarily and regularly traded on an established securities market in the United States within the
meaning of the Section 883 of the Code and the Treasury Regulations thereunder. We can give no assurance that any changes in the ownership of
our stock subsequent to the date of this report will permit us to continue to qualify for the Section 883 exemption.
If we do not qualify for the Section 883 exemption, we would be subject to U.S. federal income taxation under one of two alternative tax regimes (the
4% gross basis tax or the net basis tax). We may be subject to a 4% U.S. federal income tax on the U.S. source portion of our gross income
(without the benefit of deductions) attributable to shipping transportation that begins or ends in the United States. For this purpose, the U.S. source
portion of such gross income is deemed to be 50% of the income attributable to transportation that begins or ends in the United States.
18
If we have transportation income that is deemed to be "effectively connected" with a trade or business in the U.S. and we do not qualify for the
Section 883 exemption, we may be subject to corporate income tax on a net basis (currently the highest statutory rate is 35%); however, we do not
expect to have any transportation income that is U.S. effectively connected income.
Marshall Islands, Bahamian and Bermudian Taxation
We believe that neither we nor our subsidiaries will be subject to taxation under the laws of the Marshall Islands, the Bahamas or Bermuda, and
distributions by our subsidiaries to us also will not be subject to any taxes under the laws of such countries.
Norwegian Taxation
Our Norwegian subsidiaries are subject to the ordinary Norwegian corporate tax legislation, which in general charges a 28% tax on taxable income.
As of December 31, 2004, the operations of our Norwegian subsidiaries consisted of:
•
•
•
•
•
•
ownership and operation of 11 shuttle tankers (including two 50%-owned vessels);
12 in-chartered shuttle tankers;
ownership and operation of two FSO vessels currently trading as conventional crude oil tankers;
commercial management services for certain of our crude oil and product tankers;
our 51% interest in IUM; and
11 plants installed on shuttle tankers that reduce volatile organic compound emissions during loading, transportation and storage of oil and
oil products.
We don’t expect that payment of Norwegian income taxes will have a material effect on our results.
Spanish Taxation
Spain imposes income taxes on income generated by our Spanish subsidiary’s shipping related activities at a rate of 35%. Our Spanish subsidiary’s
vessels are registered in the Canary Islands Special Ship Registry. Consequently, we are allowed a credit, equal to 90% of the tax payable on
income from the commercial operation of the Canary Islands registered ships, against the tax otherwise payable. This effectively results in an
income tax rate of approximately 3.5% on income from the operation of these vessels. Vessel sales are subject to the full 35% Spanish tax rate. A
20% reinvestment credit it available if the entire gross proceeds from the vessel sale are reinvested in a qualifying asset and if the asset disposed of
has been held for a minimum period of one year.
We record deferred taxes on the consolidated financial statements in accordance with accounting principles generally accepted in the United States.
Please see Note 1 to our December 31, 2004 audited consolidated financial statements included elsewhere in this annual report on Form 20-F. We
don’t expect Spanish income taxes will have a material effect on our results.
Item 5. Operating and Financial Review and Prospects
Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Teekay is one of the world’s leading providers of international crude oil and petroleum product transportation services. We estimate that we
transported more than 10% of the world’s seaborne oil in 2004. Through our acquisition of Teekay Shipping Spain S.L. (or Teekay Spain) (formerly
Naviera F. Tapias S.A.), we have also expanded into the liquefied natural gas (or LNG) shipping sector. As at December 31, 2004, our fleet
(excluding vessels managed for third parties) consisted of 154 vessels (including 15 newbuildings on order, 51 vessels time-chartered-in, nine
vessels held for sale and five vessels owned by joint ventures). Our conventional tankers provide for a total cargo-carrying capacity of approximately
19.1 million deadweight tonnes (or mdwt), and our LNG and LPG carriers have total cargo-capacity of approximately 1.0 million cubic meters.
Our voyage revenues are derived from:
•
•
Voyage or “spot” charters, which are charters priced on a current, or “spot,” market rate;
Time-charters, whereby vessels are chartered to customers for a fixed period of time at rates that are generally fixed, but may contain a
variable component, such as an inflation adjustment or a current market rate component; and
• Contracts of affreightment, where we carry an agreed quantity of cargo for a customer over a specified trade route within a given period of
time.
The table below illustrates the primary distinctions among these types of charters and contracts:
Voyage Charter(1)
Time-Charter
One year or more
Typical contract length.........................Single voyage
Hire rate basis(2)...................................Varies
Daily
Voyage expenses (3) ...........................We pay
Customer pays
Vessel operating expenses (3) ............We pay
We pay
Off-hire(4) .............................................Customer does not pay Varied
_____________________________________________________________________________
Contract of
Affreightment
Bareboat-Charter
One year or more
One year or more
Typically daily
Daily
We pay
Customer pays
We pay
Customer pays
Customer typically pays Customer typically does not pay
(1) Under a consecutive voyage charter, the customer pays for idle time.
(2) “Hire” rate refers to the basic payment from the charterer for the use of the vessel.
(3) Defined below under “Important Financial and Operational Terms and Concepts.”
(4)
“Off-hire” refers to the time a vessel is not available for service.
19
Segments
Our fleet is divided into three main segments, the spot tanker segment, the fixed-rate tanker segment and the fixed-rate LNG segment.
Spot Tanker Segment
Our spot tanker segment consists of conventional crude oil tankers and product carriers operating on the spot market or subject to time charters or
contracts of affreightment priced on a spot-market basis or short-term fixed-rate contracts. We consider contracts that have an original term of less
than three years in duration to be short-term. All of our very large crude carrier (or VLCC) fleet and substantially all of our conventional Aframax,
large product and small product tanker fleets are among the vessels included in the spot tanker segment. Our spot market operations contribute to
the volatility of our revenues, cash flow from operations and net income. Historically, the tanker industry has been cyclical, experiencing volatility in
profitability and asset values resulting from changes in the supply of, and demand for, vessel capacity. In addition, tanker spot markets historically
have exhibited seasonal variations in charter rates. Tanker spot markets are typically stronger in the winter months as a result of increased oil
consumption in the northern hemisphere and unpredictable weather patterns that tend to disrupt vessel scheduling. As at December 31, 2004, we
had five Aframax tankers on order in our spot tanker segment scheduled to be delivered between January 2005 and March 2007, three large
product tankers scheduled to be delivered between August 2005 and December 2006, and one Suezmax tanker which delivered in March 2005 and
was sold concurrently with its delivery.
Fixed-Rate Tanker Segment
Our fixed-rate tanker segment includes our shuttle tanker operations, floating storage and offtake (or FSO) vessels, liquid petroleum gas carriers,
and conventional crude oil, methanol and product tankers on long-term fixed-rate time-charter contracts or contracts of affreightment. Our shuttle
tanker business, which is operated through our subsidiaries Navion AS (or Navion) and Ugland Nordic Shipping (or UNS), provides services to oil
companies, primarily in the North Sea, under long-term fixed-rate contracts of affreightment or time-charter agreements. Historically, the utilization of
shuttle tankers in the North Sea is higher in the winter months as favorable weather conditions in the summer months provide opportunities for
repairs and maintenance to the offshore oil platforms, which generally reduces oil production. As at December 31, 2004, we had on order two
newbuilding conventional crude oil Aframax tankers and one newbuilding conventional crude oil Suezmax tanker in our fixed-rate tanker segment.
Upon delivery of the Aframax tankers, which is scheduled for January and March 2008, the vessels will commence 10-year long-term charters to our
SPT joint venture. The Suezmax tanker will commence a 20-year time charter contract with Compania Espanola de Petroleos, S.A. (or CEPSA), a
Spanish energy conglomerate, upon delivery scheduled for July 2005. In April 2004, we commenced a charter contract to provide Unocal Thailand
with an FSO vessel (the Pattani Spirit) for a minimum of 10 years.
Fixed-Rate LNG Segment
Our fixed-rate LNG segment consists of LNG carriers subject to long-term, fixed-rate time-charter contracts. The acquisition of Teekay Spain on
April 30, 2004 established our entry into the LNG shipping sector. Our fixed-rate LNG segment includes four LNG carriers acquired as part of the
Teekay Spain acquisition, including the delivery of one LNG carrier in July 2004, which commenced service under a 25-year time-charter contract
(with a charterer’s option to extend an additional five years), and the delivery of another LNG carrier in December 2004, which commenced service
under a 20-year time-charter contract (with a charterer’s option to extend an additional ten years). As at December 31, 2004, we had three
newbuilding LNG carriers on order, which will commence service under long-term contracts with Ras Lafan Liquefied Natural Gas Co. Limited II (or
RasGas II), a joint venture company between a subsidiary of ExxonMobil Corporation and Qatar Petroleum, upon their deliveries, which are
scheduled for the fourth quarter of 2006 and the first half of 2007. The vessels will be time-chartered to RasGas II for a period of 20 years, with a
charterer’s option to extend for periods up to an additional 15 years. These LNG charter contracts are subject, in certain circumstances, to
termination and vessel purchase rights in favor of RasGas II.
Acquisition of Teekay Shipping Spain, S.L.
On April 30, 2004, we acquired 100% of the issued and outstanding shares of Teekay Shipping Spain, S.L. for $298.2 million in cash and the
assumption of existing debt and remaining newbuilding commitments. We believe the long-term, fixed-rate nature of Teekay Spain’s charter
contracts will add stability to our cash flow and earnings throughout the tanker market cycle. Please see Item 4. Information on the Company:
Acquisition of Teekay Shipping Spain S.L. and Item 18 - Financial Statements: Note 3 - Acquisition of Teekay Shipping Spain, S.L.
Acquisition of 50% of PetroTrans Holdings Ltd.
On September 30, 2003, we acquired 50% of the issued and outstanding shares of PetroTrans Holdings Ltd., the parent company of Skaugen
PetroTrans Inc. (or SPT). Please see Item 4. Information on the Company: Acquisition of 50% of PetroTrans Holdings Ltd. and Item 18 - Financial
Statements: Note 5 - Acquisition of 50% of PetroTrans Holdings Ltd.
Acquisition of Navion AS
In April 2003, we completed our acquisition of 100% of the issued and outstanding shares of Navion AS for approximately $774.2 million in cash,
including transaction costs of approximately $7.0 million. Please see Item 4. Information on the Company: Acquisition of Navion AS and Item 18—
Financial Statements: Note 4 - Acquisition of Navion AS.
Proposed Initial Public Offering by Teekay LNG Partners L.P.
In November 2004, our wholly-owned subsidiary, Teekay LNG Partners L.P. (or Teekay LNG Partners), filed a registration statement with the U.S.
Securities and Exchange Commission for an initial public offering of its common units. Teekay LNG Partners is a Marshall Islands limited
partnership recently formed by us as part of our strategy to expand our operations in the LNG sector. Upon the closing of the offering, Teekay LNG
Partners will provide LNG and crude oil marine transportation services through a fleet of LNG carriers and Suezmaz class crude oil tankers,
primarily consisting initially of vessels we obtained through our acquisition of Teekay Spain. Teekay GP L.L.C. is a wholly owned subsidiary of
Teekay Shipping Corporation and the general partner of Teekay LNG Partners. Please see Item 18 - Financial Statements: Note 17 –
Commitments and Contingencies.
20
IMO and European Union Regulatory Changes
As described above under “Item 4. Information on the Company: Regulations,” in 2003 both the International Maritime Organization (or IMO), the
United Nations’ global maritime regulatory body, and the European Union Parliament adopted regulations that, among other things, accelerate the
phasing-out of single-hull tankers.
As a result of these regulations, which became effective April 5, 2005, we recorded a $56.9 million non-cash write-down in our spot tanker segment
in 2003, and reduced the estimated useful lives from 25 years to approximately 21 years for the two remaining vessels affected by these regulatory
changes.
Management believes that these IMO regulations may result in further discrimination against older single-hull vessels.
We are not aware of any other regulatory changes or environment liabilities that we anticipate will have a material impact on our current or future
operations.
Important Financial and Operational Terms and Concepts
We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:
Voyage Revenues. Voyage revenues primarily include revenues from voyage charters, time charters and contracts of affreightment. Voyage
revenues are affected by hire rates and the number of calendar-ship-days a vessel operates. Voyage revenues are also affected by the mix of
business between time charters, voyage charters and contracts of affreightment. Hire rates for voyage charters are more volatile, as they are
typically tied to prevailing market rates at the time of a voyage.
Forward Freight Agreements. We are exposed to market risk for vessels in our spot tanker segment from changes in spot market rates for
vessels. In certain cases we use forward freight agreements (or FFAs) to manage this risk. FFAs involve contracts to provide a fixed number of
theoretical voyages at fixed-rates, thus hedging a portion of our exposure to the spot charter market. These agreements are recorded as assets or
liabilities and measured at fair value. Changes in the fair value of the FFAs are recognized in other comprehensive income (loss) until the hedged
item is recognized as voyage revenue in income. The ineffective portion of a change in fair value is immediately recognized into income through
voyage revenues.
Voyage Expenses. Voyage expenses are all expenses unique to a particular voyage, including any bunker fuel expenses, port fees, cargo loading
and unloading expenses, canal tolls, agency fees and commissions. Voyage expenses are typically paid by the customer under time charters and
by us under voyage charters and contracts of affreightment. When we pay voyage expenses, we typically add them to our hire rates at an
approximate cost.
Net Voyage Revenues. Net voyage revenues represent voyage revenues less voyage expenses. Because the amount of voyage expenses we
incur for a particular charter depends upon the form of the charter, we use net voyage revenues to improve the comparability between periods of
reported revenues that are generated by the different forms of charters. We principally use net voyage revenues, a non-GAAP financial measure,
because it provides more meaningful information to us than voyage revenues, the most directly comparable financial measure under accounting
principles generally accepted in the U.S. (or GAAP).
Time Charter Equivalent (TCE) Rates. Bulk shipping industry freight rates are commonly measured in the shipping industry at the net voyage
revenues level in terms of time charter equivalent (or TCE) rates, which represent net voyage revenues divided by calendar-ship-days.
Vessel Operating Expenses. Under all types of charters for our vessels, we are responsible for vessel operating expenses, which include crewing,
repairs and maintenance, insurance, stores, lube oils and communication expenses.
Income from Vessel Operations. To assist us in evaluating our operations by segment, we analyze our income from vessel operations for each
segment, which represents the income we receive from the segment after deducting operating expenses and depreciation and amortization, but
prior to the deduction of net interest expense, income taxes, foreign currency and interest rate swap gains or losses and other income and losses.
Drydocking. We must periodically drydock each of our vessels for inspection, repairs and maintenance and any modifications to comply with
industry certification or governmental requirements. Generally, we drydock each of our vessels every two and a half to five years, depending upon
the type of vessel and its age. In addition, a shipping society classification intermediate survey is performed on our LNG carriers between the
second and third year of the five-year drydocking period. We capitalize a substantial portion of the costs incurred during drydocking and for the
survey and amortize those costs on a straight-line basis from the completion of a drydocking or intermediate survey to the estimated completion of
the next drydocking. We expense costs related to routine repairs and maintenance incurred during drydocking that do not improve or extend the
useful lives of the assets. The number of drydockings undertaken in a given period, the size of the vessels and the nature of the work performed
determine the level of drydocking expenditures.
Depreciation and Amortization. Our depreciation and amortization expense typically consists of the following three components:
• charges related to the depreciation of the historical cost of our fleet (less an estimated residual value) over the estimated useful lives of our
vessels;
• charges related to the amortization of drydocking expenditures over the estimated number of years to the next scheduled drydocking; and
• charges related to the amortization of the fair value of the time charters, contracts of affreightment and intellectual property where amounts
have been attributed to those items on acquisitions of subsidiary companies. These amounts are amortized over the period which the asset
is expected to contribute to the future cash flows of the Company.
Calendar-ship-days. Calendar-ship-days are equal to the aggregate number of calendar days in a period that our vessels operate during that
period.
21
Restricted Cash Deposits. Under capital lease arrangements for two of our LNG carriers, we (a) borrow under term loans and deposit the
proceeds into restricted cash accounts and (b) enter into capital leases, also referred to as “bareboat charters,” for the vessels. The restricted cash
deposits approximate the present value of the remaining amounts we owe under the lease arrangements, including our obligation to purchase the
vessels at the end of the lease terms. The restricted cash deposits and interest earned thereon will fully fund the payments under these bareboat
charters, including our obligation to purchase the vessels. During vessel construction, we borrow under the term loans and make restricted cash
deposits that approximate the construction installment payments. We also maintain cash on deposit relating to certain other term loans and other
obligations. Please see Item 18 – Financial Statements: Note 11 – Capital Leases and Restricted Cash.
Tanker Market Overview
During 2004, tanker spot rates rose to the highest level in three decades as strong global oil demand growth and a higher level of oil supplies from
long-haul sources increased the tanker demand. In early 2005, reduced oil production by Middle East OPEC members, lower Iraqi oil exports, and
unforeseen production outages in the North Sea caused tanker rates to decline, although they remained at high levels.
Global oil demand, an underlying driver of tanker demand, rose to 82.5 million barrels per day (or mb/d) during 2004, an increase of 2.7 mb/d, or
3.4%, from 2003. Strong global economic growth led by China, non-OECD Asian countries and North America helped push oil demand to record
levels.
Global oil supply increased by 3.4 mb/d, or 4.3%, to 83.0 mb/d in 2004 from 79.6 mb/d in 2003 due in part to a 1.4 mb/d rise in long-haul Middle
East OPEC oil production. Non-OPEC production rose by 1.0 mb/d mainly as a result of rising output in the former Soviet Union. At its January 30,
2005 meeting, OPEC (excluding Iraq) voted to leave its existing quota limit unchanged at 27.0 mb/d, citing a forecasted balance between oil supply
and demand for the first quarter of 2005.
The size of the world tanker fleet rose to 334.0 million deadweight tonnes (or mdwt) as of December 31, 2004, up 17 mdwt, or 5.4% from December
31, 2003. Deliveries of tanker newbuildings aggregated 27.8 mdwt in 2004, exceeding total deletions of 10.8 mdwt.
As at December 31, 2004, the world tanker order book rose to 89.6 mdwt, representing 26.8% of the total world tanker fleet, up from 77.6 mdwt, or
24.5%, as of December 31, 2003.
The outlook for the tanker market for the remainder of 2005 is positive, since the balance between tanker demand and tanker supply is expected to
continue to be relatively tight during this period. The International Energy Agency is forecasting an increase in oil demand of 1.8 mb/d, or 2.2%, in
2005 over 2004, which should typically lead to an approximate 4.0% increase in tanker demand. The 31.0 mdwt in scheduled new tanker deliveries
in 2005 are expected to be largely offset by the increase in tanker demand and the impact of the recent IMO regulations, which are expected to
phase-out approximately 3 to 5% of the existing world tanker fleet, or 10 to 15 mdwt, during 2005.
Results of Operations
In accordance with GAAP, we report gross voyage revenues in our income statements and include voyage expenses among our operating
expenses. However, shipowners base economic decisions regarding the deployment of their vessels in the spot market segment upon anticipated
TCE rates, and industry analysts typically measure bulk shipping freight rates in terms of TCE rates. This is because under time charter contracts
the customer usually pays the voyage expenses whereas under voyage charters and contracts of affreightment the shipowner usually pays the
voyage expenses, which typically are added to the hire rate at an approximate cost. Accordingly, the discussion of revenue below focuses on net
voyage revenues (i.e. voyage revenues less voyage expenses) and TCE rates of our three reportable segments where applicable. Please see Item
18 - Financial Statements: Note 2 – Segment Reporting.
The following tables compare our operating results by reportable segment for 2004, 2003 and 2002, and compare our net voyage revenues (which
is a non-GAAP financial measure) by reportable segment for 2004, 2003, and 2002 to the most directly comparable GAAP financial measure:
Year Ended December 31,
2004
Spot
Tanker
Segment
($000’s)
Fixed
-Rate
Tanker
Segment
($000’s)
Fixed
-Rate LNG
Segment
($000’s)
Total
($000’s)
Year Ended December 31,
2003
Fixed
-Rate
Tanker
Segment
($000’s)
Spot
Tanker
Segment
($000’s)
Total
($000’s)
Year Ended December 31,
2002
Fixed
-Rate
Tanker
Segment
($000’s)
Spot
Tanker
Segment
($000’s)
Total
($000’s)
Voyage Revenues
Voyage Expenses
Net Voyage Revenues
1,450,791
(355,116)
1,095,675
725,061
(77,058)
648,003
43,386
(221)
43,165
2,219,238
(432,395)
1,786,843
1,081,974
(342,928)
739,046
494,121 1,576,095
(394,656)
(51,728)
442,393 1,181,439
632,281
(234,376)
397,905
151,046
5,079)
145,967
783,327
(239,455)
543,872
Year Ended December 31, 2004
Year Ended December 31, 2003 Year Ended December 31, 2002
Spot
Tanker
Segment
(%)
Fixed-
Rate
Tanker
Segment
(%)
Fixed-
Rate LNG
Segment
(%)
Voyage Revenues
Voyage Expenses
Net Voyage Revenues
65
82
62
33
18
36
2
-
2
Total
(%)
100
100
100
22
Spot
Tanker
Segment
(%)
Fixed-
Rate
Tanker
Segment
(%)
69
87
63
31
13
37
Total
(%)
100
100
100
Spot
Tanker
Segment
(%)
Fixed-
Rate
Tanker
Segment
(%)
81
98
73
19
2
27
Total
(%)
100
100
100
The following table outlines the TCE rates earned by the vessels in our spot tanker segment for 2004, 2003 and 2002:
Year Ended December 31, 2004
Year Ended December 31, 2003
Vessel Type
VLCC
Suezmax(1)
Aframax(1)
Oil/Bulk/Ore (2)
Large Product
Small Product
Totals
Net Voyage
Revenues
($000’s)
Calendar
Days
67,129
133,706
813,371
3,269
50,221
49,175
1,116,871
887
2,423
20,697
157
1,962
3,515
29,641
TCE per
calendar-
ship-day
($)
75,681
55,182
39,299
20,822
25,597
13,990
37,680
Net Voyage
Revenues
($000’s)
Calendar
Days
TCE per
calendar-
ship-day
($)
Year Ended December 31, 2002
TCE per
calendar-
ship-day
($)
Net Voyage
Revenues
($000’s)
Calendar
Days
36,891
62,329
535,570
39,849
17,331
27,960
719,930
819
1,841
21,489
2,451
560
2,416
29,576
45,044
33,856
24,923
16,258
30,948
11,573
24,342
6,257
-
340,643
32,749
-
-
379,649
365
-
21,383
2,920
-
-
24,668
17,141
-
15,930
11,215
-
-
15,390
(1) The Suezmax net voyage revenues exclude losses on FFAs of $11.3 million (2004) and gains on FFAs of $0.6 million (2003). The Aframax net
voyage revenues exclude losses on FFAs of $10.5 million (2004) and losses on FFAs of $0.3 million (2003). We were not a party to any FFAs
during 2002.
(2) The oil/bulk/ore fleet’s net voyage revenues exclude $0.5 million (2004), $18.8 million (2003), and $18.2 million (2002) of net voyage revenues
earned by the minority pool participants in the Panamax oil/bulk/ore pool that we operated prior to our disposition of all of our oil/bulk/ore carriers
and the termination of the pool in 2004.
Year Ended December 31, 2004 versus Year Ended December 31, 2003
We acquired Teekay Spain on April 30, 2004. Consequently, our 2004 financial results for our segments only reflect Teekay Spain’s results of
operations commencing May 1, 2004. We completed our acquisition of Navion on April 1, 2003. Consequently, our 2003 financial results for our
segments only reflect Navion’s results of operations on that date.
Spot Tanker Segment
TCE rates for the vessels in our spot tanker segment primarily depend on oil production and consumption levels, the number of vessels scrapped,
the number of newbuildings delivered and charterers' preference for modern tankers. As a result of our dependence on the spot tanker market, any
fluctuations in TCE rates will affect our revenues and earnings. As a result of the previously mentioned strong tanker freight rates during 2004, our
average TCE rate for the vessels in our spot tanker segment increased 54.8% to $37,680 for 2004, from $24,342 for 2003. During 2004,
approximately 62% of our net voyage revenues were earned by the vessels in the spot tanker segment, compared to approximately 63% in 2003.
The decrease from 2003 was due primarily to our acquisition of Teekay Spain and its fixed-rate Suezmax tanker and LNG fleet and the sale of 11
older spot vessels as part of our fleet renewal program, partially offset by the increase in spot tanker rates compared to 2003 and an increase in the
chartered-in vessels in our spot tanker segment.
