Philly Shipyard — Annual Report 2017

Mar 15, 2018

Contents

In review

• 1 Company overview
• 2 History
• 4 Key events
• 5 Investment highlights
• 6 Our values
• 7 Our safety
• 8 Letter from the President and CEO

Performance 2017

• 10 Board of Directors' report
• 18 Directors' responsibility statement
• 20 Consolidated accounts
• 46 Parent company accounts
• 54 Auditor's report
• 58 Shares and shareholder matters

Our organization and governance

• 60 Corporate governance
• 64 Presentation of the Board of Directors
• 66 Presentation of the Management Team
• 68 Company information

Financial calendar 2018

Annual general meeting	5 April
Interim report Q1 2018	8 May
Interim report Q2 2018	17 July
Interim report Q3 2018	6 November

Dates are subject to change.

We are Philly Shipyard

Philly Shipyard is a leading U.S. commercial shipyard constructing vessels for operation in the Jones Act market. It possesses a stateof-the-art shipbuilding facility and has earned a reputation as a preferred provider of ocean-going merchant vessels with a track record of delivering quality ships, having delivered around 50% of all large ocean-going Jones Act commercial ships since 2000.

Philly Shipyard ASA is a holding company with headquarters in Oslo, Norway, and an operating subsidiary in Philadelphia, PA, USA.

Philly Shipyard ASA was listed on Oslo Axess in December 2007. Aker Capital AS, a wholly-owned subsidiary of Aker ASA, is the majority shareholder, holding 57.56% of the shares as of 31 December 2017.

Elements contributing to success:

• State-of-the-art shipyard with modern equipment
• Access to global shipbuilding and design expertise through agreements with partners in Asia and Europe
• A solid track record demonstrated by the delivery of 28 quality vessels (4 containerships, 22 product tankers and 2 aframax tankers) through 2017
• Skilled workforce consisting of direct and contracted employees with a strong HSE mindset and culture of improvement
• Opportunistic investment approach with respect to the post-delivery economics of the vessels that it builds
• Proven history of promoting new vessel owners

U.S. Jones Act

U.S. coastwise law, commonly referred to as the Jones Act, requires all commercial vessels transporting merchandise between ports in the United States to be built in the United States, owned, operated and manned by U.S. citizens and registered under the U.S. flag. The Jones Act market encompasses all water-borne transportation between U.S. ports, including between the mainland U.S. and non-contiguous areas of Alaska, Hawaii and Puerto Rico, as well as shuttle tankers in the Gulf of Mexico.

In review History

2017 key events and highlights

Completed four-ship order for Kinder Morgan

Philly Shipyard delivered Hulls 026, 027 and 028, the American Freedom, the American Liberty and the American Pride, respectively, to a subsidiary of Kinder Morgan, representing the second, third and fourth product tankers in the fourvessel order by Kinder Morgan

Concluded investment program in USD 1.0 billion product tanker series

The delivery of Hull 028 marked a successful conclusion to an innovative plan to invest in eight Jones Act product tankers with an approximate contract value of USD 1.0 billion through the Philly Shipyard-Crowley joint venture (Hulls 021-024) and Philly Tankers (Hulls 025-028)

Philly Shipyard's 20-year anniversary celebration

Philly Shipyard celebrated its 20-year anniversary with 2,000 close family and friends. This event was marked by an honor received from the City of Philadelphia for the shipyard's excellence in the art of shipbuilding and for continuing the legacy of shipbuilding both locally and nationally

Hull 029 milestone | Dock mounting ceremony

The first engine room section on the first containership Philly Shipyard has built in over a decade was lowered into place in the dry dock during a ceremony with representatives from Matson and Philly Shipyard

Philly Shipyard earned a record-high EBITDA of USD 105.1 million in 2017, compared to EBITDA of USD 70.4 million in 2016

Record strong earnings 2017 AOTOS award recipient

Chairman Jim Miller (on the right along with past and present CEOs) accepted on behalf of Philly Shipyard the 2017 Admiral of the Ocean Seas (AOTOS) award from United Seamen's Service

Investment highlights

1 Leading Jones Act

• Š State-of-the-art facility with more than USD 650 million invested since founding
• Š Built around 50% of all large ocean-going Jones Act commercial ships since 2000
• Š Highly skilled workforce with integrated, fully flexible subcontracting

• Š Increased competitiveness through efficiency gains from recently completed series of 8 product tankers

• commercial shipyard 2 Successful track record in

• Š 10 of the 28 vessels built since start-up with some ownership or participation by the shipyard
• Š All stakes in post-delivery economics of vessels have been successfully divested
• Š PSI benefits from being early mover and initiating projects before positive segment development is fully visible

• Š PSI targets to secure orders in 2018 for its next available slots 031-032

• vessel ownership 3 Opportunistic approach to

• Š Dynamic activities in various Jones Act market sectors fundamentals
• Š Opportunities within specialty and high-end segments of the Jones Act market
• Š Considering a wide range of vessel types and alternative structures for new contracts
• Š Replacement needs remain for segments of aging Jones Act fleet

Jones Act market 4 Strong balance sheet and cash position

• Š Record high earnings in 2017 with EBITDA of USD 105.1 million
• Š Dividend payment on hold to preserve maximum flexibility for new projects
• Š Strong balance sheet with available debt capacity
• Š Solid cash position enables the shipyard to participate in new projects and enjoy upside from ownership in shipping assets

Philly Shipyard recent deliveries and order backlog

Customer	Vessel	Delivery	2016	2017	2018	2019
Crowley	023 PT	15 Apr. 2016
	024 PT	12 Aug. 2016
	025 PT	30 Nov. 2016
Philly	026 PT	29 Mar. 2017
Tankers	027 PT	26 July 2017
	028 PT	20 Nov. 2017
	029 Containership	Q3 2018
Matson	030 Containership	Q1 2019

Vision: To be - and be recognized as - America's leading commercial shipyard that delivers on its commitments, every time.

Our CORE values

Philly Shipyard's CORE values were designed as a reflection of who we are, and who we aspire to be, as a shipyard, as an organization and as individuals.

They capture the pride, passion and commitment behind each action we take and decision we make. They are not words on a page, but our stand – a united commitment to conquer all challenges and build long lasting relationships. For years to come we will be united by these values, that give us the platform to deliver on our commitments, every time.

unique group comprised of many backgrounds and ethnicities, teams and departments; but at the end of the day, we have a healthy respect and a natural need to protect each other.

From ship owner to process owner, we are all powerfully united to deliver. That means decisions are made in the best interest of the company, rather than oneself, or one team. We are strongest when we act together.

you own it, so treat it like it's yours. This means taking the utmost care for tools and equipment, making decisions based on the impact to your bottom line, and simply doing the right thing. Success is in our hands.

the status quo lives within us. It fuels the need to challenge ourselves, and each other, to find a better way. Being efficient keeps our costs down, while driving our competitive edge up.

Caring in action

At Philly Shipyard, the way in which we achieve growth and profitability is as important as the achievements themselves. Our overriding corporate responsibility is concern for the communities that we are a part of. We strive to provide products and services in a safe, environmentally sound, ethical and socially responsible manner.

More information regarding the Company's corporate social responsibility efforts can be found on pages 14-16 of the Board of Directors' report.

HSE — 2017, the Year of Renewed Focus

Safety is the foundation for the decisions we make and the actions we take on the road to zero incidents.

At Philly Shipyard, safety is personal and our credo is clear: We fundamentally believe that all incidents are preventable and safety is everyone's responsibility; and we promise to be relentless in our pursuit of an injuryfree workforce by creating and maintaining safe working conditions and never compromising safety for anyone, anywhere, at any time.

In order to achieve this objective, we will identify Health, Safety and Environment (HSE) risks arising from our activities, utilizing lessons learned from previous incidents to prevent future incidents. We continue our belief that, together, we can build a safer future. At Philly Shipyard, it doesn't matter what position you have - we are all united on the journey toward best-in-class safety.

In 2017, Philly Shipyard, Inc. (PSI) took decisive action to reinvigorate our safety culture. With our CORE principles embedded in the mindset for a few years now, we improved upon our HSE action plan with specific targets involving management as well as workers. This living document is our roadmap to a culture change journey from top to bottom throughout the organization.

The first item on our list was to roll-out our new HSE policy statement signed by PSI's President and CEO. With an emphasis on all three aspects of HSE, this document set the tone for 2017.

Throughout the year our HSE group held weekly safety walks with members of PSI's executive team, giving them the opportunity to walk the shops, observe the ships under construction and talk to the workers about safety. In addition, PSI's VP of Production led weekly safety walks with his production managers in their respective areas. The walks took place rain or shine, and became a valuable tool in ensuring our executive team and production managers take a personal interest in safety.

With the transition in 2017 from construction of product tankers to containerships, we knew this would present multiple safety challenges; therefore the HSE department implemented a dedicated HSE coordinator with sole responsibility for the dock construction activities. This proved to be a valuable move in ensuring our dock supervisors could interact with a safety resource earmarked solely for the container vessel (CV) project.

In December of 2017, we were notified by our insurance provider, Signal Mutual, that PSI's President and CEO had been awarded the Francis R. Sharp — Executive Leadership in Safety Award and would be presented with this award at the annual meeting in January 2018. This award is a clear indication of the positive direction PSI is going in achieving best-in-class safety.

While recordable injuries increased in frequency in 2017, this can be attributed in part to the many bumps and bruises and strains and sprains. The elevated risk of these types of injuries due to smaller, tighter work spaces was identified at the beginning of the CV project. Many lessons learned have been incorporated throughout the build program. We finished the year on a positive note with a lower lost time incident (LTI) frequency rate than the previous year.

In addition to our strong focus on improving health and safety performance, PSI takes its environmental responsibilities seriously, beginning with the vessel design. The industrial nature of our activities requires the use of significant amounts of energy, both electrical and gas, as well as the release of particulate and VOC emissions. PSI will continue to address the environmental impact of our operations by reducing waste, emissions and discharges and by using energy efficiently.

All incident frequency (2001-2017)

Observations (2012-2017)

Tim Hightower (left), shipbuilder and 2017 recipient of the President's Award and Bill Burns (right), production supervisor, together with Steinar Nerbovik in our Grand Block shop

Philly Shipyard: From Tailwinds to Headwinds

2017 was a historic year for Philly Shipyard, as we completed the deliveries of three product tankers and moved forward with construction of our first two container vessels in more than a decade, while achieving record financial results. The quality of our construction and the productivity of our workforce continue to improve and our reputation as the leading commercial shipbuilder in the United States is secure.

While there is much to be proud of that occurred in 2017, as we enter 2018 the realities of building for the U.S. Jones Act market are making it challenging for us to secure new work after our two containership order for Matson. The Jones Act dry cargo market is limited, largely consisting of trade between the mainland United States and Puerto Rico, Hawaii and Alaska. In addition, the replacement cycles for vessels in these trades are much longer than seen elsewhere in the world, with some steam powered vessels still in operation. The domestic tanker market has been entirely recapitalized over the last ten years, with Philly Shipyard constructing almost 50% of all of those ships.

There is no question that Philly Shipyard is facing headwinds, but we will meet this challenge head-on and work tirelessly to secure new shipbuilding orders. The greatest source of my confidence is our people and our reputation throughout the marine community. Our workforce has shown time and again that we construct the best ships in the United States, and our customers are our greatest advocates. Yes, there are challenges, but I will do my best to extend our order book into 2019 and beyond.

Product tanker status | End of the series

In 2017, we completed the final three product tankers for Kinder Morgan: Hull 026 (the American Freedom), Hull 027 (the American Liberty) and Hull 028 (the American Pride). All three vessels achieved a "clean sweep" during sea trials and were delivered deficiency-free and either on time or early. With that, we bid farewell to this series of vessels. While this was somewhat of a bittersweet moment for us, given our success in building these vessels, it has been a remarkable period of time for Philly Shipyard, one in which we realized our full potential and something that gives all of us a large measure of pride and sense of accomplishment.

Container vessel status | CV3600 project

In May 2017, we laid the keel on the first container ship we have built since 2005 and in February 2018, Hull 029 was successfully

launched from the building dock; it is now in final outfitting and commissioning. Work has begun on Hull 030, and its first block will be placed in the building dock this quarter. Both of these vessels are proceeding according to plan, which is a reflection of our talented and experienced workforce, and when completed will be the largest container vessels ever built in the United States. We are grateful that Matson has returned to Philly Shipyard to build these vessels and know that part of the decision to choose us was based on the satisfaction Matson has with the first four vessels we built for them.

Shipping investment status | Divestment completed

With the successful delivery of Hull 028 in Q4 2017 to Kinder Morgan, Philly Shipyard has now completely divested itself of all of its shipping assets and is once again focused entirely on shipbuilding operations. However, going forward, we will remain opportunistic in participating in the post-delivery economics of the ships we build.

Subsequent events

In January 2018, Philly Shipyard placed its potential TOTE containership project on hold, following notification from TOTE that it would not renew our Letter of Intent due to issues with its proposed terminal in Hawaii. As a result of the delay we have experienced in securing new orders after the Matson project, it has been necessary to freeze operations in various departments throughout the shipyard, and place some employees in layoff status. Regretably, these actions will continue until a follow-on project is secured.

Market outlook

The legislative approval for crude oil exports from the United States has reduced demand for tankers, but starting late in 2017, there were signs of improving market conditions in the liquid bulk trades. Consequently, the tanker market outlook is turning positive. As noted, the Jones Act dry cargo market is limited in its size and the number of potential customers for Philly Shipyard, but the impending IMO regulations prohibit steam powered vessels from operating unless they fully comply with new emissions requirements. This may present an opportunity for Philly Shipyard to construct replacement vessels for these ships. Philly Shipyard is expanding its search for new opportunities throughout the marine industry, including various specialized vessels such as fishing trawlers and cable layers, as well as vessels to support the growing offshore wind industry, which appears to be in the initial stages of a major expansion along the East Coast of the United States.

On a longer term basis, the future strategy for the yard is to combine governmental and commercial work and our first opportunity is to build the first-in-class heavy polar icebreaker (HPIB) for the United States Coast Guard (USCG). Philly Shipyard has teamed with Fincantieri Marine Group (FMG) and received one of five awards in 2017 to develop the preliminary design of the new vessel. The final request for proposal (RFP) was issued earlier this month, with award of the contract for construction expected in Q2 2019. The USCG is hoping to purchase three vessels of this class. So, if we are successful in winning the contract for the first HPIB, then there is a possibility of additional vessels which would represent long term stability for the shipyard.

Striving for operational excellence

Our accomplishments in shipbuilding are the result of an unrelenting focus on operational excellence throughout the entire organization. This can be measured in a number of key areas:

✓ HSE – In 2017, we felt it necessary to seriously examine our approach to safety and determine what steps were necessary to improve the safety culture in the shipyard and to strive for a goal of zero incidents. We implemented significant changes to our HSE action plan with specific targets and increasing the accountability of management as well as our workers.

I am proud to report that Philly Shipyard was recognized by its insurance carrier, Signal Mutual, as the recipient of the Francis R. Sharp — Executive Leadership in Safety Award. This award reaffirms the positive direction Philly Shipyard's safety performance is moving to become the best-in-class among U.S. shipyards.

While we saw a slight increase in recordable injuries during 2017 compared to 2016, we are pleased to report that we finished 2017 with a lower lost time incident (LTI) frequency rate than 2016.

✓ People – I never lose sight of the fact that the primary reason for the success of this shipyard is its dedicated and professional men and women who build the finest ships in this country. Over the last twenty years, we have assembled the most highly skilled and experienced shipbuilding team in the entire industry and the results of this are reflected in the quality of the vessels we build.

2018 began on a difficult note due to the consequences of the suspension of the potential TOTE containership project. Our management team faced the very difficult task of slowing down operations, or in some cases ceasing them altogether, due to a lack of continuing work. The inevitable result of this was a decision to issue layoff notices to some of our workforce, and this difficult process will continue until we gain certainty about the near term prospects for new work in the shipyard. But for all the joy that shipbuilding brings to me personally, this is one of the hardest things that any manager can face.

✓ Cost – In 2017, we had extremely positive financial results, and Philly Shipyard achieved record high revenues and profits in 2017. We saw net income for the full year of USD 67.2 million compared to net income of USD 38.7 million in 2016. Our EBITDA for the full year 2017 was USD 105.1 million, compared to EBITDA of USD 70.4 million in 2016. These results exceeded our projections. So, overall, we were very pleased with our financial performance in 2017.

Maintaining our strategic focus

It is imperative in these challenging times to maintain our strategic focus. First, we must do our best to deliver Hulls 029 and 030 to Matson according to plan and with the quality and workmanship expected of our shipyard.

Second, we must aggressively pursue any and all business opportunities, including seeking and evaluating potential partnerships that can create a stronger entity to secure new work into the shipyard and create value for our shareholders. We are talking with potential customers every week, and developing proposals for new vessels.

Third, we must remain fully engaged with FMG to respond to the RFP and to put ourselves in the position to be awarded the contract to construct the heavy polar icebreakers. That would be a huge boost for our future, and it offers Philly Shipyard an opportunity to enter an entirely new market.

Finally, we must be open, honest and direct with our workforce with regard to the status of the shipyard. We must at all times affirm to them that they are the most important part of this shipyard, that we value what they do for us and that we will always strive to treat them with respect and understanding during these very uncertain times.

Building the future

I would like to thank all our employees for another fantastic year and for their great dedication in the face of tough competition. I would also like to extend my deep gratitude to our customers for showing confidence in us. Finally, I would like to thank our shareholders, suppliers and other partners for their support and good collaboration over the past year.

We are looking forward to a challenging 2018. Shipbuilding can be a difficult business, but one thing is certain – the United States will always need ships, and we'll do our utmost to be there to answer the call.

Steinar Nerbovik President and CEO

Philadelphia, March 5, 2018

Board of Directors' report 2017

Philly Shipyard ASA and its subsidiaries (referred to herein as a group as "Philly Shipyard" or the "Company") is a leading shipbuilder in the U.S. Jones Act market. Aker Capital AS, a wholly-owned subsidiary of Aker ASA, is the majority shareholder in Philly Shipyard ASA.

Highlights

• ✓ Philly Shipyard delivered Hulls 026-028 to Kinder Morgan, Inc. (KMI), representing the final three product tankers in the four-vessel series for KMI
• ✓ Philly Shipyard received dividends totaling USD 39.9 million from Philly Tankers AS
• ✓ As of 31 December 2017, Philly Shipyard had an order backlog of USD 187.7 million with the last delivery in Q1 2019
• ✓ Philly Shipyard earned record strong EBITDA of USD 105.1 million in 2017, compared to EBITDA of USD 70.4 million in 2016

Activities

The main entities in Philly Shipyard are the Norwegian holding company, Philly Shipyard ASA (referred to herein as "PHLY"), and its U.S. operating subsidiary, Philly Shipyard, Inc. (referred to herein as "PSI" or the "Shipyard"), a leading U.S. commercial shipyard. PHLY is located in Oslo, Norway, while PSI is located in Philadelphia, Pennsylvania, USA. Philly Shipyard owns 53.7% of the outstanding shares of Philly Tankers AS (referred to herein as "Philly Tankers"), a Jones Act shipping company.

As of 31 December 2017, PSI's workforce consisted of 1,202 people, with a breakdown of 588 direct employees and 614 subcontracted personnel.

Philly Shipyard's business strategy for PSI is to build vessels for operation in the U.S. Jones Act market and to opportunistically participate in the post-delivery economics of those vessels. At the end of 2017, PSI was building two containerships under contract with Matson (Hulls 029-030).

Safe, cost efficient and cost competitive construction of new vessels is critical for the success of Philly Shipyard's business model. There are several factors that position Philly Shipyard to capitalize on this market: a state-of-the-art shipyard with modern equipment; access to global shipbuilding and design expertise with partners in Asia and Europe; a solid track record demonstrated by the delivery of 28 quality vessels (4 containerships, 22 product tankers and 2 aframax tankers) through 2017; a skilled workforce consisting of

direct and contracted employees with a strong HSE mindset and culture of improvement; an opportunistic investment approach with respect to the post-delivery economics of the vessels that it builds; and a proven history of promoting new vessel owners.

The Jones Act market

The U.S. Jones Act generally restricts the marine transportation of cargo and passengers between points in the United States to vessels built in the United States, registered under the U.S. flag, manned by predominately U.S. crews, and 75% owned and controlled by U.S. citizens. The ability of the Company to win contracts is in part dependent on its unique ability to construct vessels that are eligible for U.S. Jones Act trades, and the Jones Act requirement for construction of the vessels in the United States limits competition for future contracts by excluding foreign shipyards. Since the Company is not a U.S. citizen for purposes of the Jones Act, the Company's ability to maintain an economic interest in the vessels it constructs depends on compliance with certain Jones Act rules and interpretations.

The Master Agreement, Shipyard Lease and Authorization Agreement with PSDC

PSI currently operates its shipyard under a 99-year lease with PSDC, a governmentsponsored non-profit corporation. A Master Agreement, a Shipyard Lease and an Authorization Agreement govern PSI's relationship with PSDC and the various

governmental parties that have contributed to the establishment of the Shipyard.

Under the Master Agreement, the governmental parties have provided approximately USD 438 million for the renovation and modernization of the facility and training of the workforce. PSI was required to make certain qualified infrastructure investments totaling USD 135 million, which have been fully satisfied. PSI was also required to match government funding for certain training costs totaling USD 50 million, which has been fulfilled.

Under the Shipyard Lease, PSDC has the right to recapture the Shipyard if PSI fails to maintain an average of at least 200 full-time employees at the Shipyard for 90 consecutive days, subject to the right of PSI to complete work-in-process projects and a one-time, limited cure right which allows PSI to restore the lease to a 5-year term under certain circumstances. With the current business plan, the Company considers it unlikely that this termination event will be triggered as long as there is ongoing shipbuilding activity at the Shipyard.

Strategy

Philly Shipyard will, through its unique partnerships and experience obtained during construction of tankers and containerships, strive to be the most efficient shipyard in the U.S. Jones Act market for production of oceangoing vessels. Philly Shipyard expects its powerful resume to facilitate possibilities for profitable construction of vessels within existing and new market segments, including governmental work. Philly Shipyard will continue

to monitor and evaluate how to derive the maximum benefit from its competitive advantage and market share. If production capacity is available, PSI will also pursue fabrication opportunities outside of traditional shipbuilding where its core competencies in steel fabrication, heavy lifting and project management are advantageous.

In 2015, Philly Shipyard launched a plan to divest all of its shipping assets, consisting of its investments in both the Philly Shipyard-Crowley joint venture and Philly Tankers. With the delivery of Hull 028 in Q4 2017, all of these shipping assets have been sold, streamlining the business and marking a successful conclusion to an innovative plan to invest in eight Jones Act product tankers with an approximate contract value of USD 1.0 billion through the Philly Shipyard-Crowley joint venture (Hulls 021-024) and Philly Tankers (Hulls 025-028). Going forward, Philly Shipyard will remain opportunistic in its approach with respect to investing in the post-delivery economics of the vessels that it builds.

Philly Shipyard's research and development activities are primarily related to two areas. The first area is the development of PSI's building methodology and working methods to ensure that PSI takes maximum benefit of the learning curve and produces each grand block and each vessel more efficiently than the previous one. The second area is work related to the development of new vessels. Ordinarily, PSI will attempt to identify and license existing best-in-class designs and cooperate with the owners of such designs to make such modifications as are necessary. However, when existing designs are unavailable or unsuitable, PSI will develop new designs to meet the needs of the market.

Key events 2017

On 18 January 2017, Philly Shipyard received USD 21.1 million in dividends from Philly Tankers AS following delivery in Q4 2016 of the first product tanker (Hull 025) sold to Kinder Morgan.

On 29 March 2017, PSI delivered Hull 026, the American Freedom, to Kinder Morgan. In connection with this delivery, Philly Tankers sold its shipbuilding contract and related assets for Hull 026 to Kinder Morgan.

On 18 April 2017, Philly Shipyard received USD 18.8 million in dividends from Philly Tankers AS following delivery in Q1 2017 of the second product tanker (Hull 026) sold to Kinder Morgan.