The following table provides a summary of the change in fleet size, based on calendar-ship-days, of our spot tanker segment by owned and
chartered-in vessels:
Year Ended December 31,
2004
(Calendar Days)
2003
(Calendar Days)
Percentage Change
(%)
Owned Vessels
Chartered-in Vessels
Total
16,181
13,460
29,641
21,206
8,370
29,576
(23.7)
60.8
0.2
The average fleet size of our spot tanker fleet (including vessels chartered-in) increased slightly in 2004, primarily due the delivery of four Aframax
newbuildings and an increase in the number of vessels chartered-in due to the inclusion of Navion for a fully year in 2004, compared to nine months
in 2003, as well as the sale and leaseback of three Aframax tankers in December 2003. These increases were substantially offset by the sale of 11
older tankers in the spot tanker segment during 2004.
Net voyage revenues for the spot tanker segment increased 48.3% to $1,095.7 million for 2004, from $739.0 million for 2003. This increase was
primarily due to the increases in average TCE rates from 2003.
Vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores and lubes, and communication expenses,
decreased 26.0% to $93.4 million for 2004, from $126.3 million for 2003. The decrease in vessel operating expenses was primarily due to the sale
of 11 older vessels during the year.
Time-charter hire expense increased 56.3% to $263.1 million for 2004, from $168.3 million for 2003. This increase was due primarily to the
previously mentioned increase of chartered-in vessels.
Depreciation and amortization expense decreased 10.2% to $95.6 million for 2004, from $106.4 million for 2003. The decrease was primarily
attributable to the previously mentioned vessel dispositions, partially offset by the deliveries of the four newbuilding Aframax tankers during 2004
and the increased amortization of older vessels due to the accelerated depreciation of vessels affected by the previously mentioned IMO
regulations. Depreciation and amortization expense included amortization of drydocking costs of $16.1 million for 2004, compared to $22.3 million
for 2003. The decrease in drydock amortization was primarily due to the previously mentioned sale of older vessels that require more frequent
drydocks.
23
Gain on sale of vessels for 2004 of $72.1 million included gains on the sale of the 11 older vessels, as well as amortization of a deferred gain on the
sale and leaseback of the three Aframax tankers in December 2003. The write-downs and loss on sale of vessels for 2003 of $90.3 million was
primarily comprised of the write-down of vessel values as a result of the previously mentioned IMO regulations and vessels sold in 2003.
We incurred restructuring charges of $1.0 million in 2004 relating to the closure of our Oslo, Norway office. Restructuring charges of $4.4 million in
2003 relate to the closure of our Oslo, Norway and Melbourne, Australia offices, and severance costs related to the termination of seafaring staff.
Fixed-Rate Tanker Segment
The following table provides a summary of the change in fleet size, based on calendar ship days, of our fixed-rate tanker segment by owned and
chartered-in vessels:
Year Ended December 31,
2004
(Calendar Days)
2003
(Calendar Days)
Percentage Change
(%)
Owned Vessels
Chartered-in Vessels
Total
14,808
5,905
20,713
10,196
4,370
14,566
45.2
35.1
42.2
The average fleet size of our fixed-rate tanker segment (including vessels chartered-in) increased significantly in 2004 compared to 2003, primarily
due to our acquisition of Teekay Spain, which included four Suezmax tankers in this segment, and the delivery of four newbuildings in 2004. In
addition, the results of Navion, including its fixed-rate shuttle tanker fleet, were only included for nine months in 2003, compared to a full year in
2004.
Net voyage revenues increased 46.5% to $648.0 million for 2004, from $442.4 million for 2003 primarily due to the increase in fleet size. The shuttle
tankers acquired as part of our acquisition of Navion generated, on average, more revenue per ship than the remaining vessels in our fixed-rate
tanker segment. During 2004, approximately 36% of our net voyage revenues were earned by the vessels in the fixed-rate tanker segment,
compared to approximately 37% in 2003.
Vessel operating expenses increased 39.3% to $117.6 million for 2004, from $84.4 million for 2003. The increase in vessel operating expenses was
primarily due to the increase in fleet size and the appreciation of other major currencies against the U.S. Dollar. The shuttle tankers acquired as part
of our acquisition of Navion incurred, on average, higher operating costs per ship than the remaining vessels in our fixed-rate tanker segment.
Time-charter hire expense increased 42.4% to $194.1 million for 2004, from $136.3 million for 2003. The increase is due primarily to Navion’s
chartered-in shuttle tankers being included for the full year in 2004, but only for nine months in 2003, the date of the Navion acquisition.
Depreciation and amortization expense increased 52.1% to $129.1 million for 2004, from $84.9 million for 2003. The increase was mainly due to
increased vessel cost amortization during 2004 as a result of the increase in fleet size of owned vessels in this segment, the amortization of the
estimated fair market value of the time charter contracts we acquired as part of the Teekay Spain acquisition and a full year of amortization during
2004 of the contracts of affreightment we acquired as part of the 2003 Navion acquisition. Depreciation and amortization expense included
amortization of drydocking costs of $7.3 million for 2004, compared to $4.2 million for 2003.
Gain on sale of vessels for 2004 of $7.2 million represents gains on the sale of three older vessels. Loss on sale of vessels for 2003 of $0.1 million
relate to the sale of a shuttle tanker in our fixed-rate tanker segment.
We incurred no restructuring charges in 2004 in our fixed-rate tanker segment. Restructuring charges of $2.0 million in 2003 relate to the closure of
our Oslo, Norway and Melbourne, Australia offices, and severance costs related to the termination of seafaring staff.
Fixed-Rate LNG Segment
The results of our fixed-rate LNG segment reflect the operations of our four LNG carriers (including one newbuilding that delivered in July 2004, and
one newbuilding that delivered in December 2004) acquired as part of our acquisition of Teekay Spain on April 30, 2004. The total number of
calendar ship days of our LNG carriers during 2004 was 660. We had no LNG shipping operations prior to the Teekay Spain acquisition.
Net voyage revenues totaled $43.2 million for 2004, or $65,402 per calendar-ship-day. During 2004 approximately 2% of our net voyage revenues
were earned by the vessels in the fixed-rate LNG segment.
Vessel operating expenses totaled $7.5 million for 2004, or $11,377 per calendar-ship-day.
Depreciation and amortization was $12.9 million in 2004, which includes $3.6 million of amortization of time-charter contracts acquired as part of the
Teekay Spain acquisition.
Other Operating Results
General and administrative expenses increased 53.5% to $130.7 million for 2004, from $85.1 million for 2003, primarily as a result of the Teekay
Spain acquisition, the inclusion of Navion for 12 months in 2004 compared to only nine months in 2003, an increase in the accrual for performance-
based bonuses in 2004, including $12.5 million authorized by the Board of Directors in addition to the regular bonus plan, and the appreciation of
several major currencies against the U.S. Dollar.
Interest expense increased 50.0% to $121.5 million for 2004, from $81.0 million for 2003. This increase primarily reflects interest on the additional
debt we incurred in connection of our acquisitions of Navion and Teekay Spain.
24
Interest income increased 372.5% to $18.5 million for 2004, compared to $3.9 million for 2003. This increase was primarily due to interest earned on
higher average cash and restricted cash balances. Please see “Important Financial and Operational Terms and Concepts - Restricted Cash
Deposits” above.
Equity income from 50%-owned joint ventures increased 97.0% to $13.7 million for 2004, from $7.0 million for 2003, primarily as a result of our
acquisition of a 50% interest in SPT during September 2003.
Gain on sale of marketable securities was $93.2 million in 2004, compared to $0.5 million in 2003. During 2004 we sold our investments in
marketable securities. Please see Item 18 – Financial Statements: Note 6 – Investments in Marketable Securities.
Other loss of $67.7 million for 2004 was primarily comprised of foreign exchange losses of $42.7 million, income taxes of $35.0 million and a $0.8
million loss on redemption of $13.4 million of our 8.32% First Preferred Ship Mortgage Notes, partially offset by dividend income from our joint
ventures and leasing income from our volatile organic compound emissions equipment. Other loss of $46.0 million for 2003 was primarily comprised
of income taxes of $36.5 million, a $5.4 million loss on redemption of $57.9 million of our 8.32% First Preferred Ship Mortgage Notes, a write-down
of marketable securities, goodwill and other assets, minority interest expense, and foreign exchange losses, partially offset by dividend income from
Nordic American Tanker Shipping Ltd. (or NATS), and leasing income from our volatile organic compound emissions equipment.
As a result of the foregoing factors, net income increased to $757.4 million for 2004, from $177.4 million for 2003.
Year Ended December 31, 2003 versus Year Ended December 31, 2002
We completed our acquisition on April 1, 2003. Consequently, our 2003 financial results for our segments only reflect Navion’s results of operations
for nine months.
Spot Tanker Segment
As a result of strengthening in tanker freight rates during 2003, our average TCE rate for the vessels in our spot tanker segment increased 58.2% to
$24,342 for 2003, from $15,390 for 2002. During 2003, approximately 63% of our net voyage revenues were earned by the vessels in the spot
tanker segment, compared to approximately 73% in 2002. The decrease from 2002 was due primarily to our acquisition of Navion and its shuttle
tanker fleet that is part of our fixed-rate tanker segment, partially offset by an increase in spot tanker rates compared to 2002.
The following table provides a summary of the change in fleet size, based on calendar ship days, of our spot tanker segment by owned and
chartered-in vessels:
Year Ended December 31,
2003
(Calendar Days)
2002
(Calendar Days)
Percentage Change
(%)
Owned Vessels
Chartered-in Vessels
Total
21,206
8,370
29,576
22,824
1,844
24,668
(7.1)
353.9
19.9
The average fleet size of our spot tanker fleet (including vessels chartered-in) increased in 2003, primarily due to our acquisition of Navion, and the
delivery of three chartered-in newbuildings (two Aframax tankers delivered in April 2003 and August 2003, and a VLCC delivered in June 2003) and
a vessel under capital lease (an Aframax tanker delivered in September 2003). These increases were partially offset by the sale of 16 older tankers
in the spot tanker segment during 2003 as part of our fleet renewal program. The average fleet size of our owned spot tanker fleet decreased in
2003.
Net voyage revenues for the spot tanker segment increased 85.7% to $739.0 million for 2003, from $397.9 million for 2002. These increases were
primarily due to the increases in average fleet size and average TCE rates from 2002.
Vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores and lubes, and communication expenses,
decreased 1.3% to $126.3 million for 2003, from $128.0 million for 2002. The decrease in vessel operating expenses was primarily due to the
decreased size of our owned spot tanker fleet, partially offset by higher repairs and maintenance costs on our remaining vessels.
Time-charter hire expense increased 237.0% to $168.3 million for 2003, from $49.9 million for 2002. This increase was due primarily to the addition
of the chartered-in vessels included as part of the Navion acquisition and the previously mentioned delivery of three additional chartered-in vessels.
Depreciation and amortization expense increased 0.9% to $106.4 million for 2003, from $105.4 million for 2002. The increase was primarily
attributable to the larger fleet size resulting from our acquisition of Navion and increased drydock amortization, substantially offset by the effect of
the previously mentioned vessel dispositions. Depreciation and amortization expense included amortization of drydocking costs of $22.3 million for
2003, compared to $18.1 million for 2002. The increase in drydock amortization was primarily due to an increase in the amount of work done in
drydock on most vessels during 2003 and an increase in the frequency of required drydockings for older vessels.
As previously mentioned, we wrote down the book values of certain of our tankers by $56.9 million in the fourth quarter of 2003 due to changes in
IMO regulations, and we sold 16 older vessels in our spot tanker segment in 2003. These dispositions resulted in a $34.7 million write-down in the
book value of these vessels, partially offset by a $1.3 million gain on the sale of some of the vessels. There were no vessel write-downs or vessel
dispositions in our spot tanker segment in 2002.
Restructuring charges of $4.4 million in 2003 related to the closure of our Oslo, Norway and Melbourne, Australia offices, and severance costs
related to the termination of seafaring staff. There were no restructuring changes in our spot tanker segment in 2002.
Fixed-Rate Tanker Segment
25
The following table provides a summary of the change in fleet size, based on calendar-ship-days of our fixed-rate tanker segment by owned and
chartered-in vessels:
Year Ended December 31,
2003
(Calendar Days)
2002
(Calendar Days)
Percentage Change
(%)
Owned Vessels
Chartered-in Vessels
Total
10,196
4,370
14,566
6,249
-
6,249
63.2
-
133.1
The average fleet size of our fixed-rate tanker segment (including vessels chartered-in) more than doubled in 2003 compared to 2002, primarily due
to our acquisition of Navion and the addition of four shuttle tankers (including deliveries of two newbuilding shuttle tankers) in 2003. In addition, the
first three of five newbuilding conventional tankers on 12-year charters to ConocoPhillips were delivered in the second half of 2003.
Net voyage revenues increased 203.1% to $442.4 million for 2003, from $146.0 million for 2002, primarily due to the increase in fleet size. The
shuttle tankers acquired as part of our acquisition of Navion generated, on average, more revenue per ship than the remaining vessels in our fixed-
rate tanker segment. During 2003, approximately 37% of our net voyage revenues were earned by the vessels in the fixed-rate tanker segment,
compared to approximately 27% in 2002.
Vessel operating expenses increased 110.7% to $84.4 million for 2003, from $40.1 million for 2002. The increase in vessel operating expenses was
primarily due to the increase in fleet size. The shuttle tankers acquired as part of our acquisition of Navion incurred, on average, higher operating
costs per ship than the remaining vessels in our fixed-rate tanker segment. Other less significant reasons for the increase in vessel operating
expenses were higher repair, maintenance and crewing costs, and the appreciation of the Norwegian Kroner against the U.S. Dollar.
Time-charter hire expense was $136.3 million for 2003. We incurred no time-charter hire expense in 2002, as we did not have any chartered-in
tankers in the fixed-rate tanker segment prior to our acquisition of Navion. As at December 31, 2003, we had 13 chartered-in shuttle tankers and
one chartered-in methanol carrier.
Depreciation and amortization expense increased 93.4% to $84.9 million for 2003, from $43.9 million for 2002. The increase was mainly due to
increased vessel cost amortization as a result of the increase in fleet size of our owned vessels and the amortization of the estimated fair market
value of the contracts of affreightment we acquired as part of the Navion acquisition. Depreciation and amortization expense included amortization
of drydocking costs of $4.2 million for 2003, compared to $3.7 million for 2002.
Loss on sale of vessels for 2003 of $0.1 million related to the sale of a shuttle tanker in our fixed-rate tanker segment. There were no vessel
dispositions in our fixed-rate tanker segment in 2002.
Restructuring charges of $2.0 million in 2003 relate to the closure of our Oslo, Norway and Melbourne, Australia offices, and severance costs
related to the termination of seafaring staff. No restructuring charges were incurred in 2002 in our fixed-rate tanker segment.
Other Operating Results
General and administrative expenses increased 48.7% to $85.1 million for 2003, from $57.2 million for 2002, primarily as a result of the Navion
acquisition, a special compensation expense to an executive officer and the appreciation of several major currencies against the U.S. Dollar.
Equity income from 50%-owned joint ventures increased 54.1% to $7.0 million for 2003, from $4.5 million for 2002, primarily as a result of our
acquisition of a 50% interest in SPT during September 2003.
Interest expense increased 39.7% to $81.0 million for 2003, from $58.0 million for 2002. This increase primarily reflects interest on the additional
debt we incurred to acquire Navion.
Interest income increased 12.2% to $3.9 million for 2003, compared to $3.5 million for 2002. This increase was primarily due to interest earned on
higher average cash balances, partially offset by lower interest rates.
Other loss of $46.0 million for 2003 was primarily comprised of income taxes of $36.5 million, a loss on redemption of $57.9 million of our 8.32%
First Preferred Ship Mortgage Notes, a write-down of available-for-sale securities, goodwill and other assets, minority interest expense, and foreign
exchange losses, partially offset by dividend income from Nordic American Tanker Shipping Ltd., leasing income from our volatile organic
compound emissions equipment and a gain on the disposition of available-for-sale securities. Other loss of $14.9 million for 2002 was primarily
comprised of income taxes of $11.4 million, the settlement of a contingent payment relating to our purchase in 1993 of all the issued and
outstanding shares of Palm Shipping Inc. (now Teekay Chartering Limited), a loss on sale of available-for-sale securities, and minority interest
expense, partially offset by dividend income from Nordic American Tanker Shipping Ltd., and foreign exchange gains.
As a result of the foregoing factors, net income increased to $177.4 million for 2003, from $53.4 million for 2002.
Liquidity and Capital Resources
As at December 31, 2004, our total cash and cash equivalents was $427.0 million, compared to $292.3 million at December 31, 2003. Our total
liquidity, including cash, short-term marketable securities and undrawn long-term borrowings, was $1,258.2 million as at December 31, 2004, up
from $774.8 million as at December 31, 2003. The increase in liquidity was mainly the result of cash generated by our operating activities, proceeds
from the sale of 14 older vessels during the year and the sale of our marketable securities during the year, partially offset by our debt repayments,
cash used for capital expenditures and payment of dividends. In our opinion, working capital is sufficient for our present requirements.
Net cash flow from operating activities increased to $814.7 million in 2004 from $455.6 million in 2003, mainly reflecting the significant increase in
our average spot TCE rates.
26
Scheduled debt repayments were $150.3 million during 2004 compared to $62.2 million during 2003. Repayments of capital lease obligations were
$66.1 million in 2004 compared to $0.3 million in 2003. Debt prepayments were $1,731.2 million during 2004 compared to $1,466.8 million during
2003. Of our 2004 debt prepayments, $1,326.0 million resulted from our drawing down and subsequently prepaying under some of our eight long-
term revolving credit facilities (the Revolvers) in anticipation of the closing of the Teekay Spain acquisition and for internal restructuring purposes. In
addition, in 2004 a total of $391.0 million of cash generated from operations and from proceeds of longer-term financings was used to prepay certain
term loans, and $14.2 million was used to repurchase a portion of the 8.32% First Preferred Ship Mortgage Notes (the 8.32% Notes). Occasionally
we use our Revolvers to temporarily finance capital expenditures until longer-term financing is obtained, at which time we typically use all or a
portion of the proceeds from the longer-term financings to prepay outstanding amounts under the Revolvers. Please see Item 18 - Financial
Statements: Note 9 – Long-Term Debt.
As at December 31, 2004, our total debt was $2,108.0 million, compared to $1,600.1 million as at December 31, 2003. As at December 31, 2004,
our Revolvers provided for borrowings of up to $1,361.2 million, of which $831.2 million was undrawn. The amount available under the Revolvers
reduces by $142.2 million (2005), $165.2 million (2006), $130.1 million (2007), $444.3 million (2008), $39.4 million (2009) and $440.0 million
(thereafter). All of the Revolvers are collateralized by first priority mortgages granted on 52 of the Company’s vessels, together with other related
collateral, and include a guarantee from Teekay for all amounts outstanding under the Revolvers. Our 8.32% Notes are due February 1, 2006 and
are subject to a sinking fund which retires $45.0 million principal amount of the 8.32% Notes on February 1 of each year, commencing 2004. Our
7.25% Premium Equity Participating Security Units are due May 18, 2006 and our unsecured 8.875% Senior Notes are due July 15, 2011. Our
outstanding term loans reduce in monthly, quarterly or semi-annual payments with varying maturities through 2023. Please see Item 18 – Financial
Statements: Note 9 – Long-Term Debt.
Among other matters, our long-term debt agreements generally provide for the maintenance of certain vessel market value-to-loan ratios and
minimum consolidated financial covenants, prepayment privileges (in some cases with penalties), and restrictions against the incurrence of new
investments by the specified subsidiaries without prior lender consent. The amount of Restricted Payments, as defined, that we can make, including
dividends and purchases of our own capital stock, was limited to $892.8 million as of December 31, 2004. Certain of the loan agreements require
that we maintain a minimum level of free cash. As at December 31, 2004, this amount was $100 million. Certain of the loan agreements also require
that a minimum level of free liquidity and undrawn revolving credit lines (excluding undrawn revolving credit lines with less than 6 months to
maturity) be maintained. As at December 31, 2004, this amount was $205.8 million.
We conduct our funding and treasury activities within corporate policies to minimize borrowing costs and maximize investment returns while
maintaining the safety of the funds and appropriate levels of liquidity for our purposes. We hold cash and cash equivalents primarily in U.S. dollars,
with some balances held in Japanese Yen, Singapore Dollars, Canadian Dollars, Australian Dollars, British Pounds, Euros and Norwegian Kroner.
We are exposed to market risk from foreign currency fluctuations, changes in interest rates, spot market rates for vessels, and bunker fuel prices.
We use forward foreign currency contracts, interest rate swaps, forward freight agreements and bunker fuel swap contracts to manage currency,
interest rate, bunker fuel price risks and spot tanker rates, but we do not use these financial instruments for trading or speculative purposes. Please
see Item 11 – Quantitative and Qualitative Disclosures About Market Risk.
Dividends declared during 2004 were $42.4 million, or $0.5125 per share. In October 2004, we increased our quarterly dividend from $0.125 per
share to $0.1375 per share.
In November 2004, we announced that our Board of Directors authorized the repurchase of up to 3,000,000 shares of our common stock. As at
December 31, 2004, we had repurchased 1,400,200 shares of our common stock at an average price of $43.73 per share. In January 2005, we
repurchased an additional 1,599,800 shares at an average price of $42.27, for a total of 3,000,000 shares repurchased.
In November 2004, our subsidiary Teekay LNG Partners filed a registration statement with the Securities and Exchange Commission for an initial
public offering of its common units. Proceeds from the offering will be used to repay debt the partnership will owe to us and to pay offering
expenses. Proceeds of any exercise of the over-allotment option will be used to repay debt under ship financing arrangements of the partnership.
Please see Item 18 – Financial Statements: Note 17 – Commitments and Contingencies.
During 2004, we incurred capital expenditures for vessels and equipment of $548.6 million. These capital expenditures primarily represented
installment payments on our newbuildings. Cash expenditures for drydocking decreased to $32.9 million for 2004, compared to $42.7 million during
2003, due primarily to the sale of 11 older vessels during 2004.
As at December 31, 2004, we were committed to the construction of seven Aframax tankers, two Suezmax tankers, three product tankers and three
LNG carriers scheduled for delivery between January 2005 and March 2008. Please see Item 18 – Financial Statements: Note 17 – Commitments
and Contingencies.
We are also committed to capital leases on one Aframax tanker, four Suezmax tankers and two LNG carriers. The leases require minimum
scheduled payments of $780.4 million, including a purchase obligation payment, over the remaining terms of the leases. Please see Item 18 –
Financial Statements: Note 11 – Capital Leases and Restricted Cash.
The following table summarizes our long-term contractual obligations as at December 31, 2004 (in millions of U.S. dollars).
Long-term debt
Chartered-in vessels (operating leases)
Commitment for chartered-in vessels
(capital leases)
Newbuilding installments(1)
Volatile organic compound emissions
equipment
Total
2005
119.5
365.5
130.1
363.7
31.5
1,010.3
2006
219.5
289.3
2007
36.4
197.3
2008
284.0
120.9
2009
189.3
83.5
There-after
1,259.3
192.8
Total
2,108.0
1,249.3
317.7
255.9
39.7
141.0
41.3
50.7
-
1,082.4
27
-
414.4
-
496.9
42.8
-
-
315.6
208.8
-
-
1,660.9
780.4
811.3
31.5
4,980.5
(1)
Includes $38.0 million of installments on a newbuilding that was sold upon delivery during the first quarter of 2005. Please see Item 18 – Financial
Statements: Note 21 – Subsequent Events.
The sale of 14 older vessels during 2004 generated gross proceeds of $440.6 million.
In 2004 we sold our investments in A/S Dampskibsselskabet Torm and Nordic American Tanker Shipping Ltd. for proceeds of $135.4 million. Please
see Item 18 - Financial Statements: Note 6 – Investments in Marketable Securities.
As part of our growth strategy, we will continue to consider strategic opportunities, including the acquisition of additional vessels and expansion into
new markets. We may choose to pursue such opportunities through internal growth, joint ventures or business acquisitions. We intend to finance
any future acquisitions through various sources of capital, including internally-generated cash flow, existing credit facilities, additional debt
borrowings and the issuance of additional shares of capital stock.
Off Balance Sheet Arrangements
We and certain of our subsidiaries have guaranteed our share of the outstanding mortgage debt in four 50%-owned joint venture companies. Please
see Item 18 - Financial Statements: Note 17 – Commitments and Contingencies. We do not believe these off-balance sheet arrangements have
and we have no other off-balance sheet arrangements that have or are reasonably likely to have, a current or future material effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP, which require us to make estimates in the application of our accounting
policies based on our best assumptions, judgments, and opinions. Following is a discussion of the accounting policies that involve a high degree of
judgment and the methods of their application. For a further description of our material accounting policies, please see Item 18 – Financial
Statements: Note 1 – Summary of Significant Accounting Policies.
Revenue Recognition
We generate a majority of our revenues from spot voyages and voyages servicing contracts of affreightment. 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. Most shipping
companies, including us, use the percentage of completion method. For each method, voyages may be calculated on either a load-to-load or
discharge-to-discharge basis. In other words, revenues are recognized ratably either from the beginning of when product is loaded for one voyage to
when it is loaded for another voyage, or from when product is discharged (unloaded) at the end of one voyage to when it is discharged after the next
voyage.