On 21 July 2017, PSI and TOTE entered into a Letter of Intent (LOI) for the construction and sale of up to four new, cost-efficient and eco-friendly containerships for the Hawai'i trade, with planned deliveries for the first pair (Hulls 031-032) in 2020 and the second pair (Hulls 033-034) in 2021. In order to support this timetable, and minimize the gap in its shipbuilding activities, PSI initiated design, planning and procurement activities for these vessels. In January 2018, the LOI expired in accordance with its terms and the TOTE containership project was placed on hold. For more details, please see the Outlook discussion on pages 16-17.

On 26 July 2017, PSI delivered Hull 027, the American Liberty, to Kinder Morgan. In connection with this delivery, Philly Tankers sold its shipbuilding contract and related assets for Hull 027 to Kinder Morgan.

On 20 November 2017, PSI delivered Hull 028, the American Pride, to Kinder Morgan. In connection with this delivery, Philly Tankers sold its shipbuilding contract and related assets for Hull 028 to Kinder Morgan.

As of 31 December 2017, the project to construct four 50,000 dwt product tankers (Hulls 025-028) for Philly Tankers was 100% complete. The final three vessels (Hulls 026-028) were delivered to Kinder Morgan in 2017. All of these product tankers were delivered on or before their contract delivery dates.

As of 31 December 2017, the project to construct two containership vessels (Hulls 029-030) for Matson was approximately 54% complete.

Philly Shipyard paid dividends totaling USD 3.0 million, consisting of an ordinary dividend of USD 0.25 per share, for Q4 2016.

Review of the annual accounts

Philly Shipyard prepares and presents its accounts according to International Financial Reporting Standards (IFRS) as adopted by the European Union.

PHLY was formed on 16 October 2007 to be the holding company of PSI which operates the shipyard located in Philadelphia, Pennsylvania, USA.

In accordance with IFRS, Philly Shipyard is recognizing the two containership order by Matson as a single combined project. As such, revenue and expense for these vessels have been recognized on a combined project basis, whereby the construction progress is measured together. 100% of the revenue and expense for each vessel included in the four MT-50 tanker order by Philly Tankers (Hulls 025-028) were recognized at delivery, as if PSI was originally building these vessels for its own account. This accounting treatment was required for Hulls 025-028 because there were no external customers at the time these contracts were signed and shipbuilding activities commenced. As of 31 December 2017, the Philly Tankers project was 100% complete and the Matson project was approximately 54% complete.

Order backlog

As of 31 December 2017, PSI's order backlog was USD 187.7 million and represents an obligation to produce vessels that have not yet been delivered to PSI's customer. Order backlog consists of future contract revenues and is subject to adjustment based on change orders as defined in the shipbuilding contracts. At the end of the year, the order backlog was comprised of two container vessels under contract with Matson. The net order backlog decrease of USD 596.8 million from 2016 is due to the delivery of the three remaining product tankers sold to Kinder Morgan and continued progress made on the Matson project.

Profit and loss accounts

In 2017 Philly Shipyard had total operating revenues and other income of USD 614.6 million from continued progress on the Matson project and the delivery of Hulls 026-028 to Kinder Morgan. The Matson project recognizes revenue based on the percentage of completion method, based primarily on the scope of completed work compared to estimated overall project scope. 100% of the shipbuilding profits on each of Hulls 026-028 were recognized upon its delivery. The Matson container vessels (Hulls 029 and 030) are based on an all-new design and this project, which was approximately 54% complete at yearend 2017, has been recognized without any margin. 2016 total operating revenues and other income of USD 233.6 million represented revenues from continued progress on the Crowley and Matson projects and the delivery of Hull 025 to Kinder Morgan. Both of the Crowley and Matson projects recognized revenues based on the percentage of completion method, based primarily on the scope of completed work compared to estimated overall project scope. 100% of the shipbuilding profit on Hull 025 was recognized upon its delivery.

2017 other income of USD 22.8 million was comprised of profit in equity-accounted investments pertaining to Hulls 026-028 and recognition of deferred net gain on equity-accounted investments pertaining to Hulls 026-028. 2016 other income of USD 28.4 million was comprised of the gain-on-sale of Philly Shipyard's joint venture interests pertaining to Hulls 023 and 024, profit in equity-accounted investments pertaining to Hull 025 and recognition of deferred gain on equity-accounted investments pertaining to Hull 025.

Philly Shipyard's earnings before interest, taxes, depreciation and amortization (EBITDA) was USD 105.1 million in 2017, compared to EBITDA of USD 70.4 million in 2016. These figures correspond to EBITDA margins of 17.1% and 30.1%, respectively.

Depreciation and amortization expense was USD 5.8 million in 2017 and USD 3.7 million in 2016. Philly Shipyard's earnings before interest and taxes (EBIT) was USD 99.3 million in 2017, compared to EBIT of USD 66.7 million in 2016.

In addition to the IFRS financial measures, EBITDA and EBIT are considered relevant earnings indicators for the Company as it measures the operational performance of the shipyard. These non-IFRS measures are included as items in the consolidated income statement.

Net financial items in 2017 and 2016 were income of USD 0.7 million and USD 1.5 million, respectively. Net financial items in 2017 were primarily driven by unrealized currency gains on foreign exchange forward contracts and higher net interest expense on debt, whereas in 2016 net financial items were driven by unrealized currency gains on foreign exchange forward contracts and lower net interest expense on debt.

Income tax expense for 2017 was USD 32.7 million, compared to income tax expense of USD 29.6 million in 2016. The 2017 income tax expense of USD 32.7 million includes an R&D tax credit of USD 8.7 million.

In 2017, Philly Shipyard's net income was USD 67.2 million and its basic and diluted earnings per share was USD 5.55. The corresponding figures for 2016 were net income of USD 38.7 million and basic and diluted earnings per share of USD 3.19.

The increase in EBITDA year-over-year was mainly driven by recognition of 100% of the shipbuilding profits along with the combined profit in equity-accounted investments and recognition of deferred net gain on equity-accounted investments on three vessels in 2017 (i.e. Hulls 026-028),

compared to only one vessel in 2016 (i.e. Hull 025).

Cash flows

The Company's cash flow from operations depends on payment terms for construction and delivery settlement for the vessels sold to external customers. Total net cash flow from operating activities in 2017 was USD 109.6 million compared to total net cash flow from operating activities of USD 20.7 million in 2016. There are significant changes year-to-year caused by the timing of ship deliveries, the level of completion of vessels and customer and vendor contract payment schedules.

Net cash flow from investment activities was USD 32.7 million in 2017 and net cash flow from investment activities was USD 14.2 million in 2016. 2017 investment activities were primarily from the dividend received from Philly Tankers offset slightly by capital improvements. 2016 investment activities were primarily proceeds from the sale of the shipping assets for Hulls 023 and 024 offset slightly by capital improvements.

Net cash flow used in financing activities was USD 101.3 million in 2017 and net cash flow used in financing activities was USD 35.8 million in 2016. Net outflows in 2017 were primarily from repayment of the Cat Financial construction loans and the dividend paid. Net outflows in 2016 were primarily from the dividend paid and repayment of the Philly Tankers note offset slightly by (net) draws on the Cat Financial construction loan facility.

Statement of financial position and liquidity

As of 31 December 2017, Philly Shipyard had cash and cash equivalents (excluding restricted cash) of USD 110.1 million. The corresponding figure for 2016 was USD 69.1 million. Philly Shipyard's net working capital (current assets less current liabilities) was USD 104.0 million at 31 December 2017, compared to USD 6.9 million at 31 December 2016. As of 31 December 2017, Philly Shipyard had restricted cash of USD 13.2 million related to the Welcome Fund loan, which is expected to be released in 2020 when the loan matures.

Current assets as of 31 December 2017 totaled USD 141.3 million and are comprised of cash and cash equivalents, vessels-underconstruction receivable, work-in-process, income tax receivable, restricted cash and prepayments and other receivables. The work-in-process of USD 13.4 million at yearend 2017 represents the costs incurred by PSI on the CV3700 project (Hulls 031-032) built for its own account. Current assets as of 31 December 2016 totaled USD 263.9 million and were comprised of cash and cash equivalents, work-in-process, income tax receivable, restricted cash and prepayments and other receivables. The decrease in current assets is primarily due to the aggregate decrease in vessels-under-construction receivable and work-in-process.

Non-current assets as of 31 December 2017 of USD 111.7 million consist of property, plant and equipment, restricted cash, equity-accounted investments, deferred tax asset and other non-current assets. Non-current assets as of 31 December 2016 of USD 144.9 million consisted of property, plant and equipment, restricted cash, equity-accounted investments, deferred tax asset and other non-current assets.

Current liabilities as of 31 December 2017 of USD 37.3 million consist of trade payables and accrued liabilities, warranties, income tax payable and the current portion of the capital lease. The corresponding figure for 31 December 2016 was USD 257.0 million and consists of trade payables and accrued liabilities, warranties, income tax payable, construction loans, customer advances, net and the current portion of the capital lease. The decrease is primarily driven by payoff of the construction loans and customer advances, net.

Non-current liabilities as of 31 December 2017 of USD 60.1 million consist of interest-bearing long-term debt and deferred tax liability. The corresponding figure for 31 December 2016 was USD 60.4 million and consists of interestbearing long-term debt, deferred tax liability and other non-current liabilities.

Interest-bearing debt decreased to USD 59.6 million at 31 December 2017 compared to USD 157.6 million as of 31 December 2016. This decrease was primarily attributable to payoff of the construction loans.

At year-end 2017, total equity was USD 155.6 million and the equity ratio (total equity divided by total assets) was 61%. Corresponding figures for 2016 were USD 91.4 million and 22%, respectively. The increase in equity was the result of the current year's profit slightly reduced by the dividend paid.

The Board deems that the Company as of 31 December 2017 is financially sound and has an appropriate financing structure.

Risks Market risks

The overall market risk is related to the Jones Act. Interest groups have lobbied the U.S. Congress in the past to repeal or modify the Jones Act, and legislation to remove the U.S-build requirement of the Jones Act has been proposed, but market experts believe that repeal of or significant changes to the Jones Act are unlikely. Repeal of or significant changes to the Jones Act could, among other things, increase competition from foreign (non-U.S.) shipbuilders with lower costs or require increased use of higher priced domestic content, and as a result reduce the demand for U.S.-built vessels. In order to address this risk, the Company has continuous engagement with local, state and federal government officials.

Philly Shipyard is also exposed to market risk related to imbalance between supply and demand for vessels in the Jones Act market, which may result in a reduction of vessel prices and/or delay in new projects. PSI faces risks related to the contracts for its vessels, including the risk that those contracts are cancelled and the underlying vessels are ultimately sold to third parties for less favorable terms.

The delay PSI has experienced in securing new contracts and financing for work after the last vessel in the current order backlog (Hull 030) has interrupted its building program, causing PSI to temporarily halt certain operations and lay-off some employees. This interruption in PSI's building program has resulted in and will continue to result in under-recovered overhead costs. If this delay continues, then it will further interrupt PSI's building program and increase the risks faced by PSI, including challenges related to attracting and retaining skilled workers at current forecasted rates. In addition, because multiple vessels are in production at any one time, lack of a continued firm order backlog may cause operational inefficiencies for completion of the remaining vessels in the current order backlog.

Philly Shipyard faces additional risks if it is unable to secure new orders and/or financing for vessels after Hull 030. There can be no assurance that PSI will obtain new orders or financing for these vessels. If the Shipyard fails to obtain new orders or financing for these vessels before the Matson project is substantially complete, then it is expected that the Company would incur significant expenses (including cancellation costs for long-lead items) and it would be challenging for PSI to continue

shipbuilding operations after delivery of Hull 030, which is scheduled in Q1 2019.

Operational risks

Philly Shipyard faces risks related to construction of vessels. The Shipyard's ability to meet budgets and schedules may be adversely affected by many factors, including changes in productivity, shortages of materials, equipment and labor and changes in the cost of goods and services, both Philly Shipyard's own and those charged by its suppliers. The Shipyard's operations also depend on stable supplier networks and the availability of key vendors for design and procurement services. In addition, the Shipyard faces challenges attracting and retaining skilled workers at current forecasted rates.

The Company furthermore faces challenges related to the construction of new classes of vessels, as well as managing multiple projects at the same time. These challenges sometimes tend to impact quality, timely delivery and cost efficiencies. In order to reduce these risks, the Shipyard enters into contracts with design and procurement partners.

During 2017, PSI completed the transition from building Hulls 021-028 as tankers to building Hulls 029-030 as prototype container vessels. The container vessels are viewed as a higher risk since PSI's main activity during the last ten years has been building tankers and the last container vessel was delivered by PSI in 2006. Accordingly, there is a higher technical design risk and a higher project execution risk compared to the recent construction of multiple product tankers, which increases the current construction cost estimation uncertainty and the occurrence of contract contingencies. In addition, due to the breakeven projected margins on Hulls 029 and 030, there is a risk that these vessels will end up as a loss-making project. Furthermore, failure to meet the Shipyard's performance obligations to deliver vessels on time and within the contract specifications (e.g., speed, container capacity and fuel consumption) can potentially lead to penalties and ultimately contract termination.

The Shipyard depends on unionized labor for construction of vessels. Work stoppages or other labor disturbances could have a material adverse effect on the Company's business, results of operations and financial condition. In order to mitigate this risk, the Shipyard has signed a collective bargaining agreement with the Unions which is effective through January 2019. The collective bargaining agreement includes a no-strike clause. In 2018, PSI intends to negotiate a multi-year extension of the collective bargaining agreement.

The Shipyard further depends upon a 99-year lease agreement for the shipyard facility and the future operations of the yard will accordingly be dependent upon PSI fulfilling its obligations under this lease agreement. Failure to maintain certain employment levels may result in early termination of this lease. For more details regarding this lease, see "The Master Agreement, Shipyard Lease and Authorization Agreement with PSDC" on pages 10-11.

The Shipyard's operations are subject to the usual hazards inherent in shipbuilding, such as the risk of equipment failure and work accidents. Despite the Shipyard's best efforts to eliminate these hazards, they can sometimes cause personal injury, business interruption, construction delays, property and equipment damage, pollution and environmental damage. PSI continues to implement its Health, Safety and Environment (HSE) management system and provide training to its workforce to mitigate these risks. The Shipyard's policy of covering these risks through contractual limitations of liability and indemnities and through insurance may not always be effective, and customers and subcontractors may not have adequate financial resources to meet their indemnity obligations to PSI.

The Company faces risk of significant financial, business and intelligence loss if there are cyber security breaches. Philly Shipyard has invested significant resources to provide a more secure computing environment over the last several years, resulting in improved security and business resiliency. PSI maintains a continued high awareness of the Company's risk profile regarding cyber security because new threats can emerge quickly.

The Shipyard's operations are subject to numerous international, national, state and local environmental, health and safety laws, regulations, treaties and conventions, including, inter alia, those controlling the permitted and unpermitted discharge of materials into the environment, requiring removal and cleanup of environmental contamination, establishing certification, licensing, health and safety, labor and training standards or otherwise relating to the protection of human health and the environment. Sanctions for failure to comply with these requirements, which may be applied retroactively, may include: administrative, civil and criminal liabilities, revocation of permits to conduct

business and corrective action orders, including orders to investigate and clean up contamination.

Financial risks

Philly Shipyard's activities expose it to a variety of financial risks: market risk (including commodity pricing risk, currency risk and price risk), credit risk and cash flow interest-rate risk. Philly Shipyard's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on Philly Shipyard's financial performance. Philly Shipyard uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out under policies and protocols approved by the Board of Directors. The Board of Directors provides principles for overall financial risk management as well as policies covering specific areas such as foreign exchange risk, interest-rate risk, credit risk and use of derivative financial instruments and non-derivative financial instruments.

The Company is exposed to changes in prices of steel and other materials and duties, tariffs and other taxes imposed on goods imported from foreign (non-U.S.) countries. The Company attempts to mitigate its exposure with respect to steel and other material price escalation and increased taxes on imported goods by attempting to pass these risks on to its end customers. PSI carried the risk of steel price escalation on Hulls 025-028. Matson carries the risk of steel price escalation on Hulls 029 and 030.

The Company is subject to exchange rate risk. In order to mitigate exposure to this risk, PSI has secured foreign exchange forward contracts for its known requirements for foreign currency for Hulls 029-030.

PSI operates in business areas that are capital intensive. The Shipyard is dependent upon having access to construction financing facilities and other loans and debt facilities to the extent its own cash flow from operations and milestone payments from customers are insufficient to fund its operations and capital expenditures. In turn, the Shipyard must secure and maintain sufficient equity capital to support construction financing facilities.

Philly Shipyard regularly monitors the financial health of its construction financing lenders as well as the financial health of the financial institutions which it uses for cash management services and in which it makes deposits and other investments.

Through construction financing, the Company is exposed to fluctuations in interest rates. There is no construction financing for the Matson project (i.e. Hulls 029 and 030), as these contracts will be fully funded by customer milestone payments.

The credit risk of ship owners is evaluated upon contract signing. Typically, ship owners have financing approvals in place before they enter into contracts with PSI. During the construction period, Philly Shipyard continually evaluates the credit risk associated with ship owners and, except in cases where PSI arranges construction financing, manages this risk by requiring payment for substantially the entire contractual amount prior to delivering a vessel, including milestone payments upon completion of specified milestones. At the completion of a vessel, transfer of ownership takes place upon settlement. Should a ship owner fail to pay, PSI may attempt to dispose of the vessel in the open-market to recover its construction costs.

PSI accrues an estimate for future warranty claims on its delivered vessels. Thus far the claims have been within the reserve amounts. In order to mitigate the risk of warranty claims exceeding warranty provisions, PSI has secured back-to-back warranties for most major components on the vessels.

Events after 31 December 2017

On 26 January 2018, PSI announced that it had placed the TOTE containership project on hold and is considering alternative projects. On 31 January 2018, the Letter of Intent between PSI and TOTE expired in accordance with its terms. For more details, please see the Outlook discussion on pages 16-17.

The going concern assumption

In view of Philly Shipyard's current equity and cash position and order backlog, the Board confirms the going concern assumption and that the 2017 annual accounts have been prepared based on the assumption of a going concern. PSI does not currently have any vessels in its order backlog after Hull 030, which is scheduled for delivery in Q1 2019. For accounting purposes, the going concern principle is for the 12-month period after the Board of Directors approves the 2017 annual financial statements. If PSI fails to obtain new orders or financing for vessels before the Matson project is substantially complete, then it would be challenging for PSI to continue shipbuilding operations after delivery of Hull 030.

Parent company accounts and allocation of income for the year

The income/(loss) account of Philly Shipyard ASA for the year 2017 shows income of USD 1.1 million. The Board of Directors proposes that the income for the year be allocated as shown below:

Dividend payment	USD (3.0) million
Other equity	USD 1.1 million
Total allocated	USD (1.9) million

As of 31 December 2017, the parent company has approximately USD 5.5 million of equity which could be distributed to shareholders by the Board in accordance with PHLY's dividend policy.

Due to the delay in securing new orders beyond Hull 030, at this time, PHLY does not plan to pay any further ordinary or extraordinary dividends in 2018. The PHLY Board will revisit PHLY's dividend policy and dividend plan when it has more clarity about the Company's new order situation and related capital requirements.

The parent company's only assets are cash and the investment in subsidiary (PSI).

Corporate social responsibility

Maintaining a healthy and safe workplace and being friendly to the environment is an essential part of Philly Shipyard's strategy. Philly Shipyard develops policies to comply with or exceed all federal, state and local requirements.

All of PSI's employees work at the shipyard facility located in Philadelphia, Pennsylvania in the United States of America. The Company believes that being a good corporate citizen is good business. As a platform for these beliefs, PSI developed a WeCare program, which provides support for employees and the community through teambuilding, volunteering and educational initiatives.

PSI's WeCare program was in full gear during 2017. The Shipyard worked with the Greater Philadelphia Chamber of Commerce to support the Read to Me program. Volunteers were given a book to read to students in Pre-K and kindergarten in several area schools in need. During another event through the Chamber of Commerce, Future Ready, students were invited into the Shipyard and met with various departments. With experiences from the finance department and engineering department, and meeting with welders, students were shown firsthand how it takes a diverse team of people to work together to build a ship. The Shipyard also organized fundraisers to help with several of the natural disasters that occurred during 2017. Philly Shipyard continued to work, for a second year, with a local non-profit to organize a book drive for a school in need, and then assisted in setting up a pop-up book store in the school. Philly Shipyard also worked with the Seamen's Church Institute to donate goodie bags for local seafarers arriving in Philadelphia, organized another annual toy drive and volunteered at the local hunger relief center to sort and pack food. All left over non-perishable food items from sea trials are also donated to the food bank. PSI employees also came together to raise funds that supported fellow employees in need. Raffles, bake sales and donations were made to help support colleagues through the year. Embedding these activities into the organization reinforces Philly Shipyard's CORE values and brings employees together in a new and powerful arrangement.

PSI seeks to be an attractive employer and maintains a human relations policy that is open and fair. PSI is committed to providing equal employment opportunity to all employees and applicants for employment, regardless of race, color, ethnic background, gender, religion, age, marital status, sexual orientation, national origin, citizenship status, disability, veteran status or any other legally protected status. Diversity strengthens the Shipyard's overall capacity and skills. In support of this diversity, PSI currently maintains an approximately 38% minority workforce.

The maritime industry has traditionally been male-dominated. The entire industry faces the challenge of increasing the proportion of female employees. PSI has taken some affirmative steps to address this challenge. For example, the Shipyard encourages female applicants and has seen increased interest among potential female employees to pursue a career with PSI. To further this goal, PSI participates in available government programs that encourage women in manufacturing and has recruited at schools and training programs with more women. PSI has also continued to train supervisors, managers and employees in our Equal Employment Opportunity (EEO) policy.

At year-end 2017, approximately 5% of the workforce was women. While there were no women on PSI's senior management team, women held key positions such as Project Cost Controller, Accounting Manager, Payroll/Benefits Supervisor and HR/Communications Manager. In addition,

two of the four members of PHLY's Board of Directors are women.

The Shipyard is committed to maintaining a work environment that is free of discrimination, harassment and hostilities. In keeping with this commitment, PSI maintains a strict Harassment Free Environment Policy and does not tolerate unlawful harassment of employees by anyone.

Philly Shipyard believes all people share the same fundamental human rights. The Company follows legal and responsible sourcing practices and expects its suppliers to uphold the same standards. In 2017, the Company did not have a formal policy regarding human rights as its sole operating company is located in the United States, which has extensive human rights laws in place.

At the operating subsidiary in Philadelphia, worker's rights are protected by federal, state and local laws. In addition, approximately three-fourths of PSI's employees are members of the Philadelphia Metal Trades Council (PMTC) union and are covered under the collective bargaining agreement between the PMTC and the Shipyard. This agreement is effective until 31 January 2019.

Under this collective bargaining agreement, union employees are granted vacation and personal time, and most union employees receive shutdown pay during the week of the Fourth of July holiday and in between the Christmas and New Year's holidays. In addition, union employees may take up to 6 unpaid days within a 12-month period. Traditional sick days are not part of the collective bargaining agreement. Non-union employees accrue sick time on a monthly basis and may maintain a balance of up to 200 hours. During 2017, 217 non-union employees used 8,651 hours of sick time, representing 2.2% of total non-union work hours. Comparably, in 2016, 191 non-union employees used 7,121 hours of sick time, representing approximately 1.9% of the total non-union work hours.

At the Shipyard, HSE is not just a priority, but is a mindset embedded in all decisions and actions. The Union-Management Safety and Environmental Board reviews the various HSE programs, and makes recommendations on policies and procedures. The HSE system includes safety training of employees and subcontractors, safety inspections, industrial health and wellness programs, drug testing, emergency response and environmental programs. PSI expects to implement new

initiatives to continuously improve its HSE mindset during 2018.

In 2017, the frequency of lost-time incidents (incidents resulting in absence from work per one million hours) was 4.9, compared with 5.5 in 2016. The incidents came from a total of 2,845,014 hours worked by PSI employees and subcontractors in 2017, compared with 2,900,698 hours worked by PSI employees and subcontractors in 2016. PSI had 14 lost time incidents in 2017. The most serious incidents to occur resulted in fractures, including fractured fingers. The most common injuries were sprains, strains and eye injuries. PSI continues to work proactively to further improve safety and reduce the number of incidents at the Shipyard. In 2017, several HSE department initiatives took place including the purchase of a training manikin for emergency rescue. This was utilized to conduct more realistic drills for our Emergency Response Team (ERT) members.

In 2018, the Shipyard will continue on the journey of culture change based on the Signal Mutual SEE audit. This effort includes more dedicated safety inspection walks with executive team members as well as the production managers. With these initiatives and additional training opportunities, the Shipyard continues to believe that improvements will be made.

Philly Shipyard takes its environmental responsibilities seriously beginning with the vessel design. The Shipyard uses the latest International Maritime Organization (IMO) requirements as guidance for environmental protection and efficiency during the design and production process. The industrial nature of the Shipyard's activities requires the use of significant amounts of energy, both electrical and gas, as well as the release of particulate and VOC emissions. During 2017 PSI used approximately 34.1 GWh of electricity and approximately 889,700 ccf of natural gas.

Its VOC emissions were 126 tons for the reporting period ending in 2017. PSI had no reported discharges into the surrounding waterways. Environmental status reporting is an integral part of the Shipyard's reporting system, on par with reporting on financial matters and operations. This commitment extends to evaluating and adopting environmentally beneficial improvements in production processes, alternative materials and services. PSI promotes open communication on environmental issues with employees, neighbors, public authorities and other interested parties and has implemented a system through which employees can make observations and suggestions about the Shipyard's environmental performance. In 2017, PSI's HSE department continued its emphasis on advanced environmental training for the HSE coordinators to keep them updated on state and federal EPA standards and guidelines.

In 2017, PSI generated approximately 80 tons of hazardous waste and recycled approximately 1,284 tons of wood and 2,765 tons of steel. PSI has continued its program to gather and sort waste to promote environmentally responsible handling, disposal and recovery of any residual value.

A basic principle of ethical business conduct requires that each employee of the Shipyard support positively, both on and off the job, the Shipyard's business activities. One important way we satisfy this responsibility is to ensure that our business dealings are never influenced by – or even appear to be influenced by – our own personal interests. The Company has zero tolerance for corruption and has adopted an Anti-Corruption Policy that is in line with the anti-corruption policies at other Aker ASA-related companies. The Company also maintains a strict Conflict of Interests policy, which is reflected in PSI's employee handbook, as well as its Terms and Conditions to outside suppliers.

In support of the above initiatives and policies, the Shipyard maintains a formal policy for the disclosure of wrongful conduct and protection from retaliation (the "Whistleblower Policy"). This policy is available to all employees and is administered by the Vice President of Human Resources. During 2014, a simplified process to make anonymous reports of violations through a third party administrator was implemented. In 2017, there were 4 cases reported using this process, none of which were considered material.

Organization

On 31 December 2017, PSI had 588 direct employees and 614 subcontracted personnel. The Shipyard experiences higher turnover amongst its union and production subcontractor employees compared to other employees. The delay PSI has experienced thus far in securing new orders beyond the Matson project has caused it, and will continue to cause it, to experience a slow-down of various departments. Due to this interruption of PSI's building program, it is necessary to temporarily cease certain operations and place some employees in a layoff status. Accordingly, PSI has

reduced and will continue to adjust its workforce in line with its order backlog.

Corporate governance

Philly Shipyard's corporate governance policy exists to ensure an appropriate division of roles among the Company's owners, Board of Directors and Executive Management. Such a separation of roles ensures that goals and strategies are prepared, that adopted corporate strategies are implemented, and that the results achieved are subject to verification and follow-up. Applying these principles also contributes to satisfactory group-wide monitoring and verification of activities. An appropriate division of responsibilities and satisfactory controls will contribute to the greatest possible value creation over time, to the benefit of shareholders and other interest groups. Philly Shipyard's corporate governance guidelines are presented in greater detail on pages 60-63 of this annual report.

Outlook Shipbuilding

Philly Shipyard has built a strong foundation for its future through both its reputation for delivering on its promises and the efficient and innovative organization that has been developed.

Today the Shipyard has a single contract with Matson (Hulls 029-030) which provides for shipbuilding activity with delivery dates through Q1 2019. As of 31 December 2017, PSI had an order backlog of USD 187.7 million.

Philly Shipyard achieved record high revenues and profits in 2017. The main drivers of the record high revenues were the deliveries of three product tankers (Hulls 026-028) to Kinder Morgan, as well as continued progress on two containerships (Hulls 029-030) for Matson. While Philly Shipyard recognized 100% of the profit (including profit and deferred net gain from equity-accounted investments) on Hulls 026-028 in 2017, there was no profit recognized on the Matson project in 2017 (currently being forecasted as a breakeven project). The container vessels are based on an all-new design and the Shipyard last delivered a containership in 2006. Accordingly, there is a higher technical design risk and a higher project execution risk compared to the recent construction of multiple product tankers, which increases the current construction cost estimation uncertainty. In addition, due to the projected breakeven margin on Hulls 029 and 030, there is a risk that these vessels will end up as a loss-making project. Furthermore, failure to meet the Shipyard's performance obligations to deliver vessels on time and within the contract specifications (e.g. speed, container capacity and fuel consumption) can potentially lead to penalties and ultimately contract termination.

In contrast, Philly Shipyard expects it will recognize revenues in 2018 only for the continued progress on the Matson project (Hulls 029-030) and potentially some initial progress on contracts for new vessel construction projects, if and when secured, provided that revenue recognition over time is allowed for such other contracts under the new IFRS 15 standard. Although the new IFRS 15 standard had no impact on the Matson vessels in 2017, it will have an impact on those vessels in 2018 when it is in effect. The revenues in 2018 will in any case be significantly lower than in 2017. Philly Shipyard expects that the margin contribution from the Matson project and any other vessel construction projects to be recognized in 2018 will not be significant and is not expected to cover any S,G&A or other operating costs not allocated to projects for 2018.

The key focus area for PSI's operations is continued progress on the containerships under construction for Matson. In addition, the main focus areas for PSI's business are securing new contracts to expand its order backlog beyond Hull 030 and seeking capital to finance the construction of new vessels. As noted in the Organization discussion above, the delay PSI has already experienced in securing this new business and financing has interrupted its building program, causing PSI to temporarily halt certain operations and lay-off some employees.

Until earlier this year, PSI had been working on a long-term project that contemplated the construction and sale of up to four state-of-the-art containerships (CV3700 vessels) for delivery to TOTE in 2020 and 2021. The parties signed a Letter of Intent (LOI) for this project in July 2017. However, in January 2018, TOTE announced that its plans to enter the U.S. mainland to Hawai'i containership service are on hold as a result of its Phase 1 technical review of Piers 1 and 2 in Honolulu Harbor and the LOI was allowed to expire in accordance with its terms on 31 January 2018.

Based on these developments, PSI's project to build Hulls 031-034 as containerships was put on hold. Philly Shipyard has suspended substantially all

construction-related activities on these vessels. As previously disclosed, the Shipyard has placed orders for all major longlead items for the first pair, enabling a rapid start-up if conditions permit. If these orders were to be cancelled, then the cancellation costs would be substantially lower than the value of the orders placed. In case of a cancellation of the CV3700 project, the total cost is estimated to be less than USD 20.0 million, of which a majority of the cash impact has already been included in the financial statements for year-end 2017.

The Shipyard intends to resume this project when there is more clarity regarding the new order situation and related capital requirements. Accordingly, PSI is exploring alternatives in order to secure contracts and financing for these vessels. In addition, PSI is continuing to pursue potential new construction projects for other types of Jones Act vessels.

In the longer term, the Shipyard is seeking to diversify its business beyond the traditional vessels it has built for the commercial market. In order to be able to maintain continuous shipbuilding activities, the Shipyard is pursuing opportunities to expand its base for operations also into new long-term projects for non-commercial end users.

Among other endeavors, PSI has teamed with Fincantieri Marine Group and Vard Marine to compete for the detail design and construction of the U.S. Coast Guard's next generation heavy polar icebreaker. In support of this effort, the team is participating in a government funded industry study to develop a baseline icebreaker design, cost estimate, and project schedule and refine key vessel features and performance requirements.

The timing of contracts for new vessels remains uncertain. Philly Shipyard continues to be committed to providing the Jones Act market with the most cost-efficient and environmentally-friendly vessels possible and believes that PSI will be the supplier of choice when these vessels are ordered. Philly Shipyard considers each opportunity for the value it would create for the Company and its shareholders.

Shipping

With the delivery of Hull 028 in 2017, Philly Shipyard has successfully divested all of its shipping assets related to Hulls 021-028. These transactions streamlined the business and marked a successful conclusion to an innovative plan to invest in eight Jones Act product tankers with an approximate contract value of USD 1.0 billion through the Philly Shipyard-Crowley joint venture (Hulls 021-024) and Philly Tankers (Hulls 025-028). Philly Tankers has initiated a liquidation process with a target of distributing a majority of its cash to Philly Shipyard and its other shareholders in 2018. In line with its business strategy, Philly Shipyard will continue to evaluate opportunities to participate in the post-delivery economics of the ships that it constructs.

Oslo, Norway 5 March 2018 Board of Directors Philly Shipyard ASA

Board Chairman Board Member Board Member

Audun Stensvold Steinar Nerbøvik Deputy Board Chairman President and CEO

James H. Miller Amy Humphreys Elin Karfjell

Directors' responsibility statement

Today, the Board of Directors and the Chief Executive Officer reviewed and approved the Board of Directors' report and the consolidated and separate annual financial statements for Phillly Shipyard ASA, as of and for the year ending 31 December 2017 (annual report 2017).

The Philly Shipyard ASA consolidated financial statements have been prepared in accordance with IFRS, as adopted by the European Union, and additional disclosure requirements in the Norwegian Accounting Act, and that should be used as of 31 December 2017. The separate financial statements for Philly Shipyard ASA have been prepared in accordance with the Norwegian Accounting Act and Norwegian Accounting Standards as of 31 December 2017. The Board of Directors' report for Philly Shipyard and the parent company is in accordance with the requirements in the Norwegian Accounting Act and Norwegian accounting standard no. 16, as of 31 December 2017.

To the best of our knowledge:

• • The consolidated and separate annual financial statements for 2017 have been prepared in accordance with applicable accounting standards
• • The consolidated and separate annual financial statements give a true and fair view of the assets, liabilities, financial position and profit as a whole as of 31 December 2017 for Philly Shipyard and the parent company
• • The Board of Directors' report for Philly Shipyard and the parent company includes a true and fair review of:
• The development and performance of the business and the position of Philly Shipyard and the parent company
• The principal risks and uncertainties Philly Shipyard and the parent company face

Oslo, Norway 5 March 2018 Board of Directors Philly Shipyard ASA

Board Chairman Board Member Board Member

Audun Stensvold Steinar Nerbøvik Deputy Board Chairman President and CEO

James H. Miller Amy Humphreys Elin Karfjell

Philly Shipyard ASA Consolidated Income Statement

Amounts in USD thousands (except share amounts and earnings per share)	Note	2017	2016
Operating revenues	2	591 784	205 249
Other income	2	22 851	28 378
Operating revenues and other income		614 635	233 627
Cost of vessels sold		(499 400)	(154 935)
Wages and other personnel expenses, net	4	(3 308)	(2 864)
Other operating expenses	5	(6 868)	(5 423)
Operating income before depreciation and amortization (EBITDA)		105 059	70 405
Depreciation	8	(5 797)	(3 666)
Operating income before interest and taxes (EBIT)		99 262	66 739
Financial income	6	2 703	2 792
Financial expense	6	(2 032)	(1 299)
Income before tax		99 933	68 232
Income tax expense	7	(32 710)	(29 580)
Net income for the year *		67 223	38 652
Weighted average number of ordinary shares	13	12 107 901	12 107 901
Basic earnings per share (USD)	13	5.55	3.19
Diluted earnings per share (USD)	13	5.55	3.19

Consolidated Statement of Comprehensive Income

Amounts in USD thousands	2017	2016
Net income for the year	67 223 -	38 652 -
Other comprehensive income, net of income tax Total comprehensive income for the year *	67 223	38 652

* All attributable to equity holders of the parent company.

Philly Shipyard ASA

Consolidated Statement of Financial Position as of 31 December

Amounts in USD thousands	Note	2017	2016
ASSETS
Property, plant and equipment	8	50 103	50 560
Restricted cash	12	13 154	13 101
Deferred tax asset	7	897	16 624
Equity-accounted investments	24	47 310	64 335
Other non-current assets	9	239	238
Total non-current assets		111 703	144 858
Vessels-under-construction receivable	3	7 275	-
Work-in-process	3	13 420	180 321
Restricted cash	12	14	7 001
Prepayments and other receivables	10	4 603	5 696
Income tax receivable	7	5 912	1 805
Cash and cash equivalents	11	110 066	69 109
Total current assets		141 290	263 932
Total assets		252 993	408 790
EQUITY AND LIABILITIES Paid in capital Other equity	14	35 206 120 371	35 206 56 175
Total equity attributable to equity holders of the parent company		155 577	91 381
Total equity		155 577	91 381
Interest-bearing long-term debt	15	59 370	59 329
Other non-current liabilities	16	-	3
Deferred tax liability	7	704	1 031
Total non-current liabilities		60 074	60 363
Construction loans	15	-	98 000
Interest-bearing short-term debt	15	248	235
Trade payables and accrued liabilities	20	34 814	56 544
Income tax payable	7	965	2 134
Customer advances, net	3	-	97 887
Other provisions - warranties	19	1 315	2 246
Total current liabilities		37 342	257 046
Total liabilities		97 416	317 409
Total equity and liabilities		252 993	408 790

Audun Stensvold Steinar Nerbovik Deputy Board Chairman President and CEO

Oslo, Norway 5 March 2018 Board of Directors Philly Shipyard ASA

James H. Miller Amy Humphreys Elin Karfjell Board Chairman Board Member Board Member

Philly Shipyard ASA Consolidated Statement of Changes in Equity

Amounts in USD thousands	Share capital	Share premium	Treasury shares	Other equity	Total equity
Balance at 31 December 2015	22 664	56 797	(9 969)	73 942	143 434
Dividend paid	-	(34 286)	-	(56 419)	(90 705)
Total comprehensive income for the year 2016	-	-	-	38 652	38 652
Balance at 31 December 2016	22 664	22 511	(9 969)	56 175	91 381
Dividend paid	-	-	-	(3 027)	(3 027)
Total comprehensive income for the year 2017	-	-	-	67 223	67 223
Balance at 31 December 2017	22 664	22 511	(9 969)	120 371	155 577

Philly Shipyard ASA

Consolidated Cash Flow Statement

Amounts in USD thousands	Note	2017	2016
Income before tax		99 933	68 232
Unrealized foreign exchange gain	6	(1 829)	(2 199)
Depreciation	8	7 649	3 666
Amortization of fees of interest-bearing non-current debt	15	289	221
Profit in equity-accounted investments	2,24	(19 618)	(6 227)
Recognition of deferred net gain on equity-accounted investments	2,24	(3 233)	(1 462)
Gain-on-sale of shipping assets	2	-	(20 689)
Interest expense accreted	6	-	72
Net financial expense	6	1 399	679
(Increase)/decrease in:
Vessels-under-construction receivable	3	(7 275)	111 736
Work-in-process	3	166 901	(134 913)
Restricted cash (current)	12	6 987	(1)
Prepayments and other receivables	10	1 326	(1 812)
Other non-current assets	9	(1)	(9)
Increase/(decrease) in:
Trade payables and accrued liabilities	19,20	(21 065)	12 054
Customer advances, net	3	(97 887)	43 918
Other non-current liabilities	16	(3)	(7 399)
Income taxes paid	7	(22 586)	(44 488)
Interest paid, net of capitalized interest	6	(5 076)	(2 721)
Interest received	6	3 677	2 042
Net cash flow from operating activities		109 588	20 700
Investments in property, plant and equipment	8	(7 192)	(8 515)
Distribution received from equity-accounted investments		39 876	-
Sale of shipping assets, net of transaction costs	2	-	22 744
Net cash flow from investing activities		32 684	14 229
Proceeds from construction loans	15	127 000	260 000
Repayment of construction loans	15	(225 000)	(191 000)
Repayment of interest-bearing debt	15	(235)	(14 059)
Portion of interest-bearing non-current debt held in escrow	12	(53)	(1)
Dividend paid		(3 027)	(90 705)
Net cash flow used in financing activities		(101 315)	(35 765)
Net change in cash and cash equivalents		40 957	(836)
Cash and cash equivalents as of 1 January		69 109	69 945
Cash and cash equivalents as of 31 December	11	110 066	69 109

Philly Shipyard ASA Notes to the accounts

Note 1: Accounting principles

STATEMENT OF COMPLIANCE

The consolidated financial statements of Philly Shipyard ASA and its subsidiaries (referred to herein as a group as Philly Shipyard or the Company) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union in effect at each financial reporting period.

These accounts have been approved for issue by the Board of Directors on 5 March 2018. The annual accounts will be submitted to Philly Shipyard's annual general meeting on 5 April 2018 for final approval.

BACKGROUND AND BASIS FOR PREPARATION

Philly Shipyard ASA (referred to herein as PHLY) was formed on 16 October 2007 to be the holding company of Philly Shipyard, Inc. (referred to herein as PSI or the Shipyard) which operates a shipyard located in Philadelphia, Pennsylvania, USA. PSI owns certain subsidiaries in connection with its investments in its shipping assets.

PHLY is domiciled in Oslo, Norway. PSI is domiciled in the Commonwealth of Pennsylvania, USA. The subsidiaries of PSI are domiciled in the State of Delaware, USA.

These consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value.

The consolidated financial statements are presented in USD (thousands), except when indicated otherwise.

USE OF ESTIMATES

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts in the financial statements. Although these estimates are based on management's best knowledge of current events and actions, actual results may ultimately differ from those estimates.

Critical accounting estimates and assumptions are as follows:

Revenue and Cost Recognition

Philly Shipyard uses the percentage of completion method for accounting for construction contracts which meet the definition of construction contracts under IAS 11. The use of the percentage of completion method requires Philly Shipyard to estimate the stage of completion of contract activity at each statement of financial position date and estimate the ultimate outcome of costs and profit on contracts. In case of a loss-making project, a loss provision will be made when it is probable that total contract costs will exceed total contract revenues. Revenue and cost estimates from shipbuilding activities depend, amongst others, on variables such as steel prices, supplier and subcontractor costs, labor costs and availability, and other production inputs. Philly Shipyard must also evaluate and estimate the outcome of variation orders, contract claims and requests from customers to modify contractual terms which can involve complex negotiations with customers. Generally, estimates are subject to a greater level of uncertainty when a vessel design is new to the Shipyard than if a vessel is being constructed later in a series.

Estimates of the Fair Value of its Cash Generating Unit

Philly Shipyard has concluded that it has only one primary cash generating unit and must determine the recoverable amount of its cash generating unit in order to perform impairment tests of its long-lived assets when impairment indicators are present. Philly Shipyard evaluates its investments in the joint venture with Crowley and its investment in Philly Tankers LLC (see note 24) separately from its primary cash generating unit. Determining the recoverable amount of the cash generating unit that includes Philly Shipyard's activities is subject to uncertainty and requires estimates of the recoverable amount which is the higher of the fair value less costs to sell and value in use. The estimated recoverable amount is determined based upon the present value of the future cash flows of the cash generating unit. Generally, there will be uncertainties regarding the timing and amount of cash flows for various reasons, including the costs of production and demand in the U.S. Jones Act shipping market. In addition, Philly Shipyard must determine an appropriate interest rate to discount expected future cash flows.

Deferred Income Taxes

Deferred income tax assets are recognized when it is probable that they will be realized. Determining probability requires Philly Shipyard to estimate the sources of future taxable income from operations, including profit sharing agreements and reversing taxable temporary differences. Determining these amounts is subject to uncertainty and is based primarily upon historical earnings, reversals of taxable temporary differences and expected earnings due to contracts in progress and contract order backlog. The recognition of deferred tax assets is primarily applicable to U.S. taxes where Philly Shipyard has a net deferred tax asset position.

R&D Tax Credit

Since 2015, PSI has qualified for the research and development (R&D) tax credit for both federal and Pennsylvania tax purposes. The Shipyard qualified for the credit because of the research it undertook to discover information that is technological in nature and intended to be useful in the development of a new or improved business component. The Company recognizes the R&D tax credit estimate as part of the income tax expense based on a calculation of qualifying research expenses using available guidance and the applicable rules and regulations. An R&D tax credit of USD 8.7 million has been included in the income tax expense in 2017.

Accruals/Provisions

Philly Shipyard has various accruals/provisions which require management to make estimates. Accruals/provisions are typically made for costs that arise after vessel deliveries, including warranty costs, and regular accruals/provisions made at the end of a financial period where costs have been incurred but an invoice has not yet been received. In addition, accruals/provisions are made if the Company has identified a commitment or event that will trigger a future payment. Management uses all available facts and circumstances when determining these estimates including historical experiences as well as input from outside advisors.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised if the revision affects that period or in the period of revision and future periods if the revision affects both current and future periods.

SIGNIFICANT JUDGMENTS

The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense.

The most significant judgments made by management in preparing these financial statements in applying the Company's accounting policies are as follows:

Equity-Accounted Investments

As of 31 December 2017, the Company owns 53.7% of the outstanding shares of Philly Tankers. The Company has performed an analysis of its ownership interests and voting rights in the articles of association in Philly Tankers and concluded that it does not control the relevant activities of Philly Tankers. Therefore, the Company accounts for the investment using the equity method and does not consolidate Philly Tankers.

Revenue and Cost Recognition of Philly Tankers Vessels

Philly Shipyard did not use the percentage of completion method for accounting for PSI's shipbuilding contracts with Philly Tankers for Hulls 025-028. In management's judgment, these contracts did not meet the definition of construction contracts under IAS 11. Accordingly, Philly Shipyard recognized the revenues, costs and profit on each of these vessels at its delivery date, as if PSI was originally building these vessels for its own account. This accounting treatment for Hulls 025-028 is required because there were no external customers at the time these contracts were signed and shipbuilding activities commenced.

PHILLY SHIPYARD ACCOUNTING AND CONSOLIDATION PRINCIPLES Subsidiaries

The consolidated financial statements include the financial statements of the parent company, Philly Shipyard ASA, and its subsidiaries. A subsidiary is an entity in which Philly Shipyard ASA has the power to control and govern the operating and financial policies.

Equity-Accounted Investments

Philly Shipyard's equity-accounted investments comprise its interests in an associate and a joint venture.

Associates are those entities in which Philly Shipyard has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which Philly Shipyard has joint control, whereby Philly Shipyard has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

Interest in associates and joint ventures are accounted for using the equity method. They are initially recognized at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include Philly Shipyard's share of the profit or loss and other comprehensive income of equity– accounted investments, until the date on which significant influence or joint control ceases.

Transactions Eliminated on Consolidation

Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated.

Revenues and costs related to vessel construction transactions with equity-accounted investees are not eliminated. However, profits from revenue transactions accounted for as construction contracts are deferred to the extent of Philly Shipyard's ownership of the investee until the investee either sells or operates the related vessel at which time the deferred profit is recognized in full when the investee sells the vessel or ratably over the useful life for vessels held for use by the investee. Deferred profit is treated as an adjustment to revenue with a corresponding adjustment to the investment balance for the equity-accounted investments.

For revenue transactions with equityaccounted investments that are not accounted for as construction contracts, any unrealized gains are eliminated prior to delivery of the vessel and treated as an adjustment to the investment to the extent of Philly Shipyard's interest in the investments. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

Foreign Currency Translation and Transactions Functional Currency

Items included in the financial statements of each entity in Philly Shipyard are initially recorded in the entity's functional currency, i.e. the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity.

The consolidated financial statements are presented in United States dollars (USD), rounded to the nearest thousand, which is the reporting currency for the consolidated accounts and the functional currencies for all the entities within Philly Shipyard.

Transactions and Balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities in foreign currencies are translated into the functional currency at the exchange rates in effect on the statement of financial position date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated income statement. Foreign exchange differences arising in respect of operating items are included in operating profit in the consolidated income statement, and those arising in respect of financial assets and liabilities are recorded net as a financial item.

PROPERTY, PLANT AND EQUIPMENT General

Property, plant and equipment acquired by the Shipyard is stated at cost at the date of acquisition. Depreciation is calculated on a straight-line basis and adjusted for impairment charges, if any. The carrying value of the property, plant and equipment on the statement of financial position represents the cost net of government grants and subsidies received (if applicable) less accumulated depreciation and any impairment charges. Cost includes expenditures that are directly attributable to the asset. The cost of self-constructed assets includes the costs of material and direct labor, and any other costs directly attributable to bringing the asset to working condition for its intended use. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalized during the period of time that is required to complete and prepare the asset for its intended use.