In applying the percentage of completion method, we believe that in most cases 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, we generally have information about the next load port
and expected discharge port, whereas at the time of loading we are normally less certain what the next load port will be. We use this method of
revenue recognition for all spot voyages and voyages servicing contracts of affreightment, with an exception for our shuttle tankers servicing
contracts of affreightment with offshore oil fields. In this case a voyage commences with tendering of notice of readiness at a field, within the agreed
lifting range, and ends with tendering of notice of readiness at a field for the next lifting. However, we do not begin recognizing voyage revenue until
a charter has been agreed to by the customer and us, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its
next voyage.
We recognize revenues from time charters daily over the term of the charter as the applicable vessel operates under the charter. We do not
recognize revenues during days that the vessel is off-hire.
Vessel Lives and Impairment
The carrying value of each of our vessels represents its original cost at the time of delivery or purchase less depreciation or impairment charges. We
depreciate our vessels on a straight-line basis over a vessel’s estimated useful life, less an estimated residual value. Depreciation is calculated
using an estimated useful life of 25 years for Aframax, Suezmax, VLCC and product tankers, and 35 years for LNG carriers, from the date the
vessel was originally delivered from the shipyard, or a shorter period if regulations prevent us from operating the vessels to 25 years or 35 years,
respectively. In the shipping industry, the use of a 25-year vessel life for Aframax, Suezmax, VLCC and product tankers has become the prevailing
standard. In addition, the use of a 30 to 40 year vessel life for LNG carriers is typical. However, the actual life of a vessel may be different, with a
shorter life potentially resulting in an impairment loss. We have reduced the estimated useful lives from 25 years to approximately 21 years for our
two remaining vessels affected by the International Maritime Organization’s regulatory changes announced in 2003. We are not aware of any other
regulatory changes or environmental liabilities that we anticipate will have a material impact on our current or future operations.
The carrying values of our vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend
to fluctuate with changes in charter rates and the cost of newbuildings. Both charter rates and newbuilding costs tend to be cyclical in nature. We
review vessels and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. We measure the recoverability of an asset by comparing its carrying amount to future undiscounted cash flows that the asset is
expected to generate over its remaining useful life. If we consider a vessel or equipment to be impaired, we recognize impairment in an amount
equal to the excess of the carrying value of the asset over its fair market value.
Drydocking
Generally, we drydock each vessel every two and a half to five years. In addition, a shipping society classification intermediate survey is performed
on our LNG carriers between the second and third year of the five-year drydocking period. We capitalize a substantial portion of the costs we incur
during drydocking and for the survey and amortize those costs on a straight-line basis from the completion of a drydocking or intermediate survey to
the estimated completion of the next drydocking. We expense costs related to routine repairs and maintenance incurred during drydocking that do
28
not improve or extend the useful lives of the assets. When significant drydocking expenditures occur prior to the expiration of the original
amortization period, the remaining unamortized balance of the original drydocking cost and any unamortized intermediate survey costs are
expensed in the month of the subsequent drydocking.
Goodwill and Intangible Assets
We allocate the cost of acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount
being classified as goodwill. Certain intangible assets, such as time charter contracts, contracts of affreightment and intellectual property are
amortized over time. Our future operating performance will be affected by the future amortization of intangible assets and potential impairment
charges related to goodwill. Accordingly, the allocation of the purchase price to intangible assets and goodwill has a significant impact on our future
operating results. The allocation of the purchase price of the acquired companies to intangible assets and goodwill requires management to make
significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the
appropriate discount rate to value these cash flows.
Goodwill and indefinite lived intangible assets are not amortized, but reviewed for impairment annually, or more frequently if impairment indicators
arise. The process of evaluating the potential impairment of goodwill and intangible assets is highly subjective and requires significant judgment at
many points during the analysis. The fair value of our reporting units was estimated based on discounted expected future cash flows using a
weighted average cost of capital rate. The estimates and assumptions regarding expected cash flows and the discount rate require considerable
judgment and are based upon existing contracts, historical experience, financial forecasts, and industry trends and conditions.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (or FASB) issued FASB Statement No. 123(R) (or SFAS 123(R)), Share-Based
Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB 25. SFAS
123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an acceptable alternative.
SFAS 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not yet been
issued. We expect to adopt SFAS 125(R) on July 1, 2005.
SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods:
1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date based on (a) the requirements
of SFAS 123(R) for all share-based payments granted after the effective date and (b) the requirements of SFAS 123 for all awards granted
to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures, either (a) all prior
periods presented or (b) prior interim periods of the year of adoption.
We plan to adopt SFAS 123(R) using the modified-prospective method.
Item 6. Directors, Senior Management and Employees
Directors and Senior Management
Our directors and executive officers as of the date of this annual report and their ages as of December 31, 2004 are listed below:
Name
C. Sean Day
Bjorn Moller
Axel Karlshoej
Bruce C. Bell
Dr. Ian D. Blackburne
Leif O. Höegh
Thomas Kuo-Yuen Hsu
Eileen A. Mercier
Tore I. Sandvold
Peter Antturi
Arthur Bensler
Peter Evensen
David Glendinning
Jennifer Gordon
Vincent Lok
Graham Westgarth
Paul Wogan
Age Position
55 Director and Chair of the Board
47 Director, President and Chief Executive Officer
64 Director and Chair Emeritus
57 Director
58 Director
41 Director
58 Director
57 Director
57 Director
46
47
46
50
43
36
50
42
President, Teekay Navion Shuttle Tankers, a division of Teekay Shipping Corporation
SVP, Secretary and General Counsel
EVP and Chief Financial Officer
President, Teekay Gas and Offshore, a division of Teekay Shipping Corporation
SVP, Corporate Resources
SVP and Treasurer
President, Teekay Marine Services, a division of Teekay Shipping Corporation
President, Teekay Tanker Services, a division of Teekay Shipping Corporation
29
Certain biographical information about each of these individuals is set forth below:
C. Sean Day has served as our Chair of the Board since September 1999. Mr. Day has served as Chair of Teekay GP L.L.C.’s board of directors
since it was formed in November 2004. From 1989 to 1999, he was President and Chief Executive Officer of Navios Corporation, a large bulk
shipping company based in Stamford, Connecticut. Prior to this, Mr. Day held a number of senior management positions in the shipping and finance
industry. He is currently serving as a director of Kirby Corporation. Mr. Day also serves as the Chair of the Board of Resolute Investments, Inc., our
largest shareholder. Please see Item 7 – Related Party Transactions.
Bjorn Moller became our President and Chief Executive Officer in April 1998. Mr. Moller has served as Vice Chair and a Director of Teekay GP
L.L.C. since it was formed in November 2004. Mr. Moller has over 20 years’ experience in the shipping industry and has served in senior
management positions with Teekay for more than 15 years. He has headed our overall operations since January 1997, following his promotion to
the position of Chief Operating Officer. Prior to this, Mr. Moller headed our global chartering operations and business development activities.
Axel Karlshoej was Chair of the Board from June 1994 to September 1999, and has been Chair Emeritus since stepping down as Chair. Mr.
Karlshoej is President and serves on the compensation committee of Nordic Industries, a California general construction firm with which he has
served for the past 30 years. He is the older brother of the late J. Torben Karlshoej, Teekay’s founder.
Bruce C. Bell is the Managing Director of Oceanic Bank and Trust Limited, a Bahamian bank and trust company, a position he has held since
March 1994. Mr. Bell has served as the Secretary of Teekay GP L.L.C. since it was formed in November 2004. Prior to joining Oceanic Bank and
Trust, Mr. Bell was engaged in the private practice of law in Canada, specializing in corporate/commercial, banking and international business
transactions. From May 2000 until May 2003, Mr. Bell served as our Corporate Secretary. Mr. Bell is a director and the Vice President of Resolute
Investments, Inc., our largest shareholder. Please see Item 7 – Related Party Transactions.
Dr. Ian D. Blackburne has over 25 years' experience in petroleum refining and marketing, and in March 2000 he retired as Managing Director and
CEO of Caltex Australia Limited, a large petroleum refining and marketing conglomerate based in Australia. He is currently serving as Chairman of
CSR Limited and is a director of Suncorp-Metway Ltd., Mayne Group Limited, Australian public companies in the diversified industrial and financial
sectors. Dr. Blackburne is also the Chairman of the Australian Nuclear Science and Technology Organization.
Leif O. Höegh was appointed as a director in June 1999 in connection with our acquisition of Bona Shipholding Ltd. He served as a director of Bona
from November 1993 to June 1999 and as its Chairman from June 1998 to June 1999. Mr. Höegh is the joint controlling shareholder and Deputy
Chairman of Leif Höegh and Co. Ltd., a shipping company. He also serves as a director of NeoMed Management Ltd. and as the Chairman of
Höegh Capital Partners, Inc.
Thomas Kuo-Yuen Hsu has served 30 years with, and is presently a director of CNC Industries, an affiliate of the Expedo Group of Companies
that manages a fleet of nine vessels ranging in size from 30,000 dwt to 150,000 dwt. He has been a Committee Director of the Britannia Steam Ship
Insurance Association Limited since 1988.
Eileen A. Mercier has over 30 years' experience in a wide variety of financial and strategic planning positions, including Senior Vice President and
Chief Financial Officer for AbitibiPrice Inc. from 1990 to 1995. She also currently serves as a director for Hydro One Inc., ING Bank of Canada, the
Ontario Teachers’ Pension Plan, Quebecor World Inc.,York University, the University Health Network and, and as a director and audit committee
member for CGI Group Inc., ING Canada Inc., Shermag Inc. and Winpak Ltd.
Tore I. Sandvold has over 30 years’ experience in the oil and energy industry. From 1973 to 1987 he served in the Norwegian Ministry of Industry,
Oil & Energy in a variety of positions in the area of domestic and international energy policy. From 1987 to 1990 he served as the Counselor for
Energy in the Norwegian Embassy in Washington, D.C. From 1990 to 2001 Mr. Sandvold served as Director General of the Norwegian Ministry of
Oil & Energy, with overall responsibility for Norway’s national and international oil and gas policy. From 2001 to 2002 he served as Chairman of the
Board of Petoro, the Norwegian state-owned oil company that is the largest oil asset manager on the Norwegian continental shelf. From 2002 to the
present, Mr. Sandvold, through his company, Sandvold Energy AS, has acted as advisor to companies and advisory bodies in the energy industry.
Mr. Sandvold serves on other boards, including those of Schlumberger Limited., E. on Ruhrgas Norge AS, Lambert Energy Advisory Ltd., University
of Stavanger, Offshore Northern Seas, and the Energy Policy Foundation of Norway.
Peter Antturi joined Teekay in September 1991. Since then, he has held a number of finance and accounting positions, including Controller from
March 1992 until his promotion to the position of Senior Vice President, Treasurer and Chief Financial Officer in October 1997. In 2003 he became
President of Navion AS upon the closing of our acquisition of Navion. In November 2003 Mr. Antturi was appointed President of our Teekay Navion
Shuttle Tankers division, which is responsible for the shuttle tanker activities and projects of our two wholly owned subsidiaries, Navion AS and
Ugland Nordic Shipping AS. Prior to joining Teekay, Mr. Antturi held various accounting and finance roles in the shipping industry since 1985.
Arthur Bensler joined Teekay in September 1998 as General Counsel. He was promoted to the position of Vice President in March 2002 and
became our Corporate Secretary in May 2003. He was appointed Senior Vice President in February 2004. Prior to joining Teekay, Mr. Bensler was
a partner in a large Vancouver, Canada law firm, where he practiced corporate, commercial and maritime law from 1986 until joining Teekay.
Peter Evensen joined Teekay in May 2003 as Senior Vice President, Treasurer and Chief Financial Officer. He was appointed Executive Vice
President and Chief Financial Officer in February 2004. Mr. Evensen has served as the Chief Executive Officer and Chief Financial Officer of
Teekay GP L.L.C. since it was formed in November 2004 and as Director of Teekay GP L.L.C. since January 2005. Mr. Evensen has over 20 years’
experience in banking and shipping finance. Prior to joining Teekay, Mr. Evensen was Managing Director and Head of Global Shipping at J.P.
Morgan Securities Inc. and worked in other senior positions for its predecessor firms. His international industry experience includes positions in New
York, London and Oslo.
David Glendinning joined Teekay in January 1987. Since then, he has held a number of senior positions, including service as Vice President,
Marine and Commercial Operations from January 1995 until his promotion to Senior Vice President, Customer Relations and Marine Project
Development in February 1999. In November 2003 Mr. Glendinning was appointed President of our Teekay Gas and Offshore division, which is
responsible for our initiatives in the LNG business and other areas of gas activity as well as building on our international presence in the floating
30
storage and offtake (or FSO) business and related offshore activities. Prior to joining Teekay, Mr. Glendinning, who is a Master Mariner, had 18
years' sea service on oil tankers of various types and sizes.
Jennifer Gordon joined Teekay in April 2004 as Senior Vice President, Corporate Resources. Prior to joining Teekay, Ms. Gordon was Senior Vice
President, Human Resources of Placer Dome Inc., an international gold, silver and copper mining company. Her experience includes positions in
human resources management at Finning International Inc., Colgate-Palmolive Canada Inc. and Suncor Energy Inc.
Vincent Lok joined Teekay in 1993. Since that time, he has held a number of finance and accounting positions, including Controller from 1997 until
his promotion to the position of Vice President, Finance in March 2002. He was appointed Senior Vice President and Treasurer in February 2004.
Prior to joining Teekay, Mr. Lok worked in the Vancouver, Canada audit practice of Deloitte & Touche.
Graham Westgarth joined Teekay in February 1999 as Vice President, Marine Operations. He was promoted to the position of Senior Vice
President, Marine Operations in December 1999. In November 2003 Mr. Westgarth was appointed President of our Teekay Marine Services
division, which is responsible for all of our marine and technical operations as well as marketing a range of services and products to third-parties,
such as marine consulting services and computer-based marine training software. He has extensive shipping industry experience. Prior to joining
Teekay Mr. Westgarth was General Manager of Maersk Company (UK), where he joined as Master in 1987. His international industry experience
includes 18 years’ sea service with five years in a command position.
Paul Wogan joined Teekay in November 2000 as the Managing Director of the London office. He was promoted to the position of Vice President,
Business Development in March 2002. In November 2003 Mr. Wogan was appointed President of our Teekay Tanker Services division, which is
responsible for the commercial management of our conventional crude oil and product tanker transportation services. Prior to joining Teekay, Mr.
Wogan was with the chartering arm of a major crude oil and product carrier fleet controlled by the Ceres Hellenic Group (Livanos), which
subsequently founded Seachem Tankers Ltd., a chemical tanker company, where he served as the Chief Executive Officer from 1997 until joining
Teekay.
Compensation of Directors and Senior Management
Director Compensation
During 2004, the eight non-employee directors received, in the aggregate, approximately $484,000 in cash fees for their services as directors, plus
reimbursement of their out-of-pocket expenses. In addition, each non-employee director received a $50,000 annual retainer to be paid by way of a
grant of restricted stock or stock options under our 2003 Equity Incentive Plan, at the director’s election. During 2004, certain of the directors elected
to receive this annual retainer in the form of stock options to purchase an aggregate of 14,400 shares of our common stock at an exercise price of
$33.63 per share. These options expire March 9, 2014, ten years after the date of the grant. Certain other directors elected to receive this annual
retainer in the form of 14,260 shares of restricted stock. In addition to the $50,000 annual retainer, the Chair of the Board received a further
$228,000 retainer in the form of a grant of restricted stock under our 2003 Equity Incentive Plan.
Annual Executive Compensation
The aggregate compensation earned by Teekay’s nine executive officers listed above (or the Executive Officers) for 2004 was $14.3 million. This is
comprised of base salary ($3.1 million), annual bonus ($4.3 million), special bonus ($6.0 million) and pension and other benefits ($0.9 million).
These amounts were paid primarily in Canadian Dollars, but are reported here in U.S. Dollars using an exchange rate of 1.20 Canadian Dollars for
each U.S. Dollar, the exchange rate on December 31, 2004. Teekay’s annual bonus plan considers both company performance, through
comparison to established targets and financial performance of peer companies, and individual performance. Due to the extraordinary performance
of Teekay during the previous four years, the Compensation and Human Resource Committee granted a special bonus to our senior management
during 2004.
Long-Term Executive Compensation
Teekay's long-term incentive programs are designed to encourage creation of long-term value for our shareholders, employee retention and equity
ownership. The programs consist of stock option grants, stock appreciation rights and restricted stock awards. All grants in 2004 and 2005 have
been made under our 2003 Equity Incentive Plan.
During 2004, we granted stock options to purchase an aggregate of 339,400 shares of our common stock, 15,494 restricted share units and stock
appreciation rights (or SARs) with respect to 33,200 shares of common stock to the Executive Officers under our 2003 Equity Incentive Plan. The
weighted-average exercise price of these stock options and SARs is $33.72 per share. These options and SARs, which vest equally over three
years, expire March 9, 2014, ten years after the date of the grant. The restricted share units vest on December 31, 2006. Upon vesting, the
restricted share units will be paid in the form of cash.
In March 2005, we awarded 303,291 restricted share units to our Executive Officers as incentive based compensation. Each restricted share unit is
equal in value to one share of our common stock and reinvested dividends from the date of the grant to the vesting of the restricted share unit.
Based on the grant date share price of $46.80 per share, the restricted share units had a notional value of $14.2 million on the date of the grant. The
restricted share units vest in three equal amounts on March 31, 2006, March 31, 2007 and November 30, 2007. Upon vesting, the restricted share
units will be paid to each grantee in the form of cash or shares of Teekay’s common stock, at the election of the grantee.
Options to Purchase Securities from Registrant or Subsidiaries
As at December 31, 2004 we had reserved pursuant to our 1995 Stock Option Plan, which was terminated with respect to new grants effective
September 10, 2003, and our 2003 Equity Incentive Plan, which was adopted effective on the same date (together, the Plans) 6,716,413 shares of
common stock for issuance upon exercise of options granted or to be granted. During 2004, 2003, and 2002 we granted options under the Plans to
acquire up to 833,840, 2,119,160 and 2,052,050 shares of common stock, respectively, to eligible officers, employees, and directors. The options
under the Plans have a 10-year term and vest equally over three years from the grant date, except for one grant of 50,000 options which will vest
100% on December 31, 2006. The outstanding options under the Plan are exercisable at prices ranging from $8.44 to $34.37 per share, with a
weighted-average exercise price of $20.47 per share, and expire between July 19, 2005 and April 5, 2014.
31
Board Practices
The Board of Directors consists of nine members. The Board of Directors is divided into three classes, with members of each class elected to hold
office for a term of three years in accordance with the classification indicated below or until his or her successor is elected and qualifies. Directors
Thomas Kuo-Yuen Hsu, Axel Karlshoej, and Bjorn Moller have terms expiring in 2005 and have been nominated by the Board of Directors for re-
election at the 2005 Annual Meeting of Shareholders. Directors Bruce C. Bell, C. Sean Day, and Dr. Ian D. Blackburne have terms expiring in 2006.
Directors Leif O. Höegh, Eileen A. Mercier and Tore I. Sandvold have terms expiring in 2007.
There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
The Board has determined that each of the current members of the Board, other than C. Sean Day and Bjorn Moller, has no material relationship
with us, either directly or as a partner, shareholder or officer of an organization that has a relationship with us, and is independent within the
meaning of our director independence standards, which reflect the NYSE director independence standards as currently in effect and as they may be
changed from time to time. In making this determination the Board considered Bruce C. Bell’s relationship with our largest shareholder and
concluded this relationship does not create a concern regarding his independence from our management.
The Board has the following three committees: Audit Committee, Compensation and Human Resources Committee, and Nominating and
Governance Committee. The membership of these committees during 2004 and the function of each of the committees are described below. Each
of the committees is currently comprised of independent members and operates under a written charter adopted by the Board. All of the committee
charters are available under “Corporate Governance” in the Investor Centre of our Web site at www.teekay.com. During 2004, the Board held nine
meetings. Each director attended all Board meetings, except for two Board meetings at which one director each was absent from each. Each
director attended all applicable committee meetings.
Our Audit Committee is composed entirely of directors who satisfy applicable NYSE and SEC audit committee independence standards. Our Audit
Committee includes Eileen A. Mercier (Chair), Leif O. Höegh and Tore I. Sandvold. All members of the committee are financially literate and the
Board has determined that Ms. Mercier qualifies as an audit committee financial expert and that her membership on four other public company audit
committees will not interfere with her service on Teekay’s Audit Committee. The Audit Committee assists the Board in fulfilling its responsibilities for
general oversight of: the integrity of our financial statements; our compliance with legal and regulatory requirements; the independent auditors’
qualifications and independence; and the performance of our internal audit function and independent auditors.
During 2004, our Compensation and Human Resource Committee included Axel Karlshoej (Chair), C. Sean Day, Ian D. Blackburne and Thomas
Kuo-Yuen Hsu. Effective March 2005, C. Sean Day ceased to be a member of this committee. The Compensation and Human Resource
Committee: reviews and approves corporate goals and objectives relevant to the Chief Executive Officer’s compensation, evaluates the Chief
Executive Officer’s performance in light of these goals and objectives and, either as a Committee or with the Board’s other independent directors,
determines the Chief Executive Officer’s compensation; reviews and approves the evaluation process and compensation structure for executives,
other than the Chief Executive Officer, evaluates their performance and sets their compensation based on this evaluation; reviews and makes
recommendations to the Board regarding compensation for directors; establishes and administers long-term incentive-compensation and equity-
based plans; and oversees our other compensation plans, policies and programs.
During 2004, our Nominating and Governance Committee included C. Sean Day (Chair), Bruce C. Bell and Eileen A. Mercier. Effective March 2005,
C. Sean Day ceased to be a member of this committee and Ian D. Blackburne (Chair) and Thomas Kuo-Yuen Hsu became members of this
committee. The Nominating and Governance Committee: identifies individuals qualified to become Board members; selects and recommends to the
Board director and committee member candidates; develops and recommends to the Board corporate governance principles and policies applicable
to us, monitors compliance with these principles and policies and recommends to the Board appropriate changes; and oversees the evaluation of
the Board and management.
Crewing and Staff
As at December 31, 2004, we employed approximately 4,800 seagoing and 700 shore-based personnel, compared to approximately 4,000 seagoing
and 700 shore-based personnel in 2003, and 3,650 seagoing and 450 shore-based personnel as at December 31, 2002. The increase in personnel
from December 31, 2003 to December 31, 2004 was primarily due to our acquisition of Teekay Spain. The increase in personnel from December 31,
2002 to December 31, 2003 was primarily due to our acquisition of Navion in April 2003.
We regard attracting and retaining motivated seagoing personnel as a top priority. Through our global manning organization comprised of offices in
Glasgow, Scotland, Grimstad, Norway, Riga, Latvia, Manila, Philippines, Mumbai, India, Sydney, Australia, and Madrid, Spain, we offer seafarers
highly competitive employment packages and comprehensive benefits. We also provide excellent opportunities for personal and career
development, which relate to our philosophy of promoting internally.
During fiscal 1996, we entered into a Collective Bargaining Agreement with the Philippine Seafarers’ Union, an affiliate of the International Transport
Workers’ Federation (or ITF), and a Special Agreement with ITF London that covers substantially all of our junior officers and seamen. We are also
party to Enterprise Bargaining Agreements with various Australian maritime unions that covers officers and seamen employed through our
Australian operations. Our officers and seamen for our Spanish-flagged vessels are covered by a collective bargaining agreement with Spain’s
Union General de Trabajdores and Comisiones Obreras. We believe our relationships with these labor unions are good.
We see our commitment to training as fundamental to the development of the highest caliber seafarers for our marine operations. Our cadet training
program is designed to balance academic learning with hands-on training at sea. We have relationships with training institutions in Canada, Croatia,
India, Latvia, Norway, Philippines, Turkey, and the United Kingdom. After receiving formal instruction at one of these institutions, the cadets’ training
continues on board a Teekay vessel. We also have a career development plan that is designed to ensure a continuous flow of qualified officers who
are trained on our vessels and are familiar with our operational standards, systems and policies. We believe that high-quality manning and training
policies will play an increasingly important role in distinguishing larger independent tanker companies that have in-house, or affiliate, capabilities
from smaller companies that must rely on outside ship managers and crewing agents.
Share Ownership
32
The following table sets forth certain information regarding beneficial ownership, as of March 15, 2005, of our common stock by the directors and
Executive Officers as a group. The information is not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person
or entity beneficially owns any shares that the person or entity has the right to acquire as of May 14, 2005 (60 days after March 15, 2005) through
the exercise of any stock option or other right. Unless otherwise indicated, each person or entity has sole voting and investment power (or shares
such powers with his or her spouse) with respect to the shares set forth in the following table. Information for certain holders is based on information
delivered to us.