Land is not depreciated, but other property, plant, and equipment in use are depreciated on a straight-line basis. Expected useful lives of longlived assets are reviewed annually and, where they differ significantly from previous estimates, depreciation periods are changed accordingly.

Ordinary repairs and maintenance costs are charged to the consolidated income statement during the financial period in which they are incurred. The cost of improvements is included in the asset's carrying amount when it is probable that the Shipyard will derive future economic

benefits in excess of the originally assessed standard of performance of the existing asset. Improvements are depreciated over the useful lives of the related assets.

Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in operating profit. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less selling costs.

Component Cost Accounting

The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant components and depreciates separately each such component part over its useful life.

IMPAIRMENT OF LONG-LIVED ASSETS

Property, plant and equipment and other non-current assets are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable, mainly independent, cash inflows. An impairment loss is the amount by which the carrying amount of the assets exceeds the recoverable amount. The recoverable amount is the higher of the asset's net selling price and its value in use. The value in use is determined by discounted cash flows and fair market value is based on recent third party appraisals.

A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount, however not to an extent higher than the carrying amount that would have been determined had no impairment loss been recognized in prior years.

LEASES

Leases of property, plant and equipment, where the Shipyard has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability. Finance charges are charged to interest expense. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.

Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases net of any incentives received from the lessor is charged to the consolidated income statement on a straight-line basis over the period of the lease when annual installments vary.

When a sale and leaseback results in a finance lease, any gain on the sale is deferred and recognized as income over the lease term. If the leaseback is classified as an operating lease, then any gain is recognized immediately if the sale and leaseback are at fair value.

CONSTRUCTION CONTRACTS

Philly Shipyard's business activities mainly involve deliveries of vessels under contract with customers. Revenue and expenses related to construction contracts with customers is recognized using the percentage of completion method, based primarily on the scope of completed work compared to estimated overall project scope at the statement of financial position date. The stage of completion is assessed by reference to production hours incurred to total estimated production hours. The percentage of completion is measured by production hours earned over total budgeted production hours. As soon as the outcome of the construction contract can be estimated reliably, contract revenue and expenses are recognized in the consolidated income statement in proportion to the degree of completion of the contract.

If the final outcome of a contract cannot be estimated reliably, contract revenue is recognized only to the extent costs incurred are expected to be recovered. Any projected losses on future work done under existing contracts are expensed and classified as accrued costs/ provisions in the statement of financial position under accrued liabilities. Losses on contracts are recognized in full when identified. Recognized contract profit includes profit derived from change orders and disputed amounts when, in management's assessment, realization is probable and reasonable estimates can be made.

Project costs include costs directly related to the specific contract and indirect costs attributable to the contract. Interest expense is included in project costs to the extent there are qualifying assets, which normally occurs when customer payments lag behind construction progress.

To the extent the Shipyard's procurement activities result in it acting as an agent for its customer, the related costs and revenues are presented net within revenue. This situation typically occurs when certain materials are paid for and supplied by the customer directly.

Project revenue is classified as operating revenues in the consolidated income statement. Vessels-under-construction receivable is classified as a current asset in the statement of financial position. Advances from customers are deducted from the value of vessels-underconstruction receivable of the contract involved or, to the extent they exceed this value, recorded as customer advances, net. Customer advances, net that exceed contract offsets would be classified as current liabilities.

Variable revenues are also classified as operating revenues in the consolidated income statement and are recognized under applicable standards when estimable and probable.

VESSEL CONSTRUCTION WHEN CONSTRUCTION CONTRACT ACCOUNTING DOES NOT APPLY

Vessels Constructed for Specified Customers Vessels under construction pursuant to contracts that do not meet the criteria to be accounted for using the percentage of completion method are capitalized into work-in-process. When the vessel is completed and sold both revenue and cost are recognized. If conditions indicate that the ultimate sales price will be below the estimated cost of the vessel, Philly Shipyard determines the estimated sales price and records an impairment charge as appropriate. The accumulated costs

for vessels-under-construction receivables are included in work-in-process.

Vessels Constructed for Its Own Account

Vessels which do not have a contractual buyer at the start of construction and are being built with the expectation of identifying a customer during the construction phase are capitalized into workin-process. When the vessel is completed and sold both revenue and cost are recognized. If conditions indicate that the ultimate sales price will be below the estimated cost of the vessel, Philly Shipyard determines the estimated sales price and records an impairment charge as appropriate. The accumulated costs for vesselsunder-construction receivable for unspecified customers is included in work-in-process.

GOVERNMENT GRANTS AND SUPPORT

Government grants and support are recognized at their fair value where there is reasonable assurance that amounts will be received and conditions have been met. In some cases, recognition occurs over a period of time as restrictions lapse or as conditions are met. Grants and support related to capital expenditures or construction of assets for the Shipyard's account are recognized as a reduction of the related asset cost. For assets held for use, this results in a lower depreciation charge over the useful life of the asset. Grants related to specific programs or projects are recognized as reductions in expense over the period in which work that relates to the grant or support is performed.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash on hand, demand deposits with banks and other short-term highly liquid investments with original maturities of three months or less.

INTEREST-BEARING LIABILITIES

All loans and borrowings are initially recognized at cost, being the fair value of the consideration received net of issue costs associated with the borrowing.

After initial recognition, interest-bearing borrowings are subsequently measured at amortized cost using the effective interest method; any difference between proceeds (net of transaction costs) and the redemption value is recognized in the consolidated income statement over the period the interest bearing liabilities are outstanding. Amortized cost is calculated by taking into account any issuance costs, and any discount or premium.

Gains and losses are recognized in net profit or loss when the liabilities are derecognized or impaired, as well as through the amortization process.

INCOME TAXES Current Income Taxes

Income taxes receivable and payable for the current period are measured at the amount expected to be recovered or paid to the taxation authorities. The tax rates and tax laws as used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date.

Deferred Income Taxes

Deferred income tax is provided, using the asset/ liability method, on all temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except upon initial recognition of an asset or a liability that does not impact income.

Deferred income tax assets are recognized for all deductible temporary differences, and carry-forward of unused tax losses and credits, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax losses and credits can be utilized. The carrying amount of deferred income tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. The expected utilization of tax losses are not discounted when calculating the deferred tax asset.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date.

PENSION OBLIGATIONS

The Shipyard has a pension plan that covers its non-union employees whereby contributions are paid to a qualifying pension plan. The Shipyard's union employees are participants in a union selected pension plan. Although the Union Plan is a defined benefit pension plan, because the union does not provide information on the Shipyard's employees and their share of the pension assets and obligations, the plan is accounted for in accordance with the requirements of a defined contribution plan. Under defined contribution pension plans, contributions are charged to the consolidated income statement in the period to which the contributions relate.

PROVISIONS

A provision is recognized when Philly Shipyard has a present obligation (legal or constructive) as a result of a past event and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each statement of financial position date and adjusted to reflect the current estimate.

The amount of the provision is the present value of the risk adjusted expenditures expected to be required to settle the obligation, determined using the estimated risk free interest rate as the discount rate. Where discounting is used, the carrying amount of provision increases in each period and is recognized as interest expense.

FINANCIAL RISK MANAGEMENT

Philly Shipyard's activities expose it to a variety of financial risks: market risk (including commodity pricing risk, currency risk and price risk), credit risk and cash-flow interest-rate risk. Philly Shipyard's overall risk management program

focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on Philly Shipyard's financial performance. Philly Shipyard uses derivative financial instruments to hedge certain risk exposures.

Risk-management is carried out under policies approved by the Board of Directors. The Board of Directors provides principles for overall financial risk management as well as policies covering specific areas such as foreign exchange risk, interest-rate risk, credit risk, and use of derivative financial instruments and non-derivative financial instruments.

Credit Risk

Due to the nature of the Shipyard's operations, revenues and related receivables are typically concentrated amongst a few customers. As of 31 December 2017, the Shipyard has one customer: Matson Navigation Company, Inc. (referred to herein as Matson). Philly Shipyard continually evaluates the credit risk associated with customers and their assignees and manages this risk by requiring payment for substantially the entire contractual amount prior to delivering a vessel, including milestone payments upon completion of specified milestones.

Interest Rate Risk

Philly Shipyard is exposed to fluctuations in interest rates for its variable interest rate debt related to construction financing and working capital facilities.

Foreign Exchange Risk

Philly Shipyard is exposed to foreign currency risk for purchases made in currencies other than the U.S. dollar which primarily relates to materials, supplies and costs related to the services of expatriate workers purchased from Korea, Norway and other countries in Europe. Philly Shipyard attempts to mitigate this risk through its foreign exchange hedging program or passing this risk onto its end customers by having them purchase certain materials directly in foreign currency.

Commodity Price Risk

The Shipyard is exposed to commodity price risk on the steel that it procures in the shipbuilding process. The Shipyard seeks to mitigate this risk by attempting to pass this risk on to its end customers by having them purchase materials directly or by including steel escalation clauses in the shipbuilding contracts. The Shipyard also seeks to mitigate this risk by attempting to pass the risk on to its suppliers by capping the increase in pricing to be paid by the Shipyard.

Capital Management Risk

Philly Shipyard's objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, while maintaining an optimal capital structure to minimize the cost of capital. To meet these capital structure objectives, Philly Shipyard reviews on a quarterly basis with its Board any proposed dividends as well as any needs to raise additional equity for future business opportunities or to reduce debt. Any payment of dividends, including ordinary dividends, is dependent on, among other things, performance on existing contracts and possible new orders and will be considered in conjunction with the Company's financial position, debt covenants, capital requirements, market prospects and potential strengthening of the Company's financial structure.

Funding/Investment Risk

Philly Shipyard regularly monitors the financial condition of its construction financing lenders. Additionally, Philly Shipyard monitors the financial condition of the financial institutions which it uses for cash management services and in which it makes deposits and other investments. Philly Shipyard responds to changes in conditions affecting its financing sources and deposit relationships as situations warrant.

Liquidity Risk

Liquidity risk is the risk that Philly Shipyard will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or other financial assets. Philly Shipyard's approach to managing liquidity is to ensure, to the extent possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to Philly Shipyard's reputation. Philly Shipyard attempts to mitigate this risk through project financing and working capital facilities, progress payments from its customers, and material supplied and paid directly by its customers.

Accounting for Derivative Financial Instruments and Hedging Activities

Derivative financial instruments are recognized initially and in subsequent periods on the statement of financial position at fair value with the resulting gains and losses included in the consolidated income statement.

In accordance with its treasury policy, Philly Shipyard does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

Estimates of the fair value for foreign currency contracts are obtained from a third party. The fair value of derivative long-term financial liabilities is disclosed in note 22 regarding financial instruments.

RELATED PARTY TRANSACTIONS

The Company's policy is that all transactions, agreements and business activities with related parties are conducted on an arm's length basis according to ordinary business terms and conditions.

SEGMENT INFORMATION

Philly Shipyard currently has one business segment which is building vessels for the U.S. Jones Act market.

BASIC AND DILUTED EARNINGS PER SHARE

The calculation of basic earnings per share is based on the profit attributable to ordinary shareholders using the weighted average number of shares outstanding during the year. The calculation of diluted earnings per share is consistent with the calculation of basic earnings per share

while giving effect to all potential dilutive ordinary shares that were outstanding during the period. Philly Shipyard currently has no potentially dilutive shares outstanding.

EVENTS AFTER 31 DECEMBER 2017

A distinction is made between events both favorable and unfavorable that provide evidence of conditions that existed at the statement of financial position date (adjusting events) and those that are indicative of conditions that arose after the statement of financial position date (non-adjusting events). Financial statements will only be adjusted to reflect adjusting events and not non-adjusting events (although there are disclosure requirements for such events).

NEW STANDARDS AND INTERPRETATIONS ADOPTED

Standards Issued But Not Yet Effective

At the date of authorization of the consolidated financial statements, a number of new standards and interpretations were issued but not yet effective. The Company has not early adopted any new or amended standards for the financial statements as of 31 December 2017.

The Company is required to adopt IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments from 1 January 2018. The Company has assessed the estimated impact of these two new standards as follows. The actual impacts may deviate from the estimates.

IFRS 15 Revenue from Contracts with Customers (effective from 1 January 2018)

The standard will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction contracts and the related interpretations when it becomes effective. IFRS 15 introduces a new five-step model that applies to revenue arising from contracts with customers.

Philly Shipyard initiated an implementation process in 2017 to analyze and evaluate the application impact. Philly Shipyard principally generates revenues from activities relating to long-term shipbuilding construction contracts, and no material revenues are recorded from the sale of goods or rendering of services. A detailed review of existing customer contracts have been carried out on the contracts for Hulls 029 and 030 with Matson, which are the only open shipbuilding construction contracts at the date of initial application of IFRS 15 (1 January 2018).

• Construction contracts:
• The construction contracts currently in the scope of IAS 11 are reassessed according to IFRS 15 to evaluate whether the revenue from such contracts shall be recognized over time or at a point in time. The Company is currently using the percentage of completion method for revenue recognition for the contracts for Hulls 029 and 030 with Matson. Based on its assessment, the Company does not expect the application of IFRS 15 to result in significant changes in the over time method of revenue recognition for these contracts.

The Company has assessed whether the current method of measuring progress is consistent with the requirements of measuring progress according to IFRS 15. Based on its assessment, the Company plans to continue the current method (production hours earned over total budgeted production hours) to measure revenue over time under IFRS 15.

• Constraint of variable consideration: To include variable consideration in the estimated contract revenue under IFRS 15, the entity has to conclude that it is highly probable that a significant revenue reversal will not occur when the uncertainties related to the variability are resolved. The threshold of including variable considerations in revenue recognition is higher than the requirements under current standards.

Based on its assessment, Philly Shipyard does not anticipate significant changes in the measurement of revenue from the application of IFRS 15.

On transition to IFRS 15, the Company plans to apply the cumulative effect method which would require the cumulative effect of initial application recognized as an adjustment to the opening balance of retained earnings as of 1 January 2018. Under this transition method, the new standard will be applied only to the contracts for Hulls 029 and 030 with Matson, which are the only open shipbuilding construction contracts that are not completed by 1 January 2018, and the comparable information presented will not be restated. Based on its assessment, and considering that the contracts for Hulls 029 and 030 with Matson are forecasted as a breakeven project, Philly Shipyard does not anticipate any significant cumulative effect of initially applying the new standard on the opening balance of equity at the date of initial application of 1 January 2018. However it is estimated that the timing of revenue recognition may be impacted by changes in the required treatment of deferred costs under IFRS 15. The actual impact may change if new information and guidance becomes known before the group presents its first financial statements using the new standard.

IFRS 9 Financial Instruments (effective from 1 January 2018)

The standard will replace IAS 39 Financial Instruments Recognition and Measurement. The standard includes revised guidance on classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets. The standard also introduces new general hedge accounting requirements, however Philly Shipyard does not apply hedge accounting to forward foreign exchange contracts held.

• Classification – Financial assets

IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. The standard contains three principal classification categories: measured at amortized costs, Fair Value to Other Comprehensive Income (FVOCI) and Fair Value to Profit and Loss (FVTPL).

Based on its assessment and the nature of financial assets held by Philly Shipyard, the Company expects the current classifications of the financial instruments held as at 31 December 2017 will not have a significant impact on the consolidated financial statements as of 1 January 2018.

• Impairment – Financial assets and contract assets

IFRS 9 replaces the "incurred loss" model in IAS 39 with a forward-looking "expected credit loss" (ECL) model. The new impairment model will apply to financial assets measured at amortized cost or FVOCI and contract assets, except for equity instruments. Under IFRS 9, loss allowance will be measured based on either "12-month ECLs" or "lifetime ECLs". The Company will apply the simplified approach and apply "lifetime ECLs" for all trade receivables and contract assets.

Based on the Company's assessment, no significant changes in loss allowance are deemed necessary in order to satisfy the impairment requirement under IFRS 9. The Company does not expect significant impact on the consolidated financial statements from the adoption of the new impairment model.

The transition to IFRS 9 will generally be applied retrospectively, with the following exemptions:

• The Company will adopt the exemption allowing it not to restate comparative information for prior years with respect to classification and measurement changes, including impairment measurement. Any impact from the adoption of IFRS 9 will be recognized as an adjustment to the opening balance of the equity as of 1 January 2018.

• IFRS 9 is not applied to financial assets or financial liabilities that have been derecognized at the initial application on 1 January 2018.

IFRS 16 Leases (effective from 1 January 2019, but not approved by the EU)

The standard replaces IAS 17 Leases and the related interpretations. The new standard introduces a single, on-balance sheet lease accounting model for lessees, with optional exemptions for short-term leases and leases of low value items. A lessee recognizes a right-ofuse asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. With regards to lessor accounting, the requirements remain similar to the current standard.

The Company has started an initial assessment of the potential impact on its consolidated financial statements and has identified the following main impact.

• The Company anticipates that new assets and liabilities will be recognized for its operating lease agreements where the Company is a lessee. In addition, the nature and timing of expenses related to these leases will change when the straight-line operating lease expenses will be replaced by depreciation charge for lease assets and interest expenses for lease liabilities under IFRS 16.
• The Company does not anticipate significant impact for the Company's finance leases.

The assessment of potential impact of implementation will be continued in 2018. The Company plans to apply IFRS 16 initially on 1 January 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening balance of retained earnings as of 1 January 2019, with no restatement of comparative information.

Note 2: Operating revenues and other income

Operating revenues and other income consist of the following items:

Amounts in USD thousands	2017	2016
Operating revenues	591 784	205 249
Profit in equity-accounted investments	19 618	6 227
Recognition of deferred net gain on equity-accounted investments	3 233	1 462
Gain-on-sale of shipping assets	-	20 689
Other income	22 851	28 378
Total operating revenues and other income	614 635	233 627

Profit in equity-accounted investments (Hulls 025-028) represents the Company's 53.7% share of the total comprehensive income of Philly Tankers which at 31 December 2017 and 31 December 2016 amounted to USD 19.618 million and USD 6.227 million, respectively (see note 24).

Recognition of deferred net gain on equity-accounted investments (Hulls 025-028) represents the Company's USD 5.848 million gain that was deferred on the issuance of Philly Tankers shares in July 2014 to external parties at a price exceeding the Company's cost basis, which at 31 December 2017 and December 2016 amounted to USD 4.386 million and USD 1.462 million, respectively. The entire USD 5.848 million was recognized at delivery of each of Hulls 025-028, reduced with recognition of a deferred transaction cost of USD 1.153 million in 2017 (see note 24).

In 2016, the Company sold its joint venture interests pertaining to Hulls 023 and 024, resulting in a gain-on-sale of USD 20.689 million. The Company recorded the gain-on-sale as part of other income in the income statement.

Note 3: Construction contracts/vessels built for own account

The order backlog is USD 187.7 million at 31 December 2017 and represents an obligation to produce vessels that have not yet been delivered to the Shipyard's customer (Matson). Order backlog consists of future contract revenues and is subject to adjustments based on change orders as defined in the shipbuilding contracts.

The order backlog on long-term contracts is as follows:

Amounts in USD thousands	Order backlog	Order intake	Order backlog	Order intake	Order backlog
	31 Dec. 2017	2017	31 Dec. 2016	2016	31 Dec. 2015
Total	187 668	(4 033)	784 427	(3 097)	983 819

The recognized profits on long-term contracts in process at year-end are as follows:

Amounts in USD thousands	31 Dec. 2017
Contract revenue recognized to date	221 744
Less: contract expenses recognized to date	(221 744)
Recognized contract profit to date	-

Other construction contracts figures:

Contract costs incurred to date for Hulls 029-030	260 141

Contract revenue and profit recognized to date includes revenue and profit for Hulls 029-030 since the contract for these vessels is accounted for as a long-term construction contract on a percentage of completion basis.

100% of the revenue, cost and profit for each of Hulls 025-028 was recognized at its delivery in Q4 2016, Q1 2017, Q3 2017 and Q4 2017, respectively. This accounting treatment is required for Hulls 025-028 because there were no external customers at the time these contracts were signed and shipbuilding activities commenced, and these vessels were considered as built for its own account.

As of 31 December 2017, the Shipyard has one contract in progress that is accounted for using the percentage of completion method. The Shipyard is building two containerships (Hulls 029-030) to be delivered to Matson in 2018 and 2019. These vessels are based on an all-new design and the Shipyard last delivered a containership in 2006. Accordingly, there is a higher technical design risk and a higher project execution risk compared to the recent construction of multiple product tankers, which increases the current estimation uncertainty. In addition, due to the projected breakeven margin on Hulls 029 and 030, there is a risk that these vessels will end up as a loss-making project. Philly Shipyard recognizes contract revenues and expenses for the two containership order from Matson as one project. As of 31 December 2017, the Matson project is approximately 54% complete.

Customer milestone payments (excluding repayment of the USD 58.0 million Philly Tankers note) as of 31 December 2017 and 31 December 2016 totaled USD 253.8 million and USD 178.1 million, respectively. Customer milestone payments pertaining to repayment of the USD 58.0 million Philly Tankers note as of 31 December 2017 and 31 December 2016 totaled USD 0 and USD 29.0 million (Hull 026), respectively. See note 24 for further details on the Philly Tankers note.

Customer advances, net as of 31 December 2017 and 31 December 2016 totaled USD 0 and USD 97.9 million, respectively.

Vessels-under-construction receivable as of 31 December 2017 and 31 December 2016 totaled USD 7.3 million and USD 0, respectively. As of 31 December 2017, vessels-under-construction receivable represents the difference between costs incurred for the Matson vessels (Hulls 029-030) and customer advances received from Matson for those vessels.

Work-in-process as of 31 December 2017 and 31 December 2016 totaled USD 13.4 million and USD 180.3 million, respectively. Work-in-process related to non-percentage-of-completion accounting projects is presented gross (where costs incurred are presented as a work-in-process asset, and payments from customers received are presented as customer advances, net liability). Percentage-of-completion accounted projects are presented net.

The work-in-process at year-end 2017 represents the costs incurred by the Shipyard on the CV3700 project (Hulls 031-032) built for its own account. In case of a cancellation of the CV3700 project, the total cost is estimated to be less than USD 20.0 million, of which a majority of the cash impact has already been included in the financial statements for year-end 2017.

As of 31 December 2017, PSI has non-cancellable purchase commitments for materials and equipment of approximately USD 28.4 million for the construction of Hulls 029-030.

Note 4: Wages and other personnel expenses, net

Wages and other personnel expenses, net consist of:

Amounts in USD thousands (except number of employees)	2017	2016
Wages	47 462	44 938
Social security contributions	4 005	4 052
Pension costs (note 18)	1 663	2 137
Other expenses	8 542	8 506
Total gross expense	61 672	59 633
Expenses related to vessel construction	(58 364)	(56 769)
Wages and other personnel expenses, net	3 308	2 864
Average number of employees	624	633
Number of employees at year-end	588	632

Other expenses relate primarily to workers' compensation and employee benefits.

Note 5: Other operating expenses

Other operating expenses consist of:

Amounts in USD thousands	2017	2016
Other operating expenses	6 868	5 423
Total	6 868	5 423

Other operating expenses primarily relate to selling, general and administrative expenses. Fees to auditors for Philly Shipyard are as follows:

Amounts in USD thousands	2017	2016
Audit fees	134	132
Other audit and attestation fees	2	36
Tax non-attest fees	5	6
Total	141	174

Note 6: Financial income and financial expense

Amounts in USD thousands	2017	2016
Interest income	874	545
Gain on foreign currency forward contracts	1 829	2 199
Foreign exchange gain	-	48
Financial income	2 703	2 792
Interest expense	(5 329)	(4 751)
Interest expense capitalized on construction contracts	3 359	3 524
Foreign exchange loss	(62)	-
Interest expense accreted	-	(72)
Financial expense	(2 032)	(1 299)
Net financial items	671	1 493

Details regarding the Company's debt facilities and interest rates are provided in note 15 and foreign exchange gain/(loss) details are provided in note 22. In 2017, the gain on foreign currency forward contracts is attributable to mark-to-market of foreign currency forward contracts in Korean Won, Norwegian Kroner and Euro and the foreign exchange loss is attributable to certain cash balances which are held in Norwegian Kroner. In 2016, the gain on foreign currency forward contracts was attributable to mark-to-market of foreign currency forward contracts in Korean Won, Norwegian Kroner and Euro and the foreign exchange gain was attributable to certain cash balances which were held in Norwegian Kroner.

Note 7: Taxes

Income tax expense/(benefit)

Recognized in the income statement

Amounts in USD thousands	2017	2016
Current income tax expense:
Current year - U.S.	16 345	33 078
Current year - Norway	965	6 642
Total current income tax expense	17 310	39 720
Deferred tax expense/(benefit):
Origination and reversal of temporary differences - U.S.	15 725	(9 941)
Origination and reversal of temporary differences - Norway	(325)	(199)
Total deferred tax expense/(benefit)	15 400	(10 140)
Total income tax expense in the income statement	32 710	29 580

Reconciliation of effective tax rate:

Amounts in USD thousands
--------------------------	--

Amounts in USD thousands	2017	2016
Income before tax	99 933	68 232
Nominal Norwegian tax rate	24.0%	25.0%
Expected tax expense using nominal Norwegian tax rate	23 984	17 058
Effect of differences between nominal Norwegian tax rate
and U.S. federal, state and city tax rate	19 848	12 919
Expenses deductible for tax purposes	(2 091)	(3 084)
Expenses not deductible for tax purposes	246	100
R&D tax credits	(8 659)	(2 374)
Other differences	(618)	(1 474)
U.S. withholding on dividends to Parent company	-	6 435
Total income tax expense in the income statement	32 710	29 580

The effective tax rate differs from the expected tax rate primarily due to the difference between the nominal Norwegian tax rate and U.S. federal, state and city tax rates, and income that was not taxable in Norway.

Income tax receivable/income tax payable

Amounts in USD thousands	2017	2016
Beginning of the period	(329)	(5 096)
Taxes payable	(17 310)	(39 721)
Taxes paid	22 586	44 488
End of the period	4 947	(329)

Income tax receivable and income tax payable are offset when there is a legally enforceable right to offset the taxes; however, when the taxes relate to different tax authorities, they cannot be offset. The Company's income tax receivable and income tax payable at 31 December 2017 relate to different tax authorities and, therefore, cannot be offset. Accordingly, the Company has an income tax receivable of USD 5.912 million and an income tax payable of USD 965 thousand on its statement of financial position at 31 December 2017.

Deferred tax asset/deferred tax liability

Deferred tax asset and deferred tax liability are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities, and when the deferred income taxes relate to the same fiscal authority, which through 31 December 2017 for the Company was primarily Norway, the United States, the State of Delaware, the Commonwealth of Pennsylvania and the City of Philadelphia.

The offset amounts for U.S. items are as follows:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Deferred tax assets - U.S. tax jurisdictions	6 825	23 802
Deferred tax liabilities - U.S. tax jurisdictions	(5 928)	(7 178)
Net deferred tax asset	897	16 624

The gross movement in the deferred income tax account for U.S. tax jurisdictions is as follows:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Beginning of the period	16 624	6 683
Deferred tax benefit	(15 727)	9 941
Net deferred tax asset	897	16 624

The movement in deferred tax asset and deferred tax liability during the year for the U.S. tax jurisdictions is as follows:

Deferred tax asset

Amounts in USD thousands	Other assets	Work-in process	Total
31 December 2016 (Charged)/credited to the income statement	6 980 (200)	16 822 (16 777)	23 802 (16 977)
31 December 2017	6 780	45	6 825

Deferred tax liability

Amounts in USD thousands	Property, plant and equipment	Other	Total
31 December 2016	(6 838)	(340)	(7 178)
(Charged)/credited to the income statement	910	340	1 250
31 December 2017	(5 928)	-	(5 928)

The movement in deferred tax asset and deferred tax liability during the year for the Norwegian tax jurisdiction is as follows:

Deferred tax liability

Amounts in USD thousands	Other liabilities	Total
31 December 2016	(1 031)	(1 031)
Charged to the income statement	327	327
31 December 2017	(704)	(704)

As a result of the recently passed U.S. federal tax reform legislation, which reduced the corporate income tax rate from 35.0% to 21.0%, and changes to the Company's effective state tax rate, PSI booked a one-time non-cash tax benefit of USD 1 472.

PSI is currently under audit by the State of Pennsylvania for the four-year period ended 31 March 2018. The Company does not anticipate any material adjustments resulting from the audit.

Note 8: Property, plant and equipment

Movements in property, plant and equipment for 2017 are shown below:

	Machinery and		Land	Assets-under
Amounts in USD thousands	vehicles	Buildings	improvements	construction	Total
Cost at 1 January 2017	48 060	60 689	18 524	2 805	130 078
Purchases	-	-	-	7 192	7 192
Transfers	6 988	486	404	(7 878)	-
Assets written-off	(155)	-	-	-	(155)
Cost at 31 December 2017	54 893	61 175	18 928	2 119	137 115
Depreciation and impairment losses at 1 January 2017	42 660	28 679	8 179	-	79 518
Depreciation	4 389	2 467	793	-	7 649
Assets written-off	(155)	-	-	-	(155)
Depreciation and impairment losses at 31 December 2017	46 894	31 146	8 972	-	87 012
Net book value at 31 December 2017 (1)	7 999	30 029	9 956	2 119	50 103
(1) Net book value of assets under financial leasing agreements
recorded in the statement of financial position (see note 17):	892	7 930	7 635	-	16 457
Depreciation period	3-12 years	7-30 years	20 years
Depreciation method	Straight-line	Straight-line	Straight-line

Movements in property, plant and equipment for 2016 are shown below:

Amounts in USD thousands	Machinery and vehicles	Buildings	Land improvements	Assets-under construction	Total
Cost at 1 January 2016	42 752	59 977	17 930	904	121 563
Purchases	-	-	-	8 515	8 515
Transfers	5 308	712	594	(6 614)	-
Assets written-off	-	-	-	-	-
Cost at 31 December 2016	48 060	60 689	18 524	2 805	130 078
Depreciation and impairment losses at 1 January 2016	38 233	26 253	7 418	-	71 904
Depreciation	4 427	2 426	761	-	7 614
Assets written-off	-	-	-	-	-
Depreciation and impairment losses at 31 December 2016	42 660	28 679	8 179	-	79 518
Net book value at 31 December 2016 (1)	5 400	32 010	10 345	2 805	50 560
(1) Net book value of assets under financial leasing agreements recorded in the statement of financial position (see note 17):	1 413	8 835	8 225	-	18 473
Depreciation period Depreciation method	3-12 years Straight-line	7-30 years Straight-line	20 years Straight-line

Leased plant and machinery

The Shipyard leases production equipment and land improvements under a number of finance lease agreements. At the end of each of the leases, the Shipyard has the option to purchase the equipment at a beneficial price. The leased equipment secures lease obligations (see note 17).

Property, plant and equipment under construction

Assets-under-construction primarily relate to upgrades in facilities and equipment.

Depreciation

Philly Shipyard's practice is to present its annual depreciation expense on a separate line item in its consolidated income statement when it is building vessels-under-construction contracts.

During 2017, Philly Shipyard, in accordance with IFRS, recognized 100% of the revenue and cost for Hulls 026-028 at its delivery. The allocated depreciation expense relating to the construction of Hulls 026-028 during 2017 was reclassified to the cost-of-vessels expense line and recognized in 2017. USD 2.0 million of depreciation expense was reclassified to the cost-of-vessels expense line in 2017.

During 2016, Philly Shipyard, in accordance with IFRS, recognized 100% of the revenue and cost for Hull 025 at its delivery. The allocated depreciation expense relating to the construction of Hull 025 during 2016 was reclassified to the cost-of-vessels expense line and recognized in 2016. USD 3.9 million of depreciation expense was reclassified to the cost-of-vessels expense line in 2016.

A reconciliation of depreciation on property, plant and equipment to depreciation recognized in the consolidated income statement is as follows:

Amounts in USD thousands	2017	2016
Depreciation of property, plant and equipment	7 804	7 614
Amount charged as cost of Philly Tankers vessels	(2 007)	(3 948)
Net depreciation expense	5 797	3 666

Determination of recoverable amounts/fair value

At 2017 year-end, the Company has assessed the risk of impairment due to the uncertainty related to PSI's new order situation and the recent cessation of certain operations and layoffs at the Shipyard. No impairment has been recorded in 2017 based on the key uncertain assumption that the Shipyard will be able to secure new contracts and continue operations following the delivery of the last vessel in its backlog (Hull 030), which is scheduled for Q1 2019. No impairment was recorded in 2016 for property, plant and equipment due to the market and company specific developments including operating results and order backlog.

Sale leaseback

The assets sold and leased back from PSDC are being accounted for as a finance lease and as such the gain is being deferred and recognized over the assets' useful lives. As part of the 2011 Authorization Agreement, PSDC purchased certain shipyard assets from PSI for a purchase price of USD 42.0 million with funds provided by the Commonwealth of Pennsylvania. PSI leases back those same assets from PSDC subject to the terms of its shipyard lease and the Authorization Agreement. The net book value of assets under financial leasing agreements recorded in the statement of financial position at 31 December 2017 amounts to USD 16.5 million (see page 33).

Note 9: Other non-current assets

Other non-current assets consist of the following items:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Prepaid lease payments and deposits	239	238
Total	239	238

Prepaid lease payments and deposits are unsecured and have no collateral.

Note 10: Prepayments and other receivables

Prepayments and other receivables consist of the following items:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Prepayments to suppliers and other	2 444	2 079
Claims receivable	1 787	3 343
Trade receivables	240	274
Loan to employee	132	-
Total	4 603	5 696

Claims receivable represents amounts the Company anticipates recovering from vendors and insurers.

Loan to employee represents advances made to PSI's SVP Operations. For more details, please see note 27.

Note 11: Cash and cash equivalents

Cash and cash equivalents consist of the following items:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Cash and bank deposits	110 066	69 109
Cash and cash equivalents in the statement of cash flows	110 066	69 109

Cash and bank deposits are invested in overnight deposits.

Note 12: Restricted cash

Restricted cash consists of the following items:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Restricted cash (non-current)	13 154	13 101
Restricted cash (current)	14	7 001
Total	13 168	20 102

Restricted cash amounts represent a custody account established in 2015 in connection with the Welcome Fund loan and an escrow account established in 2011 in conjunction with the SeaRiver contract.

PSI deposited USD 13.1 million into the Welcome Fund custody account upon the delivery of Hull 021 in 2015. This amount is expected to be released in 2020 which is when the Welcome Fund loan matures.

PSI deposited USD 20.0 million in the SeaRiver escrow account in 2011. USD 13.0 million of the SeaRiver escrow account was released upon delivery of Hull 020 in 2015. The remaining funds in the SeaRiver escrow account (excluding USD 14 thousand of interest income) were released in 2017.

Note 13: Earnings per share

Basic and diluted

Basic and diluted earnings per share are calculated by dividing the total comprehensive income attributable to equity holders of PHLY by the weighted average number of ordinary shares.

Amounts in USD thousands (except share amounts and earnings per share)	2017	2016
Total comprehensive income attributable to equity holders of PHLY	67 223	38 652
Weighted average number of ordinary shares in issue	12 107 901	12 107 901
Basic and diluted earnings per share (USD)	5.55	3.19

At 31 December 2017 and 31 December 2016, PHLY had 12,107,901 ordinary shares (excluding 466,865 treasury shares) at a par value of NOK 10 per share. There were no share issuances or repurchases in 2017 or 2016.

There were no potentially dilutive securities outstanding as of 31 December 2017 and 31 December 2016.

Note 14: Paid in capital

The current share capital (excluding 466,865 treasury shares) is 12,107,901 shares issued and outstanding as of 31 December 2017, each with a par value of NOK 10, fully paid. As of 31 December 2017, there are no additional authorized shares.

Amounts in USD thousands	Share capital	Share premium	Paid in capital
31 December 2015	22 664	56 797	79 461
Dividend paid	-	(34 286)	(34 286)
31 December 2016	22 664	22 511	45 175
Dividend paid	-	-	-
31 December 2017	22 664	22 511	45 175

Summary of purchases of treasury shares:

Treasury shares at 31 December 2017	466 865	(9 969)
Purchases	-	-
Treasury shares at 31 December 2016	466 865	(9 969)
Purchases	-	-
Treasury shares at 31 December 2015	466 865	(9 969)
Amounts in USD thousands (except number of shares)	Number of shares	Consideration

As of 31 December 2017, the parent company had approximately USD 5.5 million of equity which could be distributed to shareholders by the Board in accordance with PHLY's dividend policy.

Note 15: Interest-bearing debt

This note provides information about Philly Shipyard's contractual terms of interest-bearing loans and borrowings. For more information about Philly Shipyard's exposure to interest rate and foreign currency risk, see note 22.

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Interest-bearing long-term debt:
Welcome Fund loan, net of fees	59 350	59 061
Finance lease liability (non-current portion)	20	268
Total interest-bearing long-term debt	59 370	59 329
Interest-bearing short-term debt and construction loans:
Finance lease liability (current portion)	248	235
Construction loans	-	98 000
Total interest-bearing short-term debt and construction loans	248	98 235

PSI had a loan agreement with Caterpillar Financial Services Corporation (Cat Financial) for a USD 150.0 million loan facility, subject to a maximum borrowing amount of USD 75.0 million per vessel, for construction financing on Hulls 025-028. The loan was secured by a first lien on Hulls 025-028. The loan accrued interest at three-month LIBOR plus 3.0% per annum as defined in the loan agreement. This facility was repaid in full and terminated upon the delivery of Hull 028 on 20 November 2017.

PSI has a secured term loan of up to USD 60.0 million (USD 59.4 million on the statement of financial position which is the loan amount net of unamortized loan fees) with PIDC Regional Center, LP XXXI, a partnership between CanAm Enterprises and the Philadelphia Industrial Development Corporation (PIDC). The loan has a fixed interest rate of 2.625% per annum through maturity. The loan matures in March 2020. This loan was made through the Welcome Fund loan program, a source of low-cost capital generally available to commercial, retail, industrial or non-profit firms that create significant job growth and are located in or planning to locate to the City of Philadelphia. The loan has a five-year term and is secured by a first lien on: (1) USD 13.1 million of cash collateral; (2) PSI's shares in its wholly-owned subsidiary, APSI Tanker Holdings II LLC (ATH II); and (3) ATH II's shares in Philly Tankers AS. The loan also contains a covenant restricting dividends and other distributions by ATH II until an additional USD 39.3 million of cash collateral has been deposited to secure the loan. It is expected that the additional USD 39.3 million of cash collateral will be deposited to secure the loan in 2018 in connection with the liquidation of Philly Tankers. USD 60.0 million is drawn under this term loan at 31 December 2017.

PSI has an unsecured three-year revolving credit facility for up to USD 10.0 million from TD Bank, N.A., which automatically reduced from a maximum of USD 20.0 million on 1 May 2017. The facility terminates in April 2019. The loan accrues interest at 30-day LIBOR plus 2.50% per annum as defined in the credit agreement. USD 1.2 million of this facility was utilized as of 31 December 2017 for the issuance of letters of credit.

Loan covenants

The Welcome Fund loan contains certain financial covenants related to a minimum consolidated equity, as defined, of USD 80.0 million (USD 155.4 million at 31 December 2017) and a maximum consolidated total debt to tangible net worth, as defined, of no greater than 4.0 to 1.0 (0.4 at 31 December 2017). The TD Bank loan facility contains a financial covenant requiring a minimum liquidity amount at 31 December 2017, as defined, of USD 25.0 million (USD 131.9 million at 31 December 2017). As of 31 December 2017, the Company was in compliance with these existing covenants and is expected to remain in compliance during 2018.

Undrawn credit facilities

As of 31 December 2017, PSI has USD 8.8 million of undrawn credit facilities with TD Bank.

Note 16: Other non-current liabilities
Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Withholding tax on dividends paid to shareholders	-	3
Total	-	3

Note 17: Operating lease and finance lease liabilities

Non-cancellable operating lease rentals are payable as follows as of 31 December:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Less than one year	91	76
Between one and five years	145	4
Total	236	80

The operating leases are for facilities, vehicles and printing and copying equipment.

The building lease for PSI's plate priming facility has been extended on a month-to-month basis. The base rent is USD 16 thousand per month. This amount is not included in the operating lease rentals recorded above.

Finance lease liabilities are payable as follows as of 31 December:

Amounts in USD thousands	Payments 2017	Interest 2017	Principal 2017	Payments 2016	Interest 2016	Principal 2016
Less than one year	256	8	248	256	21	235
Between one and five years	20	-	20	276	8	268
Total	276	8	268	532	29	503

PSI has a finance lease for priming equipment with a carrying amount of USD 268 thousand at year end 2017.

PSI operates on land leased from PSDC through April 2018. Lease payments include rent, taxes and operating expenses. The lease payments are subject to an annual revision based on PSDC's operating expenses. PSI has options to renew the lease for three consecutive periods of 20 years each and one final period of 19 years. PSI can acquire the land for USD 1 after the expiration of all renewal periods. Lease payments for rent due under the finance lease are USD 1 per year.

PSDC has the right to terminate the lease if PSI fails to maintain an average of at least 200 full-time employees at the shipyard for 90 consecutive days, subject to the right of PSI to complete work-in-process projects and a one-time, limited cure right which allows PSI to restore the lease to a 5-year term under certain circumstances. Based on its current construction schedule and order backlog, the Company expects that PSI will have at least 200 full-time employees on staff so long as there is ongoing shipbuilding activity at the Shipyard. If PSI fails to obtain new orders or financing for vessels before the Matson project is substantially complete, then it would be challenging for PSI to continue shipbuilding operations after delivery of the last vessel in its order backlog (Hull 030), which is scheduled in Q1 2019.

Note 18: Pension costs

Pension costs recognized in the income statement:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Contribution plans (employer's contribution)	1 663	2 137
Total	1 663	2 137

PSI has a defined contribution plan for its non-union employees which provides for a PSI contribution based on a fixed percentage of certain employee contributions plus a discretionary percentage of salaries. In addition, PSI's union employees are participants in a multi-employer union selected pension plan (Union Plan). PSI contributes a fixed amount per hour worked to the Union Plan. If PSI were to terminate its relationship with the Union Plan, PSI could be statutorily liable for a termination liability calculated at the termination date. The termination liability at 31 December 2017 was USD 5.8 million. Currently, PSI has no plans to terminate this relationship. Thus, no termination liability has been recognized in the financial statements. PSI estimates that it will contribute approximately USD 1.0 million to the Union Plan in 2018.

Note 19: Other provisions — warranties

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Current balance as of 1 January	2 246	1 501
Provisions made during the period	1 079	1 840
Provisions released during the period	(1 417)	-
Provisions used during the period	(593)	(1 095)
Current balance as of 31 December	1 315	2 246

The warranty provision relates to the warranty work for vessels (Hulls 021-028) which were delivered through 31 December 2017. The warranty provision decreased as specific issues previously accrued for were resolved in 2017. The normal warranty period for a new vessel is typically 12 months after delivery, but can be extended in cases where there are specific issues that have not been fully resolved within the normal warranty period.

Note 20: Trade payables and accrued liabilities

Trade payables and accrued liabilities comprise the following items:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Ship material and subcontracting accruals	14 396	27 569
Trade payables	6 496	9 863
Employee-related cost accruals	8 121	5 806
Overhead and capital projects accruals	5 801	5 487
Deferred real estate tax liability	-	7 819
Total	34 814	56 544

In connection with the PSDC agreement, the City of Philadelphia agreed to temporarily defer USD 8.0 million in real estate tax payments due from PSI over three years (2011-2013). The Company discounted the deferred payments and imputed interest expense over the deferral period. At 31 December 2016, the deferred real estate tax liability was classified in trade payables and accrued liabilities as a current liability. The full deferred real estate tax amount of USD 8.0 million was paid in 2017.

Note 21: Net interest-bearing debt

Net interest-bearing debt comprise the following items at 31 December:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Interest-bearing long-term debt (see note 15)	59 370	59 329
+ Interest-bearing short-term debt (see note 15)	248	235
+ Construction loans (see note 15)	-	98 000
Total interest-bearing debt	59 618	157 564
- Cash and cash equivalents (see note 11)	(110 066)	(69 109)
- Restricted cash (see note 12)	(13 168)	(20 102)
Total interest-bearing assets	(123 234)	(89 211)
Net interest-bearing debt	(63 616)	68 353

Net interest-bearing debt is defined by the Company to be total interest-bearing debt less total interest-bearing assets.

Note 22: Financial instruments

Exposure to credit, liquidity, currency and interest rate risks arise in the normal course of the Company's business. Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates for business purposes.

Credit risk

The carrying amount of financial assets represents the maximum credit exposure. At 31 December 2017 and 2016, respectively, the maximum exposure to credit risk is as follows:

Amounts in USD thousands	31 Dec. 2017	31 Dec. 2016
Cash and cash equivalents	110 066	69 109
Restricted cash	13 168	20 102
Vessels-under-construction receivable	7 275	-
Trade receivables	240	274
Work-in-process	-	180 321
Total	130 749	269 806

Work-in-process of USD 13.4 million at 31 December 2017 is not accounted for as a credit risk given that it represents the costs incurred by PSI on the CV3700 project (Hulls 031-032) built for its own account. At 31 December 2016, work-in-process of USD 180.3 million was due from a specified external customer under contract with PSI.

Liquidity risk

The following are the contractual maturities of financial liabilities including interest payments:

	31 December 2017
Amounts in USD thousands	Book value	Contractual cash flow	Less than 6 months	6-12 months	1-2 years	2-5 years	More than 5 years
Non-derivative financial liabilities
Welcome Fund loan	60 000	(63 522)	(792)	(805)	(1 597)	(60 328)	-
Trade payables	6 496	(6 496)	(6 496)	-	-	-	-
Finance lease	268	(276)	(128)	(128)	(20)	-	-
Total	66 764	(70 294)	(7 416)	(933)	(1 617)	(60 328)	-
				31 December 2016
Amounts in USD thousands	Book value	Contractual cash flow	Less than 6 months	6-12 months	1-2 years	2-5 years	More than 5 years
Non-derivative financial liabilities
Construction loans	98 000	(98 463)	(65 412)	(33 051)	-	-	-
Welcome Fund loan	60 000	(65 119)	(792)	(805)	(1 597)	(61 925)	-
Trade payables	9 863	(9 863)	(9 863)	-	-	-	-
Deferred real estate tax liability	7 819	(8 000)	(8 000)	-	-	-	-
Finance lease	503	(532)	(128)	(128)	(256)	(20)	-
Total	176 185	(181 977)	(84 195)	(33 984)	(1 853)	(61 945)	-

Book values included in the above tables are gross loan amounts.

Currency risk

The Company incurs foreign currency risk on purchases that are denominated in a currency other than USD. The currencies giving rise to this risk are primarily EUR (Euro), KRW (Korean Won) and NOK (Norwegian Kroner).

Changes in the fair value of forward exchange contracts that economically hedge highly probable forecasted transactions (consisting of the unpaid portion of purchase commitments made by PSI) in foreign currencies and for which hedge accounting is not applied are recognized in the income statement. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognized as part of net financial items (see note 6). The fair value of exchange contracts used as economic hedges of highly probable forecasted transactions in foreign currencies at 31 December 2017 was USD 162 thousand recognized in current assets.

Exposure to currency risk

The Company's exposure to currency risk at 31 December 2017 and 2016 was as follows based on the following notional amounts:

		2017			2016
Amounts in USD thousands	EUR	KRW	NOK	EUR	KRW	NOK
Gross balance sheet exposure
Trade payables (-)	(75)	(42)	(2)	(478)	(1 766)	(45)
Cash	-	-	253	-	-	6
Gross balance sheet exposure	(75)	(42)	251	(478)	(1 766)	(39)
Estimated forecast expenses (-)	(615)	(3 049)	(95)	(5 428)	(16 045)	(281)
Gross exposure	(615)	(3 049)	(95)	(5 428)	(16 045)	(281)
Forward exchange contracts	598	3 648	72	1 899	20 589	284
Net exposure	(92)	557	228	(4 007)	2 778	(36)

Sensitivity analysis

In managing interest rate and currency risks, the Company aims to reduce the impact of short-term fluctuations on its earnings. Over the longer term, however, permanent changes in interest and foreign exchange rates would have an impact on consolidated earnings.