Identity of Person or Group
All directors and Executive Officers (17 persons)
Shares Owned
Percent of Class
644,441 (1) (3)
0.8% (2)
(1) Includes 508,669 shares of common stock subject to stock options exercisable by May 14, 2005 under our 1995 and 2003 Stock Option
Plans with a weighted-average exercise price of $20.14 that expire between May 13, 2008 and March 9, 2014. Excludes (a) 570,097 shares
of common stock subject to stock options exercisable after May 14, 2005 under our 1995 and 2003 Stock Option Plans with a weighted
average exercise price of $35.50, that expire between March 10, 2013 and March 9, 2014 (b) shares owned by Resolute Investments, Inc.
(Please see Item 7 – Major Shareholders and Related Party Transactions) and (c) 303,291 restricted share units which will be paid to each
grantee in the form of cash or shares of Teekay’s common stock, at the election of the grantee.
(2) Each director and Executive Officer beneficially owns less than one percent of the outstanding shares of common stock.
(3) Each director is expected to acquire at least 10,000 shares of Teekay’s common stock by no later than the later of May 14, 2008 or the
fifth anniversary of the date on which the director joined the Board. In addition, each Executive Officer is expected to acquire shares of
Teekay’s common stock equivalent in value to one to three times their annual base salary by 2010.
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
(a) The following table sets forth information regarding beneficial ownership, as of March 15, 2005, of Teekay’s common stock by each person we
know to beneficially own more than 5% of the common stock. Information for certain holders is based on their latest filings with the SEC or
information delivered to us. The number of shares beneficially owned by each person or entity is determined under SEC rules and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under SEC rules a person or entity beneficially owns any shares as to
which the person or entity has or shares voting or investment power. In addition, a person or entity beneficially owns any shares that the person or
entity has the right to acquire as of May 14, 2005 (60 days after March 15, 2005) through the exercise of any stock option or other right. Unless
otherwise indicated, each person or entity has sole voting and investment power (or shares such powers with his or her spouse) with respect to the
shares set forth in the following table.
Identity of Person or Group
Shares Owned
Percent of Class
Resolute Investments, Inc. (1)..............................................................................................
FMR Corp., Edward C. Johnson 3rd and Abigail P. Johnson, as a group(2)........................
32,631,380
11,554,017
Neuberger Berman, Inc. and Neuberger Berman, LLC, as a group(3) ..............................
___________________________
8,338,419
39.3%
13.9%
10.1%
(1)
(2)
(3)
Two of our directors are officers and directors of Resolute Investments, Inc. Two additional Teekay directors are directors of the entity
that ultimately controls Resolute. Please see “—-Related Party Transactions."
Includes sole voting power as to 330,922 shares and sole dispositive power as to 11,554,017 shares. This information is based on the
Schedule 13G/A filed by this group with the SEC on February 14, 2005. Based on prior information filed with the SEC, FMR Corp.’s
beneficial ownership in Teekay was 11.4% on March 15, 2004 and 14.03% on March 15, 2003.
Includes sole voting power as to 5,532,750 shares, shared voting power as to 1,274,100 shares and shared dispositive power as to
8,338,419 shares. Neuberger Berman, LLC and Neuberger Berman Management Inc. both have shared voting and dispositive power.
Neuberger Berman, LLC and Neuberger Management Inc. serve as sub-adviser and investment manager, respectively, of Neuberger
Berman Inc.’s mutual funds. This information is based on the Schedule 13G/A filed by this group on February 15, 2005. Based on prior
information filed with the SEC, Neuberger Berman Inc’s beneficial ownership in Teekay was 7.0% on March 15, 2004 and less than 5%
on March 15, 2003.
Our major shareholders have the same voting rights as our other shareholders. No corporation or foreign government or other natural or legal
person owns more than 50% of our outstanding common stock. We are not aware of any arrangements, the operation of which may at a subsequent
date result in a change in control of Teekay.
Related Party Transactions
As at December 31, 2004, Resolute Investments, Inc. (or Resolute) owned 39.3% of our outstanding Common Stock. Two of our directors, C. Sean
Day, who is also Chair of our Board, and Bruce Bell, are directors and the Chairman and Vice President, respectively, of Resolute. Two additional
directors, Thomas Kuo-Yuen Hsu and Axel Karlshoej, are among the Managing Directors of The Kattegat Trust Company Limited, which is the
trustee of the trust that owns all of Resolute’s outstanding equity.
33
Bruce Bell is also the Managing Director of Oceanic Bank and Trust Limited. Payments made by us to Oceanic Bank and Trust Limited in respect of
corporate administration fees and shared office costs for 2004, totaled approximately $0.5 million.
In 1993 we purchased all of the issued and outstanding shares of Palm Shipping Inc. (now Teekay Chartering Limited) from an affiliate of Resolute.
During 2002, we 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. We paid this amount in February 2003.
Item 8. Financial Information
Consolidated Financial Statements and Notes
Please see Item 18 below.
Legal Proceedings
From time to time we have been, and we expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business,
principally personal injury and property casualty claims. Such claims, even if lacking merit, could result in the expenditure of significant financial and
managerial resources. We are not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material
adverse effect on our financial condition or results of operations.
Dividend Policy
Commencing with the fiscal quarter ended September 30, 1995, we declared and paid quarterly cash dividends in the amount of $0.1075 per share
on our common stock. We increased our quarterly dividend from $0.1075 per share to $0.125 per share on our common stock in the fourth quarter
of 2003 and from $0.125 per share to $0.1375 per share on our common stock during the fourth quarter of 2004. On May 17, 2004, we effected a
two-for-one stock split relating to our common stock. All per share data give effect to this stock split retroactively. Subject to financial results and
declaration by the Board of Directors, we currently intend to continue to declare and pay a regular quarterly dividend in such amount per share on
our common stock. Pursuant to our dividend reinvestment program, holders of common stock are permitted to choose, in lieu of receiving cash
dividends, to reinvest any dividends in additional shares of common stock at then prevailing market prices, but without brokerage commissions or
service charges.
The timing and amount of dividends, if any, will depend, among other things, on our results of operations, financial condition, cash requirements,
restrictions in financing agreements and other factors deemed relevant by our Board of Directors. Because we are a holding company with no
material assets other than the stock of our subsidiaries, our ability to pay dividends on the common stock is dependent on the earnings and cash
flow of our subsidiaries. The indenture relating to our 8.32% First Preferred Ship Mortgage Notes due 2006 and certain of the agreements governing
our (and our subsidiaries’) credit facilities provide that our ability to pay dividends is subject to limitations based upon our cumulative net income plus
certain additional amounts, including the proceeds we receive from any issuance of our capital stock. We do not believe that the restrictions
contained in that indenture or in other financing agreements to which we and our subsidiaries are party to will restrict payment of cash dividends on
the common stock for the foreseeable future.
Significant Changes
On November 24, 2004, we announced that our wholly-owned subsidiary, Teekay LNG Partners L.P. (or Teekay LNG Partners), had filed a
registration statement with the SEC for an initial public offering of its common units. Teekay LNG Partners is a Marshall Islands partnership recently
formed by us as part of our strategy to expand our operations in the LNG shipping sector. This master limited partnership will provide LNG and
crude oil marine transportation services under long-term, fixed-rate contracts with major energy and utility companies through its fleet of four LNG
carriers and five Suezmax class crude oil tankers, primarily consisting of vessels we obtained through our acquisition of Teekay Spain in April 2004.
After the offering, we will own approximately an 81 percent interest in the partnership (including our 2% general partner interest). The offering will
increase if the underwriters exercise in full their over-allotment option, reducing our ownership to approximately 79 percent.
Item 9. The Offer and Listing
Our common stock is traded on the New York Stock Exchange (or NYSE) under the symbol “TK". The following table sets forth the high and low
closing sales prices for our common stock on the NYSE for each of the periods indicated. (1)
Years Ended
High
Low
Quarters Ended
High
Low
Months Ended
Dec. 31,
2004
Dec. 31,
2003
Dec. 31,
2002
Dec. 31,
2001
Dec. 31,
2000
$54.4500
27.9500
$28.6750
17.8550
$20.8500
13.1750
$26.3050
12.7450
$25.4375
7.6563
Dec. 31,
2004
Sep. 30,
2004
Jun. 30,
2004
Mar. 31,
2004
Dec. 31,
2003
Sep. 30,
2003
Jun. 30,
2003
Mar. 31,
2003
$54.4500
41.1400
$43.3800
34.5600
$37.6500
29.4100
$34.9350
27.9500
$28.6750
20.9550
$23.6250
20.9750
$21.8350
18.1250
$21.5800
17.8550
Feb. 28,
2005
Jan. 31,
2005
Dec. 31,
2004
Nov. 30,
2004
Oct. 31,
2004
Sep. 30,
2004
High
Low
$50.0100
44.9600
$44.3700
40.1200
$50.3600
41.1400
$54.4500
44.7000
$48.9800
43.7100
$43.3800
35.6500
34
(1) The Company’s Board of Directors authorized a two-for-one stock split relating to our common stock, which was effected in May 2004 in the
form of a 100% stock dividend. All stockholders of record on May 3, 2004 received one additional share of common stock for each share held.
The above table gives effect to this stock split retroactively.
Our Premium Equity Participating Security Units due May 18, 2006 (or Equity Units) are traded on the NYSE under the symbol "TK PR". The
following table sets forth the high and low closing sales prices for our Equity Units on the NYSE for each of the periods indicated.
Years Ended
High
Low
Quarters Ended
High
Low
Months Ended
Dec. 31,
2004
Dec. 31,
2003 (1)
$63.3400
35.2400
$36.1400
24.8600
Dec. 31,
2004
Sep. 30,
2004
Jun. 30,
2004
Mar. 31,
2004
Dec. 31,
2003
Sep. 30,
2003
Jun. 30,
2003
Mar. 31,
2003(1)
$63.3400
48.1900
$50.3800
41.2500
$44.6900
36.3900
$42.9300
35.2400
$36.1400
28.0500
$30.4500
28.0100
$29.5000
25.4700
$27.1000
24.8600
Feb. 28,
2005
Jan. 31,
2005
Dec. 31,
2004
Nov. 30,
2004
Oct. 31,
2004
Sep. 30,
2004
High
Low
$57.3300
52.1900
$51.4000
46.5400
$58.5600
48.1900
$63.3400
51.9600
$57.1500
50.8900
$50.3800
42.3300
(1) Period beginning February 11, 2003
Our 8.32% Notes are listed for trading on the NYSE. The 8.32% Notes were first offered on the market January 19, 1996. As no active trading
market exists for these 8.32% Notes, no historical pricing information is included here.
Item 10. Additional Information
Memorandum and Articles of Association
Our Articles of Incorporation and Bylaws have previously been filed as exhibits 2.1, 2.2, and 2.3 to our Annual Report on Form 20-F (File No. 1-
12874), filed with the SEC on March 30, 2000, and are hereby incorporated by reference into this Annual Report.
The rights, preferences and restrictions attaching to each class of our capital stock are described in the section entitled "Description of Capital
Stock" of our Rule 424(b) prospectus (File No. 1-12874), filed with the SEC on June 10, 1998, and hereby incorporated by reference into this Annual
Report, provided that since the date of such prospectus (1) the par value of our capital stock has been changed to $0.001 per share, (2) our
authorized capital stock has been increased to 725,000,000 shares of common stock and 25,000,000 shares of Preferred Stock, (3) we have been
domesticated in the Republic of the Marshall Islands and (4) we have adopted a staggered Board of Directors, with directors serving three-year
terms.
The necessary actions required to change the rights of holders of the stock and the conditions governing the manner in which annual general
meetings and special meetings of shareholders are convoked are described in our Bylaws filed as exhibit 2.3 to our Annual Report on Form 20-F
(File No. 1-12874), filed with the SEC on March 30, 2000, and hereby incorporated by reference into this Annual Report.
We have in place a rights agreement that would have the effect of delaying, deferring or preventing a change in control of Teekay. The rights
agreement has been filed as part of our Form 8-A (File No. 1-12874), filed with the SEC on September 11, 2000, and hereby incorporated by
reference into this Annual Report.
There are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights
on the securities imposed by the laws of the Republic of the Marshall Islands or by our Articles of Incorporation or Bylaws.
Material Contracts
The following is a summary of each material contract, other than material contracts entered into in the ordinary course of business, to which we or
any of our subsidiaries is a party, for the two years immediately preceding the date of this Annual Report:
(a) Indenture, dated January 29, 1996, for U.S. $225,000,000 8.32% First Preferred Ship Mortgage Notes due 2006, Teekay Shipping
Corporation as Issuer; United States Trust Company of New York as Trustee; VSSI Oceans Inc., VSSI Atlantic Inc., VSSI Appian Inc., Senang Spirit
Inc., Exuma Spirit Inc., Nassau Spirit Inc., and Andros Spirit Inc. as Guarantors.
(b) Agreement, dated January 26, 1998, for a U.S. $200,000,000 Reducing Revolving Credit Facility to be made available to certain wholly-
owned subsidiaries of Teekay Shipping Corporation by Den Norske Bank ASA, Christiania Bank og Kreditkasse ASA, New York Branch, and the
Bank of Nova Scotia.
(c) Amended and Restated Reimbursement Agreement dated April 16, 1998 (amended May 1999) relating to a U.S. $74,000,000 Credit facility
made available by RABO Australia Limited to Barrington (Australia) Pty Limited, Palmerston (Australia) Pty Limited, VSSI Australia Limited, VSSI
Transport Inc. and Alliance Chartering Pty Limited and Nedship Bank (America) N.V. as Guarantor.
(d) Amended and Restated Guarantee dated April 16, 1998 made by Teekay Shipping Corporation in favor of Nedship Bank (America) N.V.
relating to the U.S. $74,000,000 facility granted by RABO Australia Limited and guaranteed by Nedship Bank (America) N.V.
35
(e) Agreement, dated March 26, 1999, for the amalgamation of Northwest Maritime Inc., a 100% owned subsidiary of Teekay Shipping
Corporation, and Bona Shipholding Ltd.
(f) Amendment and Restatement Agreement, dated June 11, 1999, relating to a US $500,000,000 Revolving Loan Agreement made available to
Bona Shipholding Ltd. by Chase Manhattan plc, Citibank International plc and various other banks.
(g) Reimbursement Agreement, dated February 16, 2001, between Karratha Spirit Pty Ltd and Nedship Bank (America) N.V.
(h) Agreement, dated February 16, 2001, for a U.S. $34,000,000 Term Loan Facility to be made available to Karratha Spirit Pty Ltd by RABO
Australia Limited.
(i) Indenture dated June 22, 2001 among Teekay Shipping Corporation and The Bank of New York Trust Company of Florida (formerly U.S.
Trust Company of Texas, N.A.) for U.S. $250,000,000 8.875% Senior Notes due 2011.
(j) Amendment and Restatement Agreement, dated September 14, 2001, relating to a U.S. $500,000,000 Revolving Loan Agreement between
Bona Shipholding Ltd., Teekay Shipping Corporation, J.P. Morgan Securities Inc., Citibank International plc and various other banks.
(k) First Supplemental Indenture dated as of December 6, 2001, among Teekay Shipping Corporation and The Bank of New York Trust
Company of Florida, N.A. for U.S. $100,000,000 8.875% Senior Notes due 2011.
(l) Share Sale and Purchase Agreement by and among Statoil ASA and Statpet AS and Norsk Teekay AS dated December 15, 2002.
(m) Supplemental Indenture No. 1 between Teekay Shipping Corporation and The Bank of New York, as trustee dated as of February 18, 2003.
(n) Purchase Contract Agreement between Teekay Shipping Corporation and The Bank of New York, as purchase contract agent dated as of
February 18, 2003.
(o) Pledge Agreement between Teekay Shipping Corporation and The Bank of New York, as collateral agent dated as of February 18, 2003.
(p) Remarketing Agreement between Teekay Shipping Corporation and Morgan Stanley & Co. Incorporated dated as of February 18, 2003.
(q) Underwriting Agreement between Teekay Shipping Corporation, Morgan Stanley & Co. Incorporated and Salmon Smith Barney dated as of
February 11, 2003.
(r) Agreement, dated March 10, 2003, for a U.S. $180,000,000 Secured Credit Facility to be made available to Cork Spirit LLC, Donegal Spirit
LLC, Limerick Spirit LLC, Shannon Spirit LLC and Galway Spirit LLC by Den Norske Bank ASA, Deutsche Bank AG, DVB Bank AG and Nordea
Bank Finland Plc and various other banks.
(s) Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan Facility between Norsk Teekay Holdings Ltd.,
Den Norske Bank ASA and various other banks.
(t) Share purchase agreement dated March 15, 2004 regarding the acquisition of Naviera F. Tapias S.A. (renamed Teekay Shipping Spain S.L.)
(u) Agreement, dated September 1, 2004 for a U.S. $550,000,000 Credit Facility Agreement to be made available to Teekay Nordic Holdings
Incorporated by Nordea Bank Finland PLC, New York Branch.
(v) Amendment dated September 30, 2004 to Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan
Facility between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks.
(w) Annual Executive Bonus Plan
Exchange Controls and Other Limitations Affecting Security Holders
We are not aware of any governmental laws, decrees or regulations in the Republic of The Marshall Islands that restrict the export or import of
capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-resident holders of our
securities.
We are not aware of any limitations on the right of non-resident or foreign owners to hold or vote our securities imposed by the laws of the Republic
of the Marshall Islands or our Articles of Incorporation and Bylaws.
Taxation
Teekay Shipping Corporation was incorporated in the Republic of Liberia on February 9, 1979 and was domesticated in the Republic of The
Marshall Islands on December 20, 1999.
Marshall Islands Tax Consequences. Because Teekay and our subsidiaries do not, and do not expect that we will, conduct business or
operations in the Republic of The Marshall Islands, and because all documentation related to the public offering of our common stock was executed
outside of the Republic of The Marshall Islands, under current Marshall Islands law, no taxes or withholdings will be imposed by the Republic of The
Marshall Islands on distributions made to holders of shares of our common stock, so long as such persons do not reside in, maintain offices in, nor
engage in business in the Republic of The Marshall Islands. Furthermore, no stamp, capital gains or other taxes will be imposed by the Republic of
The Marshall Islands on the purchase, ownership or disposition by such persons of shares of our common stock.
36
Bahamian Tax Consequences. Under current Bahamian law, no taxes or withholdings will be imposed by the Commonwealth of the Bahamas on
distributions made in respect of the shares of our common stock, and no stamp, capital gains or other taxes will be imposed by the Commonwealth
of the Bahamas on the ownership or disposition of the shares of our common stock, as there are no personal income or corporation taxes, capital
gains taxes or death duties in the Commonwealth of the Bahamas.
Documents on Display
Documents concerning us that are referred to herein may be inspected at our principal executive headquarters at TK House, Bayside Executive
Park, West Bay Street & Blake Road, P.O. Box AP-59212, Nassau, The Bahamas. Those documents electronically filed via the Electronic Data
Gathering, Analysis, and Retrieval (or EDGAR) system may also be obtained from the SEC’s website at www.sec.gov or from the SEC public
reference room at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549. Further information on the operation of the public reference rooms
may be obtained by calling the SEC at 1-800-SEC-0330. Copies of documents can be requested from the SEC public reference rooms for a
copying fee.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from foreign currency fluctuations, changes in interest rates, bunker fuel prices and spot market rates for vessels.
We use foreign currency forward contracts, interest rate swaps, bunker fuel swap contracts and forward freight agreements to manage currency,
interest rate, bunker fuel price risks and spot market rates but do not use these financial instruments for trading or speculative purposes.
Foreign Currency Fluctuation Risk
Our primary economic environment is the international shipping market. This market utilizes the U.S. Dollar as its functional currency. Consequently,
virtually all of our revenues and most of our operating costs are in U.S. dollars. We incur certain voyage expenses, vessel operating expenses,
drydocking, and overhead costs in foreign currencies, the most significant of which are Japanese Yen, Singapore Dollars, Canadian Dollars,
Australian Dollars, British Pounds, Euro and Norwegian Kroner. During 2004, approximately 33% of vessel and voyage costs, overhead and
drydock expenditures were denominated in these currencies. However, we have some ability to shift the purchase of goods and services from one
country to another and, thus, from one currency to another, on relatively short notice.
We enter into forward contracts as a hedge against changes in certain foreign exchange rates. As at December 31, 2004, we had the following
foreign currency forward contracts:
(contract amounts in USD’000's)
Norwegian Kroner
Contract amount
Average contractual exchange rate
Canadian Dollar
Contract amount
Average contractual exchange rate
Expected Maturity Date
2005
2006
$ 54,046
7.33
$45,151
1.29
$5,000
7.82
-
-
To the extent the hedge is effective, changes in the fair value of the forward contract are either offset against the fair value of assets or liabilities
through income, or recognized in other comprehensive income until the hedged item is recognized in income. The ineffective portion of a forward
contract's change in fair value will be immediately recognized in income.
Although the majority of our transactions, assets and liabilities are denominated in U.S. Dollars, certain of our subsidiaries have foreign currency
denominated liabilities. There is a risk that currency fluctuations will have a negative effect on the value of our cash flows. We have not entered into
any forward contracts to protect against the translation risk of our foreign currency denominated liabilities. As at December 31, 2004, we had Euro
denominated term loans of 325.8 million Euros ($443.7 million) included in long-term debt, and Norwegian Kroner denominated deferred income
taxes of approximately 666.1 million NOK ($110.3 million) included in other long-term liabilities. Our Euro denominated revenues approximate our
Euro denominated expenses and Euro denominated loan and interest payments. For this reason we have not entered into any Euro forward
contracts.
Interest Rate Risk
We invest our cash and marketable securities in financial instruments with maturities of less than six months within the parameters of our investment
policy and guidelines.
We use interest rate swaps to manage the impact of interest rate changes on earnings and cash flows. Changes in the fair value of our interest rate
swaps are either offset against the fair value of assets or liabilities through income, or recognized in other comprehensive income until the hedged
item is recognized in income. The ineffective portion of an interest rate swap change in fair value is immediately recognized in income. Premiums
and receipts, if any, are recognized as adjustments to interest expense over the lives of the individual contracts.
The table below provides information about our financial instruments at December 31, 2004, which are sensitive to changes in interest rates,
including our debt and capital lease obligations and interest rate swaps. For long-term debt and capital lease obligations, the table presents principal
cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and
weighted average interest rates by expected contractual maturity dates.
37
(in USD’000's except for percentages)
2005
2006
2007
2008
2009
Expected Maturity Date
There-after
Rate (9)
Long-Term Debt:
Fixed-Rate Debt
Average Interest Rate
Variable Rate Debt
U.S. Dollar Denominated (1)
Euro Denominated (2) (3)
Capital Lease Obligations: (4)
Fixed-Rate Obligations
Average Interest Rate (5)
45,000
8.32%
149,656
6.09%
-
-
-
-
-
-
351,530
8.875%
63,418
11,059
60,472
9,342
26,384
10,023
273,288
10,753
177,751
11,536
516,769
391,025
7,978
7.80%
135,313
8.86%
3,355
6.13%
3,537
6.20%
3,709
6.25%
69,274
6.01%
Interest Rate Swaps: (6)(7)
Contract Amount (8)
Average Fixed Pay Rate (1)
Contract Amount
Average Fixed Pay Rate (1)
Contract Amount (Euro Denominated) (3)
Average Fixed Pay Rate (2)
100,000
2.25%
6,485
6.76%
8,340
5.90%
-
-
7,023
6.76%
9,342
5.90%
500,000
2.79%
7,606
6.76%
10,023
5.90%
-
-
8,200
6.76%
10,753
5.90%
200,000
4.24%
140,476
6.96%
11,536
5.90%
734,000
5.44%
158,494
6.41%
391,025
5.89%
(1)
Interest payments on U.S. Dollar denominated debt and interest rate swaps are based on LIBOR.
(2)
Interest payments on Euro denominated debt and interest rate swaps are based on EURIBOR.
8.07%
3.34%
3.35%
7.81%
4.21%
6.68%
5.90%
(3) Euro denominated amounts have been converted to U.S. Dollars using the prevailing exchange rate as of December 31, 2004.
(4) Excludes capital lease obligations of $413.3 million on two of our LNG carriers. Under the terms of these lease obligations, we are required
to have on deposit with financial institutions an amount of cash that, together with the interest earned thereon, will fully fund the amount
owing under the capital lease obligations. Consequently, we are not subject to interest rate risk from these obligations.
(5) The average interest rate is the weighted-average interest rate implicit in the capital lease obligations at the inception of the leases.
(6) The average variable receive rate for our interest rate swaps is set monthly at 1-month LIBOR or EURIBOR or semi-annually at the 6-
month LIBOR or EURIBOR.
(7)
In February 2005, we entered into an additional $200.0 million of interest rate swap agreements. Please see Item 18 - Financial
Statements: Note 21 – Subsequent Events.
(8) The inception date of the interest rate swaps maturing in 2009 is 2006. The inception dates of the interest rate swaps maturing after 2009
are 2006 ($478.0 million) and 2007 ($256.0 million).
(9) Rate refers to the weighted-average effective interest rate for our debt, including the margin we pay on our floating-rate debt, as at
December 31, 2004 and average fixed pay rate for our swap agreements. The average fixed pay rate on our interest rate swaps excludes
the margin we pay on our floating-rate debt.
Commodity Price Risk
We use bunker fuel swap contracts as a hedge to protect against the change in the cost of forecasted bunker fuel costs for certain vessels being
time-chartered-out and for vessels servicing certain contracts of affreightment. To the extent the hedge is effective, changes in the fair value of the
forward contract are either offset against the fair value of assets or liabilities through income, or recognized in other comprehensive income until the
hedged item is recognized in income. The ineffective portion of a forward contract's change in fair value is immediately recognized in income. As at
December 31, 2004, we were committed to bunker fuel swap contracts totaling 22,650 metric tonnes with a weighted-average price of $158.14 per
tonne, which expire between January and December 2005.
Spot Market Rate Risk
We use written forward freight agreements as a hedge to protect against the change in spot market rates earned by some of our vessels. As at
December 31, 2004, we were committed to forward freight agreements totaling 4.8 million metric tonnes with a notional principal amount of $40.0
million, which expire between January and December 2005.
The following table sets forth further information on the magnitude of these foreign currency forward contracts, interest rate swap agreements,
bunker fuel swap contracts, and forward freight agreements:
38
(in USD’000's)
December 31, 2004
Foreign Currency Forward Contracts
Interest Rate Swap Agreements
Bunker Fuel Swap Contracts
Forward Freight Agreements
Debt (including capital lease obligations)
December 31, 2003
Foreign Currency Forward Contracts
Interest Rate Swap Agreements
Bunker Fuel Swap Contracts
Forward Freight Agreements
Debt (including capital lease obligations)
Contract
Amount
Carrying Amount
Asset
Liability
Fair
Value
$ 104,197
2,304,860
3,582
39,967
2,744,545
$ 146,912
710,000
696
13,385
1,636,758
$ 16,635
98
$ 20,944
183
$
158,482
3,276
2,744,545
$
9,953
1,178
1,636,758
$ 16,635
(158,482)
98
(3,276)
(2,801,553)
$ 20,944
(9,953)
183
(1,178)
(1,686,002)
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
We conducted an evaluation of our disclosure under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer. Based on our evaluation, we concluded that disclosure controls and procedures were effective as of December 31, 2004.
During 2004 there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all
fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives, a control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Teekay have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls
also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Item 16A. Audit Committee Financial Expert
The Board has determined that director and Chair of the Audit Committee, Eileen A. Mercier, qualifies as an audit committee financial expert and is
independent under applicable NYSE and SEC standards.
Item 16B. Code of Ethics
We have adopted Standards for Business Conduct that include a Code of Ethics for all employees and directors. This document is available under
“Corporate Governance” in the Investor Centre of our Web site (www.teekay.com). We also intend to disclose any waivers to or amendments of our
Standards of Business Conduct or Code of Ethics for the benefit of our directors and executive officers on our website.
Item 16C. Principal Accountant Fees and Services
Our principal accountant for 2004 and 2003 was Ernst & Young LLP, Chartered Accountants. The following table shows the fees we paid or accrued
for audit and other services provided by Ernst & Young LLP for 2004 and 2003.
Fees
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total
2004
2003
$907,777
395,176
232,640
1,900
$1,537,493
$454,780
76,120
329,570
1,605
$862,075
39
(1) Audit fees represent fees for professional services provided in connection with the audit of our consolidated financial statements and review of
our quarterly consolidated financial statements and audit services provided in connection with other statutory or regulatory filings.
(2) Audit-related fees consisted primarily of accounting consultations, employee benefit plan audits, services related to business acquisitions and
divestitures and other attestation services.
(3) For 2004 and 2003, respectively, tax fees principally included international tax planning fees of $62,455 and $175,290, corporate tax
compliance fees of $38,849 and $67,070, and personal and expatriate tax services fees of $131,336 and $87,210.
(4) All other fees principally include subscription fees to an internet database of accounting information.
The Audit Committee has the authority to pre-approve permissible audit-related and non-audit services not prohibited by law to be performed by our
independent auditors and associated fees. Engagements for proposed services either may be separately pre-approved by the Audit Committee or
entered into pursuant to detailed pre-approval policies and procedures established by the Audit Committee, as long as the Audit Committee is
informed on a timely basis of any engagement entered into on that basis. The Audit Committee separately pre-approved all engagements and fees
paid to our principal accountant in 2004.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In November 2004, Teekay announced that its Board of Directors had authorized the repurchase of up to 3,000,000 shares of its Common Stock in
the open market. By January 31, 2005, we had repurchased the maximum number authorized. The following table shows the monthly stock
repurchase activity:
Month of Repurchase
Total Number of
Shares Purchased
Average Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publically
Announced Plans or
Program
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Program
December 2004 .........................................
January 2005 .............................................
1,400,200
1,599,800
3,000,000
$43.73
42.27
$42.95
1,400,200
1,599,800
3,000,000
1,599,800
0
0
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
PART III
The following financial statements and schedule, together with the report of Ernst & Young LLP, Chartered Accountants thereon, are filed as part of
this Annual Report:
Report of Independent Registered Public Accounting Firm ........................................................................................................................
F-1
Consolidated Financial Statements
Consolidated Statements of Income ...........................................................................................................................................................
F-2
Consolidated Balance Sheets .....................................................................................................................................................................
F-3
Consolidated Statements of Cash Flows ....................................................................................................................................................
F-4
Consolidated Statements of Changes in Stockholders' Equity ...................................................................................................................
F-5
Notes to the Consolidated Financial Statements ........................................................................................................................................
F-6
Schedule A to the Consolidated Financial Statements ...............................................................................................................................
F-21
Page
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required, are inapplicable or have been
disclosed in the Notes to the Consolidated Financial Statements and therefore have been omitted.
Item 19. Exhibits
The following exhibits are filed as part of this Annual Report:
1.1 Amended and Restated Articles of Incorporation of Teekay Shipping Corporation. (9)
1.2 Articles of Amendment of Articles of Incorporation of Teekay Shipping Corporation. (9)
1.3 Amended and Restated Bylaws of Teekay Shipping Corporation. (9)
2.1 Registration Rights Agreement among Teekay Shipping Corporation, Tradewinds Trust Co. Ltd., as Trustee for the Cirrus Trust, and
40
Worldwide Trust Services Ltd., as Trustee for the JTK Trust. (1)
2.2 Specimen of Teekay Shipping Corporation Common Stock Certificate. (1)
2.3
Indenture dated January 29, 1996 among Teekay Shipping Corporation, VSSI Oceans Inc., VSSI Atlantic Inc., VSSI Appian Inc., Senang
Spirit Inc., Exuma Spirit Inc., Nassau Spirit Inc., Andros Spirit Inc. and United States Trust Company of New York, as Trustee. (5)
2.4 Specimen of Teekay Shipping Corporation's 8.32% First Preferred Ship Mortgage Notes Due 2008. (5)
2.5 Bahamian Statutory Ship Mortgage dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York. (3) (5)
2.6 Deed of Covenants dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York. (3) (5)
2.7 First Preferred Ship Mortgage dated January 29, 1996 by VSSI Oceans Inc. to United States Trust Company of New York, as Trustee. (4)
2.8 Assignment of Time Charter dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York, as Trustee. (3)
(5)
2.9 Assignment of Insurance dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York, as Trustee. (3) (5)
2.10 Pledge Agreement and Irrevocable Proxy dated January 29, 1996 by Teekay in favor of United States Trust Company of New York, as
Trustee. (5)
2.11 Guarantee dated January 29, 1996 by Nassau Spirit Inc. in favor of United States Trust Company of New York, as Trustee. (3) (5)
2.12 Assignment of Freights and Hires dated January 29, 1996 by Nassau Spirit Inc. to United States Trust Company of New York, as Trustee.
(3) (5)
2.13 Cash Collateral Account Agreement dated January 29, 1996 between Nassau Spirit Inc. and United States Trust Company of New York,
2.14
2.15
as Trustee. (3) (5)
Investment Account Agreement dated January 29, 1996 between Teekay Shipping Corporation and United States Trust Company of New
York, as Trustee. (5)
Indenture dated June 22, 2001 among Teekay Shipping Corporation and The Bank of New York Trust Company of Florida (formerly U.S.
Trust Company of Texas, N.A.). for U.S. $250,000,000 8.875% Senior Notes due 2011. (14)
2.16 First Supplemental Indenture dated as of December 6, 2001, among Teekay Shipping Corporation and The Bank of New York Trust
Company of Florida, N.A. for U.S. $100,000,000 8.875% Senior Notes due 2011. (15)
2.17 Exchange and Registration Rights Agreement dated June 22, 2001 among Teekay Shipping Corporation and Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated, Salomon Smith Barney Inc., Deutsche Banc Alex. Brown Inc. and Scotia Capital (USA) Inc. (14)
2.18 Exchange and Registration Rights Agreement dated December 6, 2001 between Teekay Shipping Corporation and Goldman, Sachs &
Co. (15)
2.19 Specimen of Teekay Shipping Corporation's 8.875% Senior Notes due 2011. (14)
2.20 Form of Supplemental Indenture No. 1 between Teekay Shipping Corporation and The Bank of New York, as trustee. (18)
2.21 Form of Purchase Contract Agreement between Teekay Shipping Corporation and The Bank of New York, as purchase contract agent.
(18)
2.22 Form of Pledge Agreement between Teekay Shipping Corporation and The Bank of New York, as collateral agent. (18)
2.23 Form of Remarketing Agreement between Teekay Shipping Corporation and Morgan Stanley & Co. Incorporated. (18)
2.24 Form of Underwriting Agreement Between Teekay Shipping Corporation, Morgan Stanley & Co. Incorporated and Salomon Smith Barney.
(18)
4.1 1995 Stock Option Plan. (1)
4.2 Amendment to 1995 Stock Option Plan. (10)
4.3 Amended 1995 Stock Option Plan. (12)
4.4 Form of Indemnification Agreement between Teekay and each of its officers and directors. (1)
4.5 Time Charter, as amended, dated February 1, 1992 between VSSI Appian Inc. and Palm Shipping Inc. (4)
4.6 Time Charter, as amended, dated August 1, 1992 between Exuma Spirit Inc. and Palm Shipping Inc. (4)
4.7 Time Charter, as amended, dated May 1, 1992 between Nassau Spirit Inc. and Palm Shipping Inc. (4)
4.8 Agreement, dated January 26, 1998, for a U.S. $200,000,000 Reducing Revolving Credit Facility to be made available to certain wholly-
owned subsidiaries of Teekay Shipping Corporation by Den Norske Bank ASA, Christiania Bank og Kreditkasse ASA, New York Branch,
and the Bank of Nova Scotia. (7)
4.9 Agreement, dated March 26, 1999, for the amalgamation of Northwest Maritime Inc., a 100% owned subsidiary of Teekay Shipping
Corporation, and Bona Shipholding Ltd. (8)
4.10 Agreement, dated April 16, 1998, for a U.S. $30,000,000 Term Loan Facility to be made available to VSSI Australia Limited by RABO
Australia Limited. (9)
4.11 Agreement, dated December 18, 1997, for a U.S. $44,000,000 Term Loan Facility to be made available to Barrington (Australia) Pty
Limited and Palmerston (Australia) Pty Limited by RABO Australia Limited. (9)
4.12 Amended and Restated Reimbursement Agreement, dated April 16, 1998, Among Barrington (Australia) Pty Limited, Palmerston
(Australia) Pty Limited, VSSI Australia Limited, VSSI Transport Inc. and Alliance Chartering Pty Limited and Nedship Bank (America)
N.V., The Bank of New York and Landesbank Schleswig-Holstein. (9)
4.13 Amendment No. 1, dated May 1999, to Amended and Restated Reimbursement Agreement dated April 16, 1998 among Barrington
(Australia) Pty Limited, Palmerston (Australia) Pty Limited, VSSI Australia Limited, VSSI Transport Inc. and Alliance Chartering Pty
Limited and Nedship Bank (America) N.V.,
The Bank of New York and Landesbank Schleswig-Holstein. (9)
4.14 Amended and Restated Agreement, date June 11, 1999, for a U.S. $500,000,000 Revolving Loan between Bona Shipholding Ltd., Chase
Manhattan plc, Citibank International plc and various other banks. (9)
4.15 Amendment and Restatement Agreement, dated June 11, 1999, relating to a U.S. $500,000,000 Revolving Loan Agreement between
Bona Shipholding Ltd., Chase Manhattan plc, Citibank International plc and various other banks. (9)
4.16 Rights agreement, dated as of September 8, 2000, between Teekay Shipping Corporation and The Bank of New York, as Rights Agent.
(11)
4.17 Reimbursement Agreement, dated January 1, 2000, between Fleet Management Inc. and Teekay Shipping Corporation. (12)
4.18 Reimbursement Agreement, dated February 16, 2001, between Karratha Spirit Pty Ltd and Nedship Bank (America) N.V. (13)
4.19 Agreement, dated February 16, 2001, for a U.S. $34,000,000 Term Loan Facility to be made available to Karratha Spirit Pty Ltd by RABO
Australia Limited. (13)
4.20 Amendment and Restatement Agreement, dated September 14, 2001, relating to a U.S. $500,000,000 Revolving Loan Agreement
between Bona Shipholding Ltd., Teekay Shipping Corporation, J.P. Morgan Securities Inc., Citibank International plc and various other
banks. (17)
4.21 Share Sale and Purchase Agreement by and among Statoil ASA and Statpet AS and Norsk Teekay AS dated December 15, 2002. (19)
4.22 Agreement, dated March 10, 2003, for a U.S. $180,000,000 Secured Credit Facility to be made available to Cork Spirit LLC, Donegal
Spirit LLC, Limerick Spirit LLC, Shannon Spirit LLC and Galway Spirit LLC by Den Norske Bank ASA, Deutsche Bank AG, DVB Bank AG
and Nordea Bank Finland Plc and various other banks. (20)
4.23 Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan Facility between Norsk Teekay Holdings
Ltd., Den Norske Bank ASA and various other banks.(21)
4.24 Share purchase agreement dated March 15, 2004 regarding the acquisition of Naviera F. Tapias S.A. (renamed Teekay Shipping Spain
41
S.L.) (22)
4.25 2003 Equity Incentive Plan. (23)
4.26 Agreement, dated September 1, 2004 for a U.S. $550,000,000 Credit Facility Agreement to be made available to Teekay Nordic Holdings
Incorporated by Nordea Bank Finland PLC
4.27 Amendment dated September 30, 2004 to Agreement, dated June 26, 2003, for a U.S. $550,000,000 Secured Reducing Revolving Loan
Facility between Norsk Teekay Holdings Ltd., Den Norske Bank ASA and various other banks.
4.28 Annual Executive Bonus Plan
8.1 List of Significant Subsidiaries
12.1 Rule 13a-14(a)/15d-14(a) Certification of Teekay’s Chief Executive Officer
12.2 Rule 13a-14(a)/15d-14(a) Certification of Teekay’s Chief Financial Officer
13.1 Teekay Shipping Corporation Certification of Bjorn Moller, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2 Teekay Shipping Corporation Certification of Peter Evensen, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1 Letter from Ernst & Young LLP, as independent chartered accountants, dated April 7, 2005, regarding audited financial information.
__________________________________________________________________________________________________
(1) Previously filed as an exhibit to the Company's Registration Statement on Form F-1 (Registration No. 33-7573-4), filed with the SEC on July
14, 1995, and hereby incorporated by reference to such Registration Statement.
(2) Previously filed as an exhibit to the Company's Registration Statement on Form F-1 (Registration No. 33-68680), as declared effective by the
SEC on November 29, 1993, and hereby incorporated by reference to such Registration Statement.
(3) A schedule attached to this exhibit identifies all other documents not required to be filed as exhibits because such other documents are
substantially identical to this exhibit. The schedule also sets forth material details by which the omitted documents differ from this exhibit.
(4) Previously filed as an exhibit to the Company's Registration Statement on Form F-3 (Registration No. 33-65139), filed with the SEC on
January 19, 1996, and hereby incorporated by reference to such Registration Statement.
(5) Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No. 1-12874), filed with the SEC on June 4, 1996, and
hereby incorporated by reference to such Annual Report.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No. 1-12874), filed with the SEC on June 11, 1997, and
hereby incorporated by reference to such Annual Report.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No. 1-12874), filed with the SEC on May 20, 1998, and
hereby incorporated by reference to such Annual Report.
(8) Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No.1-12874), filed with the SEC on June 11, 1999, and
hereby incorporated by reference to such Annual Report.
(9) Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No.1-12874), filed with the SEC on March 30, 2000, and
hereby incorporated by reference to such Annual Report.
(10) Previously filed as an exhibit to the Company's Form 6-K (File No.1-12874), filed with the SEC on May 2, 2000, and hereby incorporated by
reference to such Report.
(11) Previously filed as an exhibit to the Company's Form 8-A (File No.1-12874), filed with the SEC on September 11, 2000, and hereby
incorporated by reference to such Annual Report.
(12) Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No.1-12874), filed with the SEC on April 2, 2001, and
hereby incorporated by reference to such Annual Report.
(13) Previously filed as an exhibit to the Company's Form 6-K (File No.1-12874), filed with the SEC on May 24, 2001, and hereby incorporated by
reference to such Report.
(14) Previously filed as an exhibit to the Company's Registration Statement on Form F-4 (Registration No. 333-64928), filed with the SEC on July
11, 2001, and hereby incorporated by reference to such Registration Statement.
(15) Previously filed as an exhibit to the Company's Registration Statement on Form F-4 (Registration No. 333-76922), filed with the SEC on
January 17, 2002, and hereby incorporated by reference to such Registration Statement.
(16) Previously filed as an exhibit to the Company's Registration Statement on Form F-4, as Amended (Registration No. 333-76922), filed with the
SEC on February 5, 2002, and hereby incorporated by reference to such Registration Statement.
(17) Previously filed as an exhibit to the Company's Annual Report on Form 20-F (File No.1-12874), filed with the SEC on March 29, 2002, and
hereby incorporated by reference to such Annual Report.
(18) Previously filed as an exhibit to the Company's Report on Form 6-K (File No.1-12874), filed with the SEC on February 12, 2003, and hereby
incorporated by reference to such Report.
(19) Previously filed as an exhibit to the Company’s Report on Form 6-K (File No.1-12874), filed with the SEC on April 1, 2003, and hereby
incorporated by reference to such Report.
42
(20) Previously filed as an exhibit to the Company’s Report on Form 6-K (File No.1-12874), filed with the SEC on May 15, 2003, and hereby
incorporated by reference to such Report.
(21) Previously filed as an exhibit to the Company’s Report on Form 6-K (File No. 1-12874), filed with the SEC on August 14, 2003, and hereby
incorporated by reference to such Report.
(22) Previously filed as an exhibit to the Company’s Report on Form 6-K (File No. 1-12874), filed with the SEC on May 14, 2004, and hereby
incorporated by reference to such Report.
(23) Previously filed as an exhibit to the Company’s Registration Statement on Form S-8 (File No. 333-119564), filed with the SEC on October 6,
2004, and hereby incorporated by reference to such Registration Statement.
43
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURE
TEEKAY SHIPPING CORPORATION
By: /s/ Peter Evensen
Peter Evensen
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: April 7, 2005
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TEEKAY SHIPPING CORPORATION
We have audited the accompanying consolidated balance sheets of Teekay Shipping Corporation and subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2004. Our audits also included the financial schedule listed in the Index: Item 18. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Teekay Shipping Corporation and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their
cash flows for each of the three years ended December 31, 2004 in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Vancouver, Canada,
February 18, 2005
/s/ ERNST & YOUNG LLP
Chartered Accountants
F-1
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of U.S. dollars, except share and per share amounts)
Year Ended
December 31,
2004
$
Year Ended
December 31,
2003
$
Year Ended
December 31,
2002
$
VOYAGE REVENUES
2,219,238
1,576,095
783,327
OPERATING EXPENSES
Voyage expenses
Vessel operating expenses
Time-charter hire expense
Depreciation and amortization
General and administrative
Vessel write-downs and (gain) loss on sale of vessels (note 19)
Restructuring charge (note 15 )
Total operating expenses
Income from vessel operations
OTHER ITEMS
Interest expense
Interest income
Equity income from joint ventures
Gain (loss) on sale of marketable securities (note 6)
Other - net (note 15)
Total other items
Net income
Earnings per common share (note 20)
• Basic
• Diluted
Weighted average number of common shares
• Basic
• Diluted
The accompanying notes are an integral part of the consolidated financial statements.
432,395
218,489
457,180
237,498
130,742
(79,254)
1,002
394,656
210,696
304,623
191,237
85,147
90,389
6,383
239,455
168,035
49,949
149,296
57,246
-
-
1,398,052
1,283,131
663,981
821,186
292,964
119,346
(121,518)
(80,999)
(57,974)
18,528
13,730
93,175
(67,661)
(63,746)
3,921
6,970
517
(46,009)
(115,600)
3,494
4,523
(1,130)
(14,868)
(65,955)
757,440
177,364
53,391
9.14
8.63
2.22
0.67
2.18
0.66
82,829,336
79,986,746
79,261,994
87,729,037
81,466,294
80,504,792
F-2
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
ASSETS
Current
Cash and cash equivalents (note 9)
Restricted cash (note 11)
Accounts receivable
Prepaid expenses and other assets
Vessels held for sale (note 19)
Total current assets
Marketable securities (note 6)
Restricted cash (note 11)
Vessels and equipment (note 9)
At cost, less accumulated depreciation of $960,597 (2003 - $1,034,747)
Vessels under capital leases, at cost, less accumulated depreciation of $11,047
(2003 – $438) (note 11)
Advances on newbuilding contracts (note 17)
Total vessels and equipment
Net investment in direct financing leases (note 4)
Investment in joint ventures (note 5)
Other assets
Intangible assets – net (note 7)
Goodwill (note 7)
As at
December 31,
2004
$
As at
December 31,
2003
$
427,037
96,087
210,089
54,717
129,952
917,882
-
352,725
292,284
2,672
146,523
39,054
-
480,533
95,511
-
2,613,379
2,386,642
665,331
252,577
3,531,287
109,215
59,637
85,893
277,511
169,590
37,562
150,656
2,574,860
73,073
54,392
60,333
118,588
130,754
Total assets
5,503,740
3,588,044
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current
Accounts payable
Accrued liabilities (note 8)
Current portion of long-term debt (note 9)
Current obligation under capital leases (notes 11 and 17)
Total current liabilities
Long-term debt (note 9)
Long-term obligation under capital leases (note 11)
Other long-term liabilities (notes 1 and 10)
Total liabilities
Commitments and contingencies (notes 10, 11, 16 and 17)
Minority interest
Stockholders' equity
Capital stock (note 13)
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders' equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the consolidated financial statements.
61,607
144,415
119,453
88,934
414,409
1,988,551
547,607
301,091
51,817
119,594
102,062
1,159
274,632
1,498,044
35,493
112,726
3,251,658
1,920,895
14,724
15,322
534,938
1,758,552
(56,132)
492,653
1,095,650
63,524
2,237,358
1,651,827
5,503,740
3,588,044
F-3
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net income
Non-cash items:
Depreciation and amortization
(Gain) loss on sale of vessels
Gain on sale of marketable securities
Loss on write-down of vessels
Loss on write-down of marketable securities
Loss on repurchase of bonds (note 15)
Equity income (net of dividends received: December 31, 2004 –
$12,576; December 31, 2003 - $7,420; December 31, 2002 - $1,748)
Income taxes (note 15)
Other – net
Change in non-cash working capital items related to
operating activities (note 18)
Expenditures for drydocking
Year Ended
December 31,
2004
$
Year Ended
December 31,
2003
$
Year Ended
December 31,
2002
$
757,440
177,364
53,391
237,498
(79,254)
(93,175)
-
-
769
(1,154)
35,048
16,971
(26,550)
(32,889)
191,237
(1,188)
(517)
91,577
4,910
5,385
450
36,501
(3,191)
(4,256)
(42,697)
149,296
-
1,130
-
-
-
(2,775)
11,413
(5,049)
7,038
(34,913)
Net operating cash flow
814,704
455,575
179,531
FINANCING ACTIVITIES
Proceeds from long-term debt
Capitalized loan costs
Scheduled repayments of long-term debt
Prepayments of long-term debt
Repayments of capital lease obligations
Decrease (increase) in restricted cash
Issuance of Common Stock upon exercise of stock options
Repurchase of Common Stock
Cash dividends paid
1,631,181
(9,960)
(150,314)
(1,731,223)
(66,109)
8,342
51,279
(61,237)
(42,362)
1,993,270
(12,442)
(62,240)
(1,466,815)
(345)
6,113
25,015
-
(35,719)
255,185
-
(51,830)
(8,000)
-
(952)
4,221
(1,547)
(34,073)
Net financing cash flow
(370,403)
446,837
163,004
INVESTING ACTIVITIES
Expenditures for vessels and equipment
Proceeds from sale of vessels and equipment
Proceeds from sale of marketable securities
Purchase of marketable securities
Purchase of Teekay Shipping Spain S.L., net of cash acquired of $11,191 (note 3)
Purchase of Navion AS (note 4)
Purchase of intangible assets
Decrease (increase) in investment in joint ventures
Purchase of PetroTrans Holdings Ltd. (note 5)
Net investment in direct financing leases (note 4)
Other
Net investing cash flow
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of the period
(548,587)
440,556
135,357
-
(286,993)
-
-
(4,369)
(357)
(43,892)
(1,263)
(372,433)
242,111
9,642
(37,291)
-
(704,734)
(7,250)
25,500
(25,050)
(20,322)
(4,926)
(135,650)
-
6,675
-
-
(76,000)
-
(26,000)
-
-
(1,885)
(309,548)
(894,753)
(232,860)
134,753
292,284
7,659
284,625
109,675
174,950
Cash and cash equivalents, end of the period
427,037
292,284
284,625
The accompanying notes are an integral part of the consolidated financial statements.