At 31 December 2017 it is estimated that a 10% strengthening of the USD against other foreign currencies would have increased the Company's income before tax by approximately USD 1.3 million. At 31 December 2016 it is estimated that a 10% strengthening of the USD against other foreign currencies would have increased the Company's income before tax by approximately USD 420 thousand.

Exposure to interest rate risk

It is estimated that a general increase of one percentage point in interest rates would not impact the Company's income before tax for 2017 and would not have impacted the Company's income before tax for 2016.

Fair values

The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.

Amounts in USD thousands	Carrying amount 2017	Fair value 2017	FV hierarchy level 2017	Carrying amount 2016	Fair value 2016	FV hierarchy level 2016
Welcome Fund loan	(60 000)	(57 592)	2	(60 000)	(56 810)	2
Finance lease	(268)	(257)	2	(503)	(473)	2
Forward exchange contracts	162	162	2	(1 597)	(1 597)	2
Construction loans	-	-	-	(98 000)	(98 000)	2

The fair value of the Welcome Fund loan is calculated by using the difference between a 4.0% market rate and the actual 2.625% loan rate.

The fair value of fixed-interest long-term debt (i.e. finance lease liabilities) is calculated based on the present value of future principal and interest cash flows discounted at a market rate of 4.0% for 2017 and 4.0% for 2016.

Except for forward exchange contracts, none of the Company's financial assets and liabilities are measured at fair value.

The fair value of the construction loans is calculated by using the existing three-month LIBOR rate plus an applicable market-based margin of 3.0%.

Financial instruments measured at fair value:

The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair values, as well as the significant unobservable inputs used:

Type	Valuation technique	Significant unobservable inputs	Inter-relationship between significant unobservable inputs and fair value measurement
Forward exchange contracts	Market comparison technique: The fair values are based on banker quotes. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments.	Not applicable.	Not applicable.

In accordance with its treasury policy, the Company does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

The Company has categorized its assets and liabilities that are recorded at fair value, based on the priority of the input to the valuation technique, into a threelevel fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets and liabilities fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The categories are described below:

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access.

Level 2. Assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Examples of Level 2 inputs include quoted prices for identical or similar assets or liabilities in non-active markets and pricing models whose inputs are observable for substantially the full term of the asset or liability.

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability.

Note 23: Shares owned or controlled by and remuneration to the President and Chief Executive Officer, Board of Directors and Senior Management of Philly Shipyard

Shares owned in Philly Shipyard ASA as of 31 December 2017 and 31 December 2016

Name	Position	2017 Number of shares held	2016 Number of shares held
Elin Karfjell	Board Member	1 200	1 200
Steinar Nerbovik	President and CEO	1 000	1 000

There is no share option agreement between Philly Shipyard ASA and Senior Management or Directors.

Remuneration to the Board of Directors for the years ended 31 December 2017 and 31 December 2016

			2017		2016
			Remuneration		Remuneration
Name	Position	(NOK)	(USD)	(NOK)	(USD)
James H. Miller (Feb. 2016-Dec. 2017)	Board Chairman	327 500	39 545	293 333	34 915
Elin Karfjell	Board Member	218 750	26 447	215 000	25 591
Amy Humphreys	Board Member	218 750	26 447	215 000	25 591
Audun Stensvold	Deputy Board Chairman	218 750	26 447	215 000	25 591
Kristian Rokke (Jan. 2016)	Board Chairman	-	-	26 667	3 174
Sum Directors' fees		983 750	118 886	965 000	114 862

No Board members received any remuneration other than Directors' fees, except James H. Miller who received USD 33,750 for the period of Jan.-Sept. 2017 related to consulting services provided by Mr. Miller to PSI on behalf of his former employer, Kvaerner Inc. For the period of Oct.-Dec. 2017, Mr. Miller received USD 22,500 related to consulting services provided by Mr. Miller to PSI on behalf of his consulting company, SeaJay Consulting LLC. The Board remuneration for Audun Stensvold is paid to Aker ASA.

Remuneration to the audit committee

The audit committee of PHLY is comprised of Elin Karfjell (Chairperson) and Audun Stensvold. Remuneration for the Chairperson is NOK 46,000 (USD 5,561) and for each member is NOK 36,000 (USD 4,352). The audit committee remuneration for Audun Stensvold is paid to Aker ASA.

Remuneration to the nomination committee

The nomination committee of Philly Shipyard ASA has the following members: Leif Arne Langoy (Chairman), Arild Storen Frick and Gerhard Heiberg. Remuneration earned by each member of the committee in 2017 was NOK 34,000 (USD 4,110). The nomination committee remuneration for Arild Storen Frick is paid to Aker ASA.

40 Philly Shipyard annual report 2017

Guidelines for remuneration to the President and CEO and members of the Executive Team

The basis of the remuneration of the President and CEO and members of the Executive Team has been developed in order to create a performance-based system. This system of reward is designed to contribute to the achievement of good financial results and increase shareholder value.

The President and CEO and members of the Executive Team receive a base salary. In addition, a variable pay may be awarded in accordance with a variable pay program which was implemented in 2007. This variable pay program is based on the achievement of financial and personal performance targets and leadership performance in accordance with the Company's values.

The variable pay program for the President and CEO represents a potential for an additional variable pay up to 70% of base salary depending on the achievement of defined short-term and long-term results such as financial targets (profit and working capital) and personal targets (project targets, development of commercial solutions, alignment with values and improvement of HSE).

The variable pay program for other members of the Executive Team represents a potential for an additional variable pay in the range of 20% to 60% of base salary depending on the achievement of the same factors described for the President and CEO.

As of 2017, the variable pay program for some members of the Executive Team includes two payments, i.e., a base award (calculated as provided above) and a deferred payment. The deferred payments are designed to incentivize and retain key personnel. The deferred payments are equal to 50% of the base awards and are payable 12 months after the base awards. In addition, commencing in 2017, the variable pay program for some members of the Executive Team includes an additional payment for the achievement of specific project targets. This payment is equal to 25% of the maximum base award.

The President and CEO and Executive Team participate in the standard pension and insurance schemes, applicable to all employees.

The Company practices standard employment contracts and standard terms and conditions regarding notice period and severance pay for the President and CEO and members of the Executive Team.

The Company does not offer share option programs to the Executive Team.

Remuneration paid to Senior Management for 2017

Amounts in USD			Base salary	Variable pay	Pension contribution	Other benefits	Total remuneration	Severance pay
Steinar Nerbovik	President and CEO	Jan-Dec	435 999	200 974	32 000	73 342	742 315	12 months
Jan Ivar Nielsen	CFO	Jan-Dec	267 040	105 020	15 000	19 574	406 634	12 months

PHLY has no employees. The Senior Management is employed in the operating company.

Remuneration paid to Senior Management for 2016

			Base	Variable	Pension	Other	Total	Severance
Amounts in USD			salary	pay	contribution	benefits	remuneration	pay
Steinar Nerbovik	President and CEO	Jan-Dec	426 971	79 575	32 000	72 760	611 306	12 months
Jan Ivar Nielsen	CFO	Jan-Dec	260 000	18 850	15 000	46 286	340 136	12 months

PHLY has no employees. The Senior Management is employed in the operating company.

Note 24: Joint venture and equity-accounted investments

Equity-accounted investments with Philly Tankers

In July 2014, Philly Tankers completed a USD 65.025 million private placement with a subsequent registration in the Norwegian OTC.

Prior to the Philly Tankers private placement, in return for 62,475 shares in Philly Tankers, the Company contributed a promissory note with a face value of USD 58.0 million to the equity capital of Philly Tankers. This note was reduced dollar-for-dollar as PSI invested its own funds into the construction of Hulls 025 and 026. As this note was issued as an interest-free instrument, the Company discounted its value and imputed interest expense on the discounted amount at a rate of 3.49% per annum. The dollar-for-dollar reductions commenced in the third quarter of 2015 with a total reduction of the full USD 58.0 million through the second quarter of 2016.

In addition, as part of the Philly Tankers private placement, the Company invested USD 6.025 million in cash in exchange for an additional 6,025 shares in Philly Tankers. As the initial shareholder of Philly Tankers, the Company was paid a cash distribution of USD 5.525 million out of the proceeds of the Philly Tankers private placement.

On 10 August 2015, Philly Tankers executed definitive agreements with a third party for the assignment of its existing contracts and related assets for four product tankers (Hulls 025-028). Per the agreements, each of the contracts and related assets were assigned by Philly Tankers to the third party immediately prior to the delivery of the relevant vessel.

In accordance with IFRS, upon each delivery, Philly Tankers recognized a gain-on-sale and Philly Shipyard, in turn, recognized a portion of the gain as profit in equity-accounted investments recorded as other income on the income statement. Upon deliveries of Hull 026 in Q1 2017, Hull 027 in Q3 2017 and Hull 028 in Q4 2017, Philly Tankers recognized a combined gain-on-sale of approximately USD 37.2 million and Philly Shipyard recognized USD 19.6 million as profit in equity-accounted investments recorded as other income on the income statement. Upon delivery of Hull 025 in Q4 2016, Philly Tankers recognized a gain-on-sale of approximately USD 12.0 million and Philly Shipyard recognized USD 6.2 million as profit in equity-accounted investments recorded as other income on the income statement.

To date, the dividends paid by Philly Tankers to its shareholders total USD 76.7 million, and Philly Shipyard's share of those dividends totals USD 41.2 million, of which USD 39.9 million was received by end of 2017 and USD 1.3 million was received in the beginning of 2018. On 19 October 2017, Philly Tankers announced that it will not make any further dividend payments before liquidation other than any dividends necessary to cover U.S. tax withholding payments on behalf of its non-U.S. shareholders due at an earlier time. In this announcement, Philly Tankers stated its belief that this is the most cost-efficient and tax-efficient manner to distribute its capital to its shareholders. Philly Tankers has initiated a liquidation process with a target of distributing a majority of its cash to its shareholders in 2018.

As of 31 December 2017, the Company owns 53.7% of the outstanding shares of Philly Tankers. The Company has performed an analysis of its ownership interests and voting rights in the articles of association in Philly Tankers and concluded that it does not control the relevant activities of Philly Tankers. While the Company may vote up to 50.1% of the shares of Philly Tankers, the Company cannot elect a majority of the board of directors of Philly Tankers and cannot control the vote on actions that require the approval of a "super-majority" of the shares of Philly Tankers. The Company does not have the current ability to direct the activities that significantly affect Philly Tankers' returns. Therefore, the Company accounts for the investment using the equity method and does not consolidate Philly Tankers.

Amounts in USD thousands	2017	2016
Percentage ownership interest	53.7%	53.7%
Non-current assets Current assets Current liabilities	- 85 771 (272)	68 590 57 863 (690)
Net assets (100%)	85 499	125 763
Company's share of net assets (53.7%)	45 934	67 564
Adjustments tor carrying value of investment: Dividend owed but not received Company's share of transaction costs Deferred gain on equity-accounted investments	1 376 - -	- 1 157 (4 386)
Carrying amount of equity-accounted investments	47 310	64 335
Income from operations (100%) Other comprehensive income (100%)	36 532 -	11 595 -
Total comprehensive income (100%)	36 532	11 595
Company's share of total comprehensive income (53.7%)	19 618	6 227

The recognition of deferred gain on equity-accounted investments represents the Company's USD 5.848 million gain that was deferred on the issuance of Philly Tankers shares in July 2014 to external parties at a price exceeding the Company's cost basis, before deduction of a deferred transaction cost of USD 1.153 million. The net gain at 31 December 2017 and 31 December 2016 amounted to USD 3.233 million and USD 1.462 million, respectively.

Joint venture with Crowley

On 6 November 2013, Philly Shipyard executed definitive agreements for a joint venture with Crowley Maritime Corporation and certain of its affiliates (Crowley) related to the ownership, operation and chartering of four product tankers (Hulls 021-024). The agreements provided that Crowley would maintain control over the ownership, technical operation and commercial management of the vessels. The first two vessels were delivered in 2015 and the remaining two vessels were delivered in 2016.

On 21 September 2015, Philly Shipyard entered into definitive agreements with a third party for the buy-out of its interest in the joint venture with Crowley. The buy-out of Philly Shipyard's interest occurred on the delivery of each vessel.

Due to the nature of the transactions, approximately 49.9% of the gross margin on each of the Crowley vessels (Hulls 021-024) was deferred and the total estimated deferred margin for all four vessels was recognized pro rata (25% per ship) upon delivery of each vessel. Upon delivery of the last two Crowley vessels (Hulls 023-024) in 2016, USD 14.4 million of deferred profit was recognized as an increase to revenue during the year ended 31 December 2016.

In addition, upon delivery of the last two Crowley vessels in 2016, USD 20.7 million was recognized as a gain-on-sale on the buy-out in Philly Shipyard's interest in the joint venture with Crowley which was calculated based on the estimated total investment in the joint venture of approximately USD 518 million and recorded as other income in the income statement for the year ended 31 December 2016. The actual amount of investment depended upon the total capital cost of the vessels to the joint venture.

Note 25: PHLY companies

	Incorporation		Ownership
Company name	State	Country	%
Philly Shipyard, Inc.	Pennsylvania	USA	100.0%
APSI Shipholding 017, Inc.	Delaware	USA	100.0%
APSI Shipholding 018, Inc.	Delaware	USA	100.0%
APSI Tanker Holdings, Inc.	Delaware	USA	100.0%
APSI Member 021, Inc.	Delaware	USA	100.0%
APSI Member 022, Inc.	Delaware	USA	100.0%
APSI Member 023, Inc.	Delaware	USA	100.0%
APSI Member 024, Inc.	Delaware	USA	100.0%
APSI Tanker Holdings II, LLC	Delaware	USA	100.0%
PSI Containership Holdings, Inc.	Delaware	USA	100.0%

Note 26: Government grants, other commitments and contingencies and legal matters

Government grants

For the year ended 31 December 2017, the Shipyard received USD 102 thousand as reimbursement of employee training costs from various governmental agencies (USD 146 thousand as reimbursement in 2016).

Other commitments and contingencies

PSI is required to pay a common area maintenance charge each month of approximately USD 55 thousand, subject to escalation, through the term of its shipyard lease.

On 13 September 2002, the Shipyard finalized an agreement with the City of Philadelphia (and others), whereby the parties agreed to the Real Estate and Use and Occupancy Tax for the years 2001 through 2017. The Shipyard is committed to a fixed assessment of approximately USD 3.3 million to USD 3.6 million per year, commencing in 2003. In connection with the closing of certain other transactions with PSDC in March 2011, the City of Philadelphia agreed to temporarily defer USD 8.0 million in tax payments due from PSI over three years (2011-2013). The full deferred amount was paid in June 2017 (see note 20).

On 29 November 2017, PSI finalized a new long-term agreement with the City of Philadelphia (and others), whereby the parties agreed to the Real Estate and Use and Occupancy Tax for the years 2018 through 2025. PSI is committed to a fixed payment-in-lieu-of-taxes (PILOT) of approximately USD 863 thousand per year, commencing in 2018.

As part of the transactions contemplated by the Authorization Agreement executed by PSI and Philadelphia Shipyard Development Corporation (PSDC) in 2011, PSI agreed to a new termination event under its shipyard lease, pursuant to which PSDC has the right to recapture the shipyard if PSI fails to maintain an average of at least 200 full-time employees at the shipyard for 90 consecutive days, subject to the right of PSI to complete work-in-process projects and a one-time, limited cure right which allows PSI to restore the lease to a five-year term under certain circumstances. Based on its current construction schedule and order backlog, Philly Shipyard expects that PSI will have at least 200 full-time employees on staff so long as there is ongoing shipbuilding activity at the Shipyard. If PSI fails to obtain new orders or financing for vessels before the Matson project is substantially complete, then it would be challenging for PSI to continue shipbuilding operations after delivery of the last vessel in its order backlog (Hull 030), which is scheduled in Q1 2019.

Legal matters

The Company is involved in various legal disputes in the ordinary course of business related primarily to personal injury matters, employment matters and commercial matters. Provisions have been made to cover the expected outcomes when it is probable that a liability has been incurred and the amount is reasonably estimable. Although the final outcome of these matters is subject to uncertainty, in the Company's opinion the ultimate resolution of such legal matters will not have a material adverse effect on the Company's financial position or results of operations.

Note 27: Transactions, guarantees and agreements with related parties and concentration of business

Aker Capital AS, a wholly-owned subsidiary of Aker ASA, is the majority shareholder in PHLY, owning 57.6% of the total outstanding shares of PHLY as of 31 December 2017. The Company believes that related party transactions are made on terms equivalent to those that prevail in arm's length transactions.

Transactions

Philly Shipyard has service agreements with Aker ASA and certain of its affiliates which provide specified consulting, tax, financial and administrative services. All payables under these agreements are paid within the normal course of business. Related administrative costs and financial statement amounts are as follows:

Amounts in USD thousands	Expenses 2017	Expenses 2016
Aker U.S. Services LLC	120	120
Aker ASA	8	54

PSI has entered into an administrative services agreement with Philly Tankers LLC (PTLLC) whereby PSI will supply certain administrative services to PTLLC. Related revenues for the year ending 31 December 2017 were USD 120 thousand (USD 120 thousand for the year ending 31 December 2016) and corresponding receivables for the year ending 31 December 2017 were USD 120 thousand (USD 120 thousand for the year ending 31 December 2016).

On 13 July 2017, PSI made an advance of USD 130 thousand to Jari Anttila, PSI's Senior Vice President Operations. The advance is made on market terms and secured by future bonus that Mr. Anttila is eligible to receive under the variable pay program for the Executive Team.

Concentrations

Operating revenues are detailed below:

Amounts in USD thousands	Revenue 2017	Revenue 2016
Philly Tankers	383 022	127 834
Matson	208 762	12 982
Crowley	-	64 433

Note 28: Events after 31 December 2017

Until January 2018, PSI had been working on a long-term project that contemplated the construction and sale of up to four state-of-the-art containerships (CV3700 vessels) for delivery to TOTE in 2020 and 2021. The parties signed a Letter of Intent (LOI) for this project in July 2017. However, in January 2018, TOTE announced that its plans to enter the U.S. mainland to Hawai'i containership service are on hold and the LOI was allowed to expire in accordance with its terms on 31 January 2018. Based on these developments, PSI's project to build Hulls 031-034 as containerships was put on hold. PSI has suspended substantially all construction-related activities on these vessels. As previously disclosed, PSI has placed orders for all major long-lead items for the first pair, enabling a rapid start-up if conditions permit. If these orders were to be cancelled, then the cancellation costs would be substantially lower than the value of the orders placed. In case of a cancellation of the CV3700 project, the total cost is estimated to be less than USD 20.0 million, of which a majority of the cash impact has already been included in the financial statements for year-end 2017.

Philly Shipyard ASA Income Statement

Amounts in USD thousands	Note	2017	2016
Operating revenues		-	20
Operating expenses	2	(296)	(472)
Operating loss		(296)	(452)
Interest income from subsidiaries		1 313	1 157
Interest expense to subsidiaries		(2 213)	(1 295)
Other interest income and financial income	3	2 995	46 646
Other interest expense and financial expense		(63)	(4)
Income before tax		1 736	46 052
Income tax expense	5	(640)	(6 443)
Net income for the year		1 096	39 609
Allocation of net income:
Net income for the year		1 096	39 609
Other equity	6	(1 096)	(39 609)

Total - -

Philly Shipyard ASA

Statement of Financial Position as of 31 December

Amounts in USD thousands	Note	2017	2016
ASSETS
Shares in subsidiary Loan to subsidiary	4 9	67 000 31 000	67 000 31 000
Total non-current assets		98 000	98 000
Prepayments and other receivables		603	29
Cash and cash equivalents	7	1 840	973
Total current assets		2 443	1 002
Total assets		100 443	99 002
EQUITY AND LIABILITIES
Share capital		22 664	22 664
Share premium reserve		12 542	12 542
Total paid in capital		35 206	35 206
Other equity		8 424	10 355
Total equity	6	43 630	45 561
		704
Deferred tax liability Other non-current liabilities	5	-	1 031 3
Loan from subsidiary	9	55 000	-
Total non-current liabilities		55 704	1 034
Trade payables and accrued liabilities		144	199
Income tax payable	5	965	208
Loan from subsidiary	9	-	52 000
Total current liabilities		1 109	52 407
Total liabilities		56 813	53 441
Total equity and liabilities		100 443	99 002

Oslo, Norway 5 March 2018 Board of Directors Philly Shipyard ASA

Audun Stensvold Steinar Nerbovik Deputy Board Chairman President and CEO

James H. Miller Amy Humphreys Elin Karfjell Board Chairman Board Member Board Member

Philly Shipyard ASA Cash Flow Statement

Amounts in USD thousands	2017	2016
Income before tax	1 736	46 052
Change in other current assets	(574)	198
Change in other current and other non-current liabilities	(57)	(32)
Income taxes paid	(211)	(6 833)
Net cash flow from operating activities	894	39 385
Dividend paid	(3 027)	(90 705)
Loan proceeds from subsidiary	3 000	52 000
Net cash flow used in financing activities	(27)	(38 705)
Net change in cash and cash equivalents	867	680
Cash and cash equivalents at beginning of period	973	293
Cash and cash equivalents as of 31 December	1 840	973

Note 1: Basis for preparation

The accounts of Philly Shipyard ASA (referred to herein as PHLY) are presented in conformity with Norwegian legislation and generally accepted accounting principles in Norway. PHLY's functional and reporting currency is the U.S. dollar (USD), except when indicated otherwise.

Subsidiaries

Subsidiaries are presented on a historical cost basis in the parent company accounts. The investment is valued at historical cost for the shares unless impairment write-downs have been deemed necessary. The shares are written down to fair value if the impairment is not of a temporary nature and is necessitated by generally accepted accounting principles. Write-downs are reversed when the basis for the write-down no longer exists.

Dividends and other payments are taken to income in the year they are accrued in the subsidiary. If dividends exceed retained earnings after the purchase, the excess represents repayment of invested capital and the payments are deducted from the invested value in PHLY's statement of financial position.

Classification and valuation of statement of financial position items

Current assets and current liabilities include items that have less than one year to maturity, and other items that are deemed operational working capital. Other items are classified as non-current assets/non-current liabilities.

Current assets are valued at the lower of historical cost and fair value. Current liabilities are valued at their nominal historical value at the time the liability arises.

Non-current assets are valued at historical cost, but are written down to fair value if impairment is deemed to be of a permanent nature. Non-current liabilities are valued at nominal historical values.

Tax

Tax expense in the income statement comprises both current payable taxes and the change in deferred tax. Payable tax is calculated on the basis of the profit for the period in Norwegian Kroner (NOK). Deferred tax at 31 December 2017 is calculated using a 23% income tax rate utilizing the difference that exists between book values and tax values and the net operating losses that can be carried forward at the statement of financial position date. Tax-increasing and tax-reducing temporary differences that are reversing or can reverse in the same period are offset against each other. Net tax assets are shown in the statement of financial position to the

extent it is probable that these assets can be utilized.

To the extent a group contribution is not shown in the income statement, the tax effect is taken directly against the investment item in the statement of financial position.

Cash flow statement

The cash flow statement is shown using the indirect method. Cash and cash equivalents comprises cash, bank deposits and other shortterm liquid placements.

Use of estimates

Preparation of financial statements in conformity with generally accepted accounting principles in Norway requires management to make estimates and assumptions that affect the income statement, the reported amounts of assets and liabilities and also the disclosure of contingent assets and liabilities on the statement of financial position date.

Contingent losses that are probable and quantifiable are expensed when they are identified.

Note 2: Other operating expenses

Fees to the auditors for ordinary audit and other audit and attestation fees have been expensed in 2017 and 2016. Fees to the auditors are as follows:

Amounts in USD thousands	2017	2016
Audit fees	31	31
Other audit and attestation fees	-	31
Tax non-attest fees	-	6
Total	31	68

PHLY has no employees. The Senior Management is employed in the operating company. Fees to the Board of Directors of USD 118,886 and USD 114,862 were expensed in 2017 and 2016, respectively.

Note 3: Other interest income and financial income

Amounts in USD thousands	2017	2016
Guarantee provisions	2 916	3 339
Gain on foreign currency forward contracts	70	345
Interest income external	9	14
Foreign exchange gain	-	48
Dividend received	-	42 900
Total	2 995	46 646

2016 dividend received of USD 42.9 million includes USD 6.4 million in U.S. withholding tax.