F-4
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands of U.S. dollars)
Thousands
of Common
Shares
#
Common
Stock
$
Retained
Earnings
$
Accumulated
Other
Compre-
hensive
Income
(Loss)
$
Compre-
hensive
Income
$
Total
Stockholders'
Equity
$
Balance as at December 31, 2001
79,100
467,341
935,660
(4,801)
1,398,200
Net income
Other comprehensive income:
Unrealized loss on marketable securities
Reclassification adjustment for loss on
marketable securities included in net
income
Unrealized gain on derivative instruments
(note 16)
Reclassification adjustment for gain on
derivative instruments (note 16)
Comprehensive income
Dividends declared
Reinvested dividends
Exercise of stock options
Repurchase of Common Stock
53,391
53,391
53,391
(239)
(239)
(239)
2
380
(98)
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
79,384
470,988
954,005
(3,095)
1,421,898
Net income
Other comprehensive income:
Unrealized gain on marketable securities
Reclassification adjustment for loss on
marketable securities included in net income
Unrealized gain on derivative instruments (note 16)
Reclassification adjustment for gain on
derivative instruments (note 16)
Comprehensive income
Dividends declared
Reinvested dividends
Exercise of stock options
7.25% Premium Equity Participating Security
Units contract adjustment fee
Issuance of Common Stock (note 13)
2
1,764
72
177,364
177,364
177,364
53,540
53,540
53,540
4,899
8,639
(459)
4,899
8,639
(459)
243,983
4,899
8,639
(459)
(35,719)
3
25,015
(4,803)
1,450
(35,719)
3
25,015
(4,803)
1,450
Balance as at December 31, 2003
81,222
492,653
1,095,650
63,524
1,651,827
Net income
Other comprehensive income:
Unrealized gain on marketable securities
Reclassification adjustment for gain on
marketable securities included in net income
Unrealized loss on derivative instruments (note 16)
Reclassification adjustment for loss on
derivative instruments (note 16)
Comprehensive income
Dividends declared
Reinvested dividends
100% Stock dividend
Exercise of stock options
Issuance of Common Stock (note 13)
Repurchase of Common Stock (note 13)
757,440
757,440
39,369
39,369
(92,539)
(94,822)
(92,539)
(94,822)
28,336
28,336
637,784
1
3,125
3
(1,400)
3
41
51,280
67
(9,106)
(42,366)
(41)
(52,131)
Balance as at December 31, 2004
82,951
534,938
1,758,552
(56,132)
The accompanying notes are an integral part of the consolidated financial statements.
757,440
39,369
(92,539)
(94,822)
28,336
(42,366)
3
-
51,280
67
(61,237)
2,237,358
F-5
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
1. Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements 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.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period.
Reporting currency
The consolidated financial statements are stated in U.S. Dollars because the Company operates in international shipping markets, the
Company’s primary economic environment, which typically utilize the U.S. Dollar as the functional currency. Transactions involving other
currencies during the year are converted into U.S. Dollars using the exchange rates in effect at the time of the transactions. At the balance
sheet date, monetary assets and liabilities that are denominated in currencies other than the U.S. Dollar are translated to reflect the year-end
exchange rates. Resulting gains or losses are reflected separately in the accompanying consolidated statements of income.
Operating revenues and expenses
The Company recognizes revenues from time charters and bareboat charters daily over the term of the charter as the applicable vessel
operates under the charter. The Company does not recognize revenue during days that the vessel is off-hire. All voyage revenues from voyage
charters are recognized on a percentage of completion method. The Company uses a discharge-to-discharge basis in determining percentage
of completion for all spot voyages, and voyages servicing contracts of affreightment (“COAs”) whereby it recognizes revenue ratably from when
product is discharged (unloaded) at the end of one voyage to when it is discharged after the next voyage. The Company does not begin
recognizing voyage revenue until a charter has been agreed to by the customer and the Company, even if the vessel has discharged its cargo
and is sailing to the anticipated load port on its next voyage. Shuttle tanker voyages servicing COAs with offshore oil fields commence with
tendering of notice of readiness at a field, within the agreed lifting range, and ends with tendering of notice of readiness at a field for the next
lifting. 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 are all expenses unique to a particular voyage, including bunker fuel expenses, port fees, cargo loading and unloading
expenses, canal tolls, agency fees and commissions. Vessel operating expenses include crewing, repairs and maintenance, insurance, stores,
lube oils and communication expenses. Voyage expenses are recognized ratably over the duration of the voyage, and vessel operating
expenses are recognized when incurred.
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, 2004, 2003 and 2002 totaled $130.1 million, $81.9 million and $65.3 million,
respectively.
Marketable securities
The Company's investments in marketable securities are classified as available-for-sale securities and are carried at fair value. Net unrealized
gains and losses on available-for-sale securities are reported as a component of other comprehensive income.
Vessels and equipment
All pre-delivery costs incurred during the construction of newbuildings, including interest, supervision and technical costs, are capitalized. The
acquisition cost and all costs incurred to restore used vessel purchases to the standard required to properly service the Company's customers
are capitalized.
Depreciation is calculated on a straight-line basis over a vessel's estimated useful life, less an estimated residual value. Depreciation is
calculated using an estimated useful life of 25 years for crude oil tankers and 35 years for liquefied natural gas (“LNG”) carriers from the date
the vessel is delivered from the shipyard, or a shorter period if regulations prevent us from operating the vessels for 25 years or 35 years,
respectively. Depreciation of vessels and equipment for the years ended December 31, 2004, 2003 and 2002 aggregated $189.4 million,
$152.4 million and $127.5 million, respectively. Depreciation and amortization includes depreciation on all owned vessels and vessels
accounted for as capital leases. (see Note 19).
Interest costs capitalized to vessels and equipment for the years ended December 31, 2004, 2003 and 2002 aggregated $9.9 million, $8.5
million and $6.0 million, respectively.
F-6
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Gains on vessels sold and leased back under capital leases are deferred and amortized over the remaining estimated useful life of the vessel.
Losses on vessels sold and leased back under capital leases are recognized immediately when the fair value of the vessel at the time of sale-
leaseback is less than its book value. In such case, the Company would recognize a loss in the amount by which book value exceeds fair
value.
Generally, the Company drydocks each vessel every two and a half to five years. In addition, a shipping society classification intermediate
survey is performed on the Company’s LNG carriers between the second and third year of the five-year drydocking period. The Company
capitalizes a substantial portion of the costs incurred during drydocking and for the survey and amortizes those costs on a straight-line basis
from the completion of a drydocking or intermediate survey to the estimated completion of the next drydocking. The Company expenses costs
related to routine repairs and maintenance incurred during drydocking that do not improve or extend the useful lives of the assets. When
significant drydocking expenditures occur prior to the expiration of the original amortization period, the remaining unamortized balance of the
original drydocking cost and any unamortized intermediate survey costs are expensed in the month of the subsequent drydocking. Amortization
of drydocking expenditures for the years ended December 31, 2004, 2003 and 2002 aggregated $23.5 million, $26.4 million and $21.8 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 cash
flows the assets are expected to generate over their remaining useful lives. If vessels and equipment are considered to be impaired, the
impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value (see Note 19).
Direct financing leases
The Company assembles, installs, operates and leases equipment that reduces volatile organic compound emissions (“VOC Equipment”)
during loading, transportation and storage of oil and oil products. Leasing of the VOC Equipment is accounted for as a direct financing lease,
with lease payments received being allocated between the net investment in the lease and other income using the effective interest method so
as to produce a constant periodic rate of return over the lease term.
Investment in joint ventures
The Company has a 50% participating interest in eight joint venture companies (2003 - five). Five of these joint ventures each own one shuttle
tanker. One of the joint ventures, which was formed on April 30, 2004, will pursue new business in the oil and gas shipping sectors that relate
only to the Spanish market or are led by Spanish entities or entities controlled by a Spanish company (see Note 3). One joint venture has a first
right of refusal on Statoil’s oil transportation requirements at the prevailing market rate until December 31, 2007 (see Note 4). One joint venture
is a lightering company acquired on September 30, 2003 (see Note 5). The joint ventures are accounted for using the equity method, whereby
the investment is carried at the Company's original cost plus its proportionate share of undistributed earnings.
Investment in the Panamax OBO Pool
All Panamax oil/bulk/ore carriers (“OBOs”) owned by the Company were operated through a pool that was managed by the Company until its
termination in 2003, when the Company sold all of its OBO carriers. The participants in the pool were the companies contributing vessel
capacity to it. 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 of the results has been deducted as time charter hire expense prior to termination of the pool.
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
The Company utilizes derivative financial instruments to reduce risk from foreign currency fluctuations, changes in interest rates, changes in
spot market rates for vessels and changes in bunker fuel prices and does not use them for trading purposes. Statement of Financial Accounting
Standards No. 133 (“SFAS 133”) “Accounting for Derivative Instruments and Hedging Activities,” which was amended in June 2000 by SFAS
No. 138 and in May 2003 by SFAS No. 149, establishes accounting and reporting standards for derivatives instruments and hedging activities.
Derivative instruments are recorded as other assets or other long-term liabilities, measured at fair value. Derivatives that are not hedges or are
not designated as hedges are adjusted to fair value through income. If the derivative is a hedge, depending upon the nature of the hedge,
changes in the fair value of the derivatives are either offset against the fair value of assets, liabilities or firm commitments through income, or
recognized in other comprehensive income (loss) until the hedged item is recognized in income. The ineffective portion of a derivative's change
in fair value is immediately recognized in income (see Note 16).
Goodwill and intangible assets
Goodwill and indefinite lived intangible assets are not amortized, but reviewed for impairment annually, or more frequently if impairment
indicators arise. Intangible assets with finite lives are amortized over their useful lives.
F-7
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
The Company’s intangible assets consist primarily of time charter contracts acquired as part of the purchase of Teekay Shipping Spain S.L
(“Teekay Spain”) and COAs acquired as part of the purchase of Navion AS (“Navion”). The time charter contracts are being amortized on a
straight line basis over the life of the contracts. The COAs are being amortized over the life of the COAs, with the amount amortized each year
being weighted based on the projected revenue to be earned from the COAs.
Income taxes
The legal jurisdictions in which Teekay and the majority of its subsidiaries are incorporated do not impose income taxes upon shipping-related
activities. The Company's Australian shipowning subsidiaries, its Canadian subsidiary Teekay Canadian Tankers Ltd., its Norwegian
subsidiaries UNS and Navion and its Spanish subsidiary Teekay Spain are subject to income taxes (see Note 15). Included in other long-term
liabilities are deferred income taxes of $121.4 million at December 31, 2004, $78.2 million at December 31, 2002, and $43.7 million at
December 31, 2002. The Company accounts for such taxes using the liability method pursuant to Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
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 (see also “Recent Accounting
Pronouncements” below). 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 expense is recognized under APB 25.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions
of SFAS 123 to stock-based employee compensation (see Note 13).
Year Ended
December 31,
2004
$
Year Ended
December 31,
2003
$
Year Ended
December 31,
2002
$
Net income - as reported ........................................................................
Less: Total stock-based compensation expense ...................................
Net income - pro forma ...........................................................................
757,440
8,996
748,444
177,364
8,243
169,121
53,391
7,538
45,853
Basic earnings per common share:
As reported .............................................................................................
Pro forma ................................................................................................
9.14
9.04
2.22
2.11
0.67
0.58
Diluted earnings per common share:
As reported .............................................................................................
Pro forma ................................................................................................
8.63
8.53
2.18
2.08
0.66
0.57
For the purpose of the above pro forma calculations, the fair value of each option granted was estimated on the date of the grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions were used in computing the fair value of the options granted:
risk-free average interest rates of 2.7% for the year ended December 31, 2004; 2.8% for the year ended December 31, 2003 and 4.7% for the
year ended December 31, 2002, respectively; dividend yield of 3.0%; expected volatility of 30%; and expected lives of five years.
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.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123(R) (“SFAS 123(R)”), Share-
Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB
25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an acceptable alternative.
SFAS 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 125(R) on July 1, 2005.
F-8
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods:
1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date based on (a) the requirements
of SFAS 123(R) for all share-based payments granted after the effective date and (b) the requirements of SFAS 123 for all awards granted
to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date; or
2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year of adoption.
The Company plans to adopt SFAS 123(R) using the modified-prospective method.
The adoption of SFAS 123(R)’s fair value method will have a significant impact on our result of operations, although it will have not impact on
our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-
based payments granted in the future. However, had we adopted SFAS (R) in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in the above table.
2. Segment Reporting
The Company is engaged in the international marine transportation of crude oil, clean petroleum products and LNG through the operation of its
tankers and LNG carriers. All of the Company’s revenues are earned in international markets.
One customer, an international oil company, accounted for 17% ($373.7 million) of the Company’s consolidated voyage revenues during the
year ended December 31, 2004. One customer, an international oil company, accounted for 15% ($239.5 million) of the Company’s
consolidated voyage revenues during the year ended December 31, 2003. No customer accounted for more than 10% of the Company’s
consolidated voyage revenues during the year ended December 31, 2002. No other customer accounted for more than 10% of the Company’s
consolidated voyage revenues during the fiscal periods presented herein.
The Company has three reportable segments: its spot tanker segment, its fixed-rate tanker segment, and its fixed-rate LNG segment. The
Company’s spot tanker segment consists of conventional crude oil tankers and product carriers operating in the spot market or subject to time
charters or contracts of affreightment priced on a spot-market basis or on short-term fixed-rate contracts. The Company considers contracts
that have an original term of less than three years in duration to be short-term. The Company’s fixed-rate tanker segment consists of shuttle
tankers, floating storage and offtake vessels, liquid petroleum gas carriers and conventional crude oil and product tankers subject to long-term,
fixed-rate time-charter contracts or contracts of affreightment. The Company’s fixed-rate LNG segment consists of LNG carriers subject to long-
term, fixed-rate time-charter contracts. The Company had no LNG operations prior to the acquisition of Teekay Spain on April 30, 2004 (see
Note 3). Segment results are evaluated based on income from vessel operations. The accounting policies applied to the reportable segments
are the same as those used in the preparation of the Company’s consolidated financial statements.
The following tables present results for these segments for the years ended December 31, 2004, 2003 and 2002.
Year ended December 31, 2004
Spot
Tanker
Segment
$
Fixed-Rate
Tanker
Segment
$
Fixed-Rate
LNG
Segment
$
725,061
77,058
117,586
194,058
129,074
56,431
(7,153)
-
158,007
4,607
6,690
30,603
2,080,855
191,085
43,386
221
7,509
-
12,854
3,940
-
-
18,862
-
-
-
1,517,027
142,930
Voyage revenues – external ............................................................
Voyage expenses ............................................................................
Vessel operating expenses..............................................................
Time-charter hire expense...............................................................
Depreciation and amortization .........................................................
General and administrative (1) .........................................................
Vessel write-downs/(gain) loss on sale of vessels .......................... (72,101)
Restructuring charge .......................................................................
Income from vessel operations........................................................
1,450,791
355,116
93,394
263,122
95,570
70,371
1,002
644,317
Voyage revenues – intersegment ....................................................
Equity income ..................................................................................
Investments in joint ventures at December 31, 2004 ......................
Total assets at December 31, 2004.................................................
Expenditures for vessels and equipment (2) ....................................
-
7,040
29,034
1,119,302
214,572
F-9
Total
$
2,219,238
432,395
218,489
457,180
237,498
130,742
(79,254)
1,002
821,186
4,607
13,730
59,637
4,717,184
548,587
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Year ended December 31, 2003
Spot
Tanker
Segment
$
Fixed-Rate
Tanker
Segment
$
Fixed-Rate
LNG
Segment
$
Voyage revenues – external ............................................................
Voyage expenses ............................................................................
Vessel operating expenses..............................................................
Time-charter hire expense...............................................................
Depreciation and amortization .........................................................
General and administrative (1) .........................................................
Vessel write-downs/(gain) loss on sale of vessels ..........................
Restructuring charge .......................................................................
Income from vessel operations........................................................
Voyage revenues – intersegment ....................................................
Equity income ..................................................................................
Investments in joint ventures at December 31, 2003 ......................
Total assets at December 31, 2003.................................................
Expenditures for vessels and equipment (2) ....................................
1,081,974
342,928
126,261
168,344
106,374
53,338
90,326
4,382
190,021
-
1,441
26,345
1,144,087
28,684
494,121
51,728
84,435
136,279
84,863
31,809
63
2,001
102,943
8,499
5,529
28,047
1,798,617
343,749
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Year ended December 31, 2002
Spot
Tanker
Segment
$
Fixed-Rate
Tanker
Segment
$
Fixed-Rate
LNG
Segment
$
Voyage revenues – external ............................................................
Voyage expenses ............................................................................
Vessel operating expenses..............................................................
Time-charter hire expense...............................................................
Depreciation and amortization .........................................................
General and administrative (1) .........................................................
Income from vessel operations........................................................
Voyage revenues – intersegment ....................................................
Equity income (loss) ........................................................................
Investments in joint ventures at December 31, 2002 ......................
Total assets at December 31, 2002.................................................
Expenditures for vessels and equipment.........................................
632,281
234,376
127,953
49,949
105,407
47,188
67,408
-
(711)
-
1,424,863
90,966
151,046
5,079
40,082
-
43,889
10,058
51,938
-
5,234
56,354
785,227
44,684
-
-
-
-
-
-
-
-
-
-
-
-
Total
$
1,576,095
394,656
210,696
304,623
191,237
85,147
90,389
6,383
292,964
8,499
6,970
54,392
2,942,704
372,433
Total
$
783,327
239,455
168,035
49,949
149,296
57,246
119,346
-
4,523
56,354
2,210,090
135,650
(1)
Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment
based on estimated use of corporate resources).
(2) Excludes vessels purchased as part of the Company’s acquisition of Teekay Spain in April 2004, and Navion AS in April 2003.
A reconciliation of total segment assets to amounts presented in the consolidated balance sheets is as follows:
December 31,
2004
$
December 31,
2003
$
Total assets of all segments.....................................................................................................
Cash, restricted cash and marketable securities .....................................................................
Accounts receivable and other assets .....................................................................................
Consolidated total assets ......................................................................................................
4,717,184
428,437
358,119
5,503,740
2,942,704
390,467
254,873
3,588,044
3. Acquisition of Teekay Shipping Spain S.L.
On April 30, 2004, the Company acquired all of the outstanding shares of Naviera F. Tapias S.A. and its subsidiaries and renamed it Teekay
Shipping Spain, S.L. Teekay Spain engages in the marine transportation of crude oil and LNG. The Company acquired Teekay Spain for
$298.2 million in cash, plus the assumption of debt and remaining newbuilding commitments. Management believes the acquisition of the
Teekay Spain business has provided the Company with a strategic platform from which to expand its presence in the liquefied natural gas
(“LNG”) shipping sector and immediate access to reputable LNG operations. The Company anticipates this will benefit it when bidding on future
LNG projects. These benefits contributed to the recognition of goodwill. In the transaction, Teekay also entered into an agreement with an entity
controlled by the former controlling shareholder of Teekay Spain to establish a 50/50 joint venture that will pursue new business in the oil and
gas shipping sectors that relate only to the Spanish market or are led by Spanish entities or entities controlled by a Spanish company. Teekay
Spain’s results of operations have been consolidated with the Company’s results commencing May 1, 2004.
F-10
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
As at December 31, 2004, the Company’s LNG fleet consisted of four LNG vessels. All four vessels were contracted under long-term, fixed-rate
time charters to major Spanish energy companies. As at December 31, 2004, Teekay Spain’s conventional crude oil tanker fleet consisted of
five Suezmax tankers and two newbuildings scheduled for delivery in 2005. Four Suezmax tankers and one newbuilding are contracted under
long-term, fixed-rate time charters with a major Spanish oil company.
The following table summarizes the fair value of the assets acquired and liabilities assumed by the Company at April 30, 2004, the date of the
Teekay Spain acquisition.
ASSETS
Cash, cash equivalents and short-term restricted cash
Other current assets
Vessels and equipment
Restricted cash – long term
Other assets – long-term
Intangible assets subject to amortization: Time-charter contracts (weighted average remaining useful life of 19.2 years)
Goodwill ($3.6 million fixed-rate tanker segment and $35.7 million fixed- rate LNG segment)
Total assets acquired
LIABILITIES
Current liabilities
Long-term debt
Obligations under capital leases
Other long-term liabilities
Total liabilities assumed
Net assets acquired (cash consideration)
As at
April 30, 2004
$
85,092
7,415
821,939
311,664
15,355
183,052
39,279
1,463,796
98,428
668,733
311,011
87,439
1,165,611
298,185
(1) The following table shows comparative summarized consolidated pro forma financial information for the Company for the years ended
December 31, 2004 and 2003, giving effect to the acquisition of 100% of the outstanding shares in Teekay Spain as if it had taken place
on January 1 of each of the periods presented:
Pro Forma
Year Ended December 31,
2003
2004
(unaudited)
(unaudited)
$
$
Voyage revenues...........................................................................................................................
Net income (1).................................................................................................................................
Earnings per share
- Basic............................................................................................................................................
- Diluted .........................................................................................................................................
2,259,956
769,240
9.29
8.77
1,662,804
104,820
1.31
1.29
(1) The results of Teekay Spain for the four months ended April 30, 2004 and the year ended December 31, 2003 included foreign exchange
gains of $18.0 million and foreign exchange losses of $71.5 million, respectively. Substantially all of these foreign exchange gains and
losses were unrealized.
4. Acquisition of Navion AS
In April 2003, Teekay completed its acquisition of 100% of the issued and outstanding shares of Navion AS for approximately $774.2 million in
cash, including transaction costs of approximately $7.0 million. The Company made a deposit of $76.0 million towards the purchase price on
December 16, 2002. The remaining portion of the purchase price was paid on closing. The Company funded its acquisition of Navion by
borrowing under a $500 million 364-day credit facility (subsequently replaced by a $550 million revolving credit facility), together with available
cash and borrowings under other existing revolving credit facilities. Navion’s results of operation have been consolidated with Teekay’s results
commencing April 1, 2003.
Navion, based in Stavanger, Norway, operates primarily in the shuttle tanker and the conventional crude oil and product tanker markets. Its
modern shuttle tanker fleet, which as of December 31, 2004, consisted of eight owned and 12 chartered-in vessels (excluding six vessels
chartered-in from the Company’s shuttle tanker subsidiary Ugland Nordic Shipping AS (“UNS”), and other subsidiaries of the Company),
provides logistical services to the Norwegian state-owned oil company, Statoil ASA, and other oil companies in the North Sea under fixed-rate,
long-term contracts of affreightment. Subsequent to the acquisition, the operations of UNS and the shuttle tanker operations of Navion were
combined into one business unit, Teekay Navion Shuttle Tankers. The projected benefits resulting from the combined operations as well as
possible growth opportunities in the North Sea and elsewhere in the world resulted in the recognition of goodwill. Navion’s modern, chartered-
in, conventional tanker fleet, which as of December 31, 2004, consisted of 12 crude oil tankers and 15 product tankers, operates primarily in the
Atlantic region, providing services to Statoil and other oil companies. In addition, Navion owns two floating storage and offtake vessels currently
trading as conventional crude oil tankers in the Atlantic region, one chartered-in methanol carrier and one liquid petroleum gas (“LPG”) carrier
on long-term charter to Statoil. Through Navion Chartering AS, an entity owned jointly with Statoil, Navion has a first right of refusal on Statoil’s
oil transportation requirements at the prevailing market rate until December 31, 2007. In addition to tanker operations, Navion also constructs,
installs, operates and leases equipment that reduces volatile organic compound emissions during loading, transportation and storage of oil and
oil products.
F-11
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
The following table summarizes the fair value of the assets acquired and liabilities assumed by the Company at April 1, 2003, the date of the
Navion acquisition.
ASSETS
Current assets
Vessels and equipment
Net investment in direct financing leases
Other assets – long-term
Intangible assets subject to amortization:
Contracts of affreightment (15-year sum-of-years declining balance)
Goodwill (fixed-rate tanker segment)
Total assets acquired
LIABILITIES
Current liabilities
Other long-term liabilities
Total liabilities assumed
Net assets acquired (cash consideration)
64,457
543,003
45,558
3,835
117,000
40,033
813,886
36,270
3,463
39,733
774,153
The following table shows comparative summarized consolidated pro forma financial information for the Company for the year ended
December 31, 2003, giving effect to the acquisition of 100% of the outstanding shares in Navion as if the acquisition had taken place on
January 1 of each of the years presented:
Voyage revenues.......................................................................................................................
Net income.................................................................................................................................
Net income per common share
- Basic ..................................................................................................................................
- Diluted ................................................................................................................................
5. Acquisition of 50% of PetroTrans Holdings Ltd.
Pro Forma
Year Ended December 31,
2002
2003
(unaudited)
(unaudited)
$
$
1,804,528
223,403
1,453,650
69,401
2.79
2.74
0.88
0.86
On September 30, 2003, Teekay acquired 50% of the issued and outstanding shares of PetroTrans Holdings Ltd., the parent company of
Skaugen PetroTrans Inc. (“SPT”). The acquisition was completed for approximately $25 million in cash, and an “earn-out element” to be
calculated based on the financial performance of SPT over the five year period following the transaction. During 2004, the Company paid $0.4
million in earn out payments. The Company funded this acquisition with available cash.
SPT is a lightering company operating out of Houston, Texas. Lightering is the process of ship-to-ship transfer of oil cargo, which is required
when vessels transporting oil are too large to enter ports that are not deep enough, or have narrow entrances or small berths. The lightering
process consists of maneuvering a smaller tanker (the “service vessel”) alongside the larger tanker, typically with both vessels underway. Once
the oil cargo is transferred to the service vessel, the service vessel transports the oil cargo to the port.
The acquisition of the 50% interest in PetroTrans Holdings Ltd. is being accounted for using the equity method, whereby the investment is
carried at the Company’s original cost plus its proportionate share of undistributed earnings. The excess carrying value of the Company’s
investment over its underlying equity in the net assets of PetroTrans Holdings Ltd., which amounts to approximately $15.7 million, has been
accounted for as goodwill. This investment is included in investments in joint ventures.
6.
Investments in Marketable Securities
Cost
$
Gross
Unrealized
Gains
$
Approximate
Market and
Carrying Values
$
December 31, 2003
Available-for-sale equity securities ......................................
42,180
53,331
95,511
Marketable securities at December 31, 2003 represent 5,812,000 shares in A/S Dampskibsselskabet Torm (“Torm”) and 351,221 shares in
Nordic American Tanker Shipping Ltd.
During the year ended December 31, 2004, the Company sold its investment in marketable securities for proceeds of $135.4 million, which
resulted in a gain on sale of marketable securities of $93.2 million.
F-12
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
7. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2004 for the Company’s reporting segments, are as follows:
Spot Tanker
Segment
$
Fixed-Rate
Tanker
Segment
$
Fixed- Rate
LNG
Segment
$
Balance as of January 1, 2004.................
Goodwill acquired .....................................
Goodwill impairment ................................
Balance as of December 31, 2004...........
-
-
-
-
128,575
3,648
-
132,223
-
35,631
-
35,631
As at December 31, 2004 intangible assets consisted of:
Other
$
2,179
137
(580)
1,736
Total
$
130,754
39,416
(580)
169,590
Contracts of affreightment .......................................................
Time-charter contracts ............................................................
Intellectual property .................................................................
Weighted-
Average
Amortization
Period
(years)
10.2
19.2
7.0
15.4
Gross
Carrying
Amount
$
124,250
182,552
7,701
314,503
Accumulated
Amortization
$
Net Carrying
Amount
$
(30,880)
(4,095)
(2,017)
(36,992)
93,370
178,457
5,684
277,511
Aggregate amortization expense of intangible assets for the year ended December 31, 2004 was approximately $25.7 million ($13.4
million – 2003). Amortization of intangible assets for the five fiscal years subsequent to December 31, 2004 is expected to be $25.2
million (2005), $22.3 million (2006), $21.3 million (2007), $20.3 million (2008), and $19.3 million (2009).
8. Accrued Liabilities
Voyage and vessel..................................................................................................................
Interest ....................................................................................................................................
Payroll and benefits ................................................................................................................
9. Long-Term Debt
Revolving Credit Facilities .....................................................................................................
First Preferred Ship Mortgage Notes (8.32%) due through 2006..........................................
Premium Equity Participating Security Units (7.25%) due May 18, 2006 ............................
Senior Notes (8.875%) due July 15, 2011 ............................................................................
USD denominated Term Loans due through 2022 ...............................................................
Euro denominated Term Loans due through 2023 ...............................................................
Less current portion ...............................................................................................................
December 31, 2004
$
December 31, 2003
$
79,566
21,137
43,712
144,415
63,362
26,351
29,881
119,594
December 31, 2004
$
December 31, 2003
$
530,000
50,906
143,750
351,530
588,080
443,738
2,108,004
119,453
1,988,551
430,000
109,314
143,750
351,765
565,277
-
1,600,106
102,062
1,498,044
As of December 31, 2004, the Company had eight long-term revolving credit facilities (the “Revolvers”) available, which, as at such date,
provided for borrowings of up to $1,361.2 million, of which $831.2 million was undrawn. Interest payments are based on LIBOR (December 31,
2004: 2.6%; December 31, 2003: 1.2%) plus a margin depending on the financial leverage of the Company; at December 31, 2004, the
margins ranged between 0.60% and 0.93% (2003 – 0.50% and 1.25%). The total amount available under the Revolvers reduces by $142.2
million (2005), $165.2 million (2006), $130.1 million (2007), $444.3 million (2008), $39.4 million (2009) and $440.0 million (thereafter). All of the
Revolvers are collateralized by first priority mortgages granted on 52 of the Company’s vessels, together with other related collateral, and
include a guarantee from Teekay for all amounts outstanding under the Revolvers.
The 8.32% First Preferred Ship Mortgage Notes due February 1, 2006 (the “8.32% Notes”) are collateralized by first preferred mortgages on
three of the Company’s Aframax tankers, together with certain other related collateral, and are guaranteed by the three subsidiaries of Teekay
that own the mortgaged vessels (the “8.32% Notes Guarantor Subsidiaries”) to a maximum of 95% of the fair value of their net assets. As at
December 31, 2004, the fair value of these net assets approximated $117.4 million. The 8.32% Notes are also subject to a sinking fund, which
retires $45.0 million principal amount on each February 1, commencing 2004. During 2004, the Company repurchased and cancelled a
principal amount of $13.4 million of the 8.32% Notes. Condensed financial information regarding Teekay, the 8.32% Notes Guarantor
Subsidiaries, and non-guarantor subsidiaries of Teekay is set out in Schedule A of these consolidated financial statements.
F-13
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
The 7.25% Premium Equity Participating Security Units due May 18, 2006 (the “Equity Units”) are unsecured and subordinated to all of the
Company’s senior debt. The Equity Units are not guaranteed by any of the Company’s subsidiaries and effectively rank behind all existing and
future secured debt. Each Equity Unit includes (a) a forward contract that requires the holder to purchase for $25 a specified fraction of a share
of the Company’s Common Stock on February 16, 2006 and (b) a $25 principal amount, subordinated note due May 18, 2006. The forward
contracts provide for contract adjustment payments of 1.25% annually and the notes bear interest at 6.0% annually. Upon settlement on
February 16, 2006 of the 5.75 million forward contracts included in the Equity Units, the Company will issue between 6,534,300 and 7,982,150
shares of its Common Stock (depending on the average closing price of the Common Stock for the 20-trading day period ending on the third
trading day prior to February 16, 2006).
The net proceeds of the offering of the Equity Units have been allocated between the notes and the forward contracts in proportion to their
respective fair market values at the time of the issuance. The present value of the Equity Units contract adjustment payments have been
charged to stockholders’ equity, with an offsetting credit to liabilities. This liability is accreted over three years by interest charges to the income
statement based on a constant rate calculation. Subsequent contract adjustment payments reduce this liability. Upon settlement of each
forward contract, the $25 received on each purchase contract will be credited to stockholders’ equity in conjunction with the issuance of the
requisite number of shares of the Company’s Common Stock.
Before the issuance of the Company’s Common Stock upon settlement of the purchase contracts, the purchase contracts will be reflected in
the Company’s diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of the
Company’s Common Stock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of
shares that would be issued upon settlement of the purchase contracts (based on the settlement formula applied at the end of the reporting
period) over the number of shares that could be purchased by the Company in the market (at the average market price during the period) using
the proceeds receivable upon settlement.
The 8.875% Senior Notes due July 15, 2011 (the “8.875% Notes”) rank equally in right of payment with all of Teekay’s existing and future
senior unsecured debt and senior to Teekay’s existing and future subordinated debt. The 8.875% Notes are not guaranteed by any of Teekay’s
subsidiaries and effectively rank behind all existing and future secured debt of Teekay and other liabilities, secured and unsecured, of its
subsidiaries.
The Company has several term loans outstanding, which, as at December 31, 2004, totaled $588.1 million (USD denominated) and 325.8
million Euros ($443.7 million). As part of certain capital leases, the Company has two long-term time-charter contracts that are denominated in
Euros, the funds from which will be used to repay the associated Euro denominated term loans. Interest payments on the U.S. Dollar
denominated term loans are based on LIBOR (December 31, 2004: 2.6%; December 31, 2003: 1.2%) plus a margin. Interest payments on the
EURO denominated term loans are based on EURIBOR (December 31, 2004: 2.1%) plus a margin. At December 31, 2004, the margins ranged
between 0.50% and 1.3%. The term loans reduce in monthly, quarterly or semi-annual payments with varying maturities through 2023. 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. Certain term loans of UNS totaling $16.8 million and certain term loans of Teekay Spain totaling $787.1
million are not guaranteed by Teekay.
The weighted average effective interest rate on the Company’s long term debt as at December 31, 2004 was 4.6% (December 31, 2003 –
4.5%). These rates do not reflect the effect of our interest rate swaps. (see Note 16)
Pursuant to long-term debt agreements, the amount of Restricted Payments, as defined, that the Company can make, including dividends and
purchases of its own capital stock, was limited as of December 31, 2004, to $892.8 million. Certain loan agreements require that a minimum
level of free cash be maintained. As at December 31, 2004, this amount was $100.0 million. Certain of the loan agreements also require that a
minimum level of free liquidity and undrawn revolving credit lines (excluding undrawn revolving credit lines with less than 6 months to maturity)
be maintained. As at December 31, 2004, this amount was $205.8 million.
The aggregate annual long-term debt principal repayments required to be made for the five fiscal years subsequent to December 31, 2004 are
$119.5 million (2005), $219.5 million (2006), $36.4 million (2007), $284.0 million (2008), $189.3 million (2009) and $1,259.3 million (thereafter).
10. Operating Leases
Charters-out
Time charters and bareboat charters of the Company’s vessels to third parties are accounted for as operating leases. As at December 31,
2004, minimum scheduled future revenues to be received on time charters and bareboat charters currently in place are approximately $5,516.3
million, comprised of $395.8 million (2005), $337.3 million (2006), $352.2 million (2007), $351.5 million (2008), $349.8 million (2009) and
$3,729.7 million (thereafter).
The minimum scheduled future revenues should not be construed to reflect total charter hire revenues for any of the years.
Charters-in
As at December 31, 2004, minimum commitments under vessel operating leases are approximately $1,249.3 million, comprised of $365.5
million (2005), $289.3 million (2006), $197.3 million (2007) $120.9 million (2008), $83.5 million (2009) and $192.8 million (thereafter).
During December 2003, the Company sold and leased back three Aframax tankers which are accounted for as vessel operating leases. The
sale generated a $16.8 million deferred gain, which was included in other long-term liabilities and is being amortized over the 7-year term of the
leases.
F-14
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
11. Capital Leases and Restricted Cash
Capital Leases
Aframax and Suezmax Tankers. As at December 31, 2004, the Company was a party to capital leases on one Aframax tanker and four
Suezmax tankers. Under the terms of the lease arrangements – which include the Company’s contractual right to full operation of the vessels
pursuant to bareboat charters – the Company is required to purchase these vessels at the end of their respective lease terms for a fixed price.
As at December 31, 2004, the remaining commitments under these capital leases, including the purchase obligations, approximated $282.7
million (including imputed interest of $59.6 million), repayable as follows:
Year
2005
2006
2007
2008
2009
Thereafter
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
......................................................................................................................................................
Commitment
$ 25.1 million
149.9 million
8.0 million
8.0 million
7.9 million
83.8 million
LNG Carriers. As at December 31, 2004, the Company was a party to capital leases on two LNG carriers, which are structured as “Spanish tax
leases”. Under the terms of the Spanish tax leases, the Company will purchase these vessels at the end of their respective lease terms in 2006
and 2011, both of which purchase obligations have been fully funded with restricted cash deposits described below. As at December 31, 2004,
the weighted-average interest rate implicit in the Spanish tax leases was 5.7%. As at December 31, 2004, the commitments under these capital
leases, including the purchase obligations, approximated 365.3 million Euros ($497.7 million) (including imputed interest of 61.9 million Euros,
($84.4 million)), repayable as follows:
Year
2005
2006
2007
2008
2009
Thereafter
Restricted Cash
....................................................................................................................
....................................................................................................................
....................................................................................................................
....................................................................................................................
....................................................................................................................
....................................................................................................................
77.1 million Euros ($105.0 million)
123.2 million Euros ($167.8 million)
23.3 million Euros ($31.7 million)
24.4 million Euros ($33.3 million)
25.6 million Euros ($34.9 million)
91.7 million Euros ($125.0 million)
Commitment
Under the terms of the Spanish tax leases for our LNG carriers, the Company is required to have on deposit with financial institutions an
amount of cash that approximates the present value of the remaining amounts owing under the leases (including the obligations to purchase
the LNG carriers at the end of the lease periods). This amount was 309.5 million Euros ($421.6 million) as at December 31, 2004. These cash
deposits are restricted to being used for capital lease payments and have been fully funded with term loans (see Note 9) and a Spanish
government grant. The interest rates earned on the deposits approximate the interest rate implicit in the Spanish tax leases. As at December
31, 2004, the weighted-average interest rate earned on the deposits was 5.3%.
The Company also maintains restricted cash deposits relating to certain term loans and other obligations. As at December 31, 2004, this
amount was $27.2 million (2003 – $2.7 million).
12. Fair Value of Financial Instruments
Long-term debt – The fair values of the Company’s fixed-rate long-term debt are either based on quoted market prices or estimated using
discounted cash flow analyses, based on rates currently available for debt with similar terms and remaining maturities.
Interest rate swap agreements, foreign exchange contracts, bunker fuel swap contracts and freight forward agreements – The fair
value of these financial instruments, used for hedging purposes, is the estimated amount that the Company would receive or pay to terminate
the agreements at the reporting date, taking into account current interest rates, foreign exchange rates, bunker fuel prices, spot market rates for
vessels, and the current credit worthiness of the swap counter parties.
F-15
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(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, 2004
December 31, 2003
Carrying
Amount
$
Fair
Value
$
Carrying
Amount
$
Fair
Value
$
Cash and cash equivalents, marketable securities, and
restricted cash .................................................................
Long-term debt (including capital lease obligations) .......
Derivative instruments (note 16) .....................................
Interest rate swap agreements .....................................
Foreign currency contracts ...........................................
Bunker fuel swap contracts............................................
Freight forward agreements ..........................................
875,849
(2,744,545)
875,849
(2,801,553)
390,467
(1,636,758)
390,467
(1,686,002)
(158,482)
16,635
98
(3,276)
(158,482)
16,635
98
(3,276)
(9,953)
20,944
183
(1,178)
(9,953)
20,944
183
(1,178)
The Company transacts all of its derivative instruments through investment grade rated financial institutions and requires no collateral from
these institutions.
13. Capital Stock
The authorized capital stock of Teekay at December 31, 2004 was 25,000,000 shares of Preferred Stock, with a par value of $1 per share, and
725,000,000 shares of Common Stock, with a par value of $0.001 per share. As at December 31, 2004, Teekay had 82,951,275 shares of
Common Stock and no shares of Preferred Stock issued and outstanding. On May 17, 2004, Teekay effected a two-for-one stock split relating
to its common stock. All earnings per share and share capital amounts disclosed in these financial statements give effect to this stock split
retroactively.
In November 2004, Teekay announced that its Board of Directors had authorized the repurchase of up to 3,000,000 shares of its Common
Stock in the open market. As at December 31, 2004, Teekay had repurchased 1,400,200 shares of Common Stock since such authorization at
an average price of $43.73 per share. In January 2005, Teekay repurchased an additional 1,599,800 shares at an average price of $42.27, for
a total of 3,000,000 shares repurchased.
In September 2003, the Company’s 1995 Stock Option Plan was terminated with respect to new grants and the Company’s 2003 Equity
Incentive Plan was adopted. As at December 31, 2004, the Company had reserved pursuant to its 1995 Stock Option Plan and 2003 Equity
Incentive Plan (collectively referred to as the “Plans”) 6,716,413 shares of Common Stock for issuance upon exercise of options or equity
awards granted or to be granted. During the years ended December 31, 2004, 2003, and 2002, the Company granted options under the Plans
to acquire up to 833,840, 2,119,160, and 2,052,050 shares of Common Stock, respectively, to certain eligible officers, employees, and directors
of the Company. The options under the Plans have a 10-year term and vest equally over three years from the grant date, except for one grant
of 50,000 options which will vest 100% on December 31, 2006.
During 2004, the Company granted 14,260 shares of restricted stock awards (2003 – 10,000) to certain of the Company’s Directors. The stock
will be released from a forfeiture provision equally over three years from the date of the award.
During 2003, the Company granted 72,500 shares of restricted stock with a fair value of $1.4 million, based on the quoted market price, as
compensation to one of the Company’s executive officers.
A summary of the Company’s stock option activity and related information for the years ended December 31, 2004, 2003 and 2002, is as
follows:
December 31, 2004
December 31, 2003
December 31, 2002
Options
(000’s)
#
Outstanding-beginning of year..............................
7,254
Granted ................................................................. 834
Exercised .............................................................. (3,125)
Forfeited................................................................ (242)
Outstanding-end of year ....................................... 4,721
Weighted-
Average
Exercise
Price
$
17.18
33.67
16.41
19.39
20.47
Options
(000’s)
#
7,014
2,119
(1,764)
(115)
7,254
Weighted-
Average
Exercise
Price
$
15.73
19.55
14.17
19.64
17.18
Options
(000’s)
#
5,480
2,052
(380)
(138)
7,014
Weighted-
Average
Exercise
Price
$
14.02
19.56
11.08
16.93
15.73
Exercisable - end of year .....................................
1,980
15.82
3,328
14.20
3,478
12.49
Weighted-average fair value of options granted
during the year (per option) ................................
9.60
4.23
4.90
Exercise prices for the options outstanding as of December 31, 2004 ranged from $8.44 per share to $34.37 per share. These options have a
weighted-average remaining contractual life of 7.1 years.
F-16
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Further details regarding the Company’s outstanding and exercisable stock options at December 31, 2004 are as follows:
Range of Exercise Prices
$ 8.44 – $ 9.99
$10.00 – $14.99
$15.00 – $19.99
$20.00 – $24.99
$25.00 – $29.99
$30.00 – $34.37
14. Related Party Transactions
Outstanding Options
Exercisable Options
Weighted-
Average
Remaining Life
(years)
Weighted-
Average
Exercise Price
$
Options
(000’s)
#
Weighted-
Average
Exercise Price
$
Options
(000’s)
#
339
548
2,534
471
-
829
4,721
4.6
4.1
7.6
6.3
-
9.2
7.1
8.46
12.54
19.45
20.57
-
33.67
20.47
339
548
638
455
-
-
1,980
8.46
12.54
19.14
20.59
-
-
15.82
As at December 31, 2004, Resolute Investments, Inc. (or Resolute) owned 39.3% of our outstanding Common Stock. Two of our directors, C.
Sean Day, who is also Chair of our Board, and Bruce Bell, are directors and the Chairman and Vice President, respectively, of Resolute. Two
additional directors, Thomas Kuo-Yuen Hsu and Axel Karlshoej, are among the Managing Directors of The Kattegat Trust Company Limited,
which is the trustee of the trust that owns all of Resolute’s outstanding equity.
Payments made by the Company to Resolute, Oceanic Bank and Trust Limited, a Bahamian bank and trust company, or companies related
through common ownership in respect of port agent services, legal and administration fees, shared office costs, and consulting fees for the
years ended December 31, 2004, 2003 and 2002 totaled $0.5 million, $0.5 million, and $0.9 million respectively. In addition to being a director
of Resolute, Bruce Bell is also the Managing Director of Oceanic Bank and Trust Limited.
In 1993 the Company purchased all of the issued and outstanding shares of Palm Shipping Inc. (now Teekay Chartering Limited) from an
affiliate of 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, that was required under the terms of the Palm Shipping acquisition agreement.
15. Other Loss
Income tax expense....................................................................................................
Loss on bond repurchase ...........................................................................................
Foreign exchange (loss) gain .....................................................................................
Write-down in the carrying value of marketable securities .........................................
Miscellaneous .............................................................................................................
Year Ended
December 31,
2004
$
(35,048)
(769)
(42,704)
-
10,860
(67,661)
Year Ended
December 31,
2003
$
(36,501)
(5,385)
(3,855)
(4,910)
4,642
(46,009)
Year Ended
December 31,
2002
$
(11,413)
-
3,897
-
(7,352)
(14,868)
During the year ended December 31, 2004, the Company incurred $1.0 million of restructuring and severance costs associated with the closure
of the Company’s office in Oslo, Norway. During the year ended December 31, 2003, the Company incurred $6.4 million of restructuring costs
associated with closure of the Company’s offices in Oslo, Norway and Melbourne, Australia, and severance costs related to the termination of
seafaring staff.
16. Derivative Instruments and Hedging Activities
The Company uses derivatives only for hedging purposes. The following summarizes the Company's risk strategies with respect to market risk
from foreign currency fluctuations, changes in interest rates, spot market rates for vessels, bunker fuel prices, and the effect of these strategies
on the Company's financial statements.
The Company hedges portions of its forecasted expenditures denominated in foreign currencies with foreign exchange forward contracts and a
portion of its bunker fuel expenditures with bunker fuel swap contracts. As at December 31, 2004, the Company was committed to foreign
exchange contracts for the forward purchase of approximately Norwegian Kroner 435.5 million and Canadian Dollars 58.3 million for U.S.
Dollars at an average rate of Norwegian Kroner 7.38 per U.S. Dollar and Canadian Dollar 1.29 per U.S. Dollar, respectively. The foreign
exchange forward contracts mature as follows: $99.2 million in 2005; and $5.0 million in 2006.
The Company hedges a portion of its bunker fuel expenditures with bunker fuel swap contracts. As at December 31, 2004, the Company was
committed to bunker fuel swap contracts totalling 22,650 metric tonnes with a weighted-average price of $158.14 per tonne. The fuel swap
contracts expire between January and December 2005.
F-17
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont’d)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
As at December 31, 2004, the Company was committed to the following interest rate swap agreements related to its LIBOR and EURIBOR
based debt, whereby certain of the Company's floating rate debt was swapped with fixed-rate obligations:
U.S. Dollar denominated interest rate swaps
U.S. Dollar denominated interest rate swaps (2)
U.S. Dollar denominated interest rate swaps (3)
Euro denominated interest rate swaps (4) (5)
_____________________________________________________________________________
Interest
Rate
Index
LIBOR
LIBOR
LIBOR
EURIBOR
Principal
Amount
$
600,000
934,000
328,459
442,401
Weighted-
Average
Remaining
Term
(years)
0.8
9.0
21.4
19.4
Fixed Interest
Rate
(%)(1)
2.8
5.4
6.7
5.9
(1) Excludes the margin the Company pays on its variable-rate debt (see Note 9).
(2)
Inception dates of swaps are 2006 ($600.0 million) and 2007 ($334.0 million).
(3) Principal amounts reduce monthly to zero by the maturity dates of the swap agreements.
(4) Principal amount reduces monthly to 70.1 million Euros ($95.5 million) by the maturity dates of the swap agreements.
(5) Principal amount is the U.S. Dollar equivalent of 324.8 million Euros.