Note 4: Shares in subsidiary

This item comprises the following as of 31 December 2017:

Amounts in USD thousands	Ownership and voting rights (%)	Business address	Historical cost	Book value
Philly Shipyard, Inc. (PSI)	100%	Philadelphia, PA	67 000	67 000
Total shares in subsidiary			67 000	67 000

PSI's results after-tax in 2017 and equity at the end of 2017 are:

Results after-tax 2017	66 126
Equity at 31 December 2017	178 947

Based on the net asset position of PSI (the investment in subsidiary) as well as the cash on hand at PSI, PHLY has concluded that no impairment has occurred to the investment in subsidiary at 31 December 2017.

Note 5: Taxes

The table below shows the difference between book and tax values by the end of 2017 and 2016 and the amounts of deferred taxes at these dates and the change in deferred taxes.

Amounts in USD thousands	2017	2016
Losses carried forward	-	-
Other temporary differences	(3 409)	(4 410)
Total differences	(3 409)	(4 410)
Net deferred tax asset/(liability), 23%/24%	(784)	(1 058)
Foreign currency impact	80	27
Deferred tax asset/(liability) in the statement of financial position	(704)	(1 031)

Estimated result for tax purposes:

Amounts in USD thousands	2017	2016
Income before tax measured in NOK for taxation purposes	2 810	40 838
Change in temporary differences	1 224	621
Permanent differences	-	(40 629)
Estimated income for tax purposes	4 034	830
Income tax payable	965	208

Income tax expense in the income statement:

Amounts in USD thousands	2017	2016
Income tax payable	(965)	(208)
Change in deferred tax in the statement of financial position	325	200
15% withholding tax dividend payment	-	(6 435)
Income tax expense	(640)	(6 443)

Note 6: Total equity

Changes in equity are:

Amounts in USD thousands	Share capital	Share premium	Treasury shares	Total paid in capital	Other equity	Total equity
Equity as of 1 January 2017	22 664	56 797	(9 969)	35 206	10 355	45 561
Dividend paid	-	-	-	-	(3 027)	(3 027)
Net income for the year 2017	-	-	-	-	1 096	1 096
Equity as of 31 December 2017	22 664	56 797	(9 969)	35 206	8 424	43 630

The share capital of NOK 125,747,660 consists of 12,574,766 shares (including 466,865 treasury shares) with a par value of NOK 10 as of 31 December 2017.

PHLY is a part of the consolidated accounts of Aker ASA, Oksenoyveien 10, NO-1366 Lysaker, Norway.

Twenty largest shareholders

(as of 31 December 2017)

Shareholders	Number of shares held	Ownership (in %)
Aker Capital AS	7 237 631	57.6%
Goldman Sachs & Co. LLC	2 570 479	20.4%
Philly Shipyard ASA	466 865	3.7%
J.P. Morgan Securities LLC	367 735	2.9%
Citibank, N.A. S/A National Financial Services	201 995	1.6%
Pershing LLC	196 052	1.6%
Interactive Brokers LLC	91 071	0.7%
Citibank, N.A. S/A Charles Schwab FBO Customers	89 893	0.7%
Ramadan Kovaci	61 765	0.5%
Merrill Lynch, Pierce, Fenner & SM, Inc.	60 675	0.5%
Avanza Bank AB	44 363	0.4%
Ole Johnny Wilson	40 297	0.3%
Lars Ro	40 000	0.3%
Citibank, N.A. S/A Morgan Stanley	38 758	0.3%
Citibank, N.A. S/A UBS Financial Securities, Inc.	34 188	0.3%
Nordnet Livsforsikring AS	32 266	0.3%
State Street Bank and Trust Company	28 050	0.2%
J.P. Morgan Chase Bank, N.A., London	27 875	0.2%
Heggum Holding AS	25 674	0.2%
Per Asgeir Bodin	23 175	0.2%
Total, 20 largest shareholders	11 678 807	92.9%
Other shareholders	895 959	7.1%
Total	12 574 766	100.0%

Note 7: Cash and cash equivalents

There is no restricted cash.

Note 8: Shares owned by the Board of Directors and the Senior Management

For information regarding shares owned by the members of the Board of Directors and the Senior Management, see note 23 to the consolidated accounts.

Note 9: Related party transactions and guarantees

PHLY has made the following guarantees:

Description	Beneficiary	Amount (USD thousands)	Borrower
Welcome Fund loan	PIDC Regional Center, LP XXXI	60 000	PSI
Working capital facility	TD Bank, N.A.	10 000	PSI

For additional information regarding the above loan facilities, see note 15 to the consolidated accounts.

PHLY has supplied a parent guarantee for the obligations of PSI under the two construction contracts with Matson Navigation Company, Inc. (Hulls 029-030).

PHLY has service agreements with Aker ASA and certain of its affiliates which provide administrative services. All payables under these agreements are paid within the normal course of business. Total expenses incurred under these agreements in 2017 and 2016 were USD 8 thousand and USD 54 thousand, respectively.

On 29 April 2008, PSI, as borrower, entered into a loan agreement with PHLY, as lender. The facility is for up to USD 50.0 million and interest is at a floating rate of three-month LIBOR plus 3.00% per annum. The loan is payable on demand with advance notice of 30 days. As of 31 December 2017, USD 31.0 million is outstanding under the facility and PHLY does not intend to call the loan for repayment in 2018.

On 18 July 2013, PSI, as lender, entered into a loan agreement with PHLY, as borrower. This facility is for up to USD 60.0 million and interest is at a fixed rate of 4.00% per annum. The loan is payable on demand with advance notice of 90 days. As of 31 December 2017, USD 55.0 million is outstanding under the facility.

PSI and PHLY are parties to certain guaranty fee agreements related to the above-referenced loan and performance guarantees by PHLY. Total revenues of PHLY from PSI under these guaranty fee agreements in 2017 and 2016 were USD 2.9 million and USD 3.3 million, respectively, with fees ranging from 0.15% to 0.30 % for performance guarantees, and 0.75% for loan guarantees.

Good dialogue

Philly Shipyard ASA (referenced to herein as "PHLY") is committed to maintaining an open and direct dialogue with its shareholders, potential investors, analysts, brokers and the financial community in general.

The timely release of information to the market that could affect PHLY's share price helps ensure that Philly Shipyard ASA's share price reflects its underlying value.

Philly Shipyard's goal is that PHLY's shareholders will, over time, receive competitive returns on their investments through a combination of dividends and share price growth. On 26 February 2014, the Company's Board of Directors adopted the following dividend policy:

"The Company's objective is to provide its shareholders with a competitive return on its shares over time based on the Company's earnings. The Company aims to pay a quarterly dividend of USD 0.25 per share, beginning with the second quarter of 2014, with intentions of increasing the amount over time. Any payment of dividends will be considered in conjunction with the Company's financial position, debt covenants, capital requirements, market prospects and potential strengthening of the Company's financial structure."

PHLY's Board of Directors uses this dividend policy as a guideline to determine how much of PHLY's earnings it will pay to shareholders.

In 2017, PHLY paid ordinary dividends totaling NOK 25.2 million (USD 3.0 million).

The Norwegian Public Limited Liability Companies Act allows for the Board of Directors to pay dividends on the basis of an authorization from the general meeting. The Board of Directors will therefore propose to the annual general meeting in 2018 that the Board of Directors is granted an authorization to pay dividends based on PHLY's annual accounts for 2017, valid up to PHLY's annual general meeting in 2019. Such authorization will facilitate potential payments of dividends by the Board of Directors in accordance with PHLY's dividend policy.

Due to the delay in securing new orders beyond Hull 030, at this time, PHLY does not plan to pay any further ordinary or extraordinary dividends in 2018. The Board of Directors will revisit PHLY's dividend policy and dividend plan when it has more clarity about the Company's new order situation and related capital requirements.

Shares and share capital

As of 31 December 2017, Philly Shipyard ASA has 12,574,766 ordinary shares; each share has a par value of NOK 10 (see note 6 to the parent company's 2017 accounts). As of 31 December 2017, PHLY had 710 shareholders, of whom 31.7% were non-Norwegian shareholders.

PHLY has a single share class. Each share is entitled to one vote. PHLY holds 466,865 of its own (treasury) shares, constituting approximately 3.71% of the shares outstanding, as of 31 December 2017.

Stock exchange listing

Philly Shipyard ASA was listed on Oslo Axess on 17 December 2007 (ticker: PHLY). PHLY's shares are registered in the Norwegian Central Securities Depository; the shares have the securities registration number ISIN NO 0010395577. DNB Bank ASA is PHLY's registrar.

Majority shareholder

Philly Shipyard ASA's majority shareholder is Aker Capital AS, a wholly-owned subsidiary of Aker ASA. Companies that are part of Aker are legally and financially independent units. Aker Capital AS exercises active ownership as part of systematic efforts to create value for all PHLY shareholders.

From time to time, agreements are entered into between the Company and one or more Aker companies. The Boards of Directors and other parties involved in the decision-making processes related to such agreements are all critically aware of

the need to handle such matters in the best interests of the involved companies, in accordance with good corporate governance practice. If needed, external, independent opinions are sought.

Current Board authorizations

As of 31 December 2017, the Board of Directors of Philly Shipyard ASA has an authorization to pay dividends, an authorization to increase the share capital and two separate authorizations to purchase own shares. All of these current Board authorizations are valid up until the next annual general meeting in 2018. For more details, please see "Board authorizations" on pages 60-61.

Stock option plans

As of 31 December 2017, Philly Shipyard ASA has no stock option program.

Investor relations

Philly Shipyard ASA seeks to maintain an open and direct dialogue with shareholders, financial analysts and the financial market in general.

All Philly Shipyard press releases and investor relations publications, including archived material, are available at the Company's website: www.phillyshipyard.com. This online resource includes PHLY's quarterly and annual reports, prospectuses, articles of association, financial calendar and its Investor Relations and Corporate Governance policies, along with other information.

Shareholders can contact the Company at contactus@phillyshipyard.com.

Electronic interim and annual reports

Philly Shipyard ASA encourages its shareholders to subscribe to the electronic version of PHLY's annual reports. Annual reports are published on the Company's website at the same time as they are made available via website release by the Oslo Stock Exchange/ Oslo Axess: www.newsweb.no (ticker: PHLY). Subscribers to this service receive annual reports in PDF format by email.

Share capital development over the past three years

Date	Change in share capital (in NOK)	Share capital (in NOK)	Number of shares	Par value (in NOK)
Change in 2015	-	-	-	-
31 December 2015	-	125 747 660	12 574 766	10.00
Change in 2016	-	-	-	-
31 December 2016	-	125 747 660	12 574 766	10.00
Change in 2017	-	-	-	-
31 December 2017	-	125 747 660	12 574 766	10.00

Quarterly reports, which are generally only distributed electronically, are available from the Company's website and other sources. Shareholders who are unable to receive the electronic version of interim and annual reports, may subscribe to the printed version by contacting Philly Shipyard's investor relations staff.

Nomination committee

PHLY's nomination committee has the following members: Leif Arne Langoy, Gerhard Heiberg and Arild Støren Frick.

Shareholders who wish to contact Philly Shipyard's nomination committee may do so using the following address:

Nomination Committee of Philly Shipyard ASA Vika Atrium Munkedamsveien 45 NO-0250 Oslo, Norway

Annual shareholders' meeting

Philly Shipyard ASA's annual shareholders' meeting is normally held in March or early April. Written notification is sent to all shareholders individually or to shareholders'

nominees. To vote at shareholders' meetings, shareholders (or their duly authorized representatives) must either be physically present or vote by proxy.

2017 share data

PHLY's total market capitalization as of 31 December 2017 was NOK 855 million. During 2017, a total of 4,130,455 Philly Shipyard ASA shares traded, corresponding to 0.328 times PHLY's freely tradable stock. The shares traded on 251 trading days in 2017.

Number of shareholders

Percent of share capital

Twenty largest shareholders

(as of 31 December 2017)

Ownership structure by number of shares held
----------------------------------------------	--	--	--	--	--

(as of 31 December 2017)

Shareholders	Number of shares held	Ownership (in %)	Shares owned
Aker Capital AS	7 237 631	57.6%
Goldman Sachs & Co. LLC	2 570 479	20.4%
Philly Shipyard ASA	466 865	3.7%
J.P. Morgan Securities LLC	367 735	2.9%
Citibank, N.A. S/A National Financial Services	201 995	1.6%
Pershing LLC	196 052	1.6%
Interactive Brokers LLC	91 071	0.7%
Citibank, N.A. S/A Charles Schwab FBO Customers	89 893	0.7%
Ramadan Kovaci	61 765	0.5%
Merrill Lynch, Pierce, Fenner & SM, Inc.	60 675	0.5%
Avanza Bank AB	44 363	0.4%
Ole Johnny Wilson	40 297	0.3%
Lars Ro	40 000	0.3%
Citibank, N.A. S/A Morgan Stanley	38 758	0.3%
Citibank, N.A. S/A UBS Financial Securities, Inc.	34 188	0.3%
Nordnet Livsforsikring AS	32 266	0.3%
State Street Bank and Trust Company	28 050	0.2%
J.P. Morgan Chase Bank, N.A., London	27 875	0.2%
Heggum Holding AS	25 674	0.2%
Per Asgeir Bodin	23 175	0.2%
Total, 20 largest shareholders	11 678 807	92.9%
Other shareholders	895 959	7.1%
Total	12 574 766	100.0%	(2015-2017)

Geographic distribution of shareholders

(as of 31 December 2017)

Nationality	Number of shares held	Ownership (in %)
Norwegian shareholders Non-Norwegian shareholders	8 584 676 3 990 090	68.3% 31.7%
Total	12 574 766	100.0%

1 – 100	225	0.1%
101 – 1 000	300	1.0%
1 001 – 10 000	146	3.6%
10 001 – 100 000	33	7.5%
100 001 – 500 000	4	9.8%
Over 500 000	2	78.0%
Total	710	100.0%

Share price development in 2017

(2017 share data)

Highest traded	NOK	100.00
Lowest traded	NOK	49.50
Share price as of 31 Dec.	NOK	68.00
Shares issued as of 31 Dec.		12 574 766
Own (treasury) shares as of 31 Dec.		466 865
Shares issued and outstanding as of 31 Dec.		12 574 766
Market capitalization as of 31 Dec.	NOK million	855
Proposed share dividend	NOK per share	-

Share price development *

* For 2015-2017, PHLY paid dividends of approximately 71 NOK per share (8 NOK/share in 2015, 61 NOK/share in 2016 and 2 NOK/share in 2017).

Corporate governance

Philly Shipyard ASA (referenced to herein as "PHLY") aims to create maximum value for its shareholders over time. Good corporate governance will help to reduce risk and ensure sustainable value creation.

The Board has reviewed and updated PHLY's principles for corporate governance. The principles are based on the Norwegian Code of Practice for Corporate Governance, dated 30 October 2014 (the "Code of Practice"), the principles set out in the Continuing Obligations of stock exchange listed companies from the Oslo Stock Exchange, and the relevant Norwegian background law such as the Norwegian Accounting Act and the Norwegian Public Limited Liability Companies Act. The Code of Practice is available at www.nues.no and the Continuing Obligations of stock exchange listed companies may be found at www.oslobors.no. The principles also apply to PHLY's subsidiaries when relevant. The Board's statement of corporate governance is included in the annual report. The following presents the current practice of PHLY regarding each of the recommendations contained in the Code of Practice. Any deviations from the recommendations are explained under the item in question.

Purpose

PHLY's Corporate Governance principles ensure an appropriate division of roles and responsibilities among PHLY's owners, its Board of Directors, and its Executive Management, and that business activities are subject to satisfactory control. The appropriate division of roles and satisfactory control contribute to the greatest possible value creation over time, to the benefit of owners and other stakeholders.

Values and ethical guidelines

The Board has adopted corporate values and ethical guidelines. The Company's corporate values are presented on page 6 of this annual report. These values consist of the following four "CORE" principles: Caring, One shipyard, Responsible and Efficient. Philly Shipyard has zero tolerance for corruption and, in 2015, the Board approved an Anti-Corruption Policy that is in-line with the anti-corruption policies in place at other Aker ASA-related companies. Philly Shipyard works to promote a sustainable and responsible company that is driven by good results and the demands for social responsibility.

Business

PHLY's business purpose clause in the articles of association is as follows:

"The Company's business is to own and manage industry and other related business related to building of ships, capital management and other operations for the group, including participating in or acquiring other business."

The function of the business purpose clause is to ensure that shareholders have control of the business and its risk profile, without limiting the Board or management's ability to carry out strategic and financially viable decisions within the defined purpose. PHLY's goals and main strategies are presented in the Board of Directors' report. PHLY's vision is for Philly Shipyard "to be – and be recognized as – America's leading commercial shipyard that delivers on its commitments, every time," and its supporting strategies for 2018 are delivering Hulls 029 and 030 to Matson according to plan, securing new orders beyond Hull 030, expanding into non-commercial work and communicating openly with the workforce.

Equity and dividends Equity

PHLY's equity as of 31 December 2017 amounted to USD 155.6 million, which corresponds to an equity ratio (total equity divided by total assets) of approximately 61%. PHLY regards its current equity structure as appropriate and adapted to its objectives, strategy, and risk profile.

Dividends

PHLY's dividend policy is included in the section "Shares and shareholder matters" (see page 58). As stated in that policy:

"The Company's objective is to provide its shareholders with a competitive return on its shares over time based on the Company's earnings. The Company aims to pay a quarterly dividend of USD 0.25 per share, beginning with the second quarter of 2014, with intentions of increasing the amount over time. Any payment of divi- dends will be considered in conjunction with the Company's financial position, debt covenants, capital requirements, market prospects and potential strengthening of the Company's financial structure."

PHLY's Board of Directors uses this dividend policy as a guideline to determine how much of the Company's earnings it will pay to shareholders.

Due to the delay in securing new orders beyond Hull 030, at this time, PHLY does not plan to pay any further ordinary or extraordinary dividends in 2018. The PHLY Board will revisit PHLY's dividend policy and dividend plan when it has more clarity about the Company's new order situation and related capital requirements.

Board authorizations

It is the intention that the Board's proposals for future Board authorizations to issue shares and to undertake share buybacks are to be limited to defined purposes and to be valid only until the next annual shareholders' meeting.

To facilitate the payment of dividends on an on-going basis in accordance with PHLY's dividend policy, the Board of Directors has an authorization to pay dividends based on PHLY's annual accounts for 2016.

The Board of Directors has an authorization to increase the share capital by up to NOK 12,574,766, which can only be used to raise equity capital for new shipbuilding projects or other future investments within the Company's scope of operations.

The Board of Directors has an authorization to purchase own shares with a total nominal value of NOK 12,574,766 which can only be used for the purpose of utilizing PHLY's shares as transaction currency in acquisitions, mergers, de-mergers or other transactions.

The Board of Directors has an authorization to purchase own shares with a total nominal value of NOK 12,574,766 which can only be used for the purpose of investment or subsequent sale or deletion of such shares.

All of these Board authorizations are valid up to the annual shareholders' meeting in 2018.

The Board currently has no other authorizations to issue shares or undertake share buybacks. The Board will propose to the annual shareholders' meeting in 2018 that the Board is granted an authorization for payment of dividends, an authorization to increase the share capital and two authorizations to purchase own shares similar to the authorizations described above.

Equal treatment of shareholders and transactions with close associates

PHLY has a single class of shares, and all shares carry the same rights in PHLY. Equal treatment of all shareholders is crucial. If existing shareholders' pre-emptive rights are proposed waived upon an increase in share capital, the Board will justify the waiver. The Board will also publicly disclose such justification in a stock exchange announcement issued in connection with such increase in share capital. Transactions in own (treasury) shares are executed on the Oslo Stock Exchange or by other means at the listed price.

If there are material transactions between the Company and a shareholder, Board member, member of Executive Management, or a party closely related to any of the aforementioned, the Board shall ensure that independent valuations are available.

PHLY has prepared guidelines designed to ensure that members of the Board of Directors and Executive Management notify the Board of any direct or indirect stake they may have in agreements entered into by the Company.

See additional information on transactions with related parties in note 27 to the consolidated accounts. As of 31 December 2017, 57.6% of the shares in PHLY are owned by Aker Capital AS, a wholly-owned subsidiary of Aker ASA. For further details on the relationship between Philly Shipyard and Aker ASA, see note 27 to the consolidated accounts.

Freely negotiable shares

PHLY's shares are freely negotiable. No restrictions on transferability are found in PHLY's articles of association.

Annual shareholders' meetings

The Board of Directors encourages shareholders to participate in shareholders' meetings. It is PHLY's priority to hold the annual shareholders' meeting as early as possible after the year-end. Notices of shareholders' meetings are sent physically by post and comprehensive supporting information, including the recommendations of the nomination committee, are made available for the shareholders on the Company's home page, in each case not later than 21 days prior to the annual shareholders' meeting. The Board seeks to ensure that the resolutions and supporting information are sufficiently detailed and comprehensive to enable the shareholders to form a view on all matters to be considered at the meeting. The deadline for shareholders to register to the shareholders' meetings is set as close to the date of the meeting as possible and the deadline for registration may not expire earlier than five days prior to the date of the shareholders' meeting. Shareholders who are unable to attend the meeting in person may vote by proxy, and normally the proxy may be given to the chairman of the meeting or any other person appointed by the chairman. Both on the attendance and proxy form and the notice of meeting, all procedures for registration are thoroughly explained. In addition, information on how to propose a resolution to the items on the agenda at the annual shareholders' meeting will be included in the notice.

Pursuant to PHLY's articles of association, the Chairman of the Board, or any other person appointed by the Chairman, chairs the shareholders' meetings. Although the Code of Practice recommends an independent chair for annual general meetings, it is the view of PHLY that the procedure followed by PHLY provides efficient and well prepared general meetings and is in the interests of the shareholders. The shareholders are invited to make a joint voting on the composition of the Board of Directors as proposed by the nomination committee and not on each board member separately. Hence, PHLY deviates from the Code of Practice in this regard as the nomination committee emphasizes that the Board's composition shall reflect a variety of experience, knowledge and qualifications.

To the extent possible, the CEO/ General Manager, nomination committee leader and auditor attend annual shareholders' meetings.

Minutes of shareholders' meetings are published as soon as practically possible on the Oslo Stock Exchange, www.newsweb.no (ticker: PHLY) and on the Company's home page www.phillyshipyard.com, under the heading "Media Center".

Nomination committee

PHLY has a nomination committee, as set forth in Section 7 of PHLY's articles of association. Pursuant to the articles of association, the nomination committee is to comprise no fewer than three members. Each member is normally elected for a two-year period. The composition of the nomination committee reflects the interests of the shareholders, and its members are independent from the Board and Executive Management. The members and Chairman of the nomination committee are elected by PHLY's annual shareholders' meeting, which also approves the remuneration payable to committee members.

Pursuant to PHLY's articles of association, the nomination committee recommends candidates for members of the Board of Directors. The nomination committee also makes recommendations as to remuneration of the members of the Board and the nomination committee. The nomination committee will justify its recommendation and such justification will address the criteria specified in Section 8 of the Code of Practice on the composition of the Board of Directors.

The nomination committee comprises the following members:

• Leif Arne Langoy, Chairman (2017-2019)
• Gerhard Heiberg (2017-2019)
• Arild Støren Frick (2017-2019)

None of the members of the nomination committee is a member of the Board of Directors. Neither the CEO/General Manager nor any other senior executive is a member of the nomination committee.

The shareholders' meeting has stipulated guidelines for the duties of the nomination committee.

PHLY provides the shareholders with information on how to submit proposals to the nomination committee for candidates for election to the Board of Directors on the Company's website.

Board composition and independence

PHLY does not have a corporate assembly because PHLY has no employees.

Pursuant to Section 4 of PHLY's articles of association, the Board comprises between three and seven members. The Board is currently comprised of a total of four members. PHLY's shareholders elect the Chairman of the Board at the annual share-holders' meeting. The Board may elect its own Deputy Board Chairman. Board members are elected for a period of two years.

The composition of the Board of Directors is designed to ensure that it can operate independently of any special interests and function effectively as a collegiate body. A majority of the shareholder-elected Board members are independent of PHLY's Executive Management and its significant business associates. The Board of Directors does not include any executive personnel. Further, three of the four shareholder-elected Board members are independent of PHLY's main shareholder, Aker ASA. Audun Stensvold, the Deputy Chairman of the Board of Directors of PHLY, is Investment Director of Aker ASA.