The Company hedges certain of its voyage revenues through the use of forward freight agreements. Forward freight agreements involve
contracts to provide a fixed number of theoretical voyages at fixed-rates, thus hedging a portion of the Company’s exposure to the spot charter
market. As at December 31, 2004, the Company was committed to forward freight agreements totaling 4.8 million metric tonnes with a notional
principal amount of $40.0 million. The forward freight agreements expire between January and December 2005.
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, bunker fuel swap contracts, and forward freight agreements; however, the Company does not anticipate non-
performance by any of the counter parties.
During the year ended December 31, 2004, the Company recognized a net gain of $0.9 million (2003 – net gain of $0.5 million) relating to the
ineffective portion of its interest rate swap agreements and foreign currency forward contracts. The ineffective portion of these derivative
instruments is presented as interest expense and other (loss) income, respectively.
As at December 31, 2004, the Company estimates, based on current foreign exchange rates, bunker fuel prices, interest rates and spot market
rates for vessels, that it will reclassify approximately $24.9 million of net loss on derivative instruments from accumulated other comprehensive
income to earnings during the next 12 months due to actual voyage, vessel operating, drydocking and general and administrative expenditures
and the payment of interest expense associated with the floating-rate debt.
As at December 31, 2004 and 2003, the Company’s accumulated other comprehensive (loss) income consisted of the following components:
December 31, 2004
$
December 31, 2003
$
Unrealized (losses) gains on derivative instruments .............................................................
Unrealized gain on marketable securities..............................................................................
(56,132)
-
(56,132)
10,193
53,331
63,524
17. Commitments and Contingencies
As at December 31, 2004, the Company was committed to the construction of seven Aframax tankers, two Suezmax tankers, three product
tankers and three LNG carriers scheduled for delivery between January 2005 and March 2008, at a total cost of approximately $1,050.6 million,
excluding capitalized interest. As of December 31, 2004, payments made towards these commitments totaled $239.4 million, excluding $13.2
million of capitalized interest and other miscellaneous construction costs. Long-term financing arrangements existed for $749.6 million of the
unpaid cost of these vessels. It is the Company's intention to finance the remaining unpaid amount of $61.6 million through incremental debt or
surplus cash balances, or a combination thereof. As of December 31, 2004, the remaining payments required to be made under these
newbuilding contracts were $363.7 million in 2005, $255.9 million in 2006, $140.9 million in 2007, and $50.7 million in 2008. Two of the
Aframax tankers will be subject to 10-year long-term charters to Skaugen PetroTrans Inc., a joint venture of the Company, upon delivery in
2008.
Under the terms of the joint venture agreement with an entity controlled by the former controlling shareholder of Teekay Spain, Teekay will
make capital contributions to the joint venture company of $50.0 million in share premium. In the event that Teekay has not contributed the
$50.0 million equity prior to April 30, 2007, it will be required to pay the other partner an amount no more than $25.0 million calculated by a pre-
determined formula based on the occurrence of certain future events.
The Company has been awarded a contract by a consortium of major oil companies to construct and install on six of its shuttle tankers volatile
compound emissions plants, which reduce emissions during cargo operations. These plants are leased to the consortium of major oil
companies. The construction and installation of these plants are expected to be completed by the end of 2005 at a total cost of approximately
$91.3 million. As at December 31, 2004, the remaining payments required to be made towards these commitments totaled $31.5 million.
F-18
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
Teekay and certain subsidiaries of Teekay have guaranteed their share of the outstanding mortgage debt in four 50%-owned joint venture
companies. As of December 31, 2004, Teekay and these subsidiaries had guaranteed $99.6 million of such debt, or 50% of the total $199.1
million in outstanding mortgage debt of the joint venture companies. The outstanding mortgage debt has maturity dates ranging from May 2008
to June 2014. These joint venture companies own an aggregate of five shuttle tankers.
On November 24, 2004, the Company announced that its wholly-owned subsidiary, Teekay LNG Partners L.P. (“Teekay LNG Partners”), had
filed a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of its common units. Teekay LNG
Partners is a Marshall Islands limited partnership recently formed by the Company as part of its strategy to expand its operations in the LNG
shipping sector. Teekay LNG Partners will provide LNG and crude oil marine transportation services under long-term, fixed-rate contracts with
major energy and utility companies through its fleet of four LNG carriers and five Suezmax class crude oil tankers, primarily consisting of
vessels the Company obtained through its acquisition of Teekay Spain in April 2004. After the offering, the Company currently anticipates that it
will own approximately an 81 percent interest in the partnership (including its 2% general partner interest), which would be reduced to
approximately 79 percent if the underwriters exercise in full their over-allotment option.
The Company enters into indemnification agreements with certain officers and directors. In addition, the Company enters into other
indemnification agreements in the ordinary course of business. The maximum potential amount of future payments required under these
indemnification agreements is unlimited. However, the Company believes that it maintains appropriate liability insurance that limits the
exposure and enables the Company to recover any future amounts paid, less any deductible amounts pursuant to the terms of the respective
policies, the amounts of which are not considered material.
18. Change in Non-Cash Working Capital Items Related to Operating Activities
Accounts receivable............................................................................
Prepaid expenses and other assets ...................................................
Accounts payable................................................................................
Accrued liabilities ................................................................................
19. Vessel Sales, Vessels Held for Sale and Vessel Write-downs
Year Ended
December 31,
2004
$
Year Ended
December 31,
2003
$
Year Ended
December 31,
2002
$
(60,494)
(1,189)
11,484
23,649
(26,550)
(26,587)
9,474
14,627
(1,770)
(4,256)
(13,508)
(5,002)
27,375
(1,827)
7,038
During 2004, the Company sold 10 Aframax tankers built between 1988 and 1993, two Suezmax tankers built in 1989 and 1991, one 1993 built
Very Large Crude Carrier, and one 1982 built shuttle tanker. The results for the year ended December 31, 2004 include a gain on sale from
these vessels totaling $76.9 million.
During December 2004, the Company entered into agreements to sell eight Aframax tankers built between 1989 and 1991, and one 1986 built
shuttle tanker, all scheduled to be delivered in the first quarter of 2005. The Company expects to record a gain of approximately $86.6 million
relating to their sale. These vessels were reclassified on the December 31, 2004 balance sheet from vessels and equipment to vessels held for
sale.
In December 2003, the Company also sold and leased back three Aframax tankers which are accounted for as vessel operating leases. The
sale generated a $16.8 million deferred gain, which has been included in other long-term liabilities and is being amortized over the seven-year
term of the leases. The amortization of this deferred gain was $2.4 million in 2004.
During 2003, the Company sold eight 1980’s-built Aframax tankers and eight 1980’s-built Panamax oil/bulk/ore carriers. The results for the year
ended December 31, 2003 include a $34.7 million write-down in the book value of these vessels, partially offset by a $1.2 million gain on sale
from these vessels.
In 2003 the International Maritime Organization (“IMO”), the United Nations’ global maritime regulatory body, announced stricter regulations
governing the tanker industry on a worldwide basis. The IMO regulations, which became effective April 5, 2005, will accelerate the mandatory
phase-out of single-hull tankers as well as impose a more rigorous inspection regime for older tankers. As a result of these regulations, the
Company recorded a $56.9 million non-cash write-down in the fourth quarter of 2003, and reduced the estimated useful lives from 25 years to
approximately 21 years for its two remaining vessels affected by these regulatory changes.
F-19
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Cont'd)
(all tabular amounts stated in thousands of U.S. dollars, other than share or per share data)
20. Earnings Per Share
Year Ended
December 31,
2004
$
Year Ended
December 31,
2003
$
Year Ended
December 31,
2002
$
Net income available for common stockholders ...............................................
757,440
177,364
53,391
Weighted average number of common shares.................................................
Dilutive effect of employee stock options and restricted stock awards ............
Dilutive effect of Equity Units ............................................................................
Common stock and common stock equivalents ...............................................
82,829,336
2,189,053
2,710,648
87,729,037
79,986,746
1,479,548
-
81,466,294
79,261,994
1,242,798
-
80,504,792
Earnings per common share:
- Basic .............................................................................................................
- Diluted...........................................................................................................
9.14
8.63
2.22
2.18
0.67
0.66
For the years ended December 31, 2003 and 2002, the anti-dilutive effect of 3.3 million and 1.8 million shares attributable to outstanding stock
options and the Equity Units were excluded from the calculation of diluted earnings per share. For the year ended December 31, 2004, no
outstanding stock options or Equity Units were anti-dilutive.
21. Subsequent Events
a)
In February 2005 the Company entered into $200.0 million of interest rate swap agreements related to its LIBOR-based debt whereby
certain of the Company’s floating-rate debt will be swapped with fixed-rate obligations with a weighted-average interest rate of
approximately 4.5% commencing in February, 2005 and maturing in February 2015.
b) During the first quarter of 2005, the Company entered into agreements to sell three Aframax tankers built in 1988 and 1989, two Suezmax
tankers, one built in 1990 and one under construction, and one Shuttle tanker built in 1991. The Company expects that the total proceeds
from the sale of these vessels will be approximately $212.5 million. These vessels are scheduled to be delivered to the buyers between
March 2005 and July 2005. The Company expects to record gains totaling approximately $43.5 million relating to the sale of these vessels.
F-20
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(in thousands of U.S. dollars)
Year Ended December 31, 2004
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
SCHEDULE A
Voyage revenues
Operating expenses
(Loss) income from vessel operations
Net interest expense
Equity in net income of subsidiaries
Other income (loss)
Net income
Retained earnings, beginning of the year
Retained earnings adjustment (1)
Dividends declared
Repurchase of Common Stock
15,140
(15,140)
(48,963)
811,509
10,034
757,440
1,095,650
-
(42,407)
(52,131)
64,765
25,841
38,924
-
-
(32)
38,892
5,107
(9,544)
-
-
2,199,627
1,402,225
797,402
(54,027)
(45,154)
(45,154)
-
-
-
(811,509)
29,242
772,617
-
(811,509)
2,219,238
1,398,052
821,186
(102,990)
-
39,244
757,440
1,343,883
(1,348,990)
1,095,650
9,544
-
-
-
-
-
-
(42,407)
(52,131)
Retained earnings, end of the year
1,758,552
34,455
2,126,044
(2,160,499)
1,758,552
(1) During 2003 and 2004, the Company repurchased $129.1 million of the 8.32% Notes. Consequently, four of the Company’s guarantor subsidiaries were released from the guarantee
of the 8.32% Notes during the second quarter of 2004.
Year Ended December 31, 2003
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
-
13,417
(13,417)
(35,326)
216,690
9,417
177,364
954,005
(35,719)
-
59,571
41,335
18,236
-
-
(17)
18,219
1,565,727
1,277,582
288,145
(41,752)
(49,203)
(49,203)
-
-
-
(216,690)
(47,922)
198,471
-
(216,690)
(13,112)
1,145,412
(1,132,300)
-
-
-
-
-
-
1,576,095
1,283,131
292,964
(77,078)
-
(38,522)
177,364
954,005
(35,719)
-
1,095,650
5,107
1,343,883
(1,348,990)
1,095,650
Voyage revenues
Operating expenses
(Loss) income from vessel operations
Net interest expense
Equity in net income of subsidiaries
Other income (loss)
Net income
Retained earnings (deficit), beginning of the
year
Dividends declared
Repurchase of Common Stock
Retained earnings, end of the year
(See Note 9)
F-21
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS - (Cont’d)
(in thousands of U.S. dollars)
Year Ended December 31, 2002
SCHEDULE A
Voyage revenues
Operating expenses
(Loss) income from vessel operations
Net interest expense
Equity in net income of subsidiaries
Other income (loss)
Net income
Retained earnings (deficit), beginning of the
year
Dividends declared
Repurchase of Common Stock
Retained earnings (deficit), end of the
year
______________
(See Note 9)
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
(142,232)
(142,232)
-
-
889,079
754,708
134,371
(12,905)
-
(111,177)
(12,455)
109,011
-
(111,177)
36,480
34,314
2,166
-
-
-
2,166
(15,278)
1,036,401
(1,021,123)
-
-
-
-
-
-
Teekay
Shipping Corp.
& Subsidiaries
$
783,327
663,981
119,346
(54,480)
-
(11,475)
53,391
935,660
(34,079)
(967)
-
17,191
(17,191)
(41,575)
111,177
980
53,391
935,660
(34,079)
(967)
954,005
(13,112)
1,145,412
(1,132,300)
954,005
F-22
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of U.S. dollars)
Year Ended December 31, 2004
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
SCHEDULE A
Net income
757,440
38,892
772,617
(811,509)
757,440
Other comprehensive income
Unrealized gain on available-for-sale
securities
Reclassification adjustment for gain on
available- for-sale securities included
in net income
Unrealized loss on derivative instruments
Reclassification adjustment for loss on
derivative instruments
-
-
-
-
-
-
-
-
Comprehensive income
757,440
38,892
39,369
(92,539)
(94,822)
28,336
652,961
-
-
-
-
(811,509)
39,369
(92,539)
(94,822)
28,336
637,784
Year Ended December 31, 2003
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
Net income
177,364
18,219
198,471
(216,690)
177,364
Other comprehensive income
Unrealized gain on available-for-sale
securities
Reclassification adjustment for loss on
available- for-sale securities included
in net income
Unrealized gain on derivative instruments
Reclassification adjustment for gain on
derivative instruments
-
-
-
-
-
-
-
-
53,540
4,899
8,639
(459)
-
-
-
-
53,540
4,899
8,639
(459)
Comprehensive income
177,364
18,219
265,090
(216,690)
243,983
Year Ended December 31, 2002
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
Net income
53,391
2,166
109,011
(111,177)
53,391
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
Reclassification adjustment for gain on
derivative instruments
-
-
-
-
-
-
-
-
Comprehensive income
53,391
2,166
______________
(See Note 9)
(239)
737
3,023
(1,815)
110,717
-
-
-
-
(111,177)
(239)
737
3,023
(1,815)
55,097
F-23
SCHEDULE A
ASSETS
Cash and cash equivalents
Other current assets
Total current assets
Vessels and equipment (net)
Advances due from subsidiaries
Investment in direct financing leases
Other assets (principally restricted cash
and investments in subsidiaries)
Investment in joint ventures
Intangible assets - net
Goodwill
LIABILITIES & STOCKHOLDERS'
EQUITY
Current liabilities
Long-term debt and other long-term liabilities
Due (from) to affiliates
Total liabilities
Minority Interest
Stockholders' Equity
Capital stock
Contributed capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(in thousands of U.S. dollars)
As at December 31, 2004
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
-
5,292
5,292
-
135,617
-
2,726,786
-
-
-
2,867,695
26,120
548,085
-
574,205
-
534,938
-
1,758,552
-
2,293,490
2,867,695
-
326
326
86,525
-
-
-
-
-
-
86,851
1,062
-
(94,594)
(93,532)
-
11
145,917
34,455
-
180,383
86,851
427,037
630,227
1,057,264
3,531,287
-
109,215
438,618
59,637
277,511
169,590
5,643,122
532,227
2,289,164
594,374
3,415,765
14,724
5,955
136,766
2,126,044
(56,132)
2,212,633
5,643,122
-
(145,000)
(145,000)
(86,525)
(135,617)
-
(2,726,786)
-
-
-
(3,093,928)
(145,000)
-
(499,780)
(644,780)
-
(5,966)
(282,683)
(2,160,499)
-
(2,449,148)
(3,093,928)
427,037
490,845
917,882
3,531,287
-
109,215
438,618
59,637
277,511
169,590
5,503,740
414,409
2,837,249
-
3,251,658
14,724
534,938
-
1,758,552
(56,132)
2,237,358
5,503,740
As at December 31, 2003
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
ASSETS
Cash and cash equivalents
Other current assets
Total current assets
Vessels and equipment (net)
Advances due from subsidiaries
Investment in direct financing leases
Other assets (principally marketable
securities and investments in subsidiaries)
Investment in joint ventures
Intangible assets - net
Goodwill
LIABILITIES & STOCKHOLDERS'
EQUITY
Current liabilities
Long-term debt and other long-term liabilities
Due (from) to affiliates
Total liabilities
Minority Interest
Stockholders' Equity
Capital stock
Contributed capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
_____________
(See Note 9)
-
1,429
1,429
-
309,071
-
1,911,491
-
-
-
2,221,991
25,371
608,317
-
633,688
-
492,653
-
1,095,650
-
1,588,303
2,221,991
292,284
282,476
574,760
2,332,678
-
73,073
155,844
54,392
118,588
130,754
3,440,089
343,515
1,037,946
493,190
1,874,651
15,322
5,943
136,766
1,343,883
63,524
1,550,116
3,440,089
-
(96,000)
(96,000)
-
(309,071)
-
(1,911,491)
-
-
-
(2,316,562)
(96,000)
-
(359,533)
(455,533)
-
(5,966)
(506,073)
(1,348,990)
-
(1,861,029)
(2,316,562)
292,284
188,249
480,533
2,574,860
-
73,073
155,844
54,392
118,588
130,754
3,588,044
274,632
1,646,263
-
1,920,895
15,322
492,653
-
1,095,650
63,524
1,651,827
3,588,044
-
344
344
242,182
-
-
-
-
-
-
242,526
1,746
-
(133,657)
(131,911)
-
23
369,307
5,107
-
374,437
242,526
F-24
TEEKAY SHIPPING CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
Year Ended December 31, 2004
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
SCHEDULE A
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net cash flow from operating activities
FINANCING ACTIVITIES
Net proceeds from long-term debt
Scheduled repayments of long-term debt
Prepayments of long-term debt
Other
Net cash flow from financing activities
INVESTING ACTIVITIES
Expenditures for vessels and equipment
Purchase of Teekay Shipping Spain S.L.
Proceeds from dispositions of vessels and
equipment
Other
Net cash flow from investing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net cash flow from operating activities
FINANCING ACTIVITIES
Net proceeds from long-term debt
Scheduled repayments of long-term debt
Prepayments of long-term debt
Other
Net cash flow from financing activities
INVESTING ACTIVITIES
Expenditures for vessels and equipment
Purchase of Navion AS
Proceeds from dispositions of vessels and
equipment
Other
Net cash flow from investing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
Cash and cash equivalents provided by (used for)
OPERATING ACTIVITIES
Net cash flow from operating activities
FINANCING ACTIVITIES
Net proceeds from long-term debt
Scheduled repayments of long-term debt
Prepayments of long-term debt
Other
Net cash flow from financing activities
INVESTING ACTIVITIES
Expenditures for vessels and equipment
Purchase of Navion AS
Other
Net cash flow from investing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
Cash and cash equivalents, end of the year
___________________
(See Note 9)
(62,726)
48,384
829,046
-
(58,408)
-
121,134
62,726
-
-
-
(48,159)
(48,159)
1,621,221
(158,015)
(1,731,223)
(116,953)
(384,970)
-
-
-
-
-
-
-
-
(225)
-
-
-
(225)
-
-
-
(548,362)
(286,993)
440,556
85,476
(309,323)
134,753
292,284
427,037
814,704
1,621,221
(216,423)
(1,731,223)
(43,978)
(370,403)
(548,587)
(286,993)
440,556
85,476
(309,548)
134,753
292,284
427,037
-
-
-
-
-
-
-
-
-
-
-
-
-
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
Year Ended December 31, 2003
(25,377)
28,996
451,956
80,594
-
-
(55,217)
25,377
-
-
-
-
-
-
-
-
-
-
-
(28,572)
(28,572)
(424)
-
-
(424)
-
-
-
1,900,234
(62,585)
(1,466,815)
79,198
450,032
(372,009)
(704,734)
242,111
(59,697)
(894,329)
7,659
284,625
292,284
-
-
-
-
-
-
-
-
-
-
-
-
-
-
455,575
1,980,828
(62,585)
(1,466,815)
(4,591)
446,837
(372,433)
(704,734)
242,111
(59,697)
(894,753)
7,659
284,625
292,284
Teekay
Shipping Corp.
$
8.32% Notes
Guarantor
Subsidiaries
$
Non-Guarantor
Subsidiaries
$
Eliminations
$
Teekay
Shipping Corp.
& Subsidiaries
$
Year Ended December 31, 2002
(51,914)
16,531
214,914
255,185
(51,830)
(8,000)
(69,312)
126,043
(134,072)
(76,000)
(21,210)
(231,282)
109,675
174,950
284,625
-
-
-
51,914
51,914
-
-
-
-
-
-
-
-
-
-
(14,953)
(14,953)
(1,578)
-
-
(1,578)
-
-
-
F-25
-
-
-
-
-
-
-
-
-
-
-
-
-
179,531
255,185
(51,830)
(8,000)
(32,351)
163,004
(135,650)
(76,000)
(21,210)
(232,860)
109,675
174,950
284,625
I, Bjorn Moller, President and Chief Executive Officer of the company, certify that:
1.
I have reviewed this report on Form 20-F of Teekay Shipping Corporation;
CERTIFICATION
EXHIBIT 12.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
covered by the report that has materially affected, or is reasonably likely to materially affect, the company’s internal control
over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: April 7, 2005
By: /s/ Bjorn Moller
Bjorn Moller President and Chief Executive Officer
I, Peter Evensen, Executive Vice President and Chief Financial Officer of the company, certify that:
1.
I have reviewed this report on Form 20-F of Teekay Shipping Corporation;
CERTIFICATION
EXHIBIT 12.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
covered by the report that has materially affected, or is reasonably likely to materially affect, the company’s internal control
over financial reporting; and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: April 7, 2005
By: /s/ Peter Evensen
Peter Evensen
Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.1
In connection with the annual report of Teekay Shipping Corporation (the "Company") on Form 20-F for the year ended December 31,
2004 as filed with the Securities and Exchange Commission on the date hereof (the "Form 20-F"), I Bjorn Moller, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78o(d)); and
(2) The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: April 7, 2005
By: /s/ Bjorn Moller
Bjorn Moller
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.2
In connection with the annual report of Teekay Shipping Corporation (the "Company") on Form 20-F for the year ended December 31,
2004 as filed with the Securities and Exchange Commission on the date hereof (the "Form 20-F"), I Peter Evensen, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 20-F fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m
or 78o(d)); and
(2) The information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: April 7, 2005
By: /s/ Peter Evensen
Peter Evensen
Executive Vice President and Chief Financial Officer
C O R P O R A T E I N F O R M A T I O N
C O R P O R AT E H E A D O F F I C E
TTKK HHoouussee
Bayside Executive Park
West Bay Street & Blake Road
P.O. Box AP-59212
Nassau, The Bahamas
S T O C K T R A N S F E R A G E N T A N D R E G I S T R A R
AAddddrreessss SShhaarreehhoollddeerr IInnqquuiirriieess TToo::
Stock Transfer Agent and Registrar
Bank of New York
Shareholder Relations Department
P.O. Box 11258
Church Street Station
New York, NY 10286
Tel: +1 (800) 524 4458
Tel: +1 (610) 382 7833 (Outside the U.S.)
E-mail: Shareowners@bankofny.com
Web site: www.stockbny.com
SSeenndd CCeerrttiiffiiccaatteess FFoorr TTrraannssffeerr aanndd AAddddrreessss CChhaannggeess TToo::
Receive and Deliver Department
P.O. Box 11002
Church Street Station
New York, NY 10286
Although Teekay is a foreign private issuer, Teekay has voluntarily chosen to comply in
all material respects with the NYSE domestic corporate governance listing standards.
You can find Teekay's corporate governance documents on Teekay's Web site at
www.teekay.com under the "Investor Centre" section.
The following table sets forth on a per share basis the high and low sales prices for
consolidated trading of our common shares on the New York Stock Exchange for each
quarter during the 12 months ended December 31, 2004*:
Quarter Ended
High
Low
Mar. 31, 2004
Jun. 30, 2004
Sept. 30, 2004
Dec. 31, 2004
$34.94
$37.65
$43.38
$54.45
$27.95
$29.41
$34.56
$41.14
Dividends Declared
(Per Share)
$0.125
$0.125
$0.125
$0.1375
*Adjusted for May 2004 2:1 stock split
I N V E S T O R R E L AT I O N S
Additional copies of the Company's
Annual Report are available by writing
or calling:
Teekay Shipping (Canada) Ltd.,
Investor Relations
Suite 2000 Bentall 5
550 Burrard Street
Vancouver, BC, V6C 2K2
Canada
Tel: +1 (604) 844 6654
Fax: +1 (604) 681 3011
E-mail: investor.relations@teekay.com
Web site: www.teekay.com
Stock Exchange Listing
New York Stock Exchange
Symbol: TK
Shares outstanding at
December 31, 2004:
82,951,215
GLASGOW HAMBURG HOUSTON LONDON LUXEMBOURG MADRID MANILA MUMBAI NASSAU PERTH RIGA SANDEFJORD SINGAPORE STAVANGER SYDNEY TOKYO VANCOUVER
Teekay Shipping Corporation
www.teekay.com