The current composition of the Board, as well as the Board members' expertise, capabilities, and experience, are presented on pages 64-65 of this annual report. The shareholder-elected Board members represent a combination of expertise, capabilities, and experience from various businesses and industries.

The Board members' shareholdings are presented in note 23 to the consolidated accounts. PHLY encourages the Board members to invest in PHLY's shares.

Three of the shareholder-elected Board members are up for election. PHLY will provide the relevant information regarding such Board members in accordance with the Code of Practice guidelines in advance of the annual general meeting.

The work of the Board of Directors

The Board of PHLY annually adopts a plan for its work, emphasizing goals, strategies, and implementation. The plan also recognizes the Company's corporate social responsibility. Also, the Board has adopted instructions that regulate areas of responsibility, tasks, and division of roles of the Board, Board Chairman, and the CEO/ General Manager. These instructions feature rules governing Board schedules, rules for notice and chairing of Board meetings, decision-making rules, the CEO's/General Manager's duty and right to disclose information to the Board, professional secrecy, impartiality, and other issues.

In order to ensure a more independent consideration of matters of a material character in which the Board Chairman is, or has been, personally involved, the Board's consideration of such matters are chaired by the Deputy Board Chairman, if there is one serving at the time, or some other member of the Board in the absence of a Deputy Board Chairman.

The Board of PHLY established an audit committee in 2010. The audit committee consists of two members, Elin Karfjell (Chairperson) and Audun Stensvold. Both members are independent from operations of the Company. As discussed above, Mr. Stensvold is linked to PHLY's main shareholder.

The Board of PHLY established a tendering committee in 2012 to review tenders for new business. The tendering committee consists of two members, James H. Miller (Chairman) and Amy Humphreys. Both members are independent from operations of the Company and neither member is linked to PHLY's main shareholder.

PHLY does not have any other active Board committees at this time. In particular, PHLY does not have a remuneration committee because all members of the Board are independent of PHLY's executive personnel.

The Board evaluates its own performance and expertise once a year.

Risk management and internal control

The Board is to ensure that the Company maintains solid in-house control practices and protocols and appropriate risk management systems tailored to the Company's business activities. These practices and systems encompass the Company's corporate values, ethical guidelines and guidelines for corporate social responsibility. The Company's policy regarding corporate social responsibility is set forth on pages 14-16 of this annual report. The Board annually reviews the Company's most important risk areas and internal control systems and procedures, and these risk areas are mentioned in the Board of Directors' report. Through the use of a risk matrix and log, the Board also monitors the key risks related to the Company's business goals and assesses those risks, taking into account mitigating actions, on a quarterly basis. The issue is further described in notes 1 and 22 to the consolidated accounts.

Audit committee

The audit committee has reviewed the Company's internal reporting systems, internal control and risk management and had dialogue with the Company's auditor. The audit committee has also considered the auditor's independence.

PHLY's financial policies ensure follow-up of financial risk. Key targets are identified by the Board and management to ensure timely follow-up of currency exposure, interest rate exposure and compliance with covenants.

PHLY has prepared an authorization matrix and approval procedures for costs included in the Company's governing documents.

Financial statement close process

The Company has implemented Aker ASA's accounting and reporting guidelines which contains requirements and procedures for the preparation of both quarterly and annual reporting. The reporting is done quarterly through PHLY's reporting and consolidation system. Consolidation and control over the financial statement close process is the CFO's responsibility. Financial results and cash development are analyzed and compared to the budget by the CEO/General Manager and CFO and reported to the Board monthly.

Remuneration of the Board of Directors

Board remuneration reflects the Board's responsibility, expertise, time spent, and the complexity of the business. Remuneration does not depend on PHLY's financial performance and PHLY does not grant share options to members of its Board. Board members and companies with whom they are associated are not to take on special tasks for the Company beyond their Board appointments unless such assignments are disclosed to the full Board and the remuneration for such additional duties is approved by the Board. In this respect, PHLY's Board Chairman, James H. Miller, provides consulting services to Philly Shipyard, Inc. (PSI) on behalf of Mr. Miller's consulting company against a monthly fee. Prior to October 2017, Mr. Miller provided these services to PSI on behalf of Mr. Miller's former employer, Kvaerner Inc. Approval of this assignment has been handled by the Board of Directors in accordance with the said procedure.

Additional information on remuneration paid to Board members for 2017 is presented in note 23 to the consolidated accounts.

Remuneration of Executive Management

The Board has adopted guidelines for remuneration of Executive Management in accordance with Section 6-16a of the Norwegian Public Limited Company Act. Salary and other remuneration of the CEO/ General Manager of PHLY are determined in a Board of Directors' meeting. The basis of remuneration of Executive Management has been developed in order to create a performance-based system. The system of reward is designed to contribute to the

achievement of good financial results and increase in shareholder value.

PHLY does not have stock option plans or other such share award programs for employees. Further information on remuneration for 2017 for members of the Company's Executive Management is presented in note 23 to the consolidated accounts. PHLY's guidelines for remuneration to Executive Management are discussed on pages 40-41 of this annual report and will be presented to the shareholders at the annual shareholders' meeting. The maximum size of any payment under the existing performance-related remuneration program to any executive is linked to the size of the executive's base salary.

The Board's guidelines for remuneration of Executive Management will be made available as a separate appendix to the agenda for the annual shareholders' meeting. The statement will include information on which aspects of the guidelines are advisory, and which, if any, are binding. The Company currently does not grant remuneration to Executive Management being subject to binding guidelines.

Information and communications

PHLY's reporting of financial and other information is based on openness and on equal treatment of shareholders, the financial community, and other interested parties.

The long-term purpose of PHLY's investor relations activities is to ensure the Company's access to capital at competitive terms and to ensure shareholders' correct pricing of shares. These goals are to be accomplished through correct and timely distribution of information that can affect PHLY's share price; PHLY is also to comply with current rules and market practices, including the requirement of equal treatment.

All stock exchange notifications and press releases are made available on the Company's home page www.phillyshipyard.com; stock exchange notices are also available from www.newsweb.no. All information that is distributed to shareholders is simultaneously published on the Company's home page.

PHLY's financial calendar is found on the inside front cover of this annual report.

PHLY's investor relations staff is responsible for maintaining regular contact with PHLY's shareholders, potential investors, analysts and other financial market stakeholders. The Board is regularly informed about PHLY's investor relations activities. For more information regarding PHLY's guidelines for reporting of financial and other information, see pages 58-59.

Takeovers

PHLY has not produced special principles for how it will act in the event of a takeover bid. However, if a takeover bid occurred the Board would follow the overriding principle of equal treatment for all shareholders. Unless the Board has particular reasons for so doing, the Board will not take steps to prevent or obstruct a takeover bid for the Company's business or shares, nor use share issue authorizations or other measures to hinder the progress of the bid, without such actions being approved by a shareholders' meeting after the take-over offer has become public knowledge.

The Company will not enter into any agreement with a bidder that acts to limit the Company's ability to arrange other bids for the Company's business or shares unless it is self-evident that such an agreement is in the common interest of PHLY and its shareholders. This provision shall also apply to any agreement on the payment of financial compensation to the bidder if the bid does not proceed. Any financial compensation will be limited to the costs the bidder has incurred in making the bid.

Agreements entered into between PHLY and a bidder that are material to the market's evaluation of the bid will be announced to the public no later than at the same time as the disclosure that the bid has been made is published.

Upon the issuance of an offer for PHLY's shares, the Board will make a statement to the shareholders that provides an assessment of the bid, the Board's recommendations and reasons for these recommendations. If the Board cannot recommend to the shareholders whether they should or should not accept the bid, the Board will explain the reasons for this. The Board's statement on the offer will make it clear whether the views expressed are unanimous, and if this is not the case, it will explain the basis on which specific members of the Board have excluded themselves from the Board's statement.

For each instance, an assessment will be made as to the necessity of bringing in independent expertise and obtaining a third party valuation. If a third party valuation is obtained, such valuation will include an explanation, and the Board will aim at recording such valuation in its statement. It may be necessary to obtain a valuation from an independent expert where a competing bid is made and the bidder either is the main shareholder or has a connection to the Board members or executive personnel.

Transactions that have the effect of sale of the Company or a major component of it are to be decided on by shareholders at a shareholders' meeting.

Auditor

The auditor makes an annual presentation to the Board of a plan for the auditing work for the year. Further, the auditor has provided the Board with a written confirmation that the requirement of independence is met.

The auditor participates in the Board meeting that deals with the annual accounts, and the auditor has reviewed the companies' internal control with the Board. At these meetings, the auditor reviews any material changes to PHLY's accounting principles, comments on any material estimated accounting figures and reports all matters on which there have been disagreement between the auditor and PHLY's executive personnel. Once a year a meeting is held between the auditor and the Board, at which no representatives of Executive Management are present. In addition to the presentations to the full Board, the auditor is present at all audit committee meetings which occur throughout the year and presents both its preliminary and final audit findings to the committee during such meetings.

Guidelines have been established for Executive Management's use of auditors for services other than auditing. Auditors are to provide the Board with an annual overview of services other than auditing that have been supplied to the Company.

Remuneration for auditors is presented in note 5 to the consolidated accounts and note 2 to the parent company accounts, detailed in auditing and other services. In addition, these details are presented at the annual general meeting.

Presentation of the Board of Directors

James H. Miller Board Chairman

James H. Miller (b. 1955) is currently providing consulting services to the shipbuilding and construction industries. During the period of mid-2011 through September 2017, Mr. Miller served as Executive Vice President – Americas at Kvaerner. Prior to that Mr. Miller served as President and CEO of Philly Shipyard from June 2008 to April 2011. Before coming to the shipyard, Mr. Miller was President of Aker Solutions Process and Construction (P&C) Americas, where he was responsible for the operations of seven business units. During his tenure, Aker Solutions P&C Americas became a leading provider of global engineering and construction solutions with 7,500 employees, including 4,500 construction trades personnel. Prior to joining Aker Solutions P&C Americas, Mr. Miller held the position of President of Aker Construction, Inc., which was one of the largest union construction companies in North America. Mr. Miller is a Director and for all remaining Kvaerner U.S. based legal and operating entities. Mr. Miller currently serves as Board Director of Matrix Services Inc. based in Tulsa, Oklahoma which is a public company listed on the Nasdaq Exchange. Mr. Miller also serves on the BoD's of San Juan Construction, an ESOP company based in Montrose, Colorado. Mr. Miller previously served as Chairman of the Board for Philly Shipyard ASA from June 2011 to April 2014. Mr. Miller graduated from the University of Edinboro in Pennsylvania with a BA. Mr. Miller is a U.S. citizen. Mr. Miller holds zero shares in the company and has no stock options. He has been elected for the period 2016-2018.

Amy Humphreys Board Member

Amy Humphreys (b. 1966) is Chief Financial Officer of Darigold, one of the largest dairy cooperatives in the United States. Darigold produces and markets a full line of quality dairy products through multiple market channels worldwide. Prior to her current role, Ms. Humphreys was President and CEO of Icicle Seafoods, Inc. Icicle's core business is the processing and marketing of seafood in fisheries throughout Alaska, with both onshore and floating processing facilities. Icicle also owns the largest U.S. salmon farming company located in the Pacific Northwest. Prior to joining Icicle Seafoods, Ms. Humphreys served as CFO of North Star Petroleum Group, the Petroleum Division of Saltchuk Resources including five fuel distribution operating companies. Prior to her current role, Ms. Humphreys was President of Delta Western, Inc., a leading petroleum marketing and distribution company in Alaska and a subsidiary of Saltchuk Resources. From 1996 to 2006, Ms. Humphreys held various leading positions in her 10 year tenure with American Seafoods Group, including VP Corporate Development and Treasurer. For the past 15 years, Ms. Humphreys has worked within companies operating under the Jones Act and, for the past several years, has managed companies in the oil industry within an environment subject to OPA 90 regulation. Ms. Humphreys holds a Master of Business Administration (MBA), with honors, from University of Washington, is a Certified Public Accountant (CPA) and holds a Bachelor of Arts (BA) in Accounting and Finance, magna cum laude, from University of Puget Sound. Ms. Humphreys is a U.S. citizen. Ms. Humphreys holds zero shares in the company and has no stock options. She has been elected for the period 2016-2018.

Elin Karfjell Board Member

Elin Karfjell (b. 1965) is Managing Partner of Atelika AS. Prior to that, she was CEO of Fabi Group and Director of Finance and Administration of Atea AS. She is former partner of Ernst & Young AS. Ms. Karfjell joined Ernst & Young AS in 2002. Prior to this, Ms. Karfjell held various positions including partner at Arthur Andersen. At Ernst & Young/Arthur Andersen, she held various leading positions, both within advisory and audit, and she has experience from a broad specter of industries. Ms. Karfjell is also a Board member of North Energy ASA, DNO ASA, Hent ASA, Sevan Drilling Ltd. and Contesto AS. Previously, she has been a Board member of Norse Energy Corporation ASA, Aktiv Kapital ASA and Aker Floating Production ASA. Ms. Karfjell is a state authorized public accountant. She has a bachelor accountant's degree from Okonomisk College (Hoyskolen i Oslo) and a master of accounting and auditing from the Norwegian School of Economics and Business Administration. Ms. Karfjell is a Norwegian citizen. Ms. Karfjell holds 1,200 shares in the company and has no stock options. She has been elected for the period 2017-2019.

Audun Stensvold Deputy Board Chairman

Audun Stensvold (b. 1972) holds the position of Investment Director for Aker ASA. Previously, he was CFO and Investment Director for Converto Capital Management. Prior to joining Converto Capital Management in 2009, Mr. Stensvold worked for Aker ASA as Vice President of the M&A and Business Development team, and was involved in the initial stock exchange listing of Philly Shipyard (then named Aker American Shipping ASA) and later follow-up of Aker's ownership in the yard. Before joining Aker, Mr. Stensvold worked as a strategy and finance consultant for Selmer, and as a financial analyst for DnB NOR. Mr. Stensvold holds an MSc in Business and Economics from the Norwegian School of Economics and Business Administration (NHH). Mr. Stensvold is a Norwegian citizen. Mr. Stensvold holds zero shares in the company and has no stock options. He has been elected for the period 2016-2018.

Our organization and governance Presentation of the Management Team

Presentation of the Management Team

Steinar Nerbøvik President and CEO

Steinar Nerbøvik (b. 1961) was appointed President and Chief Executive Officer of Philly Shipyard ASA and Philly Shipyard, Inc. in November 2014 after serving as Managing Director since April 2014. Previously, Mr. Nerbovik served as SVP Operations from October 2013. Prior to that, Mr. Nerbøvik served as SVP Yard Director for Norwegian Shipyard VARD Langsten (former Aker Yards and STX OSV Langsten), a leading provider of sophisticated offshore support vessels. Mr. Nerbøvik first joined Philly Shipyard in 2003 as Vice President Projects. Mr. Nerbøvik has held other management positions as combined Design Manager and Project Manager at Aker Langsten from 1991-2003. Mr. Nerbøvik holds a Master of Science in Ship Naval Engineering from the Norwegian Institute of Technology (NTNU) in Trondheim. Mr. Nerbøvik lives in Wilmington, DE, USA. Mr. Nerbøvik is a Norwegian citizen. As of 1 February 2018, Mr. Nerbøvik holds 1,000 shares in the company and has no stock options.

Jan Ivar Nielsen Chief Financial Officer

Jan Ivar Nielsen (b. 1962) was appointed Chief Financial Officer of Philly Shipyard ASA and Philly Shipyard, Inc. in October 2015. Previously, Mr. Nielsen was EVP and CFO for VARD after serving as the VP of Finance for VARD's operations in Brazil from 2007. Prior to working at VARD, Mr. Nielsen was CFO and Head of Investor Relations for Aker American Shipping from its formation in 2005-2007, and its predecessor Aker Philadelphia Shipyard from 2002-2005. From 1998-2002 he was CFO for Kvaerner Shipbuilding in London and had CFO assignments for Kvaerner Masa Yards in Finland and Warnow Werft in Germany. Mr. Nielsen had various finance positions in the process industry from 1990-1997. Mr. Nielsen holds a Master of Science in Business degree from Bodo Graduate School of Business and an Executive MBA degree from Temple University in Philadelphia, PA, USA. Mr. Nielsen lives in Philadelphia, PA, USA. Mr. Nielsen is a Norwegian citizen. As of 1 February 2018, Mr. Nielsen holds zero shares in the company and has no stock options.

Jari Anttila

Senior Vice President Operations

Jari Anttila (b. 1966) joined Philly Shipyard, Inc. in 2015 as Senior Vice President Operations after serving as Director of Operations for Meyer Turku in Finland. Mr. Anttila has over 20 years of shipbuilding experience within Turku Meyer including serving as the shipyard's Executive Vice President, Chief Operating Officer and Senior Vice President. Mr. Anttila holds a Master of Science in Mechanical Engineering, Production Technology and Steel Structures from Lappeenranta University of Technology in Finland. Mr. Anttila lives in Penn Valley, PA, USA. Mr. Antilla is a Finnish citizen. As of 1 February 2018, Mr. Anttila holds zero shares in the company and has no stock options.

Dean Grabelle

Senior Vice President and General Counsel

Dean Grabelle (b. 1970) was appointed Senior Vice President and General Counsel of Philly Shipyard, Inc. (PSI) in November 2016, after serving as PSI's General Counsel since May 2008. Prior to joining the shipyard, Mr. Grabelle was employed with the law firm Drinker Biddle & Reath LLP in Philadelphia, PA, USA where he established a legal career spanning 12 years. Past experience includes mergers and acquisitions, business counseling, lending, private equity and corporate finance. Mr. Grabelle graduated from Duke University with a Bachelor of Arts in Economics and Public Policy Studies. He also holds a Juris Doctor from the University of Pennsylvania Law School. Mr. Grabelle lives in Voorhees, NJ, USA. Mr. Grabelle is a U.S. citizen. As of 1 February 2018, Mr. Grabelle holds zero shares in the company and has no stock options.

Michael Giantomaso Vice President Human Resources

Michael Giantomaso (b. 1966) joined Philly Shipyard, Inc. as Human Resources Manager in May 1998 and was the shipyard's first locally hired manager. Mr. Giantomaso was promoted to Vice President Human Resources in August 2001. He has over 25 years of human resources experience in the manufacturing and health care fields. Mr. Giantomaso holds a Bachelor of Arts in Business Administration and Human Resources from Temple University. Mr. Giantomaso lives in Huntingdon Valley, PA, USA. Mr. Giantomaso is a U.S. citizen. As of 1 February 2018, Mr. Giantomaso holds zero shares in the company and has no stock options.

Jeffrey Greenwell Vice President Procurement

Jeffrey Greenwell (b. 1966) joined Philly Shipyard, Inc. in 2015 as Vice President Procurement. Mr. Greenwell previously served as Vice President, Operations from 2008-2014 and as Director of Engineering from 2007- 2008 at GEA Heat Exchangers in Lakewood, CO. Mr. Greenwell began his career with U.S. Steel at Gary Works, amassing 16 years of experience, with roles ranging from Project Engineer/Manager and Area Manager Gary Works, Chief Engineer Granite City Works and Vice President – Technology Kosice, Slovakia. Mr. Greenwell holds a Bachelor of Science in Mechanical Engineering Technology from Purdue University. Mr. Greenwell lives in Mickleton, NJ, USA. Mr. Greenwell is a U.S. citizen. As of 1 February 2018, Mr. Greenwell holds zero shares in the company and has no stock options.

Robert Fitzpatrick Vice President Production

Robert Fitzpatrick (b. 1964) joined Philly Shipyard, Inc. in 2001 and had held numerous key positions including Prefabrication Manager and Senior Production Manager before being promoted to Vice President Production in January 2007. Prior to coming to the shipyard, Mr. Fitzpatrick amassed 20 years of experience in industrial manufacturing including 12 years as a production manager responsible for the fabrication of naval circuit breakers and switchgear at L-3 Communications. Mr. Fitzpatrick holds a Bachelor of Science in Mechanical Engineering from Spring Garden College in Philadelphia, PA, USA. Mr. Fitzpatrick lives in Burlington, NJ, USA. Mr. Fitzpatrick is a U.S. citizen. As of 1 February 2018, Mr. Fitzpatrick holds zero shares in the company and has no stock options.

Stian Myhre Vice President

Stian Myhre (b. 1984) is Vice President of Philly Shipyard ASA. In addition to this responsibility he serves as Controller for Aker ASA. Prior to joining Aker ASA in 2014, Mr. Myhre worked 7 years as an auditor in PwC's Oslo office, primarily serving shipping and energy related clients. Mr. Myhre holds a MSc from the Norwegian School of Economics and Business Administration (NHH) and is a State Authorized Public Accountant (Norway). Mr. Myhre lives in Oslo, Norway. Mr. Mhyre is a Norwegian citizen. As of 1 February 2018, Mr. Mhyre holds zero shares in the company and has no stock options.

Disclaimer

This annual report includes and is based, inter alia, on forward-looking information and statements that are subject to risks and uncertainties that could cause actual results to differ. Such forward-looking information and statements are based on current expectations, estimates and projections about global economic conditions, the economic conditions of the regions and industries that are major markets for Philly Shipyard ASA and its subsidiaries and affiliates (the "Philly Shipyard Group") lines of business. These expectations, estimates, and projections are generally identifiable by statements containing words such as "expects", "believes", "estimates" or similar expressions. Important factors that could cause actual results to differ materially from those expectations include, among others, economic and market conditions in the geographic areas and industries that are or will be major markets for the Philly Shipyard Group's businesses, oil prices, market acceptance of new products and services, changes in governmental regulations, interest rates, fluctuations in currency exchange rates and such other factors as may be discussed from time to time. Although Philly Shipyard ASA believes that its expectations and the information in this annual report were based upon reasonable assumptions at the time when they were made, it can give no assurance that those expectations will be achieved or that the actual results will be as set out in this annual report. Neither Philly Shipyard ASA nor any other company within the Philly Shipyard Group is making any representation or warranty, expressed or implied, as to the accuracy, reliability or completeness of the information in the annual report, and neither Philly Shipyard ASA, any other company within the Philly Shipyard Group nor any of their directors, officers or employees will have any liability to you or any other persons resulting from your use of the information in the annual report.

Philly Shipyard ASA undertakes no obligation to publicly update or revise any forward-looking information or statements in the annual report, other than what is required by law.

The Philly Shipyard Group consists of various legally independent entities, constituting their own separate identities. Philly Shipyard is used as the common brand or trade mark for most of these entities. In this annual report we may sometimes use "Company", "Philly Shipyard", "Group", "we" or "us" when we refer to Philly Shipyard companies in general or where no useful purpose is served by identifying any particular Philly Shipyard company.

Philly Shipyard ASA

Vika Atrium, Munkedamsveien 45, NO-0250 Oslo, Norway Tel: + 47 23 11 91 00, Fax: + 47 23 11 91 01

Philly Shipyard, Inc.

2100 Kitty Hawk Avenue Philadelphia, PA 19112 USA Tel: +1 (215) 875 2600, Fax: +1 (215) 875 2700

website: www.phillyshipyard.com email: info@phillyshipyard.com

Save the environment read reports online

The annual reports of Philly Shipyard ASA are available via the Internet: www.phillyshipyard.com. Alternatively, Philly Shipyard ASA encourages its shareholders to subscribe to the company's annual reports via the electronic delivery system of the Norwegian Central Securities Depository (VPS). Please note that VPS services (VPS lnvestortjenester) are designed primarily for Norwegian shareholders. Subscribers to this service receive annual reports in PDF format by email. VPS distribution takes place at the same time as distribution of the printed version of Philly Shipyard's annual report to shareholders who have requested it.

Electronic distribution is the fastest channel for accessing company information; it is also cost-effective and environmentally friendly.

Photos/illustrations: All photos courtesy of Philly Shipyard, Inc. and Charles Cerrone Photography

Layout/production: Donnelley Financial Solutions

Philly Shipyard ASA Philly Shipyard ASA

Annual report 2017 Annual report 2017

© 2017 Philly Shipyard All rights reserved www.phillyshipyard.com © 2018 Philly Shipyard All rights reserved www.phillyshipyard.